Final Results
BLACKROCK GREATER EUROPE INVESTMENT TRUST PLC
LEI: 5493003R8FJ6I76ZUW55
Annual Report and Financial Statements 31 August 2022
Performance record
|
|
As at 31 August 2022 |
As at 31 August 2021 |
|
| Net assets (£000)1 | 483,799 | 651,731 | |
| Net asset value per ordinary share (pence) | 475.72 | 678.49 | |
| Ordinary share price (mid-market) (pence) | 456.00 | 692.00 | |
| (Discount)/premium to cum income net asset value2 | (4.1%) | 2.0% | |
| FTSE World Europe ex UK Index | 1654.61 | 1869.96 | |
| ======== | ======== |
|
|
For the year ended 31 August 2022 |
For the year ended 31 August 2021 |
|
| Performance (with dividends reinvested) | |||
| Net asset value per share2 | -29.2% | 49.4% | |
| Ordinary share price2 | -33.4% | 56.8% | |
| FTSE World Europe ex UK Index | -11.5% | 27.4% | |
| ======== | ======== |
|
|
For the year ended 31 August 2022 |
For the year ended 31 August 2021 |
Change % |
| Revenue | |||
| Net profit on ordinary activities after taxation (£000) | 7,728 | 3,595 | 115.0 |
| Revenue earnings per ordinary share (pence) | 7.65 | 4.13 | 85.2 |
| -------------- | -------------- | -------------- | |
| Dividends (pence) | |||
| Interim dividend | 1.75 | 1.75 | – |
| Final dividend | 4.85 | 4.55 | 6.6 |
| -------------- | -------------- | -------------- | |
| Total dividends paid/payable | 6.60 | 6.30 | 4.8 |
| ======== | ======== | ======== |
Sources: BlackRock and Datastream.
Performance with dividends reinvested in Sterling terms, rebased to 100 at 1 September 2012.
1 The change in net assets reflects proceeds from share issuance, payments for shares repurchased into treasury, market movements and dividends paid.
2 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
CHAIRMAN’S STATEMENT
INTRODUCTION
The past year has been quite an extraordinary one for world markets as a whole, largely as a result of the Russian invasion of Ukraine. This has had a very pronounced impact on energy and food prices and has driven the already ongoing rotation from growth stocks to value stocks. It has had a material adverse short-term impact on the value of our portfolio. However, the longer-term performance of our portfolio remains strong.
MARKET OVERVIEW
European markets have faced a challenging environment during the Company’s financial year, dominated by significant geo-political uncertainty and heightened market volatility. Following the COVID-19 pandemic, supply side bottlenecks and rising prices have been further stressed by the tragic and devastating events following Russia’s invasion of Ukraine. Food supplies and energy needs affected by the disruption have become key concerns. For Europe, the main issue is how to keep a steady supply of oil and gas and a cap on prices to sustain the region given that most European countries are net importers with much of the energy coming from Russia.
A long period of steady growth and low inflation appears to be over, as central banks continue to raise interest rates to contain inflation. High inflation is due to many different factors including the rising cost of food and high energy prices, surging household demand in response to the loose fiscal and monetary policies following COVID-19, as well as supply chain shortages due to the pandemic.
PERFORMANCE
In the year under review, the Company’s net asset value per share (NAV) decreased by 29.2%, significantly underperforming the FTSE World Europe ex UK Index (the reference index), which fell by 11.5%. Some of this underperformance was directly attributable to the write down of our holdings in Russian stocks which were 6.1% of the Company’s net assets as at 31 January 2022. The Company’s share price decreased by 33.4% over the same period (all percentages calculated in Sterling terms with dividends reinvested). The wide disparity versus the reference index return reflects the Portfolio Managers’ views of backing their convictions over the longer term, whilst seeing through short-term market turbulence. More details on the portfolio’s performance, its positioning and the significant contributors and detractors during the year are given in the Investment Manager’s Report below.
Since the financial year end and up to close of business on 31 October 2022, the Company’s NAV has decreased by 1.4% compared with a fall in the FTSE World Europe ex UK Index of 0.8% over the same period.
REVENUE EARNINGS AND DIVIDENDS
Your Company’s total revenues each year are a reflection of the dividends we receive from portfolio companies. The revenue return per share for the year ended 31 August 2022 amounted to 7.65p per share, which compares with 4.13p per share for the previous year, a rise of 85.2%. This is mainly due to a significant increase in special dividends received by the Company in the current period and the lower level of dividends received in the year to 31 August 2021, as the COVID-19 pandemic hit portfolio companies’ revenue streams.
In April, the Board declared an interim dividend of 1.75p per share (2021: 1.75p) and the Board is proposing the payment of a final dividend of 4.85p per share for the year (2021: 4.55p). This, together with the interim dividend, makes a total dividend for the year of 6.60p per share (2021: 6.30p), an increase of 4.8%. The dividend will be funded from revenue received in the year. Subject to shareholder approval, the dividend will be paid on 16 December 2022 to shareholders on the Company’s register on 18 November 2022, the ex-dividend date being 17 November 2022.
DISCOUNT/PREMIUM
The Directors recognise the importance to investors that the market price of the Company’s shares should not trade at a significant premium or discount to the underlying NAV. Accordingly, in normal market conditions, the Board may use the Company’s share buy back and share issue powers, or operate six monthly tender offers, to ensure that the share price does not go to an excessive discount or premium to the underlying NAV. Resolutions to renew the Company’s semi-annual tender offers and the authorities to issue and buy back shares will be put to shareholders at the forthcoming Annual General Meeting.
Over the year to 31 August 2022, the Company’s shares have traded at an average discount of 1.4% and within a range of an 8.8% discount to a 4.1% premium. The Company allotted 4,300,000 new ordinary shares and reissued 1,945,000 ordinary shares from treasury at an average premium over NAV of 2.0%, at an average price of 681.34p per share for a net consideration of £42,550,000. In addition, the Company purchased 601,558 ordinary shares at an average price of 467.45p per share and an average discount of 5.5% for a total cost of £2,812,000. Since the year end up to 3 November 2022, a further 698,692 ordinary shares have been bought back at an average price of 431.66p per share for a total cost of £3,016,000. All shares have been placed in treasury.
As reported in the Half Yearly Financial Report, the Directors exercised their discretion not to operate the half yearly tender offers in November 2021 and May 2022. It was also announced on 20 September 2022 that the Board had decided not to implement a semi-annual tender offer in November 2022. Over the six-month period to 31 August 2022, the average discount to NAV (cum income) was 4.5%. The Board therefore concluded that it was not in the interests of shareholders, as a whole, to implement the latest semi-annual tender offer.
SHAREHOLDER COMMUNICATION
We appreciate how important access to regular information is to our shareholders. To supplement our website, we offer shareholders the ability to sign up to the Trust Matters newsletter which includes information on the Company, as well as news, views and insights. Further information on how to sign up is included on the inside cover of the Annual Report and Financial Statements.
OUTLOOK
European equity markets have faced a confluence of challenging and rapidly evolving factors so far this year and global macroeconomic fundamentals continue to deteriorate, with the prospect of developed markets edging closer to recession. In Europe, inflation is being acutely felt as the Russia-Ukraine conflict has pushed gas prices to new highs, triggering a cost of living crisis. The tragic war in Ukraine is also likely to be protracted, with no immediate peaceful solution in sight, but we should not underestimate the strengthened unity in Europe in the face of Russia’s aggression.
Investors are contending with multiple headwinds in Europe. In light of the war in Ukraine, the situation in Russia remains unclear and our holdings in Russian stocks have been written down to a nominal value. Nonetheless, European equities continue to trade at a discount to global peers, providing attractive investment opportunities for our Portfolio Managers. The Company’s portfolio is also weighted towards companies with well capitalised balance sheets and exceptional businesses that are able to adapt to the shifting market dynamics.
MANAGEMENT FEES
Your Board has reviewed the level of fees paid to your Manager and considers these to be high relative to market levels. We have engaged with the Manager on this and discussions are currently taking place.
ANNUAL GENERAL MEETING (AGM)
The AGM of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 8 December 2022 at 12 noon. Details of the business of the meeting are set out in the Notice of Annual General Meeting in the Annual Report and Financial Statements.
UK Government restrictions on public gatherings are no longer in force in connection with COVID-19 and we therefore intend to hold the AGM in the normal way with physical attendance by shareholders. However, shareholders should be aware that it is possible that restrictions could be reimposed prior to the date of the AGM. BlackRock requests that shareholders intending to attend should comply with their COVID-19 safety protocols before entering the venue. At the time of writing, visitors are not permitted in BlackRock's offices if they have tested positive for COVID-19 in the past 10 days, are experiencing COVID-19 related symptoms, or are subject to government requirements for self-isolation or quarantine.
ERIC SANDERSON
Chairman
3 November 2022
INVESTMENT MANAGER’S REPORT
OVERVIEW
The Company’s performance was negative over the year as the share price decreased by 33.4% and the underlying NAV decreased by 29.2% in the twelve months to 31 August 2022. By way of comparison, the FTSE World Europe ex UK Index fell by 11.5% over the same period (all percentages calculated in Sterling terms with dividends reinvested).
The period under review, particularly from the start of 2022, turned out quite differently from what many market participants, including ourselves, had expected. Our market outlook for 2022 assumed gradual normalisation of growth in earnings post the strong recovery in 2020 and most of 2021 and with that an easing of supply chain disruptions and inflation numbers softening. European markets were instead hit by a perfect storm as the natural ebbing of the economy was compounded by continued COVID-19 restrictions in China, stubborn supply chain difficulties and the war in Ukraine inducing a new source of inflation into the global system.
Equity investors had to come to grips with a significant change in monetary policy. To put the scale of those changes in monetary policy into some context, we would point to the fact that as recently as June 2021 the Federal Reserve (the Fed) was not expected to move interest rates until the second half of 2024. At the time of writing, the Fed has aggressively raised rates five times with Fed fund rates now priced to finish 2022 at 4.4%, a move of historic dimensions in both pace and scale. The European Central Bank is following suit with the Euro area interest rate projected to trend around 3.5% in 2023 and 2.75% in 2024.
These factors led to a sharp market sell-off, with broad-based indices like the Euro Stoxx 600 down by 20% from January to the end of August 2022. Investors also had to contend with an extreme skew of return distributions within the market: of 20 industry groups, only energy posted positive returns over the period. In this environment, style characteristics have been a far more important component for the outcome of single stocks over the year than their own fundamentals.
This extreme change in market leadership disproportionately penalised portfolios which focus on owning higher quality companies offering attractive growth and high returns. In previous annual reports, we repeatedly pointed out that market volatility can often serve as a test of an investors’ investment philosophy. Our approach to constructing portfolios is resolutely fundamental from the bottom-up.
While our approach absolutely involves being macro aware, we ultimately seek to identify end markets and income streams that allow us to own best in class operators that are set to benefit from structural demand trends on a multi-year basis. With this in mind, we aim to identify exceptional businesses with clearly articulated strategies, high returns on capital, strong free cash-flow generation, and options to deploy capital into growth projects at attractive returns.
Our target holding period is three to five years and even in a tumultuous year like the one under review, portfolio turnover only amounted to 20%, very much consistent with this stated target. This is based on the belief that the recipe for creating wealth through investing is relatively simple: it requires a combination of high returns, growth and time.
Too often, one observes investors not allowing the management teams of portfolio companies sufficient time to deliver on the strategies that they have carefully laid out. Our approach is different in the sense that once we have identified a winning franchise, we aim to run large positions and continue to own a business for as long as the fundamentals continue to support our view of the superior earnings power of that company. Understandably, this can be painful over shorter time periods, yet there was no doubt in our mind that running a low turnover strategy with a relatively concentrated portfolio would experience periodic performance drawdowns from time to time.
PORTFOLIO
In a difficult year, there were three main drivers of underperformance. Firstly, Russian companies held as part of our Emerging Europe allocation. Secondly, companies with long duration income streams where business fundamentals remain intact, but share prices were, in our view, punished disproportionately as interest rates rose. Thirdly, a smaller group of companies where our assessment of the business fundamentals was incorrect.
Coming first to Russia, the Company has since inception invested a portion of its assets in Emerging European markets, with Russia forming a significant part of this. This allocation has in the past offered access to fast growing markets at low valuations and hence a differentiated source of capital appreciation. Following the Russian invasion of Ukraine in February, BlackRock’s Pricing Committee wrote down the value of Russian securities across all portfolios. As of 31 January 2022, the Company held 6.1% of its net assets in Russian companies, all of which are now valued at nil. Whilst there likely remains some intrinsic value in these businesses, it is difficult to see how this could be realised.
In considering the second group of companies, we found that the negative share price returns were driven by a change in the valuation multiple ascribed to future profits rather than any expectation that those profits will fail to materialise. On the contrary, the operational performance of these businesses remains strong, meeting or surpassing market expectations and in many cases we believe their competitive positions are strengthening rather than weakening. Thus, in our view share prices have become disconnected from fundamentals.
Lonza is a prime example with the share price having fallen by close to 25% in the year to date. The Swiss company is a global leader in contract manufacturing of high-end biological drugs, as well as in fast growing and emerging areas such as cell and gene therapy. Its barriers to entry are wide ranging and include manufacturing expertise, its ability to spend on capital expenditure to build new capacity, and customer relationships with manufacturers written into the drug filings with regulators. We expect Lonza’s biologics business, which is the highest margin part of the group, to remain the growth engine at mid-teens for the midterm. Impressively, any incremental capacity they build earns returns on invested capital of close to 30% in our estimation. Lonza’s global production capacity is sold out for the next four years, which is not only giving the company real pricing power but also provides strong visibility on its earnings trajectory overall. Whilst Lonza’s share price has been disappointing over the past year, we believe that the company’s potential to outgrow the market over time remains highly promising.
Similarly, Dutch payment company Adyen, down over 40% over the last year, suffered a sell-off in line with other tech names, which investors sold with the rise of interest rates globally. In our view this short-term reaction by the market is ignoring the long-term potential of the business. Its best-in-class payment platform has taken the lucrative payment processing industry by storm. Adyen smoothly integrates the full payments stack – gateway, risk management, processing, issuing, acquiring and settlement – on a single platform and does that via multiple sales channels (online, mobile and offline channels) and via different currencies. For merchants, Adyen’s modern platform is straightforward to onboard and with its unified technology platform it provides a cost and product capability advantage. Due to its global reach, some of the world’s largest merchants use Adyen. The vast majority of revenues currently come from North America and Europe, but we see potential for geographical as well as mid-market expansion in years to come. The company recently reported 60% volume growth, with revenues and profits also seeing healthy improvements year-on-year. Some 80% of their revenue growth has been coming from existing clients and alongside this they have acquired new high-quality clients which themselves are growing faster than the industry overall.
In contrast to the cases above, our investment in NetCompany is an example of an investment where the fundamentals deteriorated and is a good example of us not ‘falling in love’ with a stock. A key element of our process is the constant reassessment of existing portfolio holdings, seeking to gain deeper and deeper insights and being prepared to change our assessment should the fundamentals require us to do so. NetCompany, once one of the Company’s high conviction ideas, saw a significant change after the company announced the acquisition of Intrasoft. Our original attraction to the company was based on the entrepreneurial founder-led culture and positioning in specific markets in the Nordics, the UK and the Netherlands. The acquisition brought a lot of exposure to other geographies in Europe and we felt NetCompany would have difficultly integrating this new business due to its size and operational complexity. In our view, the deal was growth and margin dilutive as Intrasoft grew 5% to 10% in previous years compared to 20% for NetCompany and was operating at much lower margins. Unlike smaller acquisitions they had done in the past, we took the view management would struggle to integrate Intrasoft successfully given its size. After initially reducing our position size, we exited the position as evidence of deteriorating operational performance came through.
More positive to see are some of our high conviction names that performed well over the period despite the extreme market volatility. Worth highlighting is a position in diabetes specialist NovoNordisk which was the top performer over the period. We have owned the shares since 2017 and have grown with the company over the years. Novo Nordisk is one of two dominant players in the global diabetes market, while also offering attractive exposure to the nascent obesity drug market, which in combination leaves this business in a sweet spot with attractive growth for the next few years driven by the continued launch of Ozempic (injectable GLP-1, diabetes drug) as well as roll out of Rybelsus (oral GLP-1, Rybelsus) and Wegovy (injectable GLP-1, obesity treatment). In addition, there should also be a steady flow of pipeline readouts over the coming years (e.g. haemophilia, long acting insulin, more in diabetes and obesity) to support the investment case.
Other great examples of well-run companies with impressive brand management and pricing power are Hermès and LVMH, both amongst the top performers and both companies we would classify as ‘European royalty’. It takes Hermès close to five years to train their craftspeople to build the various different handbags and leather goods by hand and the company enjoys up to four year waiting lists of their iconic handbags like the Birkin bag, leaving demand far outweighing supply. Hermès is a largely family-owned business and has been run in a conservative fashion for generations with strategic decisions taken with the longest of timeframes in mind. There is also a degree of resilience in a downturn as Hermès’ client base typically is less sensitive to weaker economic environments, exemplified by organic growth staying positive throughout the 2008/2009 financial crisis.
OUTLOOK
The macroeconomic environment may remain uncertain over the coming months given heightened geopolitical tensions and sticky inflation forcing central banks to tighten into slowing economies. As clients frequently ask us where and when interest rates will peak, we admit to having no strong views on this topic. What seems more certain is that powerful structural trends will continue to underpin the earnings of some of the world’s leading businesses which call Europe home. Current concerns about energy security have accelerated the need to decarbonise the global economy and we still believe that a number of portfolio holdings will be long-term beneficiaries. Linked to this, we continue to believe in the large potential profit pools available as a result of the electrification of transportation where a number of portfolio companies in the technology sector act as enablers of that shift from combustion engine cars to electric vehicles. Advances in health care and life sciences will continue to drive product innovation and the specialisation of complex production processes, all areas where Europe is well positioned. Importantly, these powerful changes are unlikely to be disrupted or stopped by higher interest rates.
More generally, when looking at the health of the corporate sector, we find corporate balance sheets in decent shape and in much better positions than in previous downturns. Corporates have spent the last decade deleveraging balance sheets and interest coverage is significantly higher than during the Global Financial Crisis or other prior periods associated with deep recessions or prolonged bear markets. Corporate spending intentions also remain healthy and this spend is often linked to transformational capital expenditure in areas like digitalisation, re-shoring of supply chains or the energy transition, again benefiting many of our portfolio holdings.
Likewise, the consumer seems in a better position than sentiment would currently suggest. Employment is at record highs, wages are well-supported and households’ higher-than-average savings should provide some cushion for the squeeze on disposable incomes that is undoubtedly occurring right now. With the help of our in-house data scientist, we closely monitor developments around consumer spending.
This year’s performance should be seen in the context of having delivered cumulative outperformance relative to the market of 10% and 26% over three and five years, respectively, as at the end of August 2022. We remain of the view that over the medium to longer term, this Company and the businesses it owns can make a real difference for clients and nothing we have seen this year has changed that assessment.
Despite the painful impact from short-term market moves that we have suffered from over the past year, we are convinced that over the medium and long term, share prices are driven by growth in earnings and dividends. Hence, for the long-term investor, volatility like experienced recently, creates opportunities to buy assets that have the potential to create significant amounts of shareholder value at much lower valuations. We would encourage investors to think like owners in businesses rather than traders of shares, as there is no doubt in our minds that this will deliver the strongest returns over time.
Finally, as 2022 is drawing to a close, we observe extremely bearish sentiment and positioning towards European equities, leaving the market, as well as many of the best-in-class companies we own, trading at highly depressed valuations not seen in years. While taking a measured approach to adding risk to the portfolio appears prudent for now, we are also cognisant of Warren Buffett’s old adage ‘to be greedy when others are fearful’. It certainly feels like fear is abundant right now when history has proven time and again that capitalism and human ingenuity finds answers to what appear to be insurmountable problems. Here is to 2023 turning out more profitably than currently forecast by some. We are absolutely intent on capitalising on opportunities that may be presented in European equities by keeping a positive mindset and a firm view on the medium to long-term income streams underwriting our investments.
STEFAN GRIES AND SAM VECHT
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
3 November 2022
TEN LARGEST INVESTMENTS
The Company’s ten largest investments represented 53.7% of the Company’s portfolio as at 31 August 2022 (31 August 2021: 46.7%).
1 + Novo Nordisk (2021: 6th)
Health care company
Market value: £40,152,000
Share of investments: 8.4%
A Danish multinational pharmaceutical company which is a leader in diabetes care. We expect Novo Nordisk to post strong growth in earnings and cashflows driven by demand for ‘Ozempic’ which treats Type 2 diabetes, as well as by its weight management drug Wegovy, which came to the market last year. Overall, we believe Novo Nordisk offers attractive long-term growth potential at high returns and sector leading cash flow conversion with any excess in cash being returned to shareholders.
2 - ASML (2021: 1st)
Technology company
Market value: £35,170,000
Share of investments: 7.4%
A Dutch company which specialises in the supply of photolithography systems for the semiconductor industry. The company is at the forefront of technological change, investing in leading research and development to capture the structural growth opportunity coming from growth in mobile devices and microchip components. High barriers to entry within the industry give ASML a protected position with strong pricing power allowing growth in margins whilst they continue to innovate. The company is run by an exceptional management team which aims to create long-term value whilst returning excess cash to shareholders.
3 + LVMH (2021: n/a)
Consumer Discretionary company
Market value: £33,904,000
Share of investments: 7.1%
A French multinational holding corporation specialising in luxury goods. The group has a strong and well-diversified portfolio of luxury brands ranging from handbags to spirits to cosmetics. LVMH’s business model enjoys high barriers to entry due to the heritage, provenance and exquisite quality of its product offering. Its consistent brand investment through economic cycles has helped to spur brand desirability and allowed for significant pricing power. LVMH’s management team also has an impressive track record of taking over struggling brands and accelerating their growth and returns profile over time.
4 + RELX (2021: 7th)
Consumer Discretionary company
Market value: £28,542,000
Share of investments: 6.0%
A multinational information and analytics company which has high barriers to entry in most of its divisions, including scientific publishing. This capital light business model allows for a high rate of cash flow conversion with repeatable revenues built on subscription-based models. The business also benefits from the structurally increasing usage of data globally, which supports their data analytics business.
5 - Lonza Group (2021: 2nd)
Health Care company
Market value: £25,810,000
Share of investments: 5.4%
A Swiss health care services and life-sciences company which has established itself as one of the leading contract manufacturers of high-end biological drugs, as well as cell and gene therapy. The company’s competitive advantages stem from the complexity of the production process – where few peers can match its offering. This is cemented by high barriers to entry given that all production facilities are required to be certified by the Food and Drug Administration. Overall, we expect the company’s biologics business to grow in the mid-teens every year for the next ten years with positive pricing, as there is generally a shortage of capacity in the market.
6 - DSV Panalpina (2021: 5th)
Industrials company
Market value: £23,697,000
Share of investments: 5.0%
A Danish freight forwarding and logistics company run by an excellent management team with a strong track record in creating value through acquisitions and by instilling a best-in-class culture in its organisation. Their success in making acquisitions has been facilitated by a strong technology platform which drives operational efficiencies leading to high conversion margins.
7 + Royal Unibrew (2021: 8th)
Consumer Staples company
Market value: £18,465,000
Share of investments: 3.9%
A brewing and beverage company based in Denmark. Through a number of well-timed acquisitions, the group has transformed itself into a multi-beverage company offering attractive growth in soft drink niches at high returns with significant potential to export their brands with strong European heritage into international markets.
8 - SIKA (2021: 3rd)
Industrials company
Market value: £17,276,000
Share of investments: 3.6%
A specialty chemical company with a leading position in both construction chemicals and in bonding agents for the automotive industry. The company has proprietary technology within adhesives, which has an increasing array of applications as technology advances. The company benefits from structural drivers of urbanisation and has exposure to multiple points in the construction cycle including new infrastructure projects, as well as maintenance or refurbishment of existing buildings. It is also likely to benefit from the EU Recovery Fund and the EU Green Deal channelling funds towards sustainable infrastructure projects. The company’s decentralised structure of subsidiaries and strong culture of new product innovation continues to drive pricing power.
9 + Hermès (2021: 15th)
Consumer Discretionary company
Market value: £17,083,000
Share of investments: 3.6%
A French luxury design house established in 1837. It specialises in leather goods, lifestyle accessories, home furnishings, perfumery, jewellery, watches and ready-to-wear. Due to deliberate brand management and craftsmanship, this ultimate high-end brand is supply constraint and enjoys strong earnings visibility given some of its most iconic products are sold on allocation via waiting lists. Hermès is a largely family-owned business and has been run in a conservative fashion for generations with any strategic decisions taken with the longest of time frames in mind. This business should prove resilient also during economic downturns as Hermès’ client base is typically less sensitive to weaker macro environments.
10 + IMCD (2021: 12th)
Basic Materials company
Market value: £16,003,000
Share of investments: 3.3%
A Dutch distributor of specialty chemicals and ingredients. The company is one of the largest pure play global specialty chemical distributors with a strong geographic footprint in Europe and North America and a growing presence in Asia Pacific and Latin America. Management has a strong track record on execution and delivering on value enhancing acquisitions. A combination of above average levels of growth from a diverse range of end markets and an asset light model should generate attractive returns for equity holders.
All percentages reflect the value of the holding as a percentage of total investments.
INVESTMENTS AS AT 31 AUGUST 2022
|
|
Country of operation |
Market value £000 |
% of investments |
| Industrials | |||
| DSV Panalpina | Denmark | 23,697 | 5.0 |
| Sika | Switzerland | 17,276 | 3.6 |
| Safran | France | 14,344 | 3.0 |
| Adyen | Netherlands | 12,480 | 2.6 |
| Atlas Copco | Sweden | 8,438 | 1.8 |
| Epiroc | Sweden | 7,243 | 1.5 |
| Rational | Germany | 5,772 | 1.2 |
| ALD | France | 5,641 | 1.2 |
| Kingspan | Ireland | 5,495 | 1.2 |
| VAT Group | Switzerland | 3,789 | 0.8 |
| --------------- | --------------- | ||
| 104,175 | 21.9 | ||
| ========= | ========= | ||
| Health Care | |||
| Novo Nordisk | Denmark | 40,152 | 8.4 |
| Lonza Group | Switzerland | 25,810 | 5.4 |
| ChemoMetec | Denmark | 14,545 | 3.0 |
| DiaSorin | Italy | 8,362 | 1.8 |
| Straumann | Switzerland | 8,246 | 1.7 |
| PolyPeptide Group | Switzerland | 4,933 | 1.0 |
| --------------- | --------------- | ||
| 102,048 | 21.3 | ||
| ========= | ========= | ||
| Consumer Discretionary | |||
| LVMH | France | 33,904 | 7.1 |
| RELX | United Kingdom | 28,542 | 6.0 |
| Hermès | France | 17,083 | 3.6 |
| Ferrari | Italy | 13,615 | 2.8 |
| Ozon Holdings* | Russia | 2 | – |
| Fix Price Group* | Russia | – | – |
| --------------- | --------------- | ||
| 93,146 | 19.5 | ||
| ========= | ========= | ||
| Technology | |||
| ASML | Netherlands | 35,170 | 7.4 |
| Amadeus IT Group | Spain | 11,768 | 2.5 |
| BE Semiconductor | Netherlands | 10,735 | 2.2 |
| Hexagon | Sweden | 10,584 | 2.2 |
| ASM International | Netherlands | 7,115 | 1.5 |
| --------------- | --------------- | ||
| 75,372 | 15.8 | ||
| ========= | ========= | ||
| Financials | |||
| KBC Groep | Belgium | 12,531 | 2.6 |
| Partners Group | Switzerland | 9,523 | 2.0 |
| National Bank of Greece | Greece | 8,566 | 1.8 |
| FinecoBank | Italy | 7,695 | 1.6 |
| Bank Pekao | Poland | 7,520 | 1.6 |
| Allfunds Group | United Kingdom | 5,446 | 1.1 |
| Avanza Bank Holding | Sweden | 4,838 | 1.0 |
| Sberbank* | Russia | 1 | – |
| --------------- | --------------- | ||
| 56,120 | 11.7 | ||
| ========= | ========= | ||
| Consumer Staples | |||
| Royal Unibrew | Denmark | 18,465 | 3.9 |
| Lindt | Switzerland | 12,487 | 2.6 |
| --------------- | --------------- | ||
| 30,952 | 6.5 | ||
| ========= | ========= | ||
| Basic Materials | |||
| IMCD | Netherlands | 16,003 | 3.3 |
| --------------- | --------------- | ||
| 16,003 | 3.3 | ||
| ========= | ========= | ||
| Energy | |||
| Lukoil* | Russia | – | – |
| --------------- | --------------- | ||
| – | – | ||
| ========= | ========= | ||
| Total investments | 477,816 | 100.0 | |
| ========= | ========= |
* The investments in Ozon Holdings, Fix Price Group, Sberbank and Lukoil have been valued at a nominal value of £0.01 as secondary listings of the depositary receipts on Russian companies have been suspended from trading.
All investments are in ordinary shares unless otherwise stated. The total number of investments held at 31 August 2022 was 39 (31 August 2021: 44).
Industry classifications in the table above are based on the Industrial Classification Benchmark standard for categorisation of companies by industry and sector.
As at 31 August 2022, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
INVESTMENT EXPOSURE AS AT 31 AUGUST 2022
MARKET CAPITALISATION
| % of portfolio | |
| €1bn to €10bn | 26.7 |
| €10bn to €20bn | 7.3 |
| €20bn to €50bn | 39.5 |
| >€50bn | 26.5 |
INVESTMENT SIZE
| Number of investments | % of portfolio | |
| <£1m | 4 | 0.0 |
| £3m to £5m | 3 | 2.8 |
| £5m to £10m | 13 | 20.0 |
| >£10m | 19 | 77.2 |
DISTRIBUTION OF INVESTMENTS
| % | |
| Industrials | 21.9 |
| Health Care | 21.3 |
| Consumer Discretionary | 19.5 |
| Technology | 15.8 |
| Financials | 11.7 |
| Consumer Staples | 6.5 |
| Basic Materials | 3.3 |
Source: BlackRock.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 August 2022. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chairman’s Statement together with the Investment Manager’s Report form part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 3 November 2022.
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.
INVESTMENT 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 also has 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 INVESTMENT POLICY
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring of performance of service providers, including the Manager.
Business model
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third party service providers including the Manager, who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive, as implemented, retained and onshored in the UK (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 ((BIM (UK) or 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 Company delegates fund accounting services to the Manager, which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the Manager and the Depositary and more details of arrangements in place governing custody services are set out in the Directors’ Report.
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 £500 million. Up to 25% of the portfolio may be invested in companies in developing Europe. Developing Europe refers to countries which are defined as developing primarily based on three criteria: economic development, size and liquidity, and market accessibility. Market accessibility as a metric aims to reflect institutional investors’ experiences of investing in a given market and includes criteria such as foreign ownership limits, operational framework, availability of investment instruments etc. The official MSCI benchmark includes Poland, Greece, Hungary, Turkey and the Czech Republic, but we may also look at off-benchmark countries if they meet our criteria. 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 2022, the Company held 39 investments and 3.4% (2021: 4.2%) 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 2022. 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 nil (2021: 4.8%).
PERFORMANCE
In the year to 31 August 2022, the Company’s NAV per share decreased by 29.2% (compared with a decrease in the FTSE World Europe ex UK Index of 11.5%) and the share price fell by 33.4% (all percentages calculated in Sterling terms with dividends reinvested). The Investment Manager’s Report above 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 in the Financial Statements. The total loss for the year, after taxation, was £201,365,000 (2021: total profit, after taxation, of £196,575,000) which is reflected in the decrease in the net asset value of the Company. The revenue return amounted to £7,728,000 (2021: £3,595,000) 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 (2021: 1.75p). The Directors recommend the payment of a final dividend of 4.85p per share, making a total dividend of 6.60p per share (2021: 6.30p). Subject to approval at the forthcoming Annual General Meeting, the dividend will be paid on 16 December 2022 to shareholders on the register of members at the close of business on 18 November 2022.
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 above.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities or impact on the environment and the Company has not adopted an ESG investment strategy or exclusionary screens. However, the Directors believe that it is important and in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s approach to ESG integration is set out on page 41 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. The Investment Manager considers modern slavery as part of supply chains and labour management within the investment process. 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 2022 are set out in the Directors’ Biographies on pages 27 and 28 of the Annual Report and Financial Statements. The Board consists of three male Directors and two female Directors. The Company’s policy on diversity is set out on page 57 of the Annual Report and Financial Statements. The Company does not have any executive employees.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time, and which are comparable to other investment trusts, are set out below. As indicated in the footnote to the table below, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ (APMs) under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Annual Report and Financial Statements.
Additionally, the Board regularly reviews the performance of the portfolio, as well as the net asset value and share price of the Company and compares this against various companies and indices. The Company does not have a benchmark. However, the Board reviews performance and ongoing charges against a peer group of European investment trusts and open-ended funds, as well as the FTSE World Europe ex UK Index.
|
|
As at 31 August 2022 |
As at 31 August 2021 |
| Net asset value per share | 475.72p | 678.49p |
| Net asset value total return1, 2 | -29.2% | +49.4% |
| Share price | 456.00p | 692.00p |
| Share price total return1, 2 | -33.4% | +56.8% |
| (Discount)/premium to net asset value2 | (4.1%) | 2.0% |
| Revenue return per share | 7.65p | 4.13p |
| Ongoing charges2, 3 | 0.98% | 1.02% |
| ========= | ========= |
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Alternative Performance Measures, see Glossary in the Annual Report and Financial Statements.
3 Ongoing charges represent the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, write back of prior year expenses and certain non-recurring items, as a % of average daily net assets.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As required by the 2018 UK Corporate Governance Code (the UK Code), the Board has put in place a robust ongoing process to identify, assess and monitor the principal risks and emerging risks facing the Company, including those that would threaten its business model. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control, are reviewed on a regular basis by the Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee chairs of the BlackRock investment trusts setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit and Management Engagement Committee also periodically receives and reviews internal control reports from BlackRock and the Company’s service providers.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Over the course of 2020 and through to the present time, the COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe. Additionally, the risk that unforeseen or unprecedented events including (but not limited to) heightened geo-political tensions such as the war in Ukraine, high inflation and the current cost of living crisis has had a significant impact on global markets. The Board has taken into consideration the risks posed to the Company by these events and incorporated them into the Company’s risk register. The threat of climate change has also reinforced the importance of more sustainable practices and environmental responsibility.
Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors are set out in the table below.
| 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. |
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Investment performance
Returns achieved are reliant primarily upon the performance of the portfolio. The Board is responsible for: · deciding the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment policy may lead to: · underperformance compared to the reference index and the Company’s peer group; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. The Board is also cognisant of the long-term risk to performance from inadequate attention to ESG issues and in particular the impact of climate change. |
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; and · 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. ESG analysis is integrated into the Manager’s investment process as set out below. This is monitored by the Board. |
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Legal & 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 corporation tax on capital gains on the profits realised from the sale of its investments. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event, the investment returns of the Company may be adversely affected. A serious regulatory 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 could 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 Sanctions and Anti-Money Laundering Act 2018 and the Market Abuse Regulation. |
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. The Company’s Investment Manager, BlackRock, at all times complies with the sanctions administered by the UK Office of Financial Sanctions Implementation, the United States Treasury’s Office of Foreign Assets Control, the United Nations, European Union member states and any other applicable regimes. |
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Market
Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements. Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws and political events can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. Market risk includes the potential impact of events which are outside the Company’s control, including (but not limited to) heightened geo-political tensions and military conflict, a global pandemic and high inflation. Companies operating in the sectors in which the Company invests may be impacted by new legislation governing climate change and environmental issues, which may have a negative impact on their valuation and share price. |
The Board considers the diversification of the portfolio, asset allocation, stock selection, and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager. The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced as a consequence of the COVID-19 pandemic and Russia/Ukraine conflict. Unlike open-ended counterparts, closed-end funds are not obliged to sell down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves. The Portfolio Managers spend a considerable amount of time understanding the environmental, social and governance (ESG) risks and opportunities facing companies and industries in the portfolio. The Company does not exclude investment in stocks based on ESG criteria, but the Portfolio Managers consider ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. |
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Operational
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager, the Depositary and Fund Accountant which maintain the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating capacity and effectiveness. 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. The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to and also a summary of the controls put in place by the Manager, Depositary, Custodian, Fund Accountant and Registrar specifically to mitigate these risks. Most third-party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit and Management Engagement Committee for review. The Committee would seek further representations from service providers if not satisfied with the effectiveness of their control environment. The Company’s financial instruments held in custody are subject to a strict liability regime and, in the event of a loss of such financial instruments held in custody, the Depositary must return financial instruments of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers on a regular basis and compliance with the Investment Management Agreement annually. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the unprecedented risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board received reports from key service providers setting out the measures that they put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board is confident that a good level of service has and will be maintained. |
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Financial
The Company’s investment activities expose it to a variety of financial risks which include interest rate risk, counterparty credit risk and liquidity risk. |
Details of these risks are disclosed in note 15 to the 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 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines. The Company is an investment trust with the objective of achieving capital growth.
The Directors expect the Company to continue for the foreseeable future and have conducted this review for the period up to the Annual General Meeting in 2027. The Directors believe that five years is an appropriate investment horizon to assess the viability of the Company. This is based on the Company’s long-term mandate, the low turnover in the portfolio and the investment holding period investors generally consider while investing in the European sector.
In making an assessment on the viability of the Company, the Board has considered the following:
· the impact of a significant fall in European equity markets on the value of the Company’s investment portfolio;
· the ongoing relevance of the Company’s investment objective, business model and investment policy in the prevailing market;
· the principal and emerging risks and uncertainties, as set out above, and their potential impact;
· the level of ongoing demand for the Company’s shares;
· the Company’s share price discount/premium to NAV;
· the liquidity of the Company’s portfolio; and
· the level of income generated by the Company and future income and expenditure forecasts.
The Directors have concluded that there is a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the period of their assessment based on the following considerations:
· the Investment Manager’s compliance with the investment objective and policy, its investment strategy and asset allocation;
· the portfolio is liquid and mainly comprises of readily realisable assets, which continue to offer a broad range of investment opportunities for shareholders as part of a balanced investment portfolio;
· the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future;
· the effectiveness of business continuity plans in place for the Company and its key service providers;
· the ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets;
· the Board’s discount management policy; and
· the Company is a closed-end investment company and therefore does not suffer from the liquidity issues arising from unexpected redemptions.
In addition, the Board’s assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement which can be found on page 46 of the Directors’ Report in the Annual Report and Financial Statements.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE COMPANY
The Companies (Miscellaneous Reporting) Regulations 2018 require directors to explain in greater detail how they have discharged their duties under Section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders’ needs into account.
The disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company’s Custodian, Depositary, Registrar and Broker.
Stakeholders
| Shareholders | Manager and Investment Manager | Other key service providers | Investee companies |
| Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term capital growth. | The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation. | In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason, the Board considers the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle. | Portfolio holdings are ultimately shareholders’ assets, and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management of portfolio companies. |
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.
| Area of Engagement | Issue | Engagement | Impact |
| Investment mandate and objective | The Board is committed to promoting the role and success of the Company in delivering on its investment mandate to shareholders over the long term. The Board also has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns. | The Board worked closely with the Investment Manager throughout the year in further developing investment strategy and underlying policies, not simply for the purpose of achieving the Company’s investment objective but in the interests of shareholders and future investors. The Company does not exclude investment in stocks based on ESG criteria, but the Manager’s approach to the consideration of ESG factors in respect of the Company’s portfolio, as well as its engagement with investee companies, is to encourage the adoption of sustainable business practices which support long-term value creation. |
The portfolio activities undertaken by the Investment Manager can be found in their report above. The Investment Manager aims to construct a portfolio that is high conviction and concentrated in nature but diversified by end market exposures. Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement and in this Strategic Report above. |
| Shareholders | Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. | The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company’s performance and the outlook. The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the Manager’s website at www.blackrock.com/uk/brge. The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders. Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Portfolio Managers as opposed to members of the Board. The Company’s willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Portfolio Managers. If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given on page 107 of the Annual Report and Financial Statements. |
The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable. Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s Broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager. The portfolio management team attended a number of professional investor meetings (mainly by video conference) and held discussions with a number of wealth management desks and offices in respect of the Company during the year under review. Portfolio holdings are ultimately shareholders’ assets and the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Investment Manager in respect of meetings with the management of portfolio companies. |
| Responsible investing | More than ever, good governance and consideration of sustainable investment are key factors in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity. | The Company does not exclude investment in stocks based on ESG criteria, but the Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective and responsible way in the interests of shareholders and future investors. The Investment Manager’s approach to the consideration of Environmental, Social and Governance (ESG) factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies are kept under review by the Board. The Board also expects to be informed by the Manager of any sensitive voting issues involving the Company’s investments. The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out on pages 41 to 43 of the Annual Report and Financial Statements. The Investment Manager’s engagement and voting policy is detailed on pages 41 and 42 of the Annual Report and Financial Statements and on the BlackRock website. |
The Investment Manager believes there is likely to be a positive correlation between strong ESG practices and investment performance over time. |
| Management of share rating | The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount or premium to their prevailing NAV. | The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Manager and the Company’s Broker regarding the level of discount or premium. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end, the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail market. In addition, the Board has worked closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company’s shares and to sustain the share rating of the Company. |
The Board will continue to monitor the Company’s premium/discount to NAV and will look to issue, 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 Board decided not to implement a semi-annual tender offer in November 2022 as, over the six months to 31 August 2022, the average discount to NAV (cum income) was 4.5%. It also decided not to implement the May 2022 semi-annual tender offer, as over the six months to 28 February 2022, the average premium to NAV (cum income) was 1.8%. During the financial year the Company reissued 1,945,000 ordinary shares from treasury and allotted 4,300,000 new ordinary shares. The Company also bought back 601,558 ordinary shares. As at 31 October 2022 the Company’s shares were trading at a discount of 5.2% to the cum income NAV. |
| Service levels of third-party providers | The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service, including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries; and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares. | The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources. The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis. The ongoing COVID-19 pandemic continues to pose significant challenges to the operation of businesses across the globe. The Board has continued to work closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s key service providers. |
All performance evaluations were performed on a timely basis and the Board concluded that all key third-party service providers, including the Manager, were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Registrar, Printer and Broker and is confident that arrangements are in place to ensure a good level of service will continue to be provided despite the impact of the COVID-19 pandemic. |
| Board composition | The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees. | During the year, the Board appointed a new Director. The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment. The services of an external search consultant were used to identify potential candidates. All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions of the 2022 evaluation process are given on page 58 of the Annual Report and Financial Statements). All Directors stand for re-election by shareholders annually. Shareholders may attend the Annual General Meeting and raise any queries in respect of Board composition or individual Directors in person or may contact the Company Secretary or the Chairman using the details provided on page 107 of the Annual Report and Financial Statements with any issues. |
As a result of the recruitment process, Mr Sayers was appointed as a Director of the Company with effect from 10 February 2022. As at the date of this report, the Board was comprised of three men and two women. Two Board Directors, Mr Sanderson and Ms Curling, have a tenure in excess of nine years. The Board considers that the tenure of the Chairman and Directors should be determined principally by how the Board’s purpose in providing strategic leadership, governance and bringing challenge and support to the Manager can best be maintained, whilst also recognising the importance of independence, refreshment, diversity and retention of accumulated knowledge. It firmly believes that an appropriate balance of these factors is essential for an effective functioning board and, at times, will naturally result in some longer serving Directors. Furthermore, the Board wishes to retain the flexibility to recruit outstanding candidates when they become available rather than simply adding new Directors based upon a predetermined timetable. Details of each Directors’ contribution to the success and promotion of the Company are set out in the Directors’ Report on pages 46 and 47 of the Annual Report and Financial Statements and details of Directors’ biographies can be found on pages 27 and 28 of the Annual Report and Financial Statements. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details of the proxy voting results in favour and against individual Directors’ re-election at the 2021 Annual General Meeting are given on the Manager’s website at www.blackrock.com/uk/brge. |
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ISSUES AND APPROACH
THE COMPANY’S APPROACH TO ESG
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. Whilst the Company does not exclude investment in stocks purely on ESG criteria, ESG analytics are integrated into the investment process when weighing up the risk and reward benefits of investment decisions and the Investment Manager believes that communication and engagement with portfolio companies is important and can lead to better outcomes for shareholders and the environment than merely excluding investment in certain areas.
More information on BlackRock’s global approach to ESG integration, as well as activity specific to the BlackRock Greater Europe Investment Trust plc portfolio, is set out below. BlackRock has defined ESG integration as the practice of incorporating material ESG information and consideration of sustainability risks into investment decisions. ESG integration does not change the Company’s investment objective or constrain the Investment Manager’s investable universe and does not mean that an ESG or impact focused investment strategy or any exclusionary screens have been or will be adopted by the Company. Similarly, ESG integration does not determine the extent to which the Company may be impacted by sustainability risks. More information on sustainability risks may be found in the AIFMD Fund Disclosures document of the Company available on the Company’s website at https://www.blackrock.com/uk/literature/policies/itc-disclosures-blackrock-greater-europe-investment-trust-plc.pdf.
BLACKROCK GREATER EUROPE INVESTMENT TRUST PLC – BLACKROCK INVESTMENT STEWARDSHIP ENGAGEMENT WITH PORTFOLIO COMPANIES FOR THE YEAR ENDED 31 AUGUST 2022
The Company benefits from two leading teams within BlackRock’s Fundamental Equity division: the 20-strong European Equity team, as well as seven analysts focusing on Emerging Europe from the Global Emerging Markets team. These teams have excellent access to company management teams and undertake in excess of 2,000 company meetings each year to identify the best management teams in the region with the ability to create value for shareholders over the long term. In addition, BlackRock also has a separate Investment Stewardship team (BIS) that is committed to promoting sound corporate governance through engagement with investee companies, development of proxy voting policies that support best governance practices and wider engagement on public policy issues. For the year to 31 August 2022, BIS held 50 company engagements on a range of governance issues with the management teams of 24 companies in the BlackRock Greater Europe Investment Trust plc portfolio, representing 72.2% of the portfolio by value at 31 August 2022. Additional information is set out in the table below and the charts on page 42 of the Annual Report and Financial Statements, as well as the key engagement themes for the meetings held in respect of the Company’s portfolio holdings.
|
|
Year ended 31 August 2022 |
| Number of engagements held1 | 50 |
| Number of companies met1 | 24 |
| % of equity investments covered2 | 72.2 |
| Shareholder meetings voted at1 | 37 |
| Number of proposals voted on1 | 551 |
| Number of votes against management1 | 69 |
| % of total items voted represented by votes against management | 12.5 |
| ========= |
1 Source: Institutional Shareholder Services as at 31 August 2022.
2 Source: BlackRock. Company valuation as included in the portfolio at 31 August 2022 as a percentage of the total portfolio value.
BLACKROCK’S APPROACH TO ESG INTEGRATION
BlackRock believes that sustainability risk – and climate risk in particular - equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn, in BlackRock’s view, is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. BlackRock believes that carbon-intensive companies will play an integral role in unlocking the full potential of the energy transition, and to do this, they must be prepared to adapt, innovate and pivot their strategies towards a low carbon economy.
As part of BlackRock’s structured investment process, ESG risks and opportunities (including sustainability/climate risk) are considered within the portfolio management team’s fundamental analysis of companies and industries and the Company’s portfolio managers work closely with BIS to assess the governance quality of companies and investigate any potential issues, risks or opportunities.
As part of their approach to ESG integration, the portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio. In particular, portfolio managers at BlackRock now have access to 1,200 key ESG performance indicators in Aladdin (BlackRock’s proprietary trading system) from third-party data providers. BlackRock’s internal sustainability research framework scoring is also available alongside third-party ESG scores in core portfolio management tools. BlackRock’s access to company management allows it to engage on issues that are identified through questioning management teams and conducting site visits. In conjunction with the portfolio management team, BIS meets with boards of companies frequently to evaluate how they are strategically managing their longer-term issues, including those surrounding ESG and the potential impact these may have on company financials. BIS’s and the portfolio management team’s understanding of ESG issues is further supported by BlackRock’s Sustainable and Transition Solutions (STS) function. STS looks to advance ESG research and integration, active engagement and the development of sustainable investment solutions across the firm.
INVESTMENT STEWARDSHIP
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. As part of this fiduciary duty to its clients, BIS is committed to promoting sound corporate governance through engagement with investee companies, development of proxy voting policies that support best governance practices and also through wider engagement on public policy issues.
GLOBAL PRINCIPLES
BlackRock’s approach to corporate governance and stewardship is explained in its Global Principles. These high-level Principles are the framework for BlackRock’s more detailed, market-specific voting guidelines, all of which are published on the BlackRock website. The Principles describe BlackRock’s philosophy on stewardship (including how it monitors and engages with companies), its policy on voting, its integrated approach to stewardship matters and how it deals with conflicts of interest. These apply across relevant asset classes and products as permitted by investment strategies. BlackRock reviews its Global Principles annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year. BlackRock’s Global Principles are available on its website at https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-engprinciples-global.pdf.
MARKET-SPECIFIC PROXY VOTING GUIDELINES
BlackRock’s voting guidelines are intended to help clients and companies understand its thinking on key governance matters. They are the benchmark against which it assesses a company’s approach to corporate governance and the items on the agenda to be voted on at the shareholder meeting. BlackRock applies its guidelines pragmatically, taking into account a company’s unique circumstances where relevant. BlackRock informs voting decisions through research and engages as necessary. BlackRock reviews its voting guidelines annually and updates them as necessary to reflect changes in market standards, evolving governance practice and insights gained from engagement over the prior year.
BlackRock’s market-specific voting guidelines are available on its website at https://www.blackrock.com/corporate/literature/fact-sheet/blk-responsible-investment-guidelines-emea.pdf.
In 2021, BIS explicitly asked that all companies disclose a business plan aligned with the goal of limiting global warming to well below 2ºC, consistent with achieving net zero global greenhouse gas (GHG) emissions by 2050. BlackRock viewed these disclosures as essential to helping investors assess a company’s ability to transition its business to a low carbon world and to capture value-creation opportunities created by the climate transition. BlackRock also asked that companies align their disclosures to the Task Force on Climate-related Financial Disclosures (TCFD) framework and the SASB standards. For 2022, BIS is evolving its perspective on sustainability reporting to recognise that companies may use standards other than that of the SASB (Sustainability Accounting Standards Board) and reiterates its ask for metrics that are industry-specific or company-specific. BIS is also encouraging companies to demonstrate that their plans are resilient under likely decarbonisation pathways, and the global aspiration to limit warming to 1.5°C. BIS is also asking companies to disclose how considerations related to having a reliable energy supply and just transition affect their plans. More information in respect of BlackRock’s investment stewardship approach to sustainable investing can be found at https://www.blackrock.com/corporate/literature/publication/blk-commentary-climate-risk-and-energy-transition.pdf.
BlackRock has been a member of Climate Action 100+ since 2020 and has aligned its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). A map of how BIS’s engagement priorities align to the UN Sustainable Development Goals (SDGs) can be found at https://www.blackrock.com/corporate/literature/publication/blk-engagement-priorities-aligned-to-sdgs.pdf.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales and is committed to voting against management to the extent that they have not demonstrated sufficient progress on ESG issues. This year, BlackRock held a record number of engagement meetings (3,693 compared to 3,650 for 2021). Globally, BlackRock voted at 18,000 shareholder meetings on more than 173,000 proposals and voted against or withheld votes from 6,555 directors globally at 3,694 different companies driven by concerns regarding director independence, executive compensation, insufficient progress on board diversity, and overcommitted directors, reflecting our intensified focus on sustainability risks. In the 2021-22 proxy year, BlackRock voted against 176 directors and against 234 companies for climate-related concerns that could negatively affect long-term shareholder value. More detail in respect of BIS’s engagement and voting history can be found at https://www.blackrock.com/corporate/literature/publication/2022-investment-stewardship-voting-spotlight.pdf.
BIS also publishes voting bulletins explaining its vote decision, and the engagement and analysis underpinning it, on certain high-profile proposals at company shareholder meetings. Vote bulletins for 2022 can be found at https://www.blackrock.com/corporate/about-us/investment-stewardship#vote-bulletins.
BLACKROCK’S REPORTING AND DISCLOSURES
In terms of its own reporting, BlackRock believes that the SASB provides a clear set of standards for reporting sustainability information across a wide range of issues, from labour practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework. BlackRock recognises that reporting to these standards requires significant time, analysis and effort. BlackRock’s 2021 TCFD report can be found at https://www.blackrock.com/corporate/literature/continuous-disclosure-and-important-information/tcfd-report-2021-blkinc.pdf.
BY ORDER OF THE BOARD
CAROLINE DRISCOLL
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
3 November 2022
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM, AIFM or the Manager) was appointed as the Company’s AIFM with effect from 2 July 2014. BlackRock Investment Management (UK) Limited (BIM (UK) or Investment Manager) acts 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 management contract is terminable by either party on six months’ notice. 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. The AIFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to the Investment Manager.
The AIFM receives an annual management fee 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 BlackRock 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 (£690 million as at 31 December 2021) and this contribution is matched by BIM (UK). In addition, a budget of a further £20,000 has been allocated for Company specific sales and marketing activity. Total fees paid or payable for these services for the year ended 31 August 2022 amounted to £130,000 (excluding VAT) (2021: £118,000). 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 five 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. With effect from 1 September 2021, the Chairman receives an annual fee of £42,500, the Chairman of the Audit and Management Engagement Committee receives an annual fee of £33,500 and each other Director receives an annual fee of £29,000. Three members of the Board hold shares in the Company. Eric Sanderson holds 4,000 ordinary shares, Peter Baxter holds 11,000 ordinary shares and Paola Subacchi holds 7,017 ordinary shares.
As at 31 August 2022, fees of £14,000 (2021: £11,000) 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 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 27 and 28 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 2018 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Financial Statements 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 61 to 65 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 31 August 2022, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
ERIC SANDERSON
Chairman
3 November 2022
INCOME STATEMENT FOR THE YEAR ENDED 31 AUGUST 2022
|
|
2022 | 2021 | |||||
|
Notes |
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
| (Losses)/gains on investments held at fair value through profit or loss | – | (206,195) | (206,195) | – | 195,351 | 195,351 | |
| Gains on foreign exchange | – | 1,142 | 1,142 | – | 1,177 | 1,177 | |
| Income from investments held at fair value through profit or loss | 3 | 10,394 | 177 | 10,571 | 5,951 | – | 5,951 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total income | 10,394 | (204,876) | (194,482) | 5,951 | 196,528 | 202,479 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Expenses | |||||||
| Investment management fee | 4 | (977) | (3,907) | (4,884) | (831) | (3,325) | (4,156) |
| Other operating expenses | 5 | (811) | (40) | (851) | (787) | (19) | (806) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Total operating expenses | (1,788) | (3,947) | (5,735) | (1,618) | (3,344) | (4,962) | |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 8,606 | (208,823) | (200,217) | 4,333 | 193,184 | 197,517 | |
| Finance costs | (68) | (270) | (338) | (51) | (204) | (255) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Net profit/(loss) on ordinary activities before taxation | 8,538 | (209,093) | (200,555) | 4,282 | 192,980 | 197,262 | |
| Taxation charge | (810) | – | (810) | (687) | – | (687) | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| Net profit/(loss) on ordinary activities after taxation | 7 | 7,728 | (209,093) | (201,365) | 3,595 | 192,980 | 196,575 |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
| Earnings/(loss) per ordinary share (pence) | 7 | 7.65 | (207.09) | (199.44) | 4.13 | 221.66 | 225.79 |
| ========= | ========= | ========= | ========= | ========= | ========= | ||
The total column of this statement represents the Company’s profit and loss account. The supplementary revenue and capital accounts are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The net profit/(loss) on ordinary activities for the year disclosed above represents the Company’s total comprehensive income/(loss).
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 AUGUST 2022
|
|
Notes |
Called up share capital £000 |
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve £000 |
Capital reserves £000 |
Revenue reserve £000 |
Total £000 |
| For the year ended 31 August 2022 | ||||||||
| At 31 August 2021 | 113 | 48,340 | 130 | 71,541 | 522,321 | 9,286 | 651,731 | |
| Total comprehensive (loss)/income: | ||||||||
| Net (loss)/profit for the year | – | – | – | – | (209,093) | 7,728 | (201,365) | |
| Transaction with owners, recorded directly to equity: | ||||||||
| Ordinary shares issued | 8,9 | 4 | 30,067 | – | – | – | – | 30,071 |
| Ordinary shares reissued from treasury | 8,9 | – | 6,974 | – | 2,843 | 2,743 | – | 12,560 |
| Ordinary shares repurchased into treasury | 8,9 | – | – | – | (2,804) | – | – | (2,804) |
| Share issue costs | 8,9 | – | (56) | – | – | – | – | (56) |
| Share reissue costs | 8,9 | – | – | – | (14) | (11) | – | (25) |
| Share buyback costs | 8,9 | – | – | – | (8) | – | – | (8) |
| Tender costs written back | – | – | – | 14 | – | – | 14 | |
| Dividends paid1 | 6 | – | – | – | – | – | (6,319) | (6,319) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 August 2022 | 117 | 85,325 | 130 | 71,572 | 315,960 | 10,695 | 483,799 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= | ||
| For the year ended 31 August 2021 | ||||||||
| At 31 August 2020 | 110 | – | 130 | 47,339 | 329,341 | 10,941 | 387,861 | |
| Total comprehensive income: | ||||||||
| Net profit for the year | – | – | – | – | 192,980 | 3,595 | 196,575 | |
| Transaction with owners, recorded directly to equity: | ||||||||
| Ordinary shares issued | 3 | 22,304 | – | – | – | – | 22,307 | |
| Ordinary shares reissued from treasury | – | 26,081 | – | 24,220 | – | – | 50,301 | |
| Share issue costs | – | (45) | – | – | – | – | (45) | |
| Share reissue costs | – | – | – | (101) | – | – | (101) | |
| Tender costs written back | – | – | – | 83 | – | – | 83 | |
| Dividends paid2 | 6 | – | – | – | – | – | (5,250) | (5,250) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 August 2021 | 113 | 48,340 | 130 | 71,541 | 522,321 | 9,286 | 651,731 | |
| ========= | ========= | ========= | ========= | ========= | ========= | ========= |
1 Interim dividend paid in respect of the year ended 31 August 2022 of 1.75p per share was declared on 11 May 2022 and paid on 17 June 2022. Final dividend paid in respect of the year ended 31 August 2021 of 4.55p per share was declared on 5 November 2021 and paid on 17 December 2021.
2 Interim dividend paid in respect of the year ended 31 August 2021 of 1.75p per share was declared on 23 April 2021 and paid on 4 June 2021. Final dividend paid in respect of the year ended 31 August 2020 of 4.40p per share was declared on 22 October 2020 and paid on 9 December 2020.
For information on the Company’s distributable reserves, please refer to note 9 below.
BALANCE SHEET AS AT 31 AUGUST 2022
|
|
Notes |
2022 £000 |
2021 £000 |
| Fixed assets | |||
| Investments held at fair value through profit or loss | 477,816 | 682,774 | |
| --------------- | --------------- | ||
| Current assets | |||
| Current tax asset | 1,919 | 1,240 | |
| Debtors | 220 | 6,424 | |
| Cash and cash equivalents | 7,348 | – | |
| --------------- | --------------- | ||
| Total current assets | 9,487 | 7,664 | |
| ========= | ========= | ||
| Creditors – amounts falling due within one year | |||
| Bank overdraft | (182) | (27,721) | |
| Other creditors | (3,322) | (10,986) | |
| --------------- | --------------- | ||
| Total current liabilities | (3,504) | (38,707) | |
| ========= | ========= | ||
| Net current assets/(liabilities) | 5,983 | (31,043) | |
| ========= | ========= | ||
| Net assets | 483,799 | 651,731 | |
| ========= | ========= | ||
| Capital and reserves | |||
| Called up share capital | 8 | 117 | 113 |
| Share premium account | 9 | 85,325 | 48,340 |
| Capital redemption reserve | 9 | 130 | 130 |
| Special reserve | 9 | 71,572 | 71,541 |
| Capital reserves | 9 | 315,960 | 522,321 |
| Revenue reserve | 9 | 10,695 | 9,286 |
| --------------- | --------------- | ||
| Total shareholders’ funds | 7 | 483,799 | 651,731 |
| ========= | ========= | ||
| Net asset value per ordinary share (pence) | 7 | 475.72 | 678.49 |
| ========= | ========= |
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 AUGUST 2022
|
|
Note |
2022 £000 |
2021 £000 |
| Operating activities | |||
| Net (loss)/profit on ordinary activities before taxation | (200,555) | 197,262 | |
| Add back finance costs | 338 | 255 | |
| Losses/(gains) on investments held at fair value through profit or loss | 206,195 | (195,351) | |
| Gains on foreign exchange | (1,142) | (1,177) | |
| Sales of investments held at fair value through profit or loss | 179,206 | 96,003 | |
| Purchase of investments held at fair value through profit or loss | (185,158) | (168,909) | |
| (Increase)/decrease in debtors | (23) | 276 | |
| (Decrease)/increase in other creditors | (160) | 865 | |
| Taxation on investment income | (1,498) | (1,272) | |
| Interest paid | (338) | (255) | |
| Refund of withholding tax reclaims | 9 | 743 | |
| --------------- | --------------- | ||
| Net cash used in operating activities | (3,126) | (71,560) | |
| ========= | ========= | ||
| Financing activities | |||
| Ordinary shares issued | 32,889 | 19,388 | |
| Ordinary shares reissued from treasury | 12,535 | 50,200 | |
| Ordinary shares repurchased into treasury | (2,234) | – | |
| Dividends paid | 6 | (6,319) | (5,250) |
| --------------- | --------------- | ||
| Net cash generated from financing activities | 36,871 | 64,338 | |
| ========= | ========= | ||
| Increase/(decrease) in cash and cash equivalents | 33,745 | (7,222) | |
| ========= | ========= | ||
| Cash and cash equivalents at the start of the year | (27,721) | (21,676) | |
| Effect of foreign exchange rate changes | 1,142 | 1,177 | |
| --------------- | --------------- | ||
| Cash and cash equivalents at the end of the year | 7,166 | (27,721) | |
| ========= | ========= | ||
| Comprised of: | |||
| Cash at bank | 1,104 | – | |
| Cash Fund1 | 6,244 | – | |
| Bank overdraft | (182) | (27,721) | |
| --------------- | --------------- | ||
| 7,166 | (27,721) | ||
| ========= | ========= |
1 Cash Fund represents funds held on deposit with the BlackRock Institutional Cash Series plc – Euro Liquid Environmentally Aware Fund.
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 AUGUST 2022
1. PRINCIPAL ACTIVITY
The Company was incorporated on 1 June 2004 and its principal activity 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 October 2019, and updated in July 2022, and the provisions of the Companies Act 2006.
Substantially, all of the assets of the Company consist of securities that are readily realisable and, accordingly, the Directors are satisfied that the Company has adequate resources to continue in operational existence for the period to 30 November 2023, being a period of at least 12 months from the date of approval of the financial statements, and therefore consider the going concern assumption to be appropriate. The Directors have reviewed compliance with covenants associated with the bank overdraft facility, income and expense projections, the liquidity of the investment portfolio and the risks associated with the current environment of heightened geo-political risk given the war in Ukraine in making their assessment.
The Directors have considered the impact of climate change on the value of the investments included in the Financial Statements and have concluded that:
– there was no further impact of climate change to be considered as the investments are valued based on market pricing as required by FRS 102; and
– the risk is adequately captured in the assumptions and inputs used in measurement of Level 3 assets, as noted in Note 10 below.
None of the Company’s other assets and liabilities were considered to be potentially impacted by climate change.
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 Company’s financial statements are presented in British Pound Sterling, which is the functional currency of the Company and 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 on the face of 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 revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.
(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue account of the 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 88 of the Annual Report and Financial Statements;
· expenses are treated as capital where a connection with the maintenance or enhancement of the value of the investments can be demonstrated; and
· the investment management fee and finance costs have been allocated 80% to the capital account and 20% to the revenue account 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) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.
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 tax 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.
(g) 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 classified 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.
Unquoted investments are valued by the Directors at fair value using International Private Equity and Venture Capital Valuation Guidelines. This policy applies to all current and non-current asset investments of the Company.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the 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.
(h) Debtors
Debtors include sales for future settlement, other debtors and prepayments 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.
(i) Creditors
Creditors include purchases for future settlement, 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 (or in the normal operating cycle of business if longer). If not, they are presented as creditors - amounts due after more than one year.
(j) 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.
(k) Cash and cash equivalents
Cash comprises cash in hand and on 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.
(l) 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 are translated into Sterling at the rates of exchange ruling at the balance sheet date. Profits and losses thereon are recognised in the capital account of the Income Statement and taken to the capital reserve.
(m) Share repurchases, share reissues and new share issues
Shares repurchased and subsequently cancelled – share capital is reduced by the nominal value of the shares repurchased and the capital redemption reserve is correspondingly increased in accordance with Section 733 of the Companies Act 2006. The full cost of the repurchase is charged to the special reserve.
Shares repurchased and held in treasury – the full cost of the repurchase is charged to the special reserve.
Where treasury shares are subsequently reissued:
· amounts received to the extent of the repurchase price are credited to the special reserve and capital reserves based on a weighted average basis of amounts utilised from these reserves on repurchases; and
· any surplus received in excess of the repurchase price is taken to the share premium account.
Where new shares are issued, amounts received to the extent of any surplus received in excess of the par value are taken to the share premium account.
Share issue costs are charged to the share premium account. Costs on share reissues are charged to the special reserve and capital reserves.
(n) Bank borrowings
Bank overdrafts are recorded as the proceeds received. Finance charges are accounted for on an accruals basis in the Income Statement.
(o) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Directors do not believe that any accounting judgements or estimates have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
3. INCOME
|
|
2022 £000 |
2021 £000 |
| Investment income: | ||
| UK dividends | 681 | 438 |
| Overseas dividends | 9,072 | 5,490 |
| Overseas special dividends | 641 | 23 |
| --------------- | --------------- | |
| Total investment income | 10,394 | 5,951 |
| ========= | ========= |
Dividends and interest received in cash during the year amounted to £8,893,000 and £nil respectively (2021: £5,031,000 and £nil).
Special dividends of £177,000 have been recognised in capital during the year (2021: £nil).
4. INVESTMENT MANAGEMENT FEE
| 2022 | 2021 | |||||
|
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
| Investment management fee | 977 | 3,907 | 4,884 | 831 | 3,325 | 4,156 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| Total | 977 | 3,907 | 4,884 | 831 | 3,325 | 4,156 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
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 20% to the revenue account and 80% to the capital account of the Income Statement. There is no additional fee for company secretarial and administration services.
5. OTHER OPERATING EXPENSES
|
|
2022 £000 |
2021 £000 |
| Allocated to revenue: | ||
| Broker fees | 46 | 48 |
| Custody fees | 61 | 58 |
| Depositary fees | 62 | 53 |
| Audit fees1 | 52 | 43 |
| Legal fees2 | 142 | 26 |
| Registrars’ fees | 92 | 84 |
| Directors’ emoluments3 | 151 | 130 |
| Marketing fees | 130 | 118 |
| Postage and printing fees | 60 | 67 |
| AIC fees | 21 | 21 |
| Professional fees | 19 | 18 |
| Stock exchange listing fees4 | 17 | 129 |
| Write back of prior year expense accruals5 | (55) | (73) |
| Other administration costs | 13 | 65 |
| --------------- | --------------- | |
| 811 | 787 | |
| ========= | ========= | |
| Allocated to capital: | ||
| Custody transaction costs6 | 40 | 19 |
| --------------- | --------------- | |
| 851 | 806 | |
| ========= | ========= | |
| The Company’s ongoing charges7, calculated as a percentage of average daily net assets and using the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, write back of prior year expenses and certain non-recurring items were: | 0.98% | 1.02% |
| ========= | ========= |
1 No non-audit services are provided by the Company’s auditors.
2 For the year ended 31 August 2022, legal fees of £117,000 (2021: £nil) related to legal work for the aborted issuance of a long-dated loan note.
3 Further information on Directors’ emoluments can be found in the Directors’ Remuneration Report on page 51 of the Annual Report and Financial Statements. The Company has no employees.
4 For the year ended 31 August 2021, this included one off blocklisting fees of £112,000.
5 Relates to legal fees, printing and postage fees, professional fees, miscellaneous fees and Directors’ expenses written back in the year ended 31 August 2022 (31 August 2021: professional fees and AIC fees written back in the year).
6 For the year ended 31 August 2022, expenses of £40,000 (2021: £19,000) were charged to the capital account of the Income Statement. These relate to transaction costs charged by the custodian on sale and purchase trades.
7 Alternative Performance Measure, see Glossary in the Annual Report and Financial Statements.
6. DIVIDENDS
|
Dividends paid on equity shares |
Record date |
Payment date |
2022 £000 |
2021 £000 |
| 2020 Final dividend of 4.40p | 30 October 2020 | 9 December 2020 | – | 3,710 |
| 2021 Interim dividend of 1.75p | 7 May 2021 | 4 June 2021 | – | 1,540 |
| 2021 Final dividend of 4.55p | 19 November 2021 | 17 December 2021 | 4,529 | – |
| 2022 Interim dividend of 1.75p | 20 May 2022 | 17 June 2022 | 1,790 | – |
| --------------- | --------------- | |||
| 6,319 | 5,250 | |||
| ========= | ========= |
The Directors have proposed a final dividend of 4.85p per share in respect of the year ended 31 August 2022. The final dividend will be paid on 16 December 2022, subject to shareholders’ approval on 8 December 2022, to shareholders on the Company’s register on 18 November 2022. The proposed final dividend has not been included as a liability in these financial statements as final dividends are only recognised in the financial statements when they have been approved by shareholders.
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 2022, meet the relevant requirements as set out in this legislation.
|
Dividends paid or proposed on equity shares |
2022 £000 |
2021 £000 |
| Interim paid of 1.75p (2021: 1.75p) | 1,790 | 1,540 |
| Final proposed of 4.85p* (2021: 4.55p) | 4,899 | 4,529 |
| --------------- | --------------- | |
| 6,689 | 6,069 | |
| ========= | ========= |
* Based on 101,000,161 ordinary shares (excluding treasury shares) in issue on 3 November 2022.
All dividends paid or payable are distributed from the Company’s current year revenue profits and, if required, from brought forward revenue reserves.
7. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue, capital earnings/(loss) and net asset value per ordinary share are shown below and have been calculated using the following:
| 2022 | 2021 | |
| Net revenue profit attributable to ordinary shareholders (£000) | 7,728 | 3,595 |
| Net capital (loss)/profit attributable to ordinary shareholders (£000) | (209,093) | 192,980 |
| ----------------- | ----------------- | |
| Total (loss)/profit attributable to ordinary shareholders (£000) | (201,365) | 196,575 |
| ========== | ========== | |
| Total shareholders’ funds (£000) | 483,799 | 651,731 |
| ========== | ========== | |
| 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: | 100,964,479 | 87,062,072 |
| The actual number of ordinary shares in issue at the end of the year on which the net asset value was calculated was: | 101,698,853 | 96,055,411 |
| ----------------- | ----------------- | |
| Calculated on weighted average number of ordinary shares: | ||
| Revenue earnings per share (pence) – basic and diluted | 7.65 | 4.13 |
| Capital (loss)/earnings per share (pence) – basic and diluted | (207.09) | 221.66 |
| ----------------- | ----------------- | |
| Total (loss)/earnings per share (pence) – basic and diluted | (199.44) | 225.79 |
| ========== | ========== |
|
|
As at 31 August 2022 |
As at 31 August 2021 |
| Net asset value per share (pence) | 475.72 | 678.49 |
| Ordinary share price (pence) | 456.00 | 692.00 |
| ========= | ========= |
There were no dilutive securities at the year end.
8. CALLED UP 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 0.1 pence each: | ||||
| At 31 August 2021 | 96,055,411 | 17,573,527 | 113,628,938 | 113 |
| Ordinary shares issued | 4,300,000 | – | 4,300,000 | 4 |
| Ordinary shares reissued from treasury | 1,945,000 | (1,945,000) | – | – |
| Ordinary shares repurchased into treasury | (601,558) | 601,558 | – | – |
| --------------- | --------------- | --------------- | --------------- | |
| At 31 August 2022 | 101,698,853 | 16,230,085 | 117,928,938 | 117 |
| ========= | ========= | ========= | ========= |
During the year, 601,558 ordinary shares were repurchased and held in treasury (2021: nil) for a net consideration after expenses of £2,812,000 (2021: £nil).
During the year, 4,300,000 (2021: 3,300,000) new ordinary shares were issued for a net consideration after expenses of £30,015,000 (2021: £22,262,000).
During the year, 1,945,000 (2021: 8,432,310) ordinary shares were reissued from treasury for a net consideration after expenses of £12,535,000 (2021: £50,200,000).
The number of ordinary shares in issue at the year end was 117,928,938 (2021: 113,628,938) of which 16,230,085 (2021: 17,573,527) were held in treasury.
Since 31 August 2022 and up to the latest practicable date of 3 November 2022, no new ordinary shares have been issued and no ordinary shares have been reissued from treasury. A further 698,692 ordinary shares have been repurchased and placed in treasury for a net consideration after expenses of £3,016,000.
9. RESERVES
| Distributable Reserves | ||||||
|
|
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve1 £000 |
Capital reserve (arising on investments sold) £000 |
Capital reserve (arising on revaluation of investments held) £000 |
Revenue reserve £000 |
| At 31 August 2021 | 48,340 | 130 | 71,541 | 233,571 | 288,750 | 9,286 |
| Movement during the year: | ||||||
| Total comprehensive income/(loss): | ||||||
| Net profit/(loss) for the year | – | – | – | 25,067 | (234,160) | 7,728 |
| Transaction with owners, recorded directly to equity: | ||||||
| Ordinary shares issued | 30,067 | – | – | – | – | – |
| Ordinary shares reissued from treasury | 6,974 | – | 2,843 | 2,743 | – | – |
| Ordinary shares repurchased into treasury | – | – | (2,804) | – | – | – |
| Share issue costs | (56) | – | – | – | – | – |
| Share reissue costs | – | – | (14) | (11) | – | – |
| Share buyback costs | – | – | (8) | – | – | – |
| Tender costs written back | – | – | 14 | – | – | – |
| Dividends paid during the year | – | – | – | – | – | (6,319) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| At 31 August 2022 | 85,325 | 130 | 71,572 | 261,370 | 54,590 | 10,695 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
| Distributable Reserves | ||||||
|
Share premium account £000 |
Capital redemption reserve £000 |
Special reserve1 £000 |
Capital reserve (arising on investments sold) £000 |
Capital reserve (arising on revaluation of investments held) £000 |
Revenue reserve £000 |
|
| At 31 August 2020 | – | 130 | 47,339 | 219,363 | 109,978 | 10,941 |
| Movement during the year: | ||||||
| Total comprehensive income: | ||||||
| Net profit for the year | – | – | – | 14,208 | 178,772 | 3,595 |
| Transaction with owners, recorded directly to equity: | ||||||
| Ordinary shares issued | 22,304 | – | – | – | – | – |
| Ordinary shares reissued from treasury | 26,081 | – | 24,220 | – | – | – |
| Share issue costs | (45) | – | – | – | – | – |
| Share reissue costs | – | – | (101) | – | – | – |
| Tender costs written back | – | – | 83 | – | – | – |
| Dividends paid during the year | – | – | – | – | – | (5,250) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| At 31 August 2021 | 48,340 | 130 | 71,541 | 233,571 | 288,750 | 9,286 |
| ========= | ========= | ========= | ========= | ========= | ========= | |
1 Relates to amount transferred from the share premium account to a special reserve pursuant to Court approval received on 15 October 2004.
The share premium account and capital redemption reserve are not distributable reserves under the Companies Act 2006. In accordance with ICAEW Technical Release 02/17BL on Guidance on Realised and Distributable Profits under the Companies Act 2006, the special reserve and capital reserves may be used as distributable reserves for all purposes and, in particular, the repurchase by the Company of its ordinary shares and for payments as dividends. In accordance with the Company’s Articles of Association, the special reserve, capital reserves and the revenue reserve may be distributed by way of dividend. The gain on the capital reserve arising on the revaluation of investments of £54,590,000 (2021: gain of £288,750,000) is subject to fair value movements and may not be readily realisable at short notice, as such it may not be entirely distributable. The investments are subject to financial risks; as such capital reserves (arising on investments sold) and the revenue reserve may not be entirely distributable if a loss occurred during the realisation of these investments.
10. VALUATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are either carried in the 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 to the Financial Statements above.
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 for similar instruments in markets that are considered less than active, or other valuation techniques where 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 market data and these 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 Level 3 asset or liability including an assessment of the relevant risks including but not limited to credit risk, market risk, liquidity risk, business risk and sustainability risk. The determination of what constitutes ‘observable’ inputs requires significant judgement by the Investment Manager and these risks are adequately captured in the assumptions and inputs used in measurement of Level 3 asset or liability.
Fair values of financial assets and financial liabilities
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 2022 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Equity investments | 477,813 | – | 3 | 477,816 |
| --------------- | --------------- | --------------- | --------------- | |
| Total | 477,813 | – | 3 | 477,816 |
| ========= | ========= | ========= | ========= |
|
Financial assets at fair value through profit or loss at 31 August 2021 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
| Equity investments | 682,774 | – | – | 682,774 |
| --------------- | --------------- | --------------- | --------------- | |
| Total | 682,774 | – | – | 682,774 |
| ========= | ========= | ========= | ========= |
The Company held four Level 3 securities as at 31 August 2022 (2021: nil).
A reconciliation of fair value measurement in Level 3 is set out below.
|
Level 3 Financial assets at fair value through profit or loss |
2022 £000 |
2021 £000 |
| Opening fair value | – | – |
| Transfers from Level 1 | 3 | – |
| --------------- | --------------- | |
| Closing balance | 3 | – |
| ========= | ========= |
As at 31 August 2022, the investments in Sberbank, Ozon Holdings, Lukoil and Fix Price Group have been valued at a nominal value of £0.01 as the secondary listings of depositary receipts of Russian companies have been suspended from trading.
For exchange listed equity investments, the quoted price is the bid price. Substantially, all investments are valued based on unadjusted quoted market prices. Where such quoted prices are readily available in an active market, such prices are not required to be assessed or adjusted for any business risks, including climate change risk, in accordance with the fair value related requirements of the Company’s financial reporting framework.
11. TRANSACTIONS WITH THE INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report on page 45 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 2022 amounted to £4,884,000 (2021: £4,156,000). At the year end, £2,199,000 was outstanding in respect of these fees (2021: £2,376,000).
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 year ended 31 August 2022 amounted to £130,000 excluding VAT (2021: £118,000). Marketing fees of £71,000 were outstanding at 31 August 2022 (2021: £64,000).
During the year, the Manager pays the amounts due to the Directors. These fees are then reimbursed by the Company for the amounts paid on its behalf. As at 31 August 2022, an amount of £149,000 was payable to the Manager in respect of Directors’ fees (2021: £130,000).
The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc., a company incorporated in Delaware, USA.
12. 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 51 to 53 of the Annual Report and Financial Statements. At 31 August 2022, an amount of £14,000 (2021: £11,000) was outstanding in respect of Directors’ fees.
Significant holdings
The following investors are:
a. funds managed by the BlackRock Group or are affiliates of BlackRock Inc. (“Related BlackRock Funds”); or
b. investors (other than those listed in (a) above) who held more than 20% of the voting shares in issue in the Company and are as a result, considered to be related parties to the Company (“Significant Investors”).
As at 31 August 2022
|
Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.8 | n/a | n/a |
As at 31 August 2021
|
Total % of shares held by Related BlackRock Funds |
Total % of shares held by Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
Number of Significant Investors who are not affiliates of BlackRock Group or BlackRock, Inc. |
| 1.4 | n/a | n/a |
13. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 August 2022 (2021: nil).
14. SUBSEQUENT EVENTS
Effective 3 October 2022, the overdraft facility was reduced to £60 million or 15% of the Company’s net assets (at the time of drawdown), whichever is lower.
15. 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 2022 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 2022 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 2021, 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.
16. 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.
17. 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, 8 December 2022 at 12.00 noon.
ENDS
The Annual Report will also be available on the BlackRock website at blackrock.com/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, 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:
Ed Hooper, Lansons Communications
Tel: 020 7294 3620
E-mail: BlackRockInvestmentTrusts@lansons.com or EdH@lansons.com
12 Throgmorton Avenue
London
EC2N 2DL
3 November 2022
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