Final Results
Fidelity European Values PLC – Final Results
PR Newswire
London, 14 March 2016
The information below has been extracted from the Annual Report and Accounts for the year ended 31 December 2015 and is included solely for the purpose of complying with DTR 6.3.5 and the requirements it imposes on issuers as to how to make public annual financial reports.
Chairman’s Statement
I have pleasure in presenting the Annual Report of Fidelity European Values PLC for the year ended 31 December 2015.
PERFORMANCE
I am pleased to report that for the year ended 31 December 2015, the net asset value (“NAVâ€) per share total return of your Company was 6.9%, outperforming its Benchmark Index, the FTSE World Europe (ex UK) Index, which returned 5.3%. The share price total return over this period was 9.2%, ahead of the NAV return as a consequence of the level of discount (ex-income) narrowing from 4.6% at the start of the year to 2.9% at the year end.
I am pleased to say that the three and five year performance returns are also ahead of the Benchmark Index, as shown in the table below. (All figures are in UK sterling terms and are on a total return basis.)
European equities rose in sterling terms over the 12-month period ending 31 December 2015. Gains were primarily driven by increasing evidence of a recovery in European economies, which were supported by the European Central Bank’s (“ECBâ€) accommodative monetary policy stance and lower energy prices. In the first quarter, markets rose strongly as the ECB announced a bond buying stimulus programme that exceeded market expectations. However, these gains were partially reversed as markets fell sharply in the third quarter due to concerns about China’s slowdown and its potential impact on the global economy. In the fourth quarter, markets rallied again on expectations of additional stimulus measures by the ECB and China. Markets also reacted positively to the US Federal Reserve’s small interest rate increase, which was taken as a vote of confidence in the world’s largest economy. Not all European companies finished the year in positive territory though. Companies exposed to slowing emerging market economies and/or involved in the extraction or production of commodities proved particularly vulnerable to renewed fears for the global economy and deflation. Against this backdrop, the Portfolio Manager’s preference for companies with solid balance sheets and growing dividends proved rewarding over the period.
OUTLOOK
Looking ahead, the recovery in the Eurozone remains intact and is being increasingly supported by improving domestic demand and an uptick in consumer confidence and spending driven by stronger employment trends, rising wages and lower energy prices. The weaker euro is also good for European companies’ competitiveness, as is the falling cost of debt and rising availability of finance and liquidity. Having said that, there are also potential risks on the horizon. Markets are becoming increasingly concerned about a global economic slowdown and deflation. In particular, growth in the Eurozone is expected to continue to be hindered by the slowdown in emerging markets and the necessary balance sheet adjustments in a number of sectors. Geopolitical risks also have the potential to weigh on global growth in 2016 and to impact negatively on demand for Eurozone exports.
One other uncertainty we need to factor into the whole equation is of course “Brexit†as we are a UK listed Company investing in continental Europe and have the flexibility to invest up to 20% of the portfolio in UK stocks. Exit from the European Union would have wide consequences for the UK and, less commonly discussed, also for continental European countries. The UK is the second largest European economy and the links are substantial, both trading and otherwise.
The Portfolio Manager’s focus on attractively valued companies exhibiting long term structural growth prospects, proven business models, strong balance sheets and disciplined use of capital seems particularly suited to this more uncertain backdrop, which is discussed in more detail in our Portfolio Manager’s Review in the Annual Report.
PERFORMANCE OVER ONE YEAR, THREE YEARS, FIVE YEARS AND SINCE LAUNCH TO 31 DECEMBER 2015 (ON A TOTAL RETURN BASIS) (%)
| NAV | Share price |
FTSE World Europe (ex UK) Index |
|
| One year | +6.9 | +9.2 | +5.3 |
| Three years | +34.8 | +43.4 | +32.1 |
| Five years | +48.9 | +72.2 | +32.7 |
| Since launch (1991)* | +2,202.9 | +2,129.8 | +658.6 |
* 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
OTHER MATTERS
Gearing
The Company continues to gear through the use of long Contracts For Difference (“CFDsâ€). As at 31 December 2015, the level of gearing was 2.8% (2014: 5.0%). The Manager has flexibility to gear within parameters set by the Board. Gearing levels are discussed at every Board meeting and between meetings when necessary. Gearing made a small positive contribution to performance in the reporting year, as can be seen from the attribution analysis table in the Annual Report.
Discount Management and Treasury Shares
The Board continues to adopt an active discount management policy. 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 the NAV per share. In order to assist in managing the discount, the Board sought and received shareholder approval at last year’s Annual General Meeting to hold in Treasury ordinary shares repurchased by the Company, rather than cancelling them altogether. These shares are then available to re-issue, should the share price come to stand at a premium to NAV, facilitating the management of and enhancing liquidity in our shares.
Treasury shares carry no voting rights or rights to receive a dividend and have no entitlement in a winding up of the Company. No more than 5% of the issued ordinary share capital of the Company can be held in Treasury. Any shares held in Treasury will only be re-issued at a premium to NAV per share. The net effect of repurchasing shares at a discount and then re-issuing them at a premium will enhance NAV per share. The Board is seeking shareholder approval to renew this authority at the forthcoming Annual General Meeting.
As a result of an improvement in the way the Company’s shares have traded against NAV, we are pleased to say that no share repurchase activity has taken place during the year ended 31 December 2015 and no shares are held as yet in Treasury. No shares have been repurchased since the end of the reporting period and as at the date of this report.
Dividends
The Board intends to continue with its practice of largely paying out revenue in full. The objective is one of long term capital growth and we will not seek to influence the Portfolio Manager by imposing any income requirement in any particular year.
The Board has decided to recommend a final dividend of 3.33 pence per share for the year ended 31 December 2015 (2014: final dividend of 3.10 pence per share; and special dividend of 0.54 pence per share which related to the successful tax reclaim in France). The dividend will be payable on 20 May 2016 to shareholders who appear on the register as at close of business on 29 March 2016 (ex-dividend date 24 March 2016).
The increase in the proposed final dividend for 2015 over the 3.10 pence paid for 2014 is therefore 7.4%. 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 and this is one of the underlying factors in his stock selection.
One observation I would like to repeat from previous years which shareholders should consider when comparing the level of dividend yield between investment companies is that we take a conservative approach of charging all management expenses against income and not against capital. Some investment trusts, particularly those with an equity income objective, split management charges between capital and income, which has the effect of increasing the income return (and thus dividend paying potential) and reducing the capital return. I would stress that this does not alter the total return from both capital and income combined whatsoever. Moreover, there is no ‘right’ or ‘wrong’ way and it is a matter for judgement. However, the basis should be taken into account when comparing the dividend yield between different companies.
Board of Directors
I became Chairman of your Company in May 2010 and have served as a Director since June 2007. After six years as Chairman and nine years altogether, I will retire at the conclusion of the forthcoming Annual General Meeting. I have thoroughly enjoyed serving on your Board and would like to thank shareholders, my fellow Directors and the team at Fidelity for all the support I have been given.
I am delighted to say that Mr Vivian Bazalgette will succeed me as Chairman. Vivian joined the Board on 1 December 2015. He has over thirty five years of investment management and financial services experience having held senior positions in a number of asset management companies. I look forward to introducing Vivian at the Annual General Meeting on 12 May 2016.
In accordance with the UK Corporate Governance Code and being a FTSE 350 Company, all Directors are subject to annual re-election by shareholders and, with my exception, put themselves forward for re-election at the forthcoming Annual General Meeting. The Directors have a wide range of appropriate skills and experience to make up a balanced Board for your Company. Biographical details are shown in the Annual Report.
Change of Auditor
During the reporting year, an audit tender process was carried out and Ernst & Young LLP were recommended for appointment as the Company’s independent Auditor from 1 January 2016 replacing Grant Thornton UK LLP who have been in office since 2006. This appointment is subject to approval by the shareholders at the forthcoming Annual General Meeting. Further details can be found in the Directors’ Report in the Annual Report. On behalf of all the shareholders, I would like to thank Grant Thornton UK LLP for all their work over the years that they have been in office.
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 12 May 2016 at midday. Full details of the meeting are given in the Annual Report.
My fellow Directors and I look forward to talking with as many shareholders as possible on this occasion and it will be our pleasure to hold a presentation by your Portfolio Manager, Sam Morse.
Humphrey van der Klugt
Chairman
11 March 2016
Portfolio Manager’s Review
PERFORMANCE REVIEW
As shown in the Financial Summary in the Annual Report, the net asset value (“NAVâ€) total return, in the year to 31 December 2015, was 6.9% compared to a total return of 5.3% for the FTSE World Europe (ex UK) Index which is the Company’s Benchmark Index. The share price total return was 9.2%, which is ahead of the NAV total return as a consequence of a narrowing in the share price discount. The discount narrowed from 4.6% at the beginning of the year to 2.9% at the end of the reporting period, based on the NAV excluding income. (All figures in UK sterling terms.)
MARKET BACKGROUND
2015 reminded me of the “Duke of York†nursery rhyme. Investors ‘marched to the top of the hill’ in April, led on by optimism about a European economic recovery, thanks to the European Central Bank’s (“ECBâ€) program of quantitative easing (“QEâ€), and then ‘marched back down again’, as concerns and nervousness regarding the outlook for global economic growth, and companies’ earnings, took over. Thankfully, the market did not quite ‘march’ back to where it started the year, so the Index registered a modest mid-single-digit gain in 2015, in sterling terms.
The ECB announced QE in January: a commitment to buy sixty billion euros of assets, mainly government bonds, each month, until September 2016. The programme started in March 2015. Continental European markets made huge gains as investors anticipated that the extra liquidity would feed into asset prices. This was compounded by optimism that QE, coupled with lower oil prices and a weaker euro, would accelerate domestic economic growth in continental Europe through stronger consumption and higher exports. On the back of this optimism, the first quarter of the year saw continental European markets rise 16%, and despite a weakening euro, this still translated into a double digit gain in sterling terms. The market peaked shortly afterwards, in April, at valuation levels not seen since before the last global financial crisis.
For markets to make progress from thereon, earnings needed to start to rise to support such elevated levels of valuation. Unfortunately, a litany of events brought down earnings expectations and, thereby, punctured the bubble of optimism that had driven the market to date. There was a mid-year ‘wobble’ as Greece reminded investors of the on-going issues, and political uncertainties, that many European countries on the periphery of Europe still faced. The third quarter saw markets give up more ground, in particular when China, unexpectedly, allowed a small devaluation of its currency, apparently in response to slowing economic growth. Many investors saw this as a ‘shot across the bows’ in terms of future exchange rate policy and this led to widespread risk aversion, especially regarding emerging markets and commodities. This was compounded by nervousness about global markets’ possible reaction to a well-flagged rise in US interest rates.
The final quarter of 2015 saw a small rebound. Political fragmentation was evident, again, in Iberian elections leading to political uncertainty in both Spain and Portugal. Elsewhere, in continental Europe, markets picked up along with global stock markets. US interest rates were, indeed, raised by a quarter point, as flagged and as expected, but markets seemed reassured that this turning point had been safely negotiated without any major adverse reaction so the year ended on a more positive note.
PORTFOLIO REVIEW
The Company’s NAV outperformed the benchmark by 1.6 % in 2015. Positive stock selection was the main contributor through the year. This was particularly true in the first half of the year but in the second half of the year stock-picking detracted from performance. Gearing, achieved through the use of contracts for difference, added just a little to performance during the year given the modest returns in the market and the relatively low level of leverage employed through the year.
The stock market trends established in the first half of 2015 continued for the balance of the year such that most of the stronger performers of the first half, mentioned in detail in the Company’s Half-Yearly Report for the six months ended 30 June, remained key positive contributors for the year. These include Novo-Nordisk, the leading diabetes care company, and a number of banks and financial institutions, such as UBS and Intesa Sanpaolo, where results gave more confidence in their internal turnaround programmes and dividend capacity. Elsewhere, the continued fall in the oil price pressured holdings in the energy sector, particularly Royal Dutch Shell, following its acquisition of BG Group. I remain confident that this will prove a sensible deal, given Shell’s ability to improve returns of the combined entity through an increased focus on reducing costs and capital spending plans while focusing on the highest return projects in the combined entity. Success in disposing of non-core businesses will be crucial in enabling the company to continue to pay high levels of dividend until the oil price recovers. Holdings in companies that export to or operate in emerging markets, such as Edenred, which has a large part of its business in Brazil, performed poorly in the second half of the year. Many of these companies have strong business models and the financial capacity to continue to pay healthy dividends, invest organically, and acquire businesses, while the external environment is difficult, which will be reflected in superior business and share price performance, as and when the environment improves.
The main detractor in the second half of the year was Volkswagen, due to the ‘emissions scandal’ that many of you will be aware of. The company fell more than half, from its peak, before recovering somewhat in the fourth quarter when it appeared that the cost of fixing the European models which had ‘defeat devices’ would be less than originally expected and when it also became apparent that the negative impact on sales, due to brand damage, was largely focused on the Volkswagen brand, rather than the very important Audi or Porsche brands. I believe that, although there is obviously a lot of uncertainty regarding the ultimate penalties the company will face, in terms of fines, ‘fix’ costs and reputational damage, the share price still discounts an overly pessimistic scenario, especially given the strength of the company’s balance sheet. Although Volkswagen is unlikely, in the short term, to increase its dividend from the current level, it would not be in the interest of our shareholders to sell at too low a level. I maintain a close watching brief and have had a number of contacts with the company, at different levels, to determine if this crisis encourages the management to ‘turn a new leaf’ in terms of strategy, with more focus on governance and shareholder returns than in the past. Hopes for such change were the main reason your Company was invested in Volkswagen in the first place, although this crisis may accelerate that change.
BREXIT
Although direct exposure to the UK economy is relatively small for continental European companies in aggregate – it only represents about 6% of the revenues of the underlying companies in the portfolio– the indirect consequences of “Brexitâ€, if it happens, are likely to be more significant. If the UK electorate votes to leave the European Union in the referendum to be held on 23 June 2016, uncertainty will rise and investors may question, again, the sustainability of the European Union. Markets do not like uncertainty so share prices may fall, in the event of a ‘leave’ vote. Having said that, if the UK were to leave the European Union, it is also likely that UK sterling would depreciate further which would, of course, make overseas earnings and dividends more valuable to UK based investors. The likely outcome of the vote is, at this stage, unclear so it is hard to say to what extent “Brexit†is already discounted in currencies and share prices.
OUTLOOK
The market has been volatile to date in 2016 with the main trends, established in 2015, of weaker emerging markets and weaker commodities leading to concern about the outlook for the earnings of many European companies. Initially, the weakness in commodity prices was considered, on balance, to be positive for the European economy and European companies’ earnings. The logic was that although companies directly exposed to commodity prices, such as the energy sector, would suffer in the short term, the majority of other companies would benefit from stronger consumer spending and cheaper input prices. It seems, however, that the weakness in commodities is now permeating a number of areas leading to lower earnings expectations overall. Related areas that have been affected include financials, especially banks pressured by continuing low interest rate levels, and industrials, especially those that supply process industry customers and emerging market customers.
Sentiment – with talk of deflationary pressures and global recession – has become quite cautious which is sometimes good news for investors prepared to take a contrarian bias knowing that uncertainty about risks can often create opportunities for reward. Valuation levels, however, still remain elevated. The median twelve month forward price to earnings ratio for Europe ex-UK is still above long term averages, partly because smaller and medium sized companies are, often, highly priced. Although shares, overall, look pricey, some companies and sectors appear to be attractively valued compared to longer term averages. Energy, some industrials, and parts of the financial sector all appear to be attractively valued unless one believes we are heading for a Japan-style deflationary era with sustainably low commodity prices. European consumers seem to be in better health, for the time being, thanks to low interest rates and low oil prices but the concern is that their confidence will be eroded if companies start to cut jobs to maintain earnings and if political uncertainty rises, as seen in Spain following their recent elections.
I remain focused on attractively-valued companies, with strong balance sheets and a track record in cash generation, which have the potential to grow dividends consistently on a three to five year view. I believe that this successful investment approach will prove particularly effective in what is likely to continue to be a low growth era for continental Europe.
Sam Morse
Portfolio Manager
11 March 2016
Strategic Report
PRINCIPAL RISKS AND UNCERTAINTIES
As required by provision C.2.1 of the 2014 UK Corporate Governance Code, the Board makes a robust assessment of the principal risks facing the Company.
The Board confirms that there is an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the internal controls process, identifies the key risks that the Company faces. The process is regularly reviewed by the Board in accordance with the Financial Reporting Council’s (“FRC’s“) ‘Risk Management, Internal Control and Related Financial and Business Reporting’. Risks are identified and graded. This process, together with the policies and procedures for the mitigation of risks, is updated and reviewed regularly in the form of comprehensive reports 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. The Board’s approach to risks is embedded in the Company’s investment objectives and investment policy in the Annual Report.
The Alternative Investment Fund Manager, FIL Investment Services (UK) Limited also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal risks and to ensure that the Board can continue to meet its UK corporate governance obligations.
The Board considers the following as the principal risks and uncertainties faced by the Company:
Market Risk
The Company’s assets consist mainly 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 risk category are included in Note 17 to 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.
Brexit
Risks associated with the UK ‘in-out’ referendum on EU membership (“Brexitâ€) are outlined in the Chairman’s Statement and the Portfolio Manager’s Review. Although direct exposure to the UK economy is relatively small for continental European companies in aggregate, indirect risks include the fact that markets could react adversely to any uncertainties created.
Performance Risk
The achievement of the Company’s performance objective relative to the market requires the application of risk such as strategy, asset allocation and stock selection and may 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 and strategy. 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. The emphasis is on long term results as the Company risks volatility of performance in the shorter term.
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 and 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 within the parameters set by the Board. 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 CFDs to invest in equities. The principal risk is that while in a rising market the Company will benefit from gearing, in a falling market 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 through the use of long CFDs. This has reduced the cost of gearing and provides greater flexibility. The Board regularly considers gearing and gearing risk and sets limits within which the Manager must operate.
Derivatives Risk
Derivative instruments are used to enable both the protection and enhancement of investment returns. There is a risk that the use of derivatives may lead to a higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in place policies and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board.
Further details on derivative instruments risk is included in Note 17 in the Annual Report.
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.
Operational Risks
The Company has no employees and relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. The Company is dependent on the Manager’s control systems and those of its Registrar and Custodian both of whom are monitored and managed by the Manager in the context of the Company’s assets and interests on behalf of the Board. The Depositary, under a tri-partite agreement, oversees the custody of investments and cash. 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 which is monitored by the Manager. In addition, service providers’ own internal controls reports are received by the Board and any concerns investigated.
Although 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. The Board receives regular updates from the Manager in relation to cyber crime.
Other Risks
A continuation vote takes place every two years. There is a risk that shareholders do not vote in favour of the continuation vote during periods when performance is poor. The next continuation vote will take place at the Annual General Meeting in 2017.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the UK Corporate Governance Code, issued by the Financial Reporting Council in September 2014, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern†provision. The Company is an investment trust with the objective of achieving long term capital growth. The Directors consider five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period. A risk to the Company’s continuation is shareholder dissatisfaction, and therefore in accordance with the Company’s Articles of Association, a continuation vote is held every two years, the next one taking place at the 2017 Annual General Meeting.
In making an assessment on the viability of the Company, the Board has considered the following:
• The ongoing relevance of the investment objective in prevailing market conditions;
• The principal risks and uncertainties facing the Company as set out above and their potential impact;
• The demand for the Company’s shares;
• The Company’s discount to the NAV;
• The liquidity of the Company’s portfolio;
• The level of income generated by the Company; and
• Future income and expenditure forecasts
The Company’s performance has been strong since launch and the investment policy is kept under review and the Board considers it to be appropriate. Based on the Manager’s compliance with the Company’s investment objective, its investment strategy and asset allocation and the fact that the portfolio mainly comprises readily realisable securities which can be sold to meet funding requirements if necessary; the Board’s discount management policy; and the ongoing processes for monitoring operating costs and income forecasts, the Board have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years.
GOING CONCERN
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt a going concern basis in preparing these Financial Statements.
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;
• prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• confirm, to the extent possible, that the Financial Statements are fair, balanced and understandable.
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 at www.fidelity.co.uk/its. Visitors to the website need to be aware that legislation in the UK 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 Financial Statements, 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.
Approved by the Board on 11 March 2016 and signed on its behalf.
Humphrey van der Klugt
Chairman
Income Statement for the year ended 31 December 2015
| 2015 | 2014 | ||||||||||||
| revenue | capital | total | revenue | capital | total | ||||||||
| Notes | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||
| Gains on investments at fair value through profit or loss | 10 | – | 33,342 | 33,342 | – | 17,549 | 17,549 | ||||||
| Gains on derivative instruments at fair value through profit or loss | 11 | – | 3,420 | 3,420 | – | 1,818 | 1,818 | ||||||
| Income | 3 | 22,988 | – | 22,988 | 22,107 | – | 22,107 | ||||||
| Investment management fees | 4 | (6,344) | – | (6,344) | (6,011) | – | (6,011) | ||||||
| Other expenses | 5 | (885) | – | (885) | (921) | – | (921) | ||||||
| Exchange losses on other net assets | (12) | (313) | (325) | (23) | (76) | (99) | |||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| Net return before finance costs and taxation | 15,747 | 36,449 | 52,196 | 15,152 | 19,291 | 34,443 | |||||||
| Finance costs | 6 | (339) | – | (339) | (162) | – | (162) | ||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| Net return on ordinary activities before taxation | 15,408 | 36,449 | 51,857 | 14,990 | 19,291 | 34,281 | |||||||
| Taxation (charge)/credit on return on ordinary activities | 7 | (1,371) | – | (1,371) | 371 | – | 371 | ||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| Net return on ordinary activities after taxation for the year | 14,037 | 36,449 | 50,486 | 15,361 | 19,291 | 34,652 | |||||||
| ========== | ========== | ========== | ========== | ========== | ========== | ||||||||
| Return per ordinary share | 8 | 3.37p | 8.75p | 12.12p | 3.67p | 4.61p | 8.28p | ||||||
| ========== | ========== | ========== | ========== | ========== | ========== |
As there are no gains and losses other than those reported in this Income Statement, the net return after taxation is also the total comprehensive income for the year.
The total column of the Income Statement is the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued in the year.
The Notes below form an integral part of these Financial Statements.
Statement of Changes in Equity
for the year ended 31 December 2015
| Share capital |
share premium account |
capital redemption reserve |
capital reserve |
revenue reserve |
total equity |
||||||||
| Note | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||
| As at 1 January 2014 | 10,547 | 58,615 | 5,278 | 617,343 | 19,408 | 711,191 | |||||||
| Net return on ordinary activities after taxation for the year | – | – | – | 19,291 | 15,361 | 34,652 | |||||||
| Repurchase of ordinary shares | (136) | – | 136 | (8,348) | – | (8,348) | |||||||
| Dividend paid to shareholders | 9 | – | – | – | – | (12,518) | (12,518) | ||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| As at 31 December 2014 | 10,411 | 58,615 | 5,414 | 628,286 | 22,251 | 724,977 | |||||||
| Net return on ordinary activities after taxation for the year | – | – | – | 36,449 | 14,037 | 50,486 | |||||||
| Dividends paid to shareholders | 9 | – | – | – | – | (15,159) | (15,159) | ||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| As at 31 December 2015 | 10,411 | 58,615 | 5,414 | 664,735 | 21,129 | 760,304 | |||||||
| ========== | ========== | ========== | ========== | ========== | ========== |
The Notes below form an integral part of these Financial Statements.
Balance Sheet as at 31 December 2015
Company number 2638812
| 2015 | 2014 | ||||
| Notes | £’000 | £’000 | |||
| Fixed assets | |||||
| Investments at fair value through profit or loss | 10 | 746,648 | 716,562 | ||
| ---------- | ---------- | ||||
| Current assets | |||||
| Derivative assets at fair value through profit or loss | 11 | 61 | 1,329 | ||
| Debtors | 12 | 2,670 | 2,128 | ||
| Amounts held in margin accounts | 3 | 607 | |||
| Fidelity Institutional Liquidity Fund plc | 8,800 | 4,038 | |||
| Cash at bank | 4,080 | 4,402 | |||
| ---------- | ---------- | ||||
| 15,614 | 12,504 | ||||
| ---------- | ---------- | ||||
| Creditors | |||||
| Derivative liabilities at fair value through profit or loss | 11 | (83) | (2,293) | ||
| Creditors | 13 | (1,875) | (1,796) | ||
| ---------- | ---------- | ||||
| (1,958) | (4,089) | ||||
| ---------- | ---------- | ||||
| Net current assets | 13,656 | 8,415 | |||
| ---------- | ---------- | ||||
| Total net assets | 760,304 | 724,977 | |||
| Capital and reserves | |||||
| Share capital | 14 | 10,411 | 10,411 | ||
| Share premium account | 15 | 58,615 | 58,615 | ||
| Capital redemption reserve | 15 | 5,414 | 5,414 | ||
| Capital reserve | 15 | 664,735 | 628,286 | ||
| Revenue reserve | 15 | 21,129 | 22,251 | ||
| ---------- | ---------- | ||||
| Total equity shareholders’ funds | 760,304 | 724,977 | |||
| ========== | ========== | ||||
| Net asset value per ordinary share | 16 | 182.57p | 174.09p | ||
| ========== | ========== |
The Financial Statements in the Annual Report were approved by the Board of Directors on 11 March 2016 and were signed on its behalf by:
Humphrey van der Klugt Chairman
Notes to the Financial Statements
1 PRINCIPAL ACTIVITY
Fidelity European Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2638812, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act, 2010 and intends to conduct its affairs so as to continue to be approved.
2 ACCOUNTING POLICIES
The Company has for the first time applied the revised Generally Accepted Accounting Practice (“UK GAAPâ€), issued by the Financial Reporting Council (“FRCâ€) and these Financial Statements have been prepared in accordance with FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland, effective for accounting periods beginning on or after 1 January 2015. The Company has adopted the amendments to FRS 102: Fair value hierarchy disclosures, issued by the FRC in March 2016. The Financial Statements have also been prepared in accordance with the revised Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORPâ€) issued by the Association of Investment Companies (“AICâ€), in November 2014.
As a result of the adoption of the revised UK GAAP and SORP, presentation formats have been amended where appropriate. The Reconciliation of Movements in Shareholders’ Funds has been renamed the Statement of Changes in Equity. The Company is exempt from preparing a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investments are highly liquid and are carried at market value. The net return on ordinary activities after taxation for the year and total shareholders’ funds remain unchanged from what was reported under the former UK GAAP basis applied in the 2014 Annual Report and the 2014 figures have not required restatement.
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.
b) Segmental reporting – The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
c) Income – Income from equity investments is credited to the revenue column of 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 to the revenue column of the Income Statement on an accruals basis. Where the Company has elected to receive a dividend as scrip dividend, that is in the form of additional shares rather than cash, the amount of the dividend foregone is credited to the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the dividend foregone is credited to the capital column of the Income Statement. Derivative income from dividends on long Contracts For Difference (“CFDsâ€) is credited to the revenue column of the Income Statement on the date on which the right to receive the payment is established.
d) Special dividends – Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case.
e) 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.
f) 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 have occurred that result in an obligation to pay more tax in the future, or a right to pay less. A deferred taxation asset is recognised when it is more likely than not that the asset will be recoverable.
g) 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 denominated 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.
h) Valuation of investments – The portfolio of investments is managed and its performance is evaluated on a fair value basis in accordance with a documented investment strategy. Information about the portfolio is provided on this basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently 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.
In accordance with the SORP the Company includes transaction costs, incidental to the purchase or sale of investments, within gains or losses on investments and has disclosed them in Note 9 below.
i) Derivative instruments – When appropriate the Company may utilise derivative instruments, including long and short CFDs. Derivative instruments are carried “at fair value through profit or loss†and are valued at fair value, which is measured as follows:
• CFDs are valued at the difference between the strike price and the bid or last price of the underlying shares in the contract.
Gains and losses in the fair value of derivative instruments are recognised in the capital column of the Income Statement. Income received or paid on derivative instruments is recognised in the revenue column of the Income Statement. Interest paid on long CFDs and dividends paid on short CFDs are charged to ‘finance costs’, in the revenue column of the Income Statement. Any positions on derivative instruments open at the year end are reflected in the Balance Sheet at their fair value either within ‘current assets’ or ‘creditors’, as appropriate.
j) Fidelity Institutional Liquidity Fund plc – The Company holds an investment in the Fidelity Liquidity Fund plc, a short term money market fund investing in a diversified range of short term instruments. It is a distributing fund and accordingly the interest earned is credited to the revenue column of the Income Statement.
k) Capital reserve – The following are accounted for in the capital reserve:
• Gains and losses on the disposal of investments and derivative instruments;
• Changes in the fair value of the investments and derivative instruments held at the year end;
• Foreign exchange gains and losses of a capital nature;
• 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 at the Balance Sheet date, without accepting adverse terms, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as ‘capital reserve’ in the Statement of Changes in Equity 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.
l) Dividends – 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. Dividends are included in the financial statements in the year in which they are paid.
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 3 | INCOME | |||||
| Income from investments at fair value through profit or loss | ||||||
| Overseas dividends | 19,228 | 19,095 | ||||
| Overseas scrip dividends | 1,462 | 338 | ||||
| UK dividends | 1,051 | 873 | ||||
| ---------- | ---------- | |||||
| 21,741 | 20,306 | |||||
| Income from derivative instruments at fair value through profit or loss | ||||||
| Dividends on long CFDs | 1,178 | 1,287 | ||||
| ---------- | ---------- | |||||
| Income from investments and derivative instruments | 22,919 | 21,593 | ||||
| ---------- | ---------- | |||||
| Interest received | ||||||
| Interest received on deposits and money market funds | 55 | 33 | ||||
| Interest received on tax reclaims | 14 | 481 | ||||
| ---------- | ---------- | |||||
| 69 | 514 | |||||
| ---------- | ---------- | |||||
| Total income and interest received | 22,988 | 22,107 | ||||
| ========== | ========== |
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 4 | INVESTMENT MANAGEMENT FEES | |||||
| Investment management fees | 6,344 | 6,011 | ||||
| ========== | ========== |
A summary of the terms of the Management Agreement is given in the Directors’ Report in the Annual Report.
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 5 | OTHER EXPENSES | |||||
| AIC fees | 21 | 21 | ||||
| Custody fees | 123 | 123 | ||||
| Depositary fees1 | 66 | 21 | ||||
| Directors’ fees2 | 138 | 133 | ||||
| Legal and professional fees | 128 | 182 | ||||
| Marketing expenses | 153 | 165 | ||||
| Printing and publication expenses | 101 | 115 | ||||
| Registrars’ fees | 104 | 78 | ||||
| Costs associated with the sub-division of the ordinary shares | – | 38 | ||||
| Fees payable to the Company’s Independent Auditor for the audit of the annual financial statements3 | 25 | 23 | ||||
| Other expenses | 26 | 22 | ||||
| ---------- | ---------- | |||||
| 885 | 921 | |||||
| ========== | ========== | |||||
1 Date of appointment 17 July 2014
2 Details of the breakdown of Directors’ fees are provided in the Directors’ Remuneration Report in the Annual Report
3 The VAT on fees payable to the Company’s Independent Auditor is included in “other expensesâ€
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 6 | FINANCE COSTS | |||||
| Interest paid on long CFDs | 76 | 162 | ||||
| Dividends paid on short CFDs | 263 | – | ||||
| ---------- | ---------- | |||||
| 339 | 162 | |||||
| ========== | ========== |
| 2015 | 2014 | |||||||||||||
| revenue | capital | total | revenue | capital | total | |||||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||||
| 7 | TAXATION ON RETURN ON ORDINARY ACTIVITIES | |||||||||||||
| a) Analysis of the tax charge/(credit) in the year | ||||||||||||||
| Overseas taxation suffered | 2,629 | – | 2,629 | 2,603 | – | 2,603 | ||||||||
| Overseas taxation recovered1 | (1,258) | – | (1,258) | (2,974) | – | (2,974) | ||||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||||||||
| Total taxation charge/(credit) for the year (see Note 7b) |
1,371 | – | 1,371 | (371) | – | (371) | ||||||||
| ========== | ========== | ========== | ========== | ========== | ========== | |||||||||
1 Includes French tax recovered from prior years, following European Court of Justice rulings, of £171,000 (2014: £1,781,000)
b) Factors affecting the taxation charge/(credit) for the year
The taxation assessed for the year is lower than the standard rate of UK corporation tax for an investment trust company of 20.25% (2014: 21.49%). The differences are explained below:
| 2015 | 2014 | |||||||||||||
| revenue | capital | total | revenue | capital | total | |||||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||||
| Net return on ordinary activities before taxation | 15,408 | 36,449 | 51,857 | 14,990 | 19,291 | 34,281 | ||||||||
| ========== | ========== | ========== | ========== | ========== | ========== | |||||||||
| Net return on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 20.25% (2014: 21.49%) |
3,120 | 7,381 | 10,501 | 3,221 | 4,146 | 7,367 | ||||||||
| Effects of: | ||||||||||||||
| Gains on investments not taxed1 | – | (7,381) | (7,381) | – | (4,146) | (4,146) | ||||||||
| Income not included for taxation purposes | (4,355) | – | (4,355) | (3,747) | – | (3,747) | ||||||||
| Movement in excess expenses for the year | 1,235 | – | 1,235 | 608 | – | 608 | ||||||||
| Overseas taxation suffered/(recovered) | 1,371 | – | 1,371 | (371) | – | (371) | ||||||||
| Overseas taxation relief | – | – | – | (82) | – | (82) | ||||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||||||||
| Total taxation charge/(credit) for the year (Note 7a) | 1,371 | – | 1,371 | (371) | – | (371) | ||||||||
| ========== | ========== | ========== | ========== | ========== | ========== | |||||||||
1 Investment trust companies are exempt from UK taxation on capital gains if they meet the HM Revenue & Customs criteria set out in Section 1159 of the Corporation Tax Act 2010
c) The Company has unrelieved excess expenses of £21,003,000 (2014: £14,900,000) and unrelieved loan relationship expenses of £5,505,000 (2014: £5,505,000). It is unlikely that the Company will generate sufficient taxable profits in the future to utilise these amounts and, therefore, no deferred tax asset has been recognised.
| 2015 | 2014 | |||||||||||||
| revenue | capital | total | revenue | capital | total | |||||||||
| 8 | RETURN PER ORDINARY SHARE | |||||||||||||
| Return per ordinary share – pence | 3.37 | 8.75 | 12.12 | 3.67 | 4.61 | 8.28 | ||||||||
| ========== | ========== | ========== | ========== | ========== | ========== | |||||||||
| Net return on ordinary activities after taxation for the year – £000s | 14,037 | 36,449 | 50,486 | 15,361 | 19,291 | 34,652 | ||||||||
| ========== | ========== | ========== | ========== | ========== | ========== |
The return per ordinary share is based on 416,447,910 ordinary shares (2014: 418,048,312) being the weighted average number of ordinary shares in issue during the year.
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 9 | DIVIDENDS | |||||
| Dividend paid | ||||||
| Final dividend of 3.10 pence per ordinary share paid for the year ended 31 December 2014 | 12,910 | – | ||||
| Special dividend of 0.54 pence per ordinary share paid for the year ended 31 December 2014 | 2,249 | – | ||||
| Dividend of 29.75 pence per ordinary share paid for the year ended 31 December 20131 | – | 12,518 | ||||
| ---------- | ---------- | |||||
| 15,159 | 12,518 | |||||
| ========== | ========== | |||||
| Dividends proposed | ||||||
| Dividend of 3.33 pence per ordinary share proposed for the year ended 31 December 20152 | 13,868 | – | ||||
| Final dividend of 3.10 pence per ordinary share paid for the year ended 31 December 2014 | – | 12,910 | ||||
| Special dividend of 0.54 pence per ordinary share paid for the year ended 31 December 2014 | – | 2,249 | ||||
| ---------- | ---------- | |||||
| 13,868 | 15,159 | |||||
| ========== | ========== | |||||
1 If the pence per ordinary share dividend rate actually paid, as shown above, was restated to reflect the ten for one ordinary share sub-division that took place on 2 June 2014, as disclosed in Note 14 below, the adjusted dividend rate per share would be 2.975 pence, for the year ended 31 December 2013
2 Based on the number of ordinary shares in issue at the date of this report
The Directors have, for the year ended 31 December 2015, proposed a final dividend of 3.33 pence per ordinary share to be paid on 20 May 2016, to shareholders on the register at the close of business on 29 March 2016 (ex-dividend date 24 March 2016). All dividends are paid out of revenue reserve.
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 10 | INVESTMENTS | |||||
| Investments at fair value through profit or loss | ||||||
| Investments listed on a recognised stock exchange | 746,648 | 716,562 | ||||
| ========== | ========== | |||||
| Opening book cost | 588,704 | 512,029 | ||||
| Opening investment holding gains | 127,858 | 157,187 | ||||
| ---------- | ---------- | |||||
| Opening fair value of investments | 716,562 | 669,216 | ||||
| Movements in the year | ||||||
| Purchases at cost | 189,552 | 258,782 | ||||
| Sales – proceeds | (192,808) | (228,985) | ||||
| Sales – gains | 19,824 | 46,878 | ||||
| Investment holding gains/(losses) | 13,518 | (29,329) | ||||
| ---------- | ---------- | |||||
| Closing fair value of investments | 746,648 | 716,562 | ||||
| ========== | ========== | |||||
| Closing book cost | 605,272 | 588,704 | ||||
| Closing investment holding gains | 141,376 | 127,858 | ||||
| ---------- | ---------- | |||||
| Closing fair value of investments | 746,648 | 716,562 | ||||
| ========== | ========== |
| Gains on investments at fair value through profit or loss for the year | ||||||
| Gains on sales of investments | 19,824 | 46,878 | ||||
| Investment holding gains/(losses) | 13,518 | (29,329) | ||||
| ---------- | ---------- | |||||
| 33,342 | 17,549 | |||||
| ========== | ========== |
| Gains on investments for the year are shown net of investment transaction costs incurred | ||||||
| Purchases expenses | 291 | 418 | ||||
| Sales expenses | 202 | 227 | ||||
| ---------- | ---------- | |||||
| 493 | 645 | |||||
| ========== | ========== |
The portfolio turnover rate for the year was 25.0% (2014: 34.7%). It represents the average of, the cost of investments purchased and the proceeds of investments sold during the year, expressed as a percentage of the average value of the investments held during the year.
| 2015 | 2014 | |||||||||
| fair value |
portfolio exposure |
fair value |
portfolio exposure |
|||||||
| £’000 | £’000 | £’000 | £’000 | |||||||
| 11 | DERIVATIVE INSTRUMENTS | |||||||||
| Derivative instruments at fair value through profit or loss | ||||||||||
| Long CFDs – assets | 61 | 5,607 | 1,329 | 21,152 | ||||||
| Long CFDs – liabilities | (83) | 29,478 | (2,293) | 23,471 | ||||||
| ---------- | ---------- | ---------- | ---------- | |||||||
| (22) | 35,085 | (964) | 44,623 | |||||||
| ========== | ========== | ========== | ========== |
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| Net gains on derivative instruments at fair value through profit or loss for the year | ||||||
| Gains on long CFD positions closed | 2,478 | 22,762 | ||||
| Holding gains/(losses) on long CFDs | 942 | (20,944) | ||||
| ---------- | ---------- | |||||
| 3,420 | 1,818 | |||||
| ========== | ========== |
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 12 | DEBTORS | |||||
| Taxation recoverable | 2,106 | 1,861 | ||||
| Other debtors | 564 | 267 | ||||
| ---------- | ---------- | |||||
| 2,670 | 2,128 | |||||
| ========== | ========== |
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| 13 | CREDITORS | |||||
| Securities purchased for future settlement | – | 4 | ||||
| Finance costs payable | 3 | 7 | ||||
| Amount payable to the Manager | 1,675 | 1,576 | ||||
| Other creditors | 197 | 209 | ||||
| ---------- | ---------- | |||||
| 1,875 | 1,796 | |||||
| ========== | ========== |
| 2015 | 2014 | |||||||||
| Number of shares |
£’000 | Number of shares |
£’000 | |||||||
| 14 | SHARE CAPITAL | |||||||||
| Existing Ordinary Shares of 25 pence each – issued, allotted and fully paid | ||||||||||
| Beginning of the year | – | – | 42,187,693 | 10,547 | ||||||
| Repurchase of Existing Ordinary Shares | – | – | (395,520) | (99) | ||||||
| ---------- | ---------- | ---------- | ---------- | |||||||
| – | – | 41,792,173 | 10,448 | |||||||
| Existing Ordinary Shares cancelled on the sub-division | – | – | (41,792,173) | (10,448) | ||||||
| ---------- | ---------- | ---------- | ---------- | |||||||
| End of the year | – | – | – | – | ||||||
| ========== | ========== | ========== | ========== | |||||||
| New Ordinary Shares of 2.5 pence each – issued, allotted and fully paid | ||||||||||
| Beginning of the year | 416,447,910 | 10,411 | – | – | ||||||
| New Ordinary Shares issued on the sub-division | – | – | 417,921,730 | 10,448 | ||||||
| ---------- | ---------- | ---------- | ---------- | |||||||
| 416,447,910 | 10,411 | 417,921,730 | 10,448 | |||||||
| Repurchase of New Ordinary Shares | – | – | (1,473,820) | (37) | ||||||
| ---------- | ---------- | ---------- | ---------- | |||||||
| End of the year | 416,447,910 | 10,411 | 416,447,910 | 10,411 | ||||||
| ========== | ========== | ========== | ========== |
On 2 June 2014 the Existing Ordinary Shares of 25 pence each were sub-divided. Ten New Ordinary Shares of 2.5 pence each were issued for each Existing Ordinary Share of 25 pence each. The New Ordinary Shares rank pari passu with each other and are subject to the same rights and restrictions as the shares they replaced. A holding of New Ordinary Shares following the sub–division represents the same proportion of the issued share capital of the Company as the corresponding holding in the Existing Ordinary Shares.
15 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 derivative instruments sold, unrealised increases and decreases in the fair value of investments and derivative instruments held and other income and costs recognised in the capital column of the Income Statement. It can be used to fund share repurchases and it is distributable by way of dividend. The Board has stated that it has no current intention to pay dividends out of capital.
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 dividend. It is distributable by way of dividend.
16 NET ASSET VALUE PER ORDINARY SHARE
The net asset value per ordinary share is based on net assets of £760,304,000 (2014: £724,977,000) and on 416,447,910 (2014: 416,447,910) shares, being the number of ordinary shares in issue at the year end.
17 FINANCIAL INSTRUMENTS
MANAGEMENT OF RISK
The general risk analysis undertaken by the Board and its overall policy approach to risk management are set out in the Strategic Report in the Annual report. This Note is incorporated in accordance with FRS 102 and refers to the identification, measurement and management of risks potentially affecting the value of financial instruments.
The Company’s financial instruments may comprise:
• Equity shares held in accordance with the Company’s investment objective and policies;
• Derivative instruments which could include long and short CFDs; and
• Cash, liquid resources and short term debtors and creditors that arise from its operations.
The risks identified by FRS 102 arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The sensitivity analysis in this Note is used by management to measure the Company’s exposure to these risks. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies have remained unchanged since the beginning of the accounting period.
Market price risk
Interest rate risk
The Company finances its operations through share capital raised. In addition, the Company has a geared exposure to European equities through the use of long CFDs which incur funding costs and provide collateral. It is, therefore, exposed to a financial risk as a result of increases in interest rates.
Interest rate risk profile
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| Exposure to financial instruments that bear interest | ||||||
| Gearing effect of exposure through long CFDs | 35,107 | 45,587 | ||||
| ---------- | ---------- | |||||
| Exposure to financial instruments that earn interest | ||||||
| Amounts held in margin accounts | 3 | 607 | ||||
| Fidelity Institutional Liquidity Fund plc | 8,800 | 4,038 | ||||
| Cash at bank | 4,080 | 4,402 | ||||
| ---------- | ---------- | |||||
| 12,883 | 9,047 | |||||
| ---------- | ---------- | |||||
| Net exposure to financial instruments that bear interest | 22,224 | 36,540 | ||||
| ========== | ========== |
Foreign currency risk
The Company’s total net assets and its total return on ordinary activities can be affected by foreign exchange movements because the Company has assets and income which are denominated in currencies other than the Company’s base currency, which is UK sterling. The Company is also subject to short term exposure from exchange rate movements, for example, between the date when an investment is bought or sold and the date when settlement of the transaction occurs.
Three principal areas have been identified where foreign currency risk could impact the Company:
• Movements in rates affecting the value of investments and derivative instruments;
• Movements in rates affecting short term timing differences; and
• Movements in rates affecting income received.
The Company does not currently hedge, by the use of derivative instruments, the UK sterling value of investments, derivative instruments and other net assets which are denominated in other currencies.
Currency exposure of financial assets
The Company’s financial assets comprise equity investments, long CFDs, short term debtors and cash. The currency profile of these financial assets is shown below:
| 2015 | ||||||||||||
| investments at fair value through profit or loss |
exposure to long CFDs |
short term debtors1 |
cash2 | total | ||||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | ||||||||
| Danish krone | 45,788 | – | 29 | – | 45,817 | |||||||
| Euro | 443,817 | 35,085 | 1,752 | 33 | 480,687 | |||||||
| Norwegian krone | 27,093 | – | – | – | 27,093 | |||||||
| Swedish krona | 18,680 | – | – | – | 18,680 | |||||||
| Swiss franc | 178,136 | – | 588 | – | 178,724 | |||||||
| UK sterling | 33,134 | – | 304 | 12,847 | 46,285 | |||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| 746,648 | 35,085 | 2,673 | 12,880 | 797,286 | ||||||||
| ========== | ========== | ========== | ========== | ========== | ||||||||
| 2014 | ||||||||||||
| investments at fair value through profit or loss |
exposure to long CFDs |
short term debtors1 |
cash2 | total | ||||||||
| £’000 | £’000 | £’000 | £’000 | £’000 | ||||||||
| Danish krone | 36,739 | – | 11 | – | 36,750 | |||||||
| Euro | 428,436 | 44,623 | 1,375 | 158 | 474,592 | |||||||
| Norwegian krone | 34,504 | – | – | – | 34,504 | |||||||
| Swedish krona | 22,285 | – | – | – | 22,285 | |||||||
| Swiss franc | 156,570 | – | 475 | – | 157,045 | |||||||
| Turkish lira | 8,745 | – | – | – | 8,745 | |||||||
| UK sterling | 29,283 | – | 874 | 8,282 | 38,439 | |||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ||||||||
| 716,562 | 44,623 | 2,735 | 8,440 | 772,360 | ||||||||
| ========== | ========== | ========== | ========== | ========== | ||||||||
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves and it has a geared exposure to European equities through the use of long CFDs. The Company’s financial liabilities comprise the gearing effect of long CFDs, which have no fixed expiry date, and other short term creditors, that are repayable within one year. The currency profile of these financial liabilities is shown below:
| 2015 | ||||||||
| gearing effect of exposure to long CFDs |
short term creditors |
total | ||||||
| £’000 | £’000 | £’000 | ||||||
| Euro | 35,107 | 3 | 35,110 | |||||
| UK sterling | – | 1,872 | 1,872 | |||||
| ---------- | ---------- | ---------- | ||||||
| 35,107 | 1,875 | 36,982 | ||||||
| ========== | ========== | ========== |
| 2014 | ||||||||
| gearing effect of exposure to long CFDs |
short term creditors |
total | ||||||
| £’000 | £’000 | £’000 | ||||||
| Euro | 45,587 | 7 | 45,594 | |||||
| UK sterling | – | 1,789 | 1,789 | |||||
| ---------- | ---------- | ---------- | ||||||
| 45,587 | 1,796 | 47,383 | ||||||
| ========== | ========== | ========== |
Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Investment Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile.
DERIVATIVE INSTRUMENTS RISK
The risks and risk management processes which result from the use of derivative instruments are included within the other risk categories disclosed in this Note. Derivative instruments are used by the Portfolio Manager for the following purposes:
• To gain “unfunded†long exposure to equity markets, sectors or single stocks. “Unfunded†exposure is exposure gained without an initial outflow of capital.
• To position “short†exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Manager believes to be over valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.
The risk and performance contribution of the derivative instruments to the Company’s portfolio is overseen by a specialist Derivative Instruments Team which draws on over forty years of experience in derivative risk management. This team uses portfolio risk assessment tools to advise the Investment Manager on portfolio construction.
Liquidity risk
The Company’s assets mainly comprise readily realisable securities and long CFDs which, if necessary, can be sold easily to meet funding commitments. Short term flexibility is achieved by the use of overdraft facilities as required.
Counterparty risk
All securities and derivative instruments are transacted with brokers and carry the risk that the counterparty to a transaction may not meet its financial obligations. In accordance with the risk management process which the Investment Manager employs, the Portfolio Manager will seek to minimise such risk by only entering into transactions with counterparties which it believes to have an adequate credit rating at the time the transaction is entered into. The Manager ensures that formal legal agreements covering the terms of the contract are entered into in advance and also adopts a counterparty risk framework which measures, monitors and manages counterparty risk through the use of internal and external credit agency ratings and evaluates derivative instrument credit risk exposure.
For Over The Counter (“OTCâ€) derivative transactions, in accordance with the terms of International Swap Dealers Association (“ISDAâ€) market standard derivative contracts, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 December 2015, £3,000 (2014: £607,000) was held in cash in a segregated collateral account.
Credit risk
Investments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with a large number of brokers and are settled on a delivery versus payment basis. Limits are set on the amount that can be due from any one broker. All security transactions are through brokers which have been approved as an acceptable counterparty. This is reviewed on an ongoing basis. At the year end, the exposure to credit risk includes cash at bank, outstanding securities transactions and derivative instruments at fair value.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
If interest rates at 31 December 2015, had increased by 0.25%, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by £56,000 (2014: £91,000). A decrease in interest rates by 0.25% would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
If the UK sterling exchange rate at 31 December 2015, had strengthened or weakened by 10% in relation to the larger currency exposures held by the Company, with all other variables held constant, total net assets and the total return on ordinary activities would have (decreased)/increased by the following amounts.
If the UK sterling exchange rate had strengthened by 10% the impact would have been:
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| Danish krone | (4,165) | (3,341) | ||||
| Euro | (40,507) | (39,000) | ||||
| Norwegian krone | (2,463) | (3,137) | ||||
| Swedish krona | (1,698) | (2,026) | ||||
| Swiss franc | (16,248) | (14,277) | ||||
| ---------- | ---------- | |||||
| (65,081) | (61,781) | |||||
| ========== | ========== |
If the UK sterling exchange rate had weakened by 10% the impact would have been:
| 2015 | 2014 | |||||
| £’000 | £’000 | |||||
| Danish krone | 5,091 | 4,083 | ||||
| Euro | 49,509 | 47,666 | ||||
| Norwegian krone | 3,010 | 3,834 | ||||
| Swedish krona | 2,076 | 2,476 | ||||
| Swiss franc | 19,858 | 17,449 | ||||
| ---------- | ---------- | |||||
| 79,544 | 75,508 | |||||
| ========== | ========== |
Other price risk sensitivity analysis
Changes in market prices, other than those arising from interest rate risk or foreign currency risk, also affect the value of the Company’s net assets and its total return on ordinary activities. Details of how the Board sets risk parameters and performance objectives can be found in the Strategic Report in the Annual Report.
Investments exposure sensitivity analysis
An increase of 10% in the fair value of investments at 31 December 2015 would have increased total net assets and total return on ordinary activities by £74,665,000 (2014: £71,656,000). A decrease of 10% would have had an equal but opposite effect.
Derivative instruments exposure sensitivity analysis
The Company invests in long CFDs to gain exposure to the equity markets. An increase of 10% in the price of shares underlying the CFDs at 31 December 2015 would have increased total net assets and total return on ordinary activities by £3,509,000 (2014: £4,462,000). A decrease of 10% would have had an equal but opposite effect.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
As explained in Notes 2(h) and 2(i) above, investments are stated at fair value, which is bid or last market price, and long CFDs are stated at fair value, which is the difference between the settlement price and the value of the underlying shares in the contract. Other financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. In the case of cash, book value approximates to fair value due to the short maturity of the instruments.
FAIR VALUE HIERARCHY
The Financial Reporting Council defines a fair value hierarchy that classifies financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs
used to measure their fair value.
Classification Valued by reference to
Level 1 The unadjusted quoted price in an active market for identical assets or liabilities that the
entity can access at the measurement date.
Level 2 Inputs other than quoted prices included within Level 1 that are observable (i.e. developed
using market data) for the asset or liability, either directly or indirectly.
Level 3 Inputs are unobservable (i.e for which market data is unavailable) for the asset or liability.
The table below sets out the fair hierarchy of the Company’s financial instruments held at fair value on the Balance Sheet:
| 2015 | 2014 | |||||||||||||
| Level 1 £’000 |
Level 2 £’000 |
Total £’000 |
Level 1 | Level 2 £’000 |
Total £’000 |
|||||||||
| Financial instruments held at fair value | ||||||||||||||
| Fixed assets – investments in listed equities | 746,648 | – | 746,648 | 716,562 | – | 716,562 | ||||||||
| Derivative assets – long CFDs | – | 61 | 61 | – | 1,329 | 1,329 | ||||||||
| Derivative liabilities – long CFDs | – | (83) | (83) | – | (2,293) | (2,293) | ||||||||
| ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | |||||||||
| 746,648 | (22) | 746,626 | 716,562 | 716,562 | 715,598 | |||||||||
| ======= | ======= | ====== | ====== | ====== | ====== |
The valuation techniques used by the Company are explained in Accounting Policies Notes 2(h) and 2(i) above.
18 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The capital of the Company comprises its gearing, which is managed via the use of long CFDs, and its issued share capital and reserves which are disclosed in the Balance Sheet above. It is managed in accordance with the Company’s investment policy in pursuit of its investment objective, as disclosed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed in the Strategic Report in the Annual Report.
The Company’s gearing at the end of the year is shown below:
| 2015 Portfolio Exposure |
2014 Portfolio Exposure |
|||||
| £’000 | £’000 | |||||
| Investments | 746,648 | 716,562 | ||||
| Derivative instruments – long CFDs | 35,085 | 44,623 | ||||
| ---------- | ---------- | |||||
| Total Portfolio Exposure | 781,733 | 761,185 | ||||
| ========== | ========== | |||||
| Shareholders’ Funds | 760,304 | 724,977 | ||||
| ========== | ========== | |||||
| Gearing – Total Portfolio Exposure in excess of Shareholders’ Funds | 2.8% | 5.0% | ||||
| ========== | ========== |
19 CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
There were no contingent liabilities or capital commitments as at 31 December 2015 (2014: none).
20 RELATED PARTY TRANSACTIONS
The Company has identified the Directors as its only related parties. The Directors have complied with the provisions of FRS 102, which require disclosure of related party transactions and balances. Key management compensation paid was £152,000 (2014: £146,000). This included fees and travel expenses paid to the Directors, as disclosed in the Directors’ Remuneration Report in the Annual Report, and £14,000 (2014: £13,000) of Employer’s National Insurance contributions.
STATUS OF RESULTS ANNOUNCEMENT
2014 FINANCIAL INFORMATION
The figures and financial information for 2014 are extracted from the published Annual Report and Accounts for the year ended 31 December 2014 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.
2015 FINANCIAL INFORMATION
The figures and financial information for 2015 are extracted from the published Annual Report and Accounts for the year ended 31 December 2015 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 be submitted to the National Storage Mechanism in due course and will be available for inspection at www.morningstar.co.uk/uk/NSM.
The Annual Report and Financial Statements will be posted to shareholders on/around 1 April 2016 and will be available on the Company's website at www.fidelity.co.uk/its in due course.
For Enquiries, please contact:
Bonita Guntrip
01737 837320
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