Final Results
FIDELITY EUROPEAN VALUES PLC
Final Results For the year ended 31 December 2013
PERFORMANCE OVER ONE YEAR, THREE YEARS, FIVE YEARS AND SINCE LAUNCH TO 31
DECEMBER 2013 (ON A TOTAL RETURN BASIS) (%)
FTSE World
Europe
(ex UK)
NAV Share price Index1
One year +20.0 +20.8 +25.2
Three years +32.5 +45.0 +25.8
Five years +58.0 +73.7 +57.4
Since launch (1991) +1,950.1 +1,777.1 +618.9
1 Data prior to the year ended 31 December 2011 is on a net of tax basis
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
Historical
Record
as at 31
December 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
Total portfolio exposure
(£m)1 742 685 562 716 742 750 958 906 802 576 471
Shareholders' funds (£m) 711 616 518 661 649 650 855 802 689 513 407
NAV per share (p) 1,685.78 1,428.97 1,168.57 1,335.78 1,269.52 1,183.61 1,449.76 1,283.77 1,094.71 815.04 647.43
Share price (p) 1,525.00 1,287.00 1,003.00 1,113.00 1,151.00 990.00 1,350.00 1,211.00 1,118.00 766.50 589.00
(Discount)/premium to
NAV
(cum income) (%) (9.5) (9.9) (14.2) (16.7) (9.3) (16.4) (6.9) (5.7) 2.1 (6.0) (9.0)
Revenue return per
ordinary
share (p) 29.82 27.78 26.94 15.95 20.59 36.77 13.79 5.34 2.82 1.98 1.93
Dividend per ordinary
share (p) 29.75 27.75 26.50 15.75 22.502 23.263 13.75 5.25 2.50 1.75 1.502
Cost of running the
Company
(ongoing charges) (%)4 0.96 0.98 0.94 0.91 0.92 0.89 1.06 1.47 1.55 1.58 1.63
Gearing (%)5 4.3 11.1 8.6 4.6 1.0 nil (1.0) 12.4 16.0 11.5 15.3
NAV performance (%)6 +20.0 +24.7 -11.5 +7.1 +11.3 -17.5 +13.4 +17.5 +34.7 +26.2 +38.2
Share price performance
(%)6 +20.8 +31.3 -8.6 -1.3 +21.3 -25.9 +12.0 +8.6 +46.2 +30.4 +43.3
Index performance (%)6,7 +25.2 +17.8 -14.7 +5.1 +19.1 -24.6 +15.1 +19.5 +23.4 +13.2 +29.0
The total exposure of the investment portfolio, including exposure to the
investments underlying the long CFDs. The amounts prior to 2011 represent
1 total assets less
current liabilities, excluding the fixed term loan
liabilities
Interim dividend in respect of the years ended 31 December
2 2003 and 31 December 2009
An additional 13.24p per share was paid by way of a
3 special dividend
4 The percentages prior to 2012 are total expense ratios
Total portfolio exposure in excess of shareholders' funds. The amounts
prior to 2011 represent total net assets, less loans plus cash at bank
5 and cash funds, in excess
of shareholders' funds
6 Total return basis
Data prior to the year ended 31 December 2011 is on a net
7 of tax basis
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
CHAIRMAN'S STATEMENT
I have pleasure in presenting the Annual Report of Fidelity European Values
PLC for the year ended 31 December 2013.
Shareholders will see that the format of the Report has changed
this year with the introduction of a Strategic Report and other changes
brought about through new regulations, as referred to later in my Statement.
In my view, some refreshment and additional information is a positive and I
hope you find this useful.
PERFORMANCE
European equities rose over the year to December 2013 as European
economies stabilised and the risk of a Eurozone break-up receded. Markets were
supported by improving macroeconomic data from the Eurozone and the US; the
accommodative (or easy) monetary policy adopted by global policymakers to
reduce the cost of borrowing also boosted sentiment. However, there was
intermittent volatility during the year, particularly as the Italian election
ended in a deadlock, renewing doubts about the continuation of the much needed
structural reforms in the country; and later in the year when investors became
worried about the collapse of the banking system in Cyprus.
Against this backdrop, the net asset value ("NAV") per share of the
Company returned 20.0%, but underperformed its Benchmark, the FTSE World
Europe (ex UK) Index, which returned 25.2%. While absolute performance
remained healthy, relative performance reflected a number of stock-specific
disappointments but also an environment in which some of the companies and
regions that had previously been challenged, often for good reason, became
some of the best performers. These included lower-quality companies that did
not meet the Manager's investment criteria of solid balance sheets and growing
dividends.
A detailed review of the performance of the portfolio is provided
in the Manager's Review (see below). Sam Morse has concentrated in his Review
on the one year period. I would, however highlight, that the three year
numbers continue to be ahead of Benchmark, with a NAV total return of 32.5%
versus the Benchmark of 25.8%. (All figures are in UK sterling and are on a
total return basis.)
DISCOUNT MANAGEMENT
The Board continues to adopt an active discount management policy
and share buybacks have been made during the year. Whilst the primary purpose
of our policy is to reduce share price volatility in relation to NAV, buying
in shares at a discount also results in an enhancement to NAV per share.
Your Board has sanctioned share buybacks over the course of 2013
amounting to 2.2% of the issued share capital of the Company, a lower figure
than the 2.7% repurchased in 2012. The great majority of the repurchases took
place in the first half of the year, when continental European equities were
still out of favour and lacked the support from investors which became more
apparent as the year progressed.
The lower level of share price volatility apparent in the second
half of 2013 has continued into 2014. Furthermore, the level of discount has
narrowed from 8.1% at the start of 2013 to 7.9% at the year end, based on the
NAV excluding income. This small narrowing in the discount has given rise to a
share price total return of 20.8% for 2013, ahead of the NAV total return of
20.0%.
Further details of share repurchases may be found in the Directors'
Report of the Annual Report.
DIVIDENDS
The Board intends to continue with its practice of paying out
earnings in full. The objective is one of long term capital growth and we will
not seek to influence the Manager to determine the level of income of your
Company's portfolio in any particular year.
The Board has decided to recommend a final dividend of 29.75 pence
per share for the year ended 31 December 2013 (2012: 27.75 pence). This
dividend will be payable on 23 May 2014 to shareholders who appear on the
register as at close of business on 21 March 2014 (ex-dividend date 19 March
2014).
The proposed dividend increase for 2013 over 2012 is therefore
7.2%. Whilst we emphasise that the increase is a function of stock selection
and cannot be extrapolated into the future, Sam Morse continues to focus on
companies which are able to grow their dividends as one of the key factors in
his stock selection. A further explanation of the investment process can be
found in the Annual Report.
I would like to make one further observation for shareholders when
comparing the level of dividend yield between companies. This is that we take
a conservative approach of charging all management expenses against income and
not against capital. Only the performance fee (when applicable) is charged
against capital. Some companies, particularly those with an equity income
objective, split management expenses between capital and income, which has the
effect of increasing the income return (and dividend paying potential) and
reducing the capital return. I should stress that this does not alter the
total return from both capital and income combined. Moreover there is no
`right' or `wrong' way and it is a matter for judgement. However, the basis
should be taken into account, particularly when comparing the dividend yield
between different companies.
GEARING
The Company gears through the use of long Contracts For Difference
("CFDs"). As at 31 December 2013, the level of gearing was 4.3% and the Board
is currently working within a range of 0-10%. Our gearing range at the start
of the year was 5-15%, with gearing on 1 January 2013 of 11.1%. Gearing was
reduced as the year progressed, in line with a more cautious stance as share
prices rose, expressed in the Manager's Review shown below. Gearing made a
positive contribution to performance during the year.
It is pleasing to note that the move to using CFDs as a means of
gearing the portfolio, introduced in 2011 in place of traditional bank loans,
continues to be positive. Operationally it works smoothly and it has been
significantly cheaper for the Company than if we had used more traditional
forms of borrowing.
REVISED ARTICLES OF ASSOCIATION
There have been a number of recent changes to tax, regulation and
company law which affect investment trusts and the Company. The Board is
therefore seeking approval at the forthcoming Annual General Meeting to adopt
new Articles of Association substantially in the form of the existing Articles
of Association but updated to reflect these changes. In particular, the new
Articles of Association have been amended: (i) to remove the prohibition on
the distribution of realised capital profits; this change will help to keep
our Articles in line with what is allowable under current legislation. I
believe we should move with legislative changes, but stress that the Board has
no intention of using this power in the immediate future and would only do so
if it felt that it were in the best interest of the Company's shareholders;
and (ii) to incorporate provisions to facilitate compliance with the
Alternative Investment Fund Managers Directive. Further details can be found
below.
REGULATORY CHANGES
There are a number of regulatory changes that have come into force,
or are shortly to come into force, and the Company's Annual Report for the
year under review reflect these changes. We now include a Strategic Report
which is designed to provide better information to the Company's members and
potential investors on how the Directors have performed their duty in
promoting the success of the Company. The Strategic Report is shown below. New
regulations have come into force requiring additional information to be
included in the Directors' Remuneration Report and you will note that we are
now required to adopt a Remuneration Policy which will be put to shareholders
at the forthcoming Annual General Meeting and formally come into force from
that date. You will see also that there is a new Report of the Audit Committee
in the Annual Report.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE ("AIFMD")
You may recall I wrote in the Half-Yearly Report to 30 June 2013
that the Board had agreed to appoint FIL Investments International (the
current Manager) as its interim Alternative Investment Fund Manager ("AIFM").
Further to that announcement, the Board has agreed in principle to appoint FIL
Investment Services (UK) Limited (a FIL Group company) to become the Company's
AIFM. FIL Investment Services (UK) Limited will delegate the portfolio
management to FIL Investments International.
An additional requirement of the AIFMD is to appoint a depositary
on behalf of the Company who will oversee the custody cash arrangements and
other AIFM responsibilities of the Company. To this end the Board have agreed
in principle to appoint J.P. Morgan Europe Limited to act as the Company's
depositary. J.P. Morgan Europe Limited is part of the same group of companies
as JPMorgan Chase Bank, who act as the Company's bankers and custodians.
JPMorgan Chase Bank will continue to act as bankers and custodians to the
Company.
PROPOSED SUB DIVISION OF SHARES
The Board are conscious that the Company's share price has
increased substantially from its launch price of £1 per share in 1991 to a
price of £15.20 per share as at close of business on 6 March 2014. The higher
share price has caused a notable proportion of individuals' monthly savings
amounts and dividend reinvestment amounts in Savings and ISA plans to roll
over to the following month. To help alleviate this problem, and to enhance
the appeal of the Company's shares to investors with smaller amounts, we
announced on 17 January 2014 a proposal to sub divide your Company's shares on
a 10 for 1 basis. If this had been in effect on 6 March 2014, the new share
price for each of the 10 new ordinary shares arising would, following the
sub-division, become approximately £1.52 and the nominal value per share
would, following the sub-division, become 2.5 pence per share.
A 10 for 1 basis, rather than some other multiple, has the
advantage of making it easier for shareholders to equate their new share price
and holding to their original purchase price and holding. The proposed share
split will be put to shareholders at the forthcoming Annual General Meeting as
an ordinary resolution. If passed, applications will be made for admission of
the new Ordinary shares to the Official List and on the London Stock
Exchange's market for listed securities. If the applications are accepted, it
is proposed that the effective date for dealings to commence in the new
Ordinary shares will be 2 June 2014. Further details of the resolution are
shown below. We hope you will support this resolution.
DIRECTORATE
We are pleased to have welcomed Marion Sears to the Board in 2013
and shareholders voted in favour of her appointment at our 2013 Annual General
Meeting. Also at the 2013 Annual General Meeting Simon Duckworth retired from
the Board after ten years as a Director and we give thanks to Simon for the
valuable contribution he has made over the many years he has served on the
Board. We wish him well in his future endeavours. Subsequently, no further
changes have been made.
In accordance with the UK Corporate Governance Code for Directors
of FTSE 350 companies the entire Board is subject to annual re-election. The
Directors have a wide range of appropriate skills and experience to make up a
balanced Board for your Company. With the exception of Simon Fraser, in the
opinion of the Board, all other Directors are independent.
Simon Fraser, due to his previous employment relationship with the
Manager and his directorship of another investment trust managed by Fidelity,
namely Fidelity Japanese Values PLC, is deemed non-independent by the UK
Corporate Governance Code. The Board is convinced that Simon Fraser's
experience serves the Company well; and the Directors support unanimously his
continued position as a Director of the Company.
In line with good corporate governance the Board carries out an
assessment of its own performance every year and every three years an
independent, externally facilitated evaluation of its performance takes place
as required by the UK Corporate Governance Code for Directors of all FTSE 350
companies. The next such independent evaluation will take place during 2015.
The Board has considered the proposals for the re-election of all of the
Directors and recommends to shareholders that they vote in favour of the
proposals.
CONTINUATION VOTE
In accordance with the Articles of Association of the Company, an
ordinary resolution that the Company continue as an investment trust for a
further two years was passed at the 2013 Annual General Meeting. A further
continuation vote will take place at the Annual General Meeting in 2015.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at
Fidelity's offices at 25 Cannon Street, London EC4M 5TA (St Paul's or Mansion
House tube stations) on Thursday 15 May 2014 at midday. My fellow Directors
and I look forward to talking with as many shareholders as possible on this
occasion. We will be holding a presentation by our Portfolio Manager, Sam
Morse.
OUTLOOK
The economic backdrop in Europe is improving and the trend is
continuing into 2014. Whilst the Eurozone still presents many challenges, the
main focus of concern amongst investors has shifted to China, which is
experiencing a slowdown in growth, and Emerging Markets which are being
impacted by the tapering of Quantitative Easing in the United States. However,
we should not ignore the fact that many companies that operate within Europe
generate much of their earnings from Emerging Markets, particularly China and
this, along with the level of exuberance we saw in markets in 2013, means that
a degree of caution should be exercised. As I write this report, there is a
dangerous situation developing closer to home in Crimea. The outcome is
difficult to predict, but it will certainly impact equity markets. In this
respect, our focus remains on investing in strong European companies offering
fundamental value with the prospect of making decent returns from current
valuation levels. We are, as I said this time last year, fortunate to have a
wide choice of investment opportunities across the region.
Humphrey van der Klugt
Chairman
10 March 2014
MANAGER'S REVIEW
PERFORMANCE REVIEW
As shown in the Financial Summary in the table above, the NAV per
share of the Company returned 20.0% in the year to 31 December 2013,
underperforming the FTSE World Europe (ex UK) Index, which returned 25.2%.
(All performance figures are quoted on a total return basis and in UK
sterling).
MARKET BACKGROUND
2013 turned out to be a surprisingly strong year for continental European
equities.
In a rewarding first quarter, Italian elections, which resulted in
dead-lock, and the banking system woes in Cyprus created short term volatility
but did little to halt a rise in share values. The market did, however, suffer
a brief mid-year correction when US bond yields started to climb in
anticipation of the June "tapering" announcement from the Federal Reserve.
Shares resumed their long march upwards, in the second half of the year, as
optimism grew that European economies were on the mend and that earnings and
dividend growth would follow.
Economic news improved as the year progressed with some of the more
indebted European countries, such as Spain and Italy, finally emerging from
recession in the third quarter. As a consequence of improved growth prospects,
the cost of government debt in these countries also started to fall rapidly.
Existential threats to the Eurozone receded further as these countries
appeared to have fiscal deficits more firmly under control; Greece, for
instance, forecast a primary surplus. This positive economic momentum was
given a further boost, in November, when the European Central Bank ("ECB"),
reduced its core interest rate by a quarter of a percent, to protect the
nascent recovery and to ward off the possibility that very low rates of
inflation might turn into outright deflation.
Responding to better news in Europe, markets rose steadily through
the second half of the year, shrugging off growing evidence that emerging
markets, such as China, Brazil and Turkey, were, by contrast, beginning to
experience less robust prospects for growth and, in some cases, weakening
currencies. This is partly on the premise that rising bond yields in the US
would result in the repatriation of liquidity that had supported emerging
market growth for many years. There was some concern that weakness in emerging
markets might impact the recovery in developed markets more forcefully but a
delay in "tapering", which had been expected in the autumn, allayed investors'
worries in the short term.
The year ended on a quiet note despite the positive announcement,
following the German election, of a "grand coalition" between Merkel's winning
Christian Democratic Union and the Social Democrats. The market was held in
check by renewed fears of "tapering", after stronger economic data in the US,
and by some nervousness ahead of the ECB's review of the asset quality of
Eurozone banks and subsequent stress tests.
Against a backdrop of improving domestic economies, cyclical
sectors such as financials and consumer discretionary were re-rated strongly.
Conversely, more defensive sectors, especially those with emerging market or
commodity exposure, such as energy and consumer staples, delivered more modest
returns. Disappointingly, although share prices rose handsomely in 2013, the
earnings and dividends of continental European companies did not, in
aggregate, grow. This makes the scale of the returns enjoyed in the year quite
surprising.
PORTFOLIO REVIEW
The Company's investment strategy has not changed: your Manager
continues to focus on identifying, and investing in, attractively valued
companies, with sound balance sheets, which can deliver consistent dividend
growth. This investment strategy has worked well, in terms of superior returns
to the Benchmark, over the long term but it does not work every year. Although
your Company enjoyed satisfactory absolute returns in 2013, the Company's NAV
underperformed the Benchmark, despite the benefits of gearing in a rising
market.
This underperformance is largely attributable to poor stock
selection. Some of the underperformance is, however, also attributable to a
more `risk-on' environment, particularly in the second half of the year.
Companies which performed best in this environment were often the laggards of
previous years, such as highly-leveraged companies or companies exposed to the
domestic economies of Spain and Italy. In many cases, these companies did not
meet your Manager's required criteria of growing dividends, cash generation
and a strong balance sheet. By contrast, companies whose earnings and
dividends had proved more robust in more difficult economic times started the
year at more elevated valuation levels and, therefore, did not enjoy the same
quantum of re-rating although, in many cases, they delivered continued
earnings and dividend growth.
In terms of stock selection, which remains the primary determinant
of your Company's performance, there were a number of detractors spread across
different sectors. In the energy and materials sectors, in addition to Saipem
and Umicore, whose travails were covered in the half-yearly report, Royal
Dutch Shell performed poorly, particularly in the second half of the year,
with the resignation of the Chief Executive preceding very disappointing
quarterly results. Turkiye Garanti Bankasi, also mentioned in the half-yearly
report, declined further, particularly towards the end of the year, as the
Turkish Lira weakened and as political tensions resurfaced due to a corruption
probe involving some cabinet ministers' relations. The technology business,
SAP, also performed poorly as it became apparent that the company would not
meet medium-term guidance on margins due to the requirement to invest more to
address the challenge from "cloud" competitors. Swedish Match, already facing
increasing competition in Swedish snus, also saw a sharp slowdown in growth in
its other major business, US mass-market cigars, as the competitive
environment worsened. Most of these businesses are sound businesses, which
meet the investment criteria of your Manager's strategy, so holdings have been
retained, although often in reduced amounts. Saipem was a mistake and it was
sold entirely early on in the year.
There were some stock-picking successes, most notably in the
financial sectors, with 3i Group, KBC, the Belgian bank, and Sampo, the
Finnish insurance company, all delivering strong relative performances but, in
general, the detractors more than off-set these more encouraging performers.
To summarise, it was a poor year for stock selection. Mistakes have been made
and lessons learned. As the great investor, Sir John Templeton, famously
remarked: "The only way to avoid mistakes is not to invest - which is the
biggest mistake of all" which was certainly true in 2013.
OUTLOOK
The market has had two strong years in a row. The Benchmark has,
over that time, climbed by almost 50%. Valuations of continental European
companies have risen from a low base but are now, in aggregate, beginning to
look less attractive, relative to history and relative to bonds. Some argue
that equities will remain well supported by global liquidity and a possible
rotation out of bonds and cash into equities. Time will tell. In your
Manager's opinion, the market will struggle to make much progress from here,
unless the improvement in the economic environment feeds through into
stronger-than-expected earnings and dividend growth; expectations are high
that this will happen, and that is, in itself, a risk.
The improvement in the economies of Europe is encouraging and,
going forward, fiscal austerity will be less of a drag on growth as deficits
shrink. This recovery is, however, likely to be slow and fragile, because
there is little credit growth, given high debt levels and a requirement,
particularly in the case of banks, to delever. Slowing growth, currency
weakness and political instability in emerging markets may also restrain the
pace of economic growth in developed economies. The recent events in the
Ukraine are a case in point. It is important to remember that almost a third
of continental European companies' revenues and profits are sourced from these
emerging economies.
The outlook remains balanced. Caution is warranted, especially
given the more positive sentiment towards European equities, and a pull-back
is quite probable, hence the reduction in your Company's level of gearing, but
many of the major risks that have plagued markets in recent years have, for
the time being, receded.
FIL Investments International
10 March 2014
STRATEGIC REPORT
The Directors have pleasure in presenting the Strategic Report of
the Company which replaces and enhances reporting previously included in the
`Business Review' section of the Directors' Report. It provides a review of
the Company's business and describes the principal risks and uncertainties it
faces. An analysis of the performance of the Company during the financial year
and the position at the year end is included taking into account its
objective, strategy and risks and how these are measured using Key Performance
Indicators. The Chairman's Statement and Manager's Review form part of the
Strategic Report.
BUSINESS AND STATUS
The Company carries on business as an investment trust and has been
accepted as an approved investment trust by HM Revenue & Customs under
Sections 1158 and 1159 of the Corporation Tax Act 2010, subject to the Company
continuing to meet eligibility conditions. The Directors are of the opinion
that the Company has conducted its affairs in a manner which will satisfy the
conditions for continued approval.
The Company is registered as an investment company under Section
833 of the Companies Act 2006 and operates as such. It is not a close company
and has no employees.
OBJECTIVE
The Company's objective is to achieve long term capital growth from
the stockmarkets of continental Europe. The Benchmark Index for performance
measurement purposes is the FTSE World Europe (ex UK) Index.
STRATEGY
In order to achieve this objective, the Company has an actively
managed portfolio of investments, consisting primarily of continental European
securities. The principal activity is to pursue the objective through
operating as an investment trust company. As part of the strategy, the Board
has delegated the management of the portfolio and other services. The
objective, strategy and principal activity have remained unchanged throughout
the year ended 31 December 2013.
The Board has reviewed the summary of the year's activities and is
in agreement with the indications of likely future developments and the
factors likely to affect these which are given in the Chairman's Statement and
the Manager's Review shown above.
The stock selection approach adopted by the Portfolio Manager is
considered to be well suited to achieving the objective. Although income is
being received by way of dividend payments the emphasis is placed on capital
growth. The Board takes the view that investing in equities is a long term
process, and that the Company's returns to shareholders will vary from year to
year. Unlike equivalent open-ended investment vehicles, the investment trust
structure offers investors a portfolio which may be geared. The Board takes
the view that long term returns can be enhanced by the use of gearing, in a
carefully considered and monitored way.
The gearing range is considered by the Board and Portfolio Manager at their
quarterly board meetings.
INVESTMENT POLICY
The Company invests principally in continental European securities
with a view to achieving long term capital growth for shareholders. The
portfolio is selected by the Manager on the basis of its assessment of the
fundamental value available in individual situations. Whilst the Company's
overall exposure to individual countries and industry sectors is monitored,
the portfolio is not structured primarily on a country or industrial
weightings basis, although certain investment restrictions apply in order to
diversify risk.
No material change will be made to the investment policy without shareholder
approval.
INVESTMENT RESTRICTIONS
- A minimum of 80% of gross assets will be invested in companies
from countries which are included in the Benchmark Index.
- A maximum of 5% of gross assets may be invested in companies of non-European
countries which have some European exposure or connection.
- A maximum of 10% of the Company's gross assets may be invested in
the aggregate of:
a) securities not listed on a recognised stock exchange; and
b) holdings in which the interest of the Company amounts to 20% or
more of the equity capital of any listed company.
- The Company will not invest more than 10% of gross assets in any
one quoted company at the time of acquisition.
- A maximum of 5% of the Company's gross assets may be held in
unquoted securities in aggregate at any one time.
- The Company's normal policy is to be geared in the belief that
long term investment returns will exceed the costs of gearing. This gearing is
obtained through the use of borrowing and/or through the use of Contracts for
Difference ("CFDs") to obtain exposure to securities selected by the Manager.
The effect of gearing is to magnify the consequence of market movements on the
portfolio. If the portfolio value rises the NAV will be positively impacted,
but if it falls the NAV will be adversely impacted. The Board is responsible
for the level of gearing in the Company and reviews the position on a regular
basis.
The aggregate exposure of the Company to equities, as a result of
borrowing or under CFDs, will not exceed 130% of the total net assets (a
gearing level of 30%) at the time at which any CFD is entered into or a
security acquired. It should be stressed that the majority of the Company's
exposure to equities will be through direct investment, not CFDs.
In addition, the limits on exposure to individual companies and
groups will be calculated on the basis that the Company has acquired the
securities to which any CFD is providing exposure.
- The maximum amount of cash or cash equivalents held by the
Company will be 25% of the Company's total net assets, but this limit will not
include any cash or cash equivalent paid as collateral for unrealised losses
on CFDs. In practice the cash position will normally be much lower.
- The Board reserves the right to lend stock and/or assets of up to
10% of the Company's total net assets.
- The Board reserves the right to hedge the portfolio by way of
currency.
- A maximum of 10% of the Company's gross assets may be invested in
the securities of other investment companies (including listed investment
trusts).
INVESTMENT MANAGEMENT PHILOSOPHY, STYLE AND PROCESS
The Portfolio Manager's key focus is on identifying attractively
valued companies which exhibit good long term structural growth prospects. The
Portfolio Manager prefers companies that he believes can grow their dividend
over the next three to five years, as evidence suggests that such companies
outperform over the long term.
In order to identify these companies, the Portfolio Manager looks for the
following main characteristics:
- positive fundamentals (structural growth prospects, a proven
business model);
- the ability to generate cash;
- a strong balance sheet; and
- an attractive valuation.
The Portfolio Manager draws upon the substantial intelligence
uncovered by Fidelity's team of pan-European analysts when researching stocks.
A great deal of importance is placed on attending company meetings.
Being a bottom- up stock picker, the Portfolio Manager aims to
generate outperformance through company selection, on a three to five year
investment horizon, rather than through sector or country positions.
PERFORMANCE
In the year ended 31 December 2013, the Company's net asset value
total return was 20.0%, underperforming the FTSE World Europe (ex UK) Index
total return of 25.2%. Details on trends and factors that may impact the
future performance of the Company are included in the Chairman's Statement on
and Manager's Review shown above. The ten year Summary of Performance is shown
above. The Ten Largest Investments, the Distribution of the Portfolio and the
Full Portfolio Listing is disclosed in the Annual Report.
RESULTS AND DIVIDENDS
The Company's results are set out in the Income Statement shown
below. The total return after taxation for the year ended 31 December 2013 was
£120.06 million, of which the revenue return amounted to £12.66 million.
The Directors recommend that a final dividend of 29.75 pence (2012:
27.75 pence) per share be paid on 23 May 2014 to shareholders who appear on
the register as at the close of business on 21 March 2014 (ex-dividend date 19
March 2014).
ATTRIBUTION ANALYSIS
The attribution analysis table below shows how the increase in NAV has been
achieved.
Analysis of change in NAV during the
year (pence
per share)
Starting NAV 1 January 2013 1,428.97
Impact of:
Index +314.97
Exchange Rate +44.94
Gearing +24.72
Stock Selection -87.40
Share Repurchases +4.86
Charges -14.83
Cash/Residual -2.70
NAV Excluding the Dividend
Paid 1,713.53
Dividend paid -27.75
Closing NAV 31 December
2013 1,685.78
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
KEY PERFORMANCE INDICATORS
The key performance indicators ("KPIs") used to determine the progress and
performance of the Company over time and which are comparable to those
reported by other investment trusts are set out below.
Year ended Three years
31 December ended
31 December
2013 2012 2013
% % %
NAV per
share1,2 +20.0 +24.7 +32.5
Share Price2 +20.8 +31.3 +45.0
FTSE World
Europe
(ex UK) Index2 +25.2 +17.8 +25.8
Discount to
NAV
(based on
ex income NAV) 7.9 8.1 n/a
Discount to
NAV
(based on
cum income
NAV) 9.5 9.9 n/a
Ongoing
Charges1 0.96 0.98 n/a
1 Calculated in accordance with AIC guidelines
2 Calculated on a total return basis
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
The Summary of Performance graphs in the Annual Report indicate the
relative historical performance of the Company against its Benchmark Index
since launch and the discount or premium to NAV over that period. Some of the
Company's KPIs are considered to be beyond the Board's control. However, they
are measures of the Company's absolute and relative performance and the Board
monitors them regularly. Indices and ratios which assist in managing
performance and compliance are also reviewed, including the ongoing charges.
Expenses are considered regularly at Board meetings and this enables the Board
to review costs and consider any expenditure outside that of its normal
operations.
In addition to the KPIs set out above, the Board regularly reviews
the Company's performance against its peer group of investment trusts. The
principal risks and uncertainties stated below includes descriptions of other
performance indicators, their monitoring and management which are important to
the business of the Company. Long term performance is also monitored and the
Summary of Performance graphs in the Annual Report show this information.
PRINCIPAL RISKS AND UNCERTAINTIES
The Board confirms that there is an ongoing process for
identifying, evaluating and managing the principal risks faced by the Company.
The process is regularly reviewed by the Board in accordance with the
Financial Reporting Council's "Internal Control: Revised Guidance for
Directors".
The Board is responsible for the Company's system of internal
control and for reviewing its effectiveness. An internal controls report
providing an assessment of risks, together with controls to mitigate these
risks, is prepared by the Manager and considered by the Audit Committee.
The Board also determines the nature and extent of any risks it is
willing to take in order to achieve its strategic objectives.
Market Risk
The Company's assets consist of listed securities and the principal
risks are therefore market related such as market downturn, interest rate
movements, and exchange rate movements. The Portfolio Manager's success or
failure to protect and increase the Company's assets against this background
is core to the Company's continued success.
Risks to which the Company is exposed and which form part of the
market risks category are included in the financial statements in the Annual
Report together with summaries of the policies for managing these risks. These
comprise: market price risk (which comprises interest rate risk, foreign
currency risk and other price risk); derivative instruments risk; liquidity
risk; counterparty risk; and credit risk.
Performance Risk
The achievement of the Company's performance objective relative to
the market requires the application of risk. Strategy, asset allocation and
stock selection might lead to underperformance of the Benchmark Index. The
Board reviews risk at each Board meeting, considers the asset allocation of
the portfolio and the risk associated with particular countries and industry
sectors within the parameters of the investment objective. The Portfolio
Manager is responsible for actively monitoring the portfolio selected in
accordance with the asset allocation parameters and seeks to ensure that
individual stocks meet an acceptable risk/reward profile.
Income/Dividend Risk
The Company's revenue may decline which would impact on the
Company's ability to maintain its dividend. The Company's objective is capital
growth and, as explained in the Chairman's Statement above, the Portfolio
Manager is not constrained in any way to determine the level of income. The
Board monitors this risk through the receipt of detailed income reports and
forecasts which are considered at each meeting.
Discount Control Risk
The price of the Company's shares as well as its discount to NAV,
are factors which are not within the Company's total control. Some short term
influence over the discount may be exercised by the use of share repurchases
at acceptable prices. Details of share repurchases during the year are given
in the Annual Report. The Company's share price, NAV and discount volatility
are monitored daily by the Manager and considered by the Board at each of its
meetings.
Gearing Risk
The Company has the option to invest up to the total of any loan
facilities or to use Contracts for Difference ("CFDs") to invest in equities.
The principal risk is that gearing magnifies investment returns. Therefore, if
the Company is geared in strongly performing stocks, it will benefit from
gearing. If the Company is geared in poorly performing stocks, the impact
would be detrimental. Other risks are that the cost of gearing may be too high
or that the term of the gearing is inappropriate in relation to market
conditions. The Company currently has no bank loans and geared exposure is
being achieved solely through the use of long CFDs. This has reduced the cost
of gearing as outlined in the Chairman's Statement above and provides greater
flexibility. The Board regularly considers gearing and gearing risk and sets
limits accordingly.
Tax and Regulatory Risks
A breach of Section 1158 of the Corporation Tax Act 2010 could lead
to a loss of investment trust status, resulting in the Company being subject
to tax on capital gains. A breach of other legal and regulatory rules may lead
to suspension from listing on the London Stock Exchange or a qualified audit
report. The Board receives regular reports from the Manager confirming
regulatory compliance during the year.
There are a number of prospective regulations which could impact
the Company. Of greatest significance is the Alternative Investment Fund
Managers Directive ("AIFMD"). The implementation date for the Directive was
July 2013 but with a transitional period whereby investment trusts will not be
required to apply for AIFMD authorisation until July 2014. The Board has
reviewed the impact of the directive on the Company's operations and decided
in principle to appoint FIL Investment Services (UK) Limited (for no
additional fee) as its Authorised Investment Fund Manager ("AIFM") before the
end of the transitional period on 22 July 2014. FIL Investment Services (UK)
Limited is in the process of seeking to become a registered AIFM during the
transitional period so that your Company will become fully compliant by July
2014.
An additional requirement of the AIFMD is to appoint a depositary
on behalf of the Company which will oversee custody and cash arrangements of
the Company. To this end the Board have agreed in principle to appoint J. P.
Morgan Europe Limited to act as the Company's depositary. JPMorgan Chase Bank
will continue to act as bankers and custodians to the Company. There will be
an additional operating cost associated with this new role but it is not
possible at this stage to be precise about the level of additional cost.
Operational Risks
The Company has no employees and relies on a number of third party
service providers, principally the Manager, Registrar and Custodian. The
Company is dependent on the Manager's control systems and those of its
Custodian and Registrar, both of which are monitored and managed by the
Manager in the context of the Company's assets and interests on behalf of the
Board.
The security of the Company's assets, dealing procedures,
accounting records and the maintenance of regulatory and legal requirements,
among other things, rely on the effective operation of such systems.
The Manager, Registrar and Custodian are subject to a risk-based
programme of internal audits by the Manager. In addition, service providers'
own internal controls reports are received by the Board and any concerns
investigated.
Certain of the Company's relationships with its service providers
will change as the Company implements AIFMD and in particular the Company is
required to appoint a depositary.
While it is believed that the likelihood of poor governance,
compliance and operational administration by third party service providers is
low, the financial consequences, for example, of cyber crime, could be
serious, including the associated reputational damage to the Company.
Other Risks
A continuation vote takes place every two years. This takes the
form of an ordinary resolution to shareholders and requires a simple majority
of votes cast in favour to ensure that the Company continues in existence for
a further two years until the next continuation vote is put to shareholders.
There is a risk that shareholders do not vote in favour of the continuation
vote during periods when performance is poor. Further details are provided in
the Chairman's Statement, in relation to the next continuation vote and a
review of the Company's performance.
BOARD DIVERSITY
The Board carries out any candidate search against a set of
objective criteria on the basis of merit, with due regard for the benefits of
diversity on the Board, including gender. As at 31 December 2013, there were
four male Directors and one female Director on the Board.
EMPLOYEE, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
The Company has no employees and all of its Directors are non-executive, the
Company's day- to- day activities being carried out by third parties. The
Company has not adopted a policy on human rights as it has no employees and
its operational processes are delegated.
The Company's financial reports are printed by a company which has
won awards for its environmental awareness and further details of this may be
found on the back cover of this report. Financial reports and other publicly
available documentation are also available on the Company's website
www.fidelity.co.uk/its. Details about Fidelity's own community involvement may
be found on its website www.fidelity.co.uk.
CORPORATE ENGAGEMENT
The Board believes that the Company should, where appropriate, take
an active interest in the affairs of the companies in which it invests and
that it should exercise its voting rights at their general meetings. Unless
there are any particularly controversial issues (which are then referred to
the Board) it delegates the responsibility for corporate engagement and
shareholder voting to Fidelity. These activities are reviewed annually.
FUTURE DEVELOPMENTS
The Company's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Chairman's
Statement and the Manager's Review shown above.
By Order of the Board
FIL Investments International
Secretary
10 March 2014
RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER
The Directors have complied with the provisions of Financial
Reporting Standard 8 "Related Party Disclosures", which require disclosure of
related party transactions and balances. FIL Investments International is the
Manager and Secretary of the Company and details of the services provided and
fees paid are given in the Annual Report. Fees paid to the Directors are
disclosed in the Directors' Remuneration Report of the Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the annual report and
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial period. Under that law they have elected to prepare the financial
statements in accordance with UK Generally Accepted Accounting Practice.
The financial statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss for the 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 ensuring that adequate accounting
records are kept which disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that its
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.
Under applicable law and regulations the Directors are also
responsible for preparing a Strategic Report, a Directors' Report, a Corporate
Governance Statement and a Directors' Remuneration Report that comply with
that law and those regulations.
The Directors have delegated responsibility for the maintenance and
integrity of the corporate and financial information included on the Company's
pages of the Manager's website www.fidelity.co.uk/its. Visitors to the website
need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in their own jurisdictions.
We confirm that to the best of our knowledge the financial
statements, prepared in accordance with the applicable set of accounting
standards, give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company; and the Strategic Report and
Directors' Report include 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 it faces. We confirm that we consider
the annual report and accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary for shareholders to
assess the company's performance, business and strategy.
Approved by the Board on 10 March 2014 and signed on its behalf.
Humphrey van der Klugt
Chairman
Sub-Division of Ordinary Shares
Resolution 12 to be proposed at the forthcoming Annual General
Meeting is being proposed as an ordinary resolution and concerns the
sub-division of the Company's Ordinary shares on a 10 for 1 basis (the
Sub-Division).
The Company's Ordinary shares (the Existing Ordinary Shares)
currently have a nominal value of 25 pence each.
The closing price of the Existing Ordinary Shares as at 6 March
2014 (being the last practical date prior to the publication of this Annual
Report) was £15.20.
As announced by the Company on 17 January 2014, the Board are aware
that smaller investors, or investors who participate in monthly saving plans
or dividend reinvestment schemes have experienced difficulty fulfilling their
order because of the high price at which the Existing Ordinary Shares trade,
resulting in a cash surplus that cannot be invested until sufficient funds
have built up in their accounts.
If the Existing Ordinary Shares were to have been sub-divided on 6
March 2014, the shares would have been valued at £1.52 per share reflecting
the fact that Ordinary shareholders would have then held ten times as many new
Ordinary shares. Shareholders should note therefore that, subject to market
movements, the aggregate value of their shareholdings should remain the same.
The Board are of the opinion that the lower share price will
enhance the appeal of the Existing Ordinary Shares to smaller investors.
It is therefore proposed that, on 2 June 2014 (or such other time
and date as the Directors may determine), each of the Existing Ordinary Shares
that appear on the share register at the Record Date of 6.00 pm on 30 May 2014
will be sub-divided into 10 Ordinary shares of 2.5 pence each (the New
Ordinary Shares). The resolution is conditional upon, and takes effect on, the
admission of the New Ordinary Shares to the Offcial List of the UK Listing
Authority and to trading on the London Stock Exchange's market for listed
securities.
The New Ordinary Shares will carry the same rights in all respects
as the Existing Ordinary Shares, including voting rights. The only change will
be the aggregate number of shares held and the nominal value per share. The
Company's net assets will remain unchanged following the Sub-Division and the
Company's daily released net asset value per share will equate to one tenth of
its original net asset value per share.
The number of shares in issue on 6 March 2014 (being the last
practical date prior to the publication of these accounts) was 42,162,834
Existing Ordinary Shares. If resolution 12 is passed and becomes effective,
the number of shares in issue following the Sub-Division will be 421,628,340
New Ordinary Shares.
The Company's final dividend is due to be paid on 23 May 2014 to
existing shareholders who appear on the Company's register on 21 March 2014.
The Sub-Division will not affect the payment of the Company's final dividend.
If the Sub-Division is approved and based on the timetable set out
above, applications will be made for admission of the New Ordinary Shares to
the Official List and to trading on the London Stock Exchange's market for
listed securities. If the applications are accepted, it is proposed that the
last day of trading on the London Stock Exchange of the Existing Ordinary
Shares will be 30 May 2014 and the New Ordinary Shares will commence trading
on 2 June 2014, with the following identifiers:
ISIN: GB00BK1PKQ95
Sedol: BK1PKQ9
Ticker: FEV/LON.
No fractional entitlements will arise as a result of the
Sub-Division, as each shareholder's holding of Existing Ordinary Shares will
be capable of division into New Ordinary Shares on a whole number basis.
By way of an example, a shareholder who held 1,000 Existing
Ordinary Shares prior to the Sub-Division, would, immediately following the
Sub-Division, hold 10,000 New Ordinary Shares. Based on this example, the net
asset value of the Existing Ordinary Shares as at 6 March 2014 (being the
latest practical date prior to the publication of these accounts) of £15.20
per share would, following the Sub-Division, become £1.52 per share.
If resolution 12 becomes effective, new share certificates
representing the New Ordinary Shares will be sent to shareholders who
currently hold shares in certificated form, on or about 16 June 2014. Once
received, all old share certificates which relate to the Existing Ordinary
Shares must be destroyed as they will no longer be valid. If you do not
receive a new share certificate but believe you are entitled to one please
call 0871 664 0300 (calls cost 10 pence per minute plus network extras. Lines
are open 8.30 am - 5.30 pm Monday to Friday) or email:
shareholderenquiries@capita.co.uk. No temporary documents to title will be
issued. Transfers between 2 June 2014 and 16 June 2014 will be certified
against the register of members of the Company. CREST accounts are expected to
be credited on 2 June 2014.
Based on current UK tax legislation and the practice of HMRC, for
those shareholders who (i) are beneficial owners of their Existing Ordinary
Shares, (ii) hold their Existing Ordinary Shares as an investment (and not via
an individual savings account (ISA)) and (iii) are ordinarily resident in the
UK for taxation purposes, the Sub-Division will not be treated as a disposal
for the purposes of UK capital gains tax, nor as a distribution of income for
the purposes of UK income tax. If you are in any doubt as to your taxation
position or if you are subject to tax in any jurisdiction other than the UK
then you should consult your own professional adviser. No UK stamp duty or
stamp duty reserve tax will be payable by shareholders as a result of the
Sub-Division.
Adoption of New Articles of Association
Resolution 16 to be proposed at the forthcoming Annual General
Meeting is being proposed as a special resolution and relates to the adoption
of new Articles of Association (the New Articles) which update the Company's
existing Articles of Association.
There have been a number of recent changes to tax, regulation and
company law which affect investment trusts and the Company. The Board is
therefore seeking approval to adopt the New Articles, substantially in the
form of the existing Articles, but updated to reflect these changes.
In particular:
1. As a result of changes in tax law, the Companies Act 2006 has
been amended to remove the requirement that an investment company's articles
of association must prohibit a distribution of realised capital profits and so
it is now possible for such companies to pay dividends out of capital profits.
It is therefore proposed that the Company's Articles should be updated to give
the Company this greater flexibility in line with tax and company laws. The
Board has no current intention to pay dividends out of capital profits but
believes that it is in shareholders' best interests for the Board to have this
power should circumstances warrant its use in the future.
2. The Company is an alternative investment fund for the purposes
of the Alternative Investment Fund Managers Directive ("AIFMD"). The proposed
New Articles have therefore also been updated in order to incorporate the
powers that may be granted to the Board as a result of the implementation of
AIFMD. In particular, it is proposed to include a new Article 131, expressly
granting the Board the authority to allow a depositary to discharge liability
for loss of financial instruments held in custody in accordance with the
limited circumstances permitted by Article 21 of AIFMD.
A copy of the existing Articles of Association and the proposed New
Articles (showing all changes to the existing Articles), are available for
inspection at the registered office of the Company and at 25 Cannon Street,
London EC4M 5TA and will be made available for inspection at the Company's
forthcoming Annual General Meeting at least 15 minutes prior to the start of
the meeting and up until the close of the meeting.
Income Statement for the year ended 31 December 2013
2013 2012
revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments
designated at fair value
through profit or loss - 95,243 95,243 - 93,403 93,403
Gains on derivative
instruments held at fair
value through profit or loss - 12,044 12,044 - 19,630 19,630
Income* 21,066 - 21,066 18,518 - 18,518
Investment management and (5,821) - (5,821) (4,929) (2,243) (7,172)
performance fees
Other expenses (803) - (803) (629) - (629)
Exchange gains/(losses) on 4 108 112 (76) (153) (229)
other net assets
Net return before finance 14,446 107,395 121,841 12,884 110,637 123,521
costs and taxation
Finance costs (279) - (279) (326) - (326)
Net return on ordinary
activities
before taxation 14,167 107,395 121,562 12,558 110,637 123,195
Taxation on return on
ordinary activities** (1,505) - (1,505) (503) - (503)
Net return on ordinary
activities
after taxation for the year 12,662 107,395 120,057 12,055 110,637 122,692
Return per ordinary share* 29.82p 252.94p 282.76p 27.78p 254.97p 282.75p
Reconciliation of Movements in Shareholders' Funds
for the year ended 31 December 2013
share capital
share premium redemption capital revenue total
capital account reserve reserve reserve equity
£'000 £'000 £'000 £'000 £'000 £'000
Opening shareholders' funds
as at 1 January 2012 11,073 58,615 4,752 425,007 18,170 517,617
Net return on ordinary
activities after - - - 110,637 12,055 122,692
taxation for the year
Repurchase of ordinary (292) - 292 (12,457) - (12,457)
shares
Dividend paid to - - - - (11,578) (11,578)
shareholders
Closing shareholders' funds
as
at 31 December 2012 10,781 58,615 5,044 523,187 18,647 616,274
Net return on ordinary
activities after - - - 107,395 12,662 120,057
taxation for the year
Repurchase of ordinary (234) - 234 (13,239) - (13,239)
shares
Dividend paid to - - - - (11,901) (11,901)
shareholders
Closing shareholders' funds
as at 31 December 2013 10,547 58,615 5,278 617,343 19,408 711,191
Balance Sheet as at 31 December 2013
Company number 2638812
2013 2012
£'000 £'000
Fixed assets
Investments designated at fair value through
profit or loss 669,216 583,938
Current assets
Derivative assets held at fair value through 19,980 16,448
profit or loss
Debtors 2,463 1,940
Fidelity Institutional Liquidity Fund plc 31 30
Cash at bank 21,326 20,450
43,800 38,868
Creditors
Derivative liabilities held at fair value - (2,747)
through profit or loss
Other creditors (1,825) (3,785)
(1,825) (6,532)
Net current assets 41,975 32,336
Total net assets 711,191 616,274
Capital and reserves
Share capital 10,547 10,781
Share premium account 58,615 58,615
Capital redemption reserve 5,278 5,044
Capital reserve 617,343 523,187
Revenue reserve 19,408 18,647
Total equity shareholders' funds 711,191 616,274
Net asset value per ordinary share 1,685.78p 1,428.97p
The financial statements were approved and authorised for issue by the Board
of Directors on 10 March 2014 and were signed on its behalf by:
Humphrey Van der Klugt
Chairman
Cash Flow Statement for the year ended 31 December 2013
2013 2012
£'000 £'000
Operating activities
Investment income received
14,631 13,165
Income received on long CFDs 3,009 1,162
Deposit interest received 44 53
Investment management fee paid (5,619) (4,721)
Performance fee paid (2,243) -
Directors' fees paid (104) (161)
Other cash payments (660) (675)
Net cash inflow from operating activities 9,058 8,823
Finance costs
Interest paid on long CFDs (281) (335)
Net cash outflow from finance costs (281) (335)
Overseas taxation recovered 651 1,106
Financial investments
Purchase of investments (156,750) (129,219)
Disposal of investments 167,459 144,451
Net cash inflow from financial investment 10,709 15,232
Derivative activities
Proceeds of long CFD positions closed 5,765 9,038
Net cash inflow from derivative activities 5,765 9,038
Dividends paid to shareholders (11,901) (11,578)
Net cash inflow before use of liquid resources
and financing 14,001 22,286
Cash flow from management of liquid resources
Fidelity Institutional Liquidity Fund plc (1) 1
Net cash (outflow)/inflow from management of (1) 1
liquid resources
Net cash inflow before financing
14,000 22,287
Financing
Repurchase of ordinary shares (13,232) (14,055)
Net cash outflow from financing (13,232) (14,055)
Increase in cash 768 8,232
Notes to the Financial Statements
1. The principal activity of the Company is that of an investment trust
company within the meaning of section 1158 of the Corporation Tax Act 2010.
2. Accounting Policies
a) Basis of accounting - The financial statements have been
prepared on a going concern basis and under the historical cost convention,
except for the measurement at fair value of fixed asset investments and
derivative assets and liabilities, and on the assumption that approval as an
investment trust continues to be granted by HM Revenue & Customs.
b) Income - Income from equity investments is credited to the Income Statement
on the date on which the right to receive the payment is established. Overseas
dividends are stated gross of withholding tax. UK dividends are stated at the
amount actually receivable, which is net of the attaching tax credit. Interest
receivable on short term deposits is credited on an accruals basis. Where the
Company has elected to receive its dividends in the form of additional shares
rather than cash, the amount of the dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of the shares
received over the amount of the dividend foregone is recognised in the capital
column of the Income Statement. Derivative income
from dividends on long contracts for difference ("CFDs") is
included in `Income' and recognised in the revenue column of the Income
Statement.
c) Special dividends - Special dividends are treated as a revenue
receipt or a capital receipt depending on the facts and circumstances of each
particular case.
d) Expenses - All expenses are accounted for on an accruals basis and are
charged in full to the revenue column of the Income Statement with the
exception of any performance fee which is charged wholly to the capital
column, as it arises mainly from capital returns on the portfolio.
e) Taxation - Irrecoverable overseas withholding tax suffered is recognised at
the same time as the income to which it relates. Deferred taxation is
recognised in respect of all timing differences that have originated, but not
reversed, at the Balance Sheet date, where transactions or events that result
in an obligation to pay more, or a right to pay less, tax in the future have
occurred. A deferred taxation asset is recognised when it is more likely than
not that the asset will be recoverable.
f) Foreign currency - The Directors, having regard to the currency of the
Company's share capital and the predominant currency in which its investors
operate, have determined the functional currency to be UK sterling.
Transactions denominated in foreign currencies are translated to UK sterling
at the rate of exchange ruling as at the date of those transactions. Assets
and liabilities in foreign currencies are translated at the rates of exchange
ruling at the Balance Sheet date. All capital gains and losses, including
exchange differences on the translation of foreign currency assets and
liabilities, are dealt with in the capital column of the Income Statement.
g) Valuation of investments - The Company's business is investing
in financial assets with a view to profiting from their total return in the
form of income and capital growth. This portfolio of financial assets is
managed and its performance evaluated on a fair value basis, in accordance
with a documented investment strategy, and information about the portfolio is
provided
internally on that basis to the Company's Board of Directors. Accordingly,
upon initial recognition the investments are designated by the Company as "at
fair value through profit or loss". They are included initially at fair value,
which is taken to be their cost, and subsequently the investments are valued
at fair value, which is measured as follows:
- Listed investments are valued at bid prices, or last market
prices, depending on the convention of the exchange on which they are listed,
or otherwise at fair value based on published price quotations; and
- Unlisted investments, where there is not an active market, are
valued using an appropriate valuation technique so as to establish what the
transaction price would have been at the Balance Sheet date.
In accordance with the AIC SORP the Company includes transaction costs,
incidental to the purchase or sale of investments, within gains on investments
and has disclosed them in the Annual Report.
h) Derivative instruments - Some of the Company's exposure to European
equities is through the use of long CFDs. The gearing level is monitored and
reviewed by the Board on a regular basis. CFDs are measured at fair value
which is the difference between the settlement price of the contract and the
fair value of the underlying shares in the contract, which is calculated in
accordance with policy 1(g). Gains and losses in the fair value of the CFDs
are included in `Gains on derivatives instruments held at fair value through
profit or loss' in the capital column of the Income Statement. Income received
from dividends on
long CFDs is included in `Income' and interest paid on long CFDs is
included in `Finance costs', in the revenue column of the Income Statement.
i) Fidelity Institutional Liquidity Fund plc - The Company holds an investment
in the Fidelity Institutional Liquidity Fund plc - Euro Fund (the "Fund"). The
Fund invests in low risk short term investments. It is a distributing fund and
accordingly the interest earned within the Fund is treated as income.
j) Capital reserve - The following are accounted for in capital
reserve:
- Gains and losses on the disposal of investments and derivative
instruments;
- Changes in the fair value of investments and derivative
instruments held at the year end;
- Foreign exchange gains and losses of a capital nature;
- Performance fees;
- Dividends receivable which are capital in nature; and
- Costs of repurchasing ordinary shares.
As a result of technical guidance by the Institute of Chartered Accountants in
England and Wales in TECH 02/10: Distributable Profits, changes in the fair
value of investments which are readily convertible to cash, without accepting
adverse terms at the Balance Sheet date, can be treated as realised. Capital
reserves realised and unrealised are shown in aggregate as `capital reserve'
in the Reconciliation of Movements in Shareholders' Funds and the Balance
Sheet. At the Balance Sheet date all investments held by the Company were
listed on a recognised stock exchange and were considered to be readily
convertible to cash.
k) Dividends - In accordance with Financial Reporting Standard 21:
Events after the Balance Sheet Date, dividends declared and approved by the
Company after the Balance Sheet date have not been recognised as a liability
of the Company at the Balance Sheet date.
2013 2012
£'000 £'000
3 INCOME
Income from investments designated at fair value through profi t
or loss
Overseas dividends 16,599 15,301
Overseas scrip dividends 728 1,435
UK dividends 686 570
18,013 17,306
Income from derivative instruments held at fair value through
profi t or loss
Dividends on long CFDs 3,009 1,162
21,022 18,468
Other income
Deposit interest 44 50
Total income 21,066 18,518
4 INVESTMENT MANAGEMENT AND PERFORMANCE FEES
Investment management fee - charged to revenue 5,821 4,929
Performance fee - charged to capital - 2,243
Total investment management and performance fees 5,821 7,172
A summary of the terms of the Management Agreement is given in the Directors'
Report of the Annual Report.
2013 2012
£'000 £'000
5 OTHER EXPENSES
AIC fees 23 26
Custody fees 132 118
Directors' fees1 136 127
Legal and professional fees 158 88
Marketing expenses2 155 60
Printing and publication expenses 78 87
Registrars' fees 68 76
Other expenses 30 26
Fees payable to the Company's Auditor - for the audit of the annual
financial statements3 23 21
803 629
Details of the breakdown of Directors' fees are provided in
1 the Directors' Remuneration Report of the Annual Report
Marketing expenses in 2012 include the release of £82,000 due
2 to an underspend of the 2011 accrual
The VAT on fees payable to the Company's Auditor is included
3 in "other expenses"
2013 2012
£'000 £'000
6 DIVIDENDS
Dividend paid:
Dividend of 27.75 pence per ordinary share paid for the year ended
31 December 2012 11,901 -
Dividend of 26.50 pence per ordinary share paid for the year ended
31 December 2011 - 11,578
11,901 11,578
Dividend proposed:
Dividend of 29.75 pence per ordinary share proposed for the year
ended 31 December 2013 12,543 -
and based on the number of ordinary shares in issue at the date of
this report - 11,901
Dividend of 27.75 pence per ordinary share proposed for the year
ended 31 December 2012 12,543 11,901
The Directors have proposed the payment of a final dividend for the year ended
31 December 2013 of 29.75 pence per ordinary share to be paid on 23 May 2014,
to shareholders on the register at the close of business on 21 March 2014
(ex-dividend date 19 March 2014).
7. NET ASSET VALUE PER ORDINARY SHARE
The net asset value per ordinary share is based on net assets of
£711,191,000 (2012: £616,274,000) and on 42,187,693 (2012: 43,127,073) shares,
being the number of ordinary shares in issue at the year end.
8 . SHARE CAPITAL
Issued, allotted and fully paid Ordinary shares of 25 pence each
Beginning of the year 43,127,073 10,781 44,294,946 11,073
Repurchase of ordinary shares (939,380) (234) (1,167,873) (292)
End of the year
42,187,693 10,547 43,127,073 10,781
9 . RESERVES
The "share premium account" arose on the issue of ordinary shares.
It is not distributable by way of dividend and it cannot be used to fund share
repurchases.
The "capital redemption reserve" maintains the equity share capital of the
Company and represents the nominal value of shares repurchased and cancelled.
It is not distributable by way of dividend and it cannot be used to fund share
repurchases.
The "capital reserve" reflects realised gains or losses on
investments and derivatives sold, unrealised increases and decreases in the
fair value of investments and derivatives held and other income and costs
recognised in the capital column of the Income Statement. It is not currently
distributable by way of dividend. It can be used to fund share repurchases.
The "revenue reserve" represents the net revenue surpluses
recognised in the revenue column of the Income Statement that have been
retained and have not been distributed to shareholders as dividends. It is
distributable by way of dividend.
STATUS OF RESULTS ANNOUNCEMENT
2012 Financial Information
The figures and financial information for 2012 are extracted from
the published Annual Report and Accounts for the year ended 31 December 2012
and do not constitute the statutory accounts for that year. The Annual Report
and Accounts has been delivered to the Registrar of Companies and included the
Report of the Independent Auditors which was unqualified and did not contain a
statement under either section 498(2) or section 498(3) of the Companies Act
2006.
2013 Financial Information
The figures and financial information for 2013 are extracted from
the published Annual Report and Accounts for the year ended 31 December 2013
and do not constitute the statutory accounts for that year. The Annual Report
and Accounts include the Report of the Independent Auditors which is
unqualified and does not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006. The Annual Report and Accounts will
be delivered to the Registrar of Companies in due course.
A copy of the annual report will shortly be submitted to the
National Storage Mechanism and will be available for inspection at
www.morningstar.co.uk/uk/NSM.
The annual report and financial statements will be posted to
shareholders as soon as is practicable and in any event no later than 13 April
2014 and will shortly be available on the Company's website at
www.fidelity.co.uk/its.
Enquiries:
Jenny Thompson - Company Secretary, FIL Investment International -
01737 836869
Keren Holland - Corporate Communications, FIL Investments
International - 0207 074 5262
Christopher Pirnie - Head of UK Company Secretariat, FIL Investment
International - 01737 837929
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