Annual Financial Report
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
For the Year Ended 31 March 2016
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Performance Statistics
The Company’s Benchmark is the FTSE All-Share Index
| FOR THE YEAR TO 31 MARCH | 2016 | 2015 |
| % | % | |
| CHANGE | CHANGE | |
| Total Return (capital growth with income reinvested) | ||
| Net asset value (NAV) total return(1): | ||
| – debt at par | +4.2 | +16.5 |
| – debt at market value | +4.6 | +16.2 |
| Share price total return(1) | +4.0 | +15.7 |
| FTSE All-Share Index total return(1) | –3.9 | +6.6 |
| AT | AT | ||
| 31 MARCH | 31 MARCH | % | |
| 2016 | 2015 | CHANGE | |
| Capital Return | |||
| NAV: | |||
| – debt at par | 710.74p | 704.23p | +0.9 |
| – debt at market value | 695.30p | 686.07p | +1.3 |
| Share price(1) | 665.0p | 662.0p | +0.5 |
| FTSE All-Share Index(1) | 3395.19 | 3663.58 | –7.3 |
| Discount/(premium): | |||
| – debt at par | 6.4% | 6.0% | |
| – debt at market value | 4.4% | 3.5% | |
| Gearing (at par): | |||
| – gross gearing | 12.9% | 10.9% | |
| – net gearing | 12.8% | 10.9% |
| % | |||
| FOR THE YEAR TO 31 MARCH | 2016 | 2015 | CHANGE |
| Revenue Return | |||
| Revenue return per share | 26.7p | 24.8p | +7.7 |
| Dividends: | |||
| – first interim | 5.20p | 5.00p | |
| – second interim | 5.20p | 5.10p | |
| – third interim | 5.20p | 5.15p | |
| – final proposed | 8.75p | 8.60p | |
| – total dividends | 24.35p | 23.85p | +2.1 |
| Retail Price Index(1) | 1.6% | 0.9% | |
| Ongoing Charges Ratio | 0.61 | 0.61 |
(1) Source: Thomson Reuters Datastream.
| AT THE YEAR END | 2016 | 2015 |
| Dividend Yield | 3.7% | 3.6% |
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CHAIRMAN’S STATEMENT
Dear Shareholder
I am pleased to be able to report strong investment performance during the year against both the Company’s benchmark and peer group, outperforming the former by 8.5% (total return, debt at market value). This was despite a more challenging market background during the last quarter which featured a recovery in the fortunes of commodities, miners and oil stocks, most of which are not held in the portfolio. This performance and the conditions on both the economic and market fronts are discussed below.
The income generation of the portfolio remained solid, especially when viewed against FTSE All-Share companies – a number of which reduced their dividends. The Board is proposing a final dividend of 8.75p per share for the year which would result in a full year dividend of 24.35p per share, an increase of 2.1% year-on-year.
UK Equity Market
A gradual recovery of the UK economy continued in 2015 with, as in previous years, services leading the way with manufacturing and construction lagging behind.
The US is the only major economy where bank credit has returned to normal. By contrast, the Eurozone and Japan are still in the middle of extended programmes of quantitative easing intended mainly to keep interest rates low. The divergence in monetary policy of the US and UK on the one hand, and Europe and Japan on the other, imply probable further volatility in the currency, fixed income and equity markets this year.
The overall picture, therefore, is one in which both growth and inflation are likely to remain subdued for the foreseeable future with an extended period of ultra-low interest rates. Not many foresaw at the start of the global financial crisis in 2008 that it would take 10 years or more for markets and economies to return to normal but it seems as if it will. The prognosis for global and UK growth remains questionable with short-term uncertainties around the referendum unhelpful in this regard.
A review of the Company’s portfolio in the context of this market background can be found in the Portfolio Manager’s Report below.
Investment Strategy
The portfolio manager has remained consistent in his approach in favouring good quality companies, many of which derive their income in US dollars and euros. This has proved beneficial both in terms of capital growth and in producing a growing income stream available for distribution to shareholders in the form of dividends. This strategy also enables the portfolio’s outcome to be less dependent on the growth in UK consumption.
In this continuing low interest rate world, both the Board and portfolio manager remain acutely aware of the need to provide a growing dividend stream for shareholders and to ensure a measure of capital preservation whenever possible. The portfolio remains well balanced across the UK market cap spectrum and there have been some disposals and additions of new holdings, including specialist lenders. The overseas holdings have continued to contribute in both capital and income terms.
Performance for the Year
I am pleased to report the Company’s good performance for the year, producing on a total return basis a net asset value (NAV) with debt at par of +4.2% versus a negative return of 3.9% for the FTSE All-Share Index (the ‘Index’), the Company’s benchmark. For the same period the NAV with debt at market returned +4.6% and the share price total return (with dividends reinvested) was +4.0%.
The portfolio continues to be concentrated in a relatively small number of stocks (54 at the year end) as well as sectors, and its overweight or underweight positions in various sectors continue to be material drivers of the Company’s relative investment performance.
The Company’s share price ended the year at 665p, an increase of 0.5% from the previous year end of 662p. With debt at market value, the discount moved out from 3.5% to 4.4%. This slight widening of discount was less marked than the trend of the peer group, the average discount of which widened from 2.5% to 4.5% over the same period. At 24 May 2016, the latest practical date before signing this report, the NAV and share price were respectively 712.14p and 695p, and the resultant discount was 2.4% (debt at par) and 0.2% (debt at market value).
Borrowings and Gearing
The Company’s cost of borrowing has fallen substantially following the redemption in June 2014 of the £100 million 11½% debenture. The Company now has a mix of fixed and floating rate borrowings, comprising the old £100 million 73/4% debenture 2022 and the new 364 day credit facility. It is pleasing to see that the interest saving for this year alone – being the first full year without the 11½% debenture – was just over £10.5 million.
As I previously reported in the half-yearly financial report, during the year the Board, together with the portfolio manager, reviewed the Company’s maximum level of flexible debt. Following this review, the facility was increased from £100 million to £150 million. As anticipated, the portfolio manager has used this new flexibility to manage actively the gearing of the portfolio during the year based on his assessment of risk and reward of the additional market exposure. Consequently, total borrowings have ranged from £150 million at the start of the year, to £180 million at the year end – the latter being equivalent to gearing of 12.9%.
Dividend
Income from the portfolio during the year was £58.9 million (2015: £56 million). Of this, £6.8 million, which is equal to 3.5p per share (2015: £7.0 million; 3.6p), was from special dividends. Theoretically special dividends are non-recurring; however, the Company has received a good flow of these dividends over the past few years and corporate results announced to date indicate that there will likely be more special dividends receivable for the year to 31 March 2017. The Board remains alert to the income requirement of the Company, and reviews the situation on a regular basis with the portfolio manager.
The Board is recommending a final dividend of 8.75p per share which, if approved at the AGM, will be paid on 29 July 2016 to shareholders on the Company’s register on 10 June 2016. This increases the total dividend to 24.35p for the year, an increase of 0.5p on last year’s total dividend of 23.85p. This represents an increase of 2.1% compared with the annual increase in the Retail Prices Index of 1.6%, and demonstrates the Company’s commitment to its long-term objective of providing income growth which exceeds the rate of inflation.
Issued Share Capital
I am pleased to report that in order to satisfy demand in the market for the Company’s shares, 550,000 new ordinary shares were issued during the year at an average price of 716.2p. There have been no further shares issued since the year end and as at the date of this report, the Company’s issued share capital is 195,666,734 ordinary shares.
Outlook
As was the case this time last year, the path of the UK equity market has many obstacles to overcome. Globally there are a number of uncertainties including the strength and sustainability of the economic recovery, geo?political risks, the work-out of high debt levels in China and certain emerging markets, and the pace at which the US Federal Reserve will raise short term interest rates. These are exacerbated by the referendum on 23 June 2016 that will decide if the UK remains in or leaves the Eurozone, not to mention the US presidential election in November. Against this uncertain short-term backdrop, your Company’s portfolio manager has decided that it would be unwise to alter the portfolio to favour one specific scenario over another. Portfolio turnover in this last year has been low and, as before, the portfolio manager continues to favour those companies that demonstrate the ability to grow market share, have a strong emphasis on and track record of growing dividends, and whose management is aligned with the interest of shareholders. Your Board continues to endorse this approach.
Jim Pettigrew
Chairman
25 May 2016
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STRATEGIC REPORT
FOR THE YEAR ENDED 31 MARCH 2016
BUSINESS REVIEW
The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective has been to contract the services of Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is Mark Barnett.
Investment Objective and Policy
Investment Objective
The Company invests primarily in UK securities with the long term objective of achieving:
1. an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and
2. growth in dividends per share in excess of the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company’s investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company’s overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company’s investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.
The Company may borrow money to provide gearing to the equity portfolio up to 25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.
Results and Dividends
At the year end the share price was 665p per ordinary share (2015: 662p). The net asset value (debt at par) and net asset value (debt at market value) per ordinary share were 710.74p and 695.30p respectively. The comparative figures on 31 March 2015 were 704.23p and 686.07p.
Subject to approval at the AGM, the final proposed dividend for the year ended 31 March 2016 of 8.75p (2015: 8.60p) per ordinary share will be payable on 29 July 2016 to shareholders on the register on 10 June 2016. The shares will be quoted ex-dividend on 9 June 2016. This will give total dividends for the year of 24.35p per share, an increase of 2.1% on the previous year’s dividends of 23.85p. The revenue return per share for the year was 26.7p, a 7.7% increase on the 2015 return of 24.8p.
Performance
The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are set out below. Notwithstanding that some KPIs are beyond its control, they are measures of the Company’s absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.
| Year to 31 March | 2016 | 2015 |
| Total Return: | ||
| Net asset value (per share debt at par)(1) | +4.2% | +16.5% |
| Net asset value (per share debt at market value)(1) | +4.6% | +16.2% |
| Share price(1) | +4.0% | +15.7% |
| FTSE All-Share Index(1) | –3.9% | +6.6% |
| Discount to NAV (debt at par) | 6.4% | 6.0% |
| Discount to NAV (debt at market value) | 4.4% | 3.5% |
| Revenue return per share | 26.7p | 24.8p |
| Dividend per share | 24.35p | 23.85p |
| Yield (at year end) | 3.7% | 3.6% |
| Gross gearing | 12.9% | 10.9% |
| Ongoing charges ratio(2) | 0.6 | 0.6 |
(1) Source: Thomson Reuters Datastream.
(2) Calculated in accordance with AIC Guidelines i.e. total ongoing expenses ÷ average NAV (debt at market value).
Past performance is not a guide to future returns.
The Chairman’s Statement gives a commentary on the performance of the Company during the year, the gearing and the dividend.
Expenses are reviewed at each Board meeting enabling the Board, amongst other things, to review costs and consider any expenditure outside that of its normal operations. For the year being reported, all KPIs are considered satisfactory.
The Board also regularly reviews the performance of the Company in relation to the 22 investment trusts in the UK Equity Income sector. As at 31 March 2016, the Company was ranked 5th by NAV performance in this sector over one year and 4th over both three and five years (source: JPMorgan Cazenove).
| Analysis of Performance | Analysis of Performance – analyses the performance of the Company relative to its benchmark index. Relative performance – represents the arithmetic difference between the NAV and the benchmark. Net gearing effect – measures the impact of the debenture stock, bank loan and cash on the Company’s relative performance. This will be positive if the portfolio has positive performance. Interest – arising from the debenture stock and bank loan reduces the assets available to invest and has a negative impact on performance. Management fee – the base fee reduces the Company’s net assets and decreases performance. Other expenses and tax – reduce the level of assets and therefore result in a negative effect for relative performance. Effect of ordinary share issues – measures the effect of ordinary shares issued on the Company’s relative performance. |
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| FOR THE YEAR | |||
| TOTAL RETURN BASIS | ENDED | ||
| 31 MARCH 2016 | |||
| % | |||
| Net asset value total return | 4.2 | ||
| Benchmark total return | (3.9) | ||
| Relative Performance | 8.1 | ||
| Analysis of Relative Performance | |||
| Portfolio total return | 5.5 | ||
| Less Benchmark total return | (3.9) | ||
| Portfolio outperformance | 9.4 | ||
| Borrowings: | |||
| Net gearing effect | 0.1 | ||
| Interest | (0.7) | ||
| Management fee | (0.5) | ||
| Other expenses | (0.1) | ||
| Tax | (0.1) | ||
| Total | 8.1 | ||
Financial Position and Borrowings
The Company’s balance sheet shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 73/4% debenture which matures in 2022 and £80 million drawn down on the Company’s £150 million (2015: £100 million) bank revolving credit facility. Details of this facility are contained in notes to the financial statements in the Annual Financial Report.
The Company also has a bank overdraft facility of up to 10% of assets held by the custodian, which is available to facilitate settlement of short-term cash timing differences. As at 31 March 2016, none (2015: £0.2 million) was drawn down.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company follow.
Principal Risks and Uncertainties
The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the growth in RPI. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to monitor these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring is delegated to the Manager. The Board has carried out a robust assessment of the principal risks facing the Company and the following sets out a description of those risks and how they are being managed or mitigated.
Market Risk
A great majority of the Company’s investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company’s investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, political events, and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company’s shares and its earnings and dividends may consequently also experience volatility and may decline.
Investment Performance Risk
The Board sets performance objectives and delegates the investment management process to the Manager. The achievement of the Company’s performance objectives relative to the market requires active management of the portfolio of assets and securities. The Manager’s approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Manager is a long term investor, prepared to take substantial positions in securities and sectors which may well be out of fashion, but which the Manager believes will have potential for material increases in earnings and, in due course, dividends and share prices. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the benchmark and/or income targets. The Manager’s style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager’s high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company’s objectives of capital growth in excess of the benchmark and real dividend growth.
Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company’s performance against the benchmark and peer group is provided to the Board on a quarterly basis. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company’s objectives. The Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk?reward profile.
As shown in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio. During the year, no forward currency contracts or derivatives were used for hedging or market exposure respectively.
Gearing and Borrowing Risk
The Company may borrow to provide gearing to the equity portfolio up to 25% of net assets. Borrowing is a mix of the Company’s’ £100 million debenture stock and the Company’s £150 million facility. Details of all borrowing is given in the notes to the financial statements in the Annual Financial Report. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the facility can be renewed on terms acceptable to the Company.
The Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase or restructuring of borrowing are for the Board to decide. Information related to borrowing and gearing is provided to the Directors as part of the Board papers. Additionally, the Board keeps under review the cost of buying back the debt.
Income/Dividend Risk
The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers. The Board considers the level of income at each meeting.
Share Price Risk
There is a risk that the Company’s prospects and NAV may not be fully reflected in the share price from time-to-time.
The share price is monitored on a daily basis. The Board is empowered to repurchase shares within agreed parameters. The discount at which the shares trade to NAV can be influenced by share repurchases. The Company has not repurchased shares in the last year.
Control Systems Risk
The Board delegates a number of specific risk control activities to the Manager including:
• good practice industry standards in fund management operations;
• financial controls;
• meeting regulatory requirements;
• the management of the relationship with the depositary;
• via the depositary, the management of the custody and security of the Company’s assets; and
• the management of the relationship with the registrar.
Consequently in respect of these activities the Company is dependent on the Manager’s control systems and those of its depositary and registrars, both of which are monitored by the Manager in the context of safeguarding the Company’s assets and interests. There is a risk that the Manager fails to ensure that these controls are operated in a satisfactory manner. In addition, the Company relies on the soundness and efficiency of the custodian for good title and timeliness of receipt and delivery of securities.
A risk-based programme of internal audits is carried out by the Manager regularly to test the controls environment. An internal controls report providing an assessment of these risks and operation of the controls is prepared by the Manager and considered by the Audit Committee, and is formally reported to and considered by the Board.
Reliance on the Manager and other Third Party Providers
The Company has no employees and the Directors are all appointed on a non-executive basis. The Company is reliant upon the performance of third party providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility both for the Company’s portfolio and for the provision of company secretarial and administrative services is delegated. The Company has other contractual arrangements with third parties to act as auditor, registrar, depositary and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns are dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.
• The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of the named portfolio manager. Mark Barnett is Head of UK Equities at Invesco Perpetual. He has worked in equity markets since 1992 and has been part of the UK equities team at Invesco Perpetual for 19 years.
• The risk that the portfolio manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Invesco Perpetual UK Equity team.
• The Board has set guidelines within which the portfolio manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.
Other Risks
The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), and the perceived impact of the Manager ceasing to be involved with the Company.
The instruments in which the Company’s cash positions are invested are reviewed by the Board to ensure credit, liquidity and concentration risks are adequately managed. Where an Invesco Group vehicle is utilised, it is assessed for suitability against other similar investment options.
The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List. A breach of the conditions for approval as an investment trust could lead to the Company being subject to capital gains tax on the sale of the investments in the Company’s portfolio. A serious breach of other regulatory rules may lead to suspension from listing on the Stock Exchange.
The Manager is regulated by the Financial Conduct Authority and failure to comply with the relevant regulations could harm the Manager’s reputation with a potential detrimental effect on the Company.
The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from the service providers. The Manager’s compliance and internal audit officers produce regular reports for review by the Company’s Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.
There is an ongoing process for the Board to consider these other risks. In addition, the composition of the Board is regularly reviewed to ensure the membership offers sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.
Viability Statement
The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
In assessing the viability of the Company, the Directors considered the principal risks to which it is exposed, as set out above, together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the business model of the Company, which has effectively been stress tested for many years through different and difficult market cycles; the liquidity of the portfolio, with nearly all investments being listed on the London Stock Exchange and readily realisable; the Company’s borrowings – both long and short term – and the ability of the Company to meet these liabilities as they fall due; and the Company’s annual operating costs.
Based on the above, and assuming there is no significant adverse change to the regulatory environment and tax treatment of UK investment trusts, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.
Board Diversity
The Board considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. As a norm the Board comprises either five or six non-executive directors of which, at present, one is female. Summary biographical details of the Directors are set out in the Annual Financial Report. The Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Company does not have a human rights policy, although the Manager does apply the United Nations Principles for Responsible Investment.
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
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PORTFOLIO MANAGER'S REPORT
Market Review
The UK equity market was volatile over the 12 months under review, notably towards the end of the period. The FTSE All-Share Index reached an all-time high in April 2015, only to hit its lowest level since 2012 some 10 months on. Intra-day market activity was additionally characterised by some particularly sharp index moves, with a low volume of shares traded.
The swings in stock market sentiment were largely driven by concerns over a slowing Chinese economy and the global economic outlook, the actions of central banks and movements in commodity prices. The strong start to the period was driven by the introduction of quantitative easing in the Eurozone and further stimulus from Japan. However, equity market sentiment swung sharply negative as concerns grew over the impact of the strengthening US dollar on emerging market debt and the deflationary impact of a possible devaluation of the Chinese Yuan.
A strong year-end stock market rally followed the first increase in US interest rates for seven years. However, the start of 2016 saw the FTSE All-Share Index fall sharply to a multi-year low, as commodity prices hit 10 year lows, and oil and mining companies cut profit guidance and, in some cases, dividends. Confirmation of the Brexit referendum date had little impact on the market, but did lead to weakness in sterling. The market turbulence moderated as oil and metal prices showed some recovery and the European Central Bank surprised financial markets by cutting interest rates in the Eurozone to zero and stepping up the pace of quantitative easing. Nevertheless, worries persisted over the profitability of banks in a zero interest rate world. Towards the end of the Company’s financial year the Chairman of the US Federal Reserve, Janet Yellen, provided a boost to equities by stating that the US central bank should proceed cautiously with interest rate rises, causing a welcome weakening in the US dollar.
Portfolio Strategy and Review
The Company’s net asset value, including reinvested dividends, rose by 4.2% during the year under review, compared with a total negative return of 3.9% by the FTSE All-Share Index.
Against a highly volatile market backdrop, the key contributors to the Company’s outperformance of its benchmark index were the holdings in the tobacco sector. All four, namely Reynolds American, British American Tobacco, Imperial Brands and Altria, delivered strongly positive returns over the period under review, with Reynolds’ shares rising by over 55%. Reynolds concluded the purchase of US tobacco company Lorillard in June 2015 and the company is beginning to see the benefits of this acquisition, with cost and revenue synergies emerging from the process of integration. Dividend growth and profit margins remain healthy across all the tobacco majors, in spite of the continuing volume decline, driven by product innovation, tobacco quality improvements and cost rationalisation.
Also contributing strongly to performance were certain investments in the financials sector. In March 2016, the London Stock Exchange announced a ‘merger of equals’ with Deutsche Boerse and saw its shares rise to a record high as New York Stock Exchange owner ICE said it may make a counter offer for the company. Earlier in the period Amlin, a Lloyds insurance market investment vehicle, agreed to a takeover from Japanese company Mitsui, resulting in a significant uplift to its share price. The share prices of Beazley and Hiscox, also in the non-life insurance sector, both rose on the back of positive results and amid growing takeover speculation. Meanwhile, the portfolio’s long term holding in Provident Financial gained entry to the FTSE 100 index during the period, as the company delivered a sixth consecutive year of double-digit percentage dividend increases. The company reassured investors of the positive long term outlook for this specialist lending business.
Within the fixed line telecoms sector, BT announced its strongest revenue growth in over seven years and continued its expansion into mobile telephony, with its acquisition of EE gaining approval from the Competition & Markets Authority. Shareholders received further good news as it was confirmed that the company would not have to demerge or sell the Openreach fixed line infrastructure, as had been feared. TalkTalk Telecom, however, announced that it had been the victim of a cyber-attack. The shares were marked down in the weeks following the news, but stabilised towards the end of the period as it was confirmed that the impact of the attack had been less than originally suspected.
The portfolio continues to avoid any exposure to banks, where dividend prospects are still uncertain, and mining companies, where the medium term outlook for metals prices is still problematic. The zero weighting in the banking sector impacted positively on performance, while the zero weighting in the mining sector, where share prices demonstrated exceptional swings, was a positive over the period as a whole, but a negative over the final quarter.
Among the less successful investments during the period were support services businesses Capita and G4S. Capita’s results led to a lowering of forecasts for organic growth and a higher interest charge while G4S has faced headwinds in its emerging market businesses and from provisions for its ‘onerous’ (unprofitable) contracts in the UK and from balance sheet concerns. The negative share price reactions have been unduly harsh, with the companies well positioned to deliver growth from their bid pipelines in a challenging macro-economic environment.
GAME Digital saw its shares fall sharply after an update on pre-Christmas trading, which confirmed that UK sales had fallen off sharply at the most critical time of year for the company. Sales in old format content have declined much faster than expected and, while sales of new generation content have remained strong, these were not enough to offset the fall. The company’s sales in the Spanish market have remained strong.
Rolls-Royce published a negative trading update in November, forecasting that 2015 profits would be at the lower end of expectations and that demand would weaken in 2016. With visibility of future earnings growth showing no signs of improvement, the remainder of the holding in the company was sold, having reduced the position earlier in the year.
Also weighing on portfolio performance were the holdings in the travel & leisure sector, where sentiment has been overshadowed by terrorist events. Thomas Cook confirmed a challenging trading backdrop for 2016, although it has moved much of its summer capacity to the Western Mediterranean. EasyJet reported a reduction in revenue per seat – with the Paris bombing and the French air traffic control strikes having a short term impact.
In terms of portfolio activity, the Company’s holding in Amlin was disposed of on acceptance of the bid from Mitsui. As mentioned above, the holding in Rolls-Royce was sold and holdings in GlaxoSmithKline, Serco and Workspace were also disposed of. New investments were made in BCA Marketplace, Circassia Pharmaceuticals, easyJet, Honeycomb, VPC Specialty Lending and Zegona Communications.
Outlook
The near term outlook for the UK stock market is likely to remain clouded by a muted macro-economic backdrop in the global economy and increased pressure on profitability in the corporate sector. The multiyear monetary policy of setting interest rates at close to zero has not stimulated capital investment. Rather, companies have contained costs, particularly wages, and have used low financing costs to buy back their own stock. Whilst good for profit margins and shareholder returns in the short term, the result has been a level of economic growth in the developed world which is below historic averages. Another side effect has been to widen income inequality in many developed market economies, prompting incumbent governments, increasingly wary of more populist movements, to redress the balance – measures have included increasing minimum wages and tackling corporate tax arbitrage. Combined with some natural wage pressure from tighter labour markets in the US, this is beginning to threaten corporate profit margins.
The collapse in energy prices and the relentless drive of digital technology have entrenched low inflation expectations such that, combined with the factors outlined above; the global economy faces an ongoing lack of pricing power. This in turn has restrained the level of turnover growth in many industries, while any rebound in energy prices or pick up in employment costs may not easily be passed on.
The overall implications for the UK stock market, which is highly global in its make-up, are that earnings growth in many sectors may disappoint. Given that valuations are not obviously cheap, overall returns from equities may be expected to be subdued for the time being. The volatility witnessed since the start of 2016, partly caused by nervousness over financial stability in China, is also likely to remain a feature of the investment landscape for the remainder of the year. The Company’s portfolio has changed relatively little in recent months, as the current investments continue to demonstrate the ability to grow earnings and dividends in this challenging environment.
Mark Barnett
Portfolio Manager
The Strategic Report was approved by the Board of Directors on 25 May 2016.
Invesco Asset Management Limited
Company SecretaryÂ
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 MARCH 2016
UK listed and ordinary shares unless stated otherwise
AIM Investments quoted on AIM
| MARKET | ||||
| VALUE | % OF | |||
| INVESTMENT | SECTOR | £’000 | PORTFOLIO | |
| Reynolds American – US common stock | Tobacco | 97,249 | 6.2 | |
| British American Tobacco | Tobacco | 86,029 | 5.5 | |
| Imperial Brands (formerly Imperial Tobacco) | Tobacco | 77,540 | 5.0 | |
| BT Group | Fixed Line Telecommunications | 67,948 | 4.4 | |
| AstraZeneca | Pharmaceuticals & Biotechnology | 61,248 | 3.9 | |
| BAE Systems | Aerospace & Defence | 60,996 | 3.9 | |
| Roche – Swiss common stock | Pharmaceuticals & Biotechnology | 55,412 | 3.5 | |
| Altria – US common stock | Tobacco | 55,226 | 3.5 | |
| BP | Oil & Gas Producers | 54,497 | 3.5 | |
| Provident Financial | Financial Services | 50,371 | 3.2 | |
| Ten Top Holdings | 666,516 | 42.6 | ||
| London Stock Exchange | Financial Services | 42,378 | 2.7 | |
| Capita | Support Services | 39,741 | 2.6 | |
| Legal & General | Life Insurance | 39,681 | 2.5 | |
| RELX | Media | 39,050 | 2.5 | |
| Babcock International | Support Services | 37,663 | 2.4 | |
| Compass | Travel & Leisure | 36,286 | 2.3 | |
| Hiscox | Non-life Insurance | 34,709 | 2.2 | |
| SSE | Electricity | 34,453 | 2.2 | |
| NewRiver RetailAIM | Real Estate Investment Trusts | 34,017 | 2.2 | |
| BTG | Pharmaceuticals & Biotechnology | 33,973 | 2.2 | |
| Twenty Top Holdings | 1,038,467 | 66.4 | ||
| Centrica | Gas, Water & Multiutilities | 33,575 | 2.1 | |
| Rentokil Initial | Support Services | 30,233 | 1.9 | |
| Shaftesbury | Real Estate Investment Trusts | 28,386 | 1.8 | |
| Derwent London | Real Estate Investment Trusts | 26,803 | 1.7 | |
| easyJet | Travel & Leisure | 25,930 | 1.7 | |
| Smith & Nephew | Health Care Equipment & Services | 24,448 | 1.6 | |
| Drax | Electricity | 23,110 | 1.5 | |
| Beazley | Non-life Insurance | 22,907 | 1.5 | |
| G4S | Support Services | 21,044 | 1.3 | |
| TalkTalk Telecom | Fixed Line Telecommunications | 20,443 | 1.3 | |
| Thirty Top Holdings | 1,295,346 | 82.8 | ||
| BCA Marketplace | Financial Services | 20,015 | 1.3 | |
| Novartis – Swiss common stock | Pharmaceuticals & Biotechnology | 19,505 | 1.3 | |
| Reckitt Benckiser | Household Goods & Home Construction | 19,341 | 1.2 | |
| Lancashire | Non-life Insurance | 16,302 | 1.1 | |
| Thomas Cook | Travel & Leisure | 16,223 | 1.0 | |
| KCOM | Fixed Line Telecommunications | 16,041 | 1.0 | |
| IP Group | Financial Services | 14,752 | 1.0 | |
| Circassia Pharmaceuticals | Pharmaceuticals & Biotechnology | 14,585 | 0.9 | |
| HomeServe | Support Services | 14,564 | 0.9 | |
| P2P Global Investments | Equity Investment Instruments | 13,884 | 0.9 | |
| Forty Top Holdings | 1,460,558 | 93.4 | ||
| N Brown | General Retailers | 12,918 | 0.8 | |
| Zegona Communications | Non-Equity Investment Instruments | 12,646 | 0.8 | |
| CLS | Real Estate Investment & Services | 12,164 | 0.8 | |
| Burford CapitalAIM | Equity Investment Instruments | 12,097 | 0.8 | |
| Vectura | Pharmaceuticals & Biotechnology | 11,719 | 0.8 | |
| GAME Digital | General Retailers | 10,554 | 0.7 | |
| ReddeAIM | Financial Services | 8,341 | 0.5 | |
| Raven Russia – Ordinary | Real Estate Investment & Services | 4,212 | ||
| Raven Russia – Preference | 3,670 | |||
| 7,882 | 0.5 | |||
| VPC Specialty Lending Investments | Financial Services | 6,646 | 0.4 | |
| Honeycomb Investment Trust | Equity Investment Instruments | 4,500 | 0.3 | |
| Fifty Top Holdings | 1,560,025 | 99.8 | ||
| Funding Circle SME | Equity Investment Instruments | 2,754 | 0.2 | |
| Eurovestech – Unquoted | Financial Services | 462 | — | |
| Proximagen – Rights 12 Sep 2017 – Unquoted | Pharmaceuticals & Biotechnology | 173 | — | |
| Barclays Bank – Nuclear Power Notes 28 Feb 2019 | Non-Equity Investment Instruments | 120 | — | |
| Total Holdings (54) | 1,563,534 | 100.0 | ||
.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
IN RESPECT OF THE ANNUAL FINANCIAL REPORT AND THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the annual financial 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 the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• 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 which enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Directors’ Remuneration Report and a Corporate Governance Statement that complies with that law and those regulations.
The Directors of the Company each confirm to the best of their knowledge, that:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company taken as a whole; and
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The Directors consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Jim Pettigrew
Chairman
Signed on behalf of the Board of Directors
25 May 2016
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH
| 2016 | 2015 | |||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Gains on investments | — | 19,056 | 19,056 | — | 158,768 | 158,768 |
| Foreign exchange (losses)/profits | — | (30) | (30) | — | 2 | 2 |
| Income – note 2 | 58,971 | — | 58,971 | 56,045 | — | 56,045 |
| Investment management fee – note 3 | (2,226) | (5,194) | (7,420) | (2,035) | (4,748) | (6,783) |
| Other expenses | (857) | (1) | (858) | (870) | (1) | (871) |
| Net return before finance costs and taxation | 55,888 | 13,831 | 69,719 | 53,140 | 154,021 | 207,161 |
| Finance costs | (2,689) | (6,275) | (8,964) | (3,515) | (8,203) | (11,718) |
| Return on ordinary activities before taxation | 53,199 | 7,556 | 60,755 | 49,625 | 145,818 | 195,443 |
| Tax on ordinary activities | (1,132) | — | (1,132) | (1,278) | — | (1,278) |
| Return on ordinary activities after taxation for the financial year | 52,067 | 7,556 | 59,623 | 48,347 | 145,818 | 194,165 |
| Return per ordinary share | ||||||
| Basic – note 4 | 26.7p | 3.8p | 30.5p | 24.8p | 74.7p | 99.5p |
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 MARCH
| CAPITAL | ||||||
| SHARE | SHARE | REDEMPTION | CAPITAL | REVENUE | ||
| CAPITAL | PREMIUM | RESERVE | RESERVE | RESERVE | TOTAL | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Balance at 31 March 2014 | 48,779 | 6,639 | 24,676 | 1,086,473 | 61,244 | 1,227,811 |
| Dividends paid – note 5 | — | — | — | — | (46,025) | (46,025) |
| Net return on ordinary activities | — | — | — | 145,818 | 48,347 | 194,165 |
| Balance at 31 March 2015 | 48,779 | 6,639 | 24,676 | 1,232,291 | 63,566 | 1,375,951 |
| Net proceeds from issue of new shares | 138 | 3,755 | — | — | — | 3,893 |
| Dividends paid – note 5 | — | — | — | — | (47,150) | (47,150) |
| Net return on ordinary activities | — | — | — | 7,556 | 52,067 | 59,623 |
| Balance at 31 March 2016 | 48,917 | 10,394 | 24,676 | 1,239,847 | 68,483 | 1,392,317 |
.
BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH
| 2016 | 2015 | |
| £’000 | £’000 | |
| Fixed assets | ||
| Investments held at fair value through profit or loss | 1,563,534 | 1,512,631 |
| Current assets | ||
| Debtors | 6,072 | 12,428 |
| Cash and cash equivalents | 1,981 | 100 |
| 8,053 | 12,528 | |
| Creditors: amounts falling due within one year | (80,902) | (51,091) |
| Net current liabilities | (72,849) | (38,563) |
| Total assets less current liabilities | 1,490,685 | 1,474,068 |
| Creditors: amounts falling due after more than one year | (98,368) | (98,117) |
| Net assets | 1,392,317 | 1,375,951 |
| Capital and reserves | ||
| Share capital – note 6 | 48,917 | 48,779 |
| Share premium | 10,394 | 6,639 |
| Capital redemption reserve | 24,676 | 24,676 |
| Capital reserve | 1,239,847 | 1,232,291 |
| Revenue reserve | 68,483 | 63,566 |
| Shareholders’ funds | 1,392,317 | 1,375,951 |
| Net asset value per ordinary share | ||
| Basic – note 7 | 710.74p | 704.23p |
These financial statements were approved and authorised for issue by the Board of Directors on 25 May 2016.
Signed on behalf of the Board of Directors
Jim Pettigrew
Chairman
.
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year, unless otherwise stated.
(a) Basis of preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014. Accordingly, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland applies for these financial statements for the year ended 31 March 2016 and has been applied for the first time. The financial statements are issued on a going concern basis.
As a result of the first time adoption of FRS 102 and the revised SORP, comparative figures and presentation have been revised where required. The net return attributable to ordinary shareholders and shareholders’ funds remain unchanged. As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds) is provided. The accounting policies applied to these financial statements are consistent with those applied for the year ended 31 March, apart from a revision to cash which is now defined as cash and cash equivalents. Note 1 (d) sets out the accounting policy for cash and cash equivalents. No other accounting policies have changed as a result of the application of FRS102, amendments to FRS102 (see below) and the revised SORP.
Amendments to FRS 102 – Fair value hierarchy disclosures (March 16) amends paragraphs 34.22 and 34.42 of FRS 102, revising the disclosure requirements for financial instruments held at fair value to align these with the disclosure requirements of EU-adopted IFRS. These amendments become effective for accounting periods beginning on or after 1 January 2017. The Company has chosen to early adopt these paragraphs. There are no accounting policy or disclosure changes as a result of this adoption.
2. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2016 | 2015 | |
| £’000 | £’000 | |
| Income from listed investments | ||
| UK dividends | ||
| – Ordinary dividends | 40,163 | 37,540 |
| – Special dividends | 5,039 | 4,391 |
| Overseas dividends | ||
| – Ordinary dividends | 9,610 | 10,615 |
| – Special dividends | 1,744 | 2,583 |
| Scrip dividends | 1,514 | 911 |
| Unfranked investment income | 737 | — |
| Income from money market funds | 7 | 4 |
| 58,814 | 56,044 | |
| Other income | ||
| Deposit interest | 2 | 1 |
| Underwriting commission | 155 | — |
| Total income | 58,971 | 56,045 |
3. Investment Management Fees
This note shows the fee due to the Manager. This is calculated and paid monthly.
| 2016 | 2015 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Investment management fee | 2,226 | 5,194 | 7,420 | 2,035 | 4,748 | 6,783 |
Details of the investment management agreement are disclosed in the Annual Financial Report. At 31 March 2016 investment management fee of £596,000 (2015: £592,000) was accrued.
4. Return per Ordinary Share
Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.
The basic, capital and total returns per ordinary share are based on each return on ordinary shares after tax and on 195,275,887 (2015: 195,116,734) ordinary shares, being the weighted average number of shares in issue during the year.
5. Dividends
Dividends represent the distribution of income to shareholders. The Company pays four dividends a year – three interim and one final dividend.
| 2016 | 2015 | |||
| pence | £’000 | pence | £’000 | |
| Dividends paid and recognised in the year: | ||||
| Third interim paid in respect of previous year | 5.15 | 10,049 | 5.00 | 9,756 |
| Final paid in respect of previous year | 8.60 | 16,780 | 8.50 | 16,585 |
| First interim paid | 5.20 | 10,146 | 5.00 | 9,756 |
| Second interim paid | 5.20 | 10,175 | 5.10 | 9,951 |
| 24.15 | 47,150 | 23.60 | 46,048 | |
| Unclaimed dividends | — | — | — | (23) |
| 24.15 | 47,150 | 23.60 | 46,025 | |
| Dividends on shares payable in respect of | ||||
| the year: | ||||
| First interim | 5.20 | 10,146 | 5.00 | 9,756 |
| Second interim | 5.20 | 10,175 | 5.10 | 9,951 |
| Third interim | 5.20 | 10,175 | 5.15 | 10,049 |
| Proposed final | 8.75 | 17,121 | 8.60 | 16,780 |
| 24.35 | 47,617 | 23.85 | 46,536 | |
The proposed final dividend is subject to approval by ordinary shareholders at the AGM.
6. Share Capital
Share capital represents the total number of shares in issue, on which dividends accrue.
| 2016 | 2015 | |||
| NUMBER | £’000 | NUMBER | £’000 | |
| Allotted 25p ordinary shares: | ||||
| Brought forward | 195,116,734 | 48,779 | 195,116,734 | 48,779 |
| Issue of new shares | 550,000 | 138 | — | — |
| Carried forward | 195,666,734 | 48,917 | 195,116,734 | 48,779 |
During the year the Company issued 550,000 ordinary shares at an average price of 716.20p. No shares have been issued or bought back subsequent to the year end.
The Directors’ Report in the Annual Financial Report sets out the Company’s share capital structure, restrictions and voting rights.
7. Net Asset Value (NAV) per Ordinary Share
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into NAV per ordinary share by dividing by the number of shares in issue.
The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 195,666,734 (2015: 195,116,734).
(a) NAV – debt at par
The shareholders’ funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par and the corresponding NAV per share. A reconciliation between the two sets of figures follows:
| 2016 | 2015 | ||||
| NAV | Shareholders’ | NAV | Shareholders’ | ||
| per share | Funds | Per share | Funds | ||
| PENCE | £’000 | PENCE | £’000 | ||
| Shareholders’ funds | 711.58 | 1,392,317 | 705.19 | 1,375,951 | |
| Less: Unamortised discount and expenses arising from debenture issue | (0.84) | (1,632) | (0.96) | (1,883) | |
| NAV – debt at par | 710.74 | 1,390,685 | 704.23 | 1,374,068 | |
(b) NAV – debt at market value
The market value of the debenture stocks is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilts.
The net asset value per share adjusted to include the debenture stocks at market value rather than at par is as follows:
| 2016 | 2015 | ||||
| NAV | Shareholders’ | NAV | Shareholders’ | ||
| per share | Funds | Per share | Funds | ||
| PENCE | £’000 | PENCE | £’000 | ||
| NAV – debt at par | 710.74 | 1,390,685 | 704.23 | 1,374,068 | |
| Debt at par | 51.11 | 100,000 | 51.25 | 100,000 | |
| Debt at market value | |||||
| – 73/4% Debenture Stock 2022 | (66.55) | (130,208) | (69.41) | (135,439) | |
| NAV – debt at market value | 695.30 | 1,360,477 | 686.07 | 1,338,629 | |
8. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ emoluments and interests have been disclosed in the Annual Financial Report with additional disclosure in the notes to the financial statements. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Directors’ Report in the Annual Financial Report, and in note 3 above.
9. This Annual Financial Report announcement is not the Company’s statutory accounts. The statutory accounts for the year ended 31 March 2015 have been delivered to the Registrar of Companies. The statutory accounts for the year ended 31 March 2015 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006. The statutory accounts for the financial year ended 31 March 2016 have been approved and audited but have not yet been filed.
10. The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the Company’s registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP. A copy of the Annual Financial Report will be available from Invesco Perpetual on the following website:
www.invescoperpetual.co.uk/edinburgh
11. The Annual General Meeting of the Company will be held at 11.00 am on 14 July 2016 at the Weston Link, National Galleries of Scotland, Princes Street, Edinburgh.
By order of the Board
Invesco Asset Management Limited - Company Secretary
25 May 2016
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