Annual Financial Report
Invesco Asia Trust plc
Annual Financial Report Announcement
For the Financial Year Ended 30 April 2020
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FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
The benchmark index of the Company is the MSCI AC Asia ex Japan Index (total return, in sterling terms)
| Total Return Statistics(1) (dividends reinvested) | |||
| Change for the year | 2020 | 2019 | |
| Net asset value (NAV)(2) | –10.2% | 0.8% | |
| Share price | –10.0% | 6.0% | |
| Benchmark index(2) | –4.1% | 1.6% | |
| Capital Statistics | |||
| At 30 April | 2020 | 2019 | CHANGE % |
| Net assets (£000) | 186,948 | 227,375 | –17.8 |
| NAV per share(2) | 279.6p | 322.7p | –13.4 |
| Share price(1) | 254.0p | 294.0p | –13.6 |
| Benchmark index(2) | 904.96 | 969.82 | –6.7 |
| Discount(2) per ordinary share (cum income): | (9.2)% | (8.9)% | |
| Average discount over the year (cum income)(1)(2) | (11.0)% | (11.6)% | |
| Gearing(2): | |||
| gross | 5.5% | nil | |
| net | 4.3% | nil | |
| net cash | nil | (1.1)% | |
| Revenue Statistics | |||
| Year Ended 30 April | 2020 | 2019 | CHANGE % |
| Income (£000) | 7,120 | 5,440 | +30.9 |
| Net revenue available for ordinary shares (£000) | 5,354 | 3,927 | +36.3 |
| Revenue return per ordinary share | 7.81p | 5.55p | +40.7 |
| Dividends per share(3): | |||
| first interim/interim | 3.40p | 2.80p | |
| second interim/final | 3.60p | 2.90p | |
| Total dividends | 7.00p | 5.70p | +22.8 |
| Ongoing charges ratio(2) | 1.02 | 0.98 | |
(1) Source: Refinitiv.
(2) Alternative Performance Measure (APM). See Glossary of terms and alternative performance measures on pages 76 to 78 of the financial report for details of the explanation and reconciliations of APMs.
(3) During the year, the Board resolved to pay two interim dividends (previously an interim and final dividend was paid).
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CHAIRMAN’S STATEMENT
HIGHLIGHTS
• Portfolio positioned for recovery when the Covid-19 crisis hit.
• Net Asset Value (NAV) per share down 10.2% over 1 year, benchmark index* down 4.1%, both on a total return basis.
• Share price total return down 10.0% as discount (on a cum-income basis) moved from 8.9% to 9.2% over the year.
• Second interim dividend of 3.60p per share takes full year dividend to 7.00p, up 22.8% on previous year. Shares yielded 2.8% at 30 April 2020 closing price.
• Investment case: We continue to believe in the institutional strength, people and process of Invesco’s Asian Investment team.
• Corporate proposition: We have introduced a series of measures designed to increase demand for our shares and to reduce the discount. However, we have been hurt by abnormal market conditions and a poor period of performance.
* Benchmark index is the MSCI AC Asia ex Japan Index from 1 May 2015 and was the MSCI AC Asia Pacific ex Japan Index before then.
Sometimes you just have to admit that you got it wrong. I wrote in our interim statement that the Board was “reassured that there are many Asian companies with good fundamentals at attractive valuations that are very well positioned to prosper when conditions return to normal. When that might be depends upon political and market sentiment but our experience tells us that it is better to be positioned early.” That was written before Covid-19 took hold in China. We did not see what was coming and we now know it was wrong to be positioned early for a cyclical recovery when what actually happened was a sudden, very sharp recession. Could we have been positioned differently? Possibly, but it would not have been true to our Manager’s investment style. What really matters now is how we position the Company for future performance. It is still true that there are many Asian companies with good fundamentals at attractive valuations that are very well positioned to prosper. But some of the old candidates have suffered severe financial stress as a result of the Covid-19 crisis while some exciting new candidates are available at attractive buying levels. Ian Hargreaves, supported by Fiona Yang, has worked hard to reassess all our current holdings and to research potential new ones. He discusses his investment strategy in detail in his Portfolio Manager's report. The exposure to China and to the consumer discretionary and technology sectors has increased over the year. The exposure to financials has reduced (page 16).
Annual General Meeting
As the Government begins to ease the Stay at Home measures introduced in response to Covid-19, it is uncertain as to whether we will be able hold an Annual General Meeting (AGM) in the traditional format and it may not be possible for Shareholders to attend. The Company is still legally required to hold an AGM which will be held at Invesco’s office, 43-45 Portman Square, London W1H 6LY on 3 September 2020 at 12 noon.
At present attendance of more than two people at an AGM (other than where this is essential for work purposes) is not permitted and shareholders should not attend the AGM and anyone who attempts to join the meeting in person will not be admitted. Given the restrictions on attendance, shareholders are encouraged to appoint the ‘Chairman of the Meeting’ as their proxy. Should the Government restrictions have changed in advance of the AGM and it is possible to attend in person, the Company will notify shareholders via the website www.invesco.com/invescoasia and make a regulatory announcement.
In light of the above, this year’s AGM will be restricted to the formal business of the meeting as set out in the Notice of Meeting. There will be no presentation by the Portfolio Manager, a video presentation from Ian Hargreaves will be made available on the Company's website following the conclusion of the AGM. The Directors have carefully considered all resolutions proposed and believe them to be in the best interests of shareholders and the Company as a whole. Accordingly, the Directors recommend that shareholders vote in favour of each resolution, as will the Directors in respect of their own shareholdings.
We encourage shareholders to exercise their votes online or by completing paper proxy forms. If you have questions, on the business of the meeting or otherwise, please address them to the Company Secretary at IAT@invesco.com or, in hard copy, to 43-45 Portman Square, London W1H 6LY no later than 21 August 2020. Questions will be relayed to the Board and responses provided in due course.
The Board would like to thank all shareholders for their understanding during these unprecedented times. We will return to full shareholder engagement as soon as possible.
Discount
On a cum-income basis the discount to NAV at 30 April 2020 was 9.2%, compared to 8.9% at 30 April 2019. The average cum-income discount over the year was 11.0%. Last year the Board, in consultation with the Company’s corporate broker, decided to change the discount target to a cum-income rather than ex-income basis, making it a tougher target to hit. Our buyback policy was having some impact but was overtaken by what were clearly far from normal market conditions.
We have considered carefully what action to take in the best interests of all shareholders. Buybacks are a part of that, along with performance and the other measures outlined below. Plainly the next continuation vote, due in 2022, provides shareholders with the ultimate means by which they can determine the Company’s future.
Investment Case
The investment case rests on people, process and performance: Our investment management is contracted to Invesco Fund Managers Limited (the Manager) with Ian Hargreaves as our Portfolio Manager, actively supported by Fiona Yang. Ian is Co-Head of Asian and Emerging Markets Equities at Invesco, has been our lead manager since 1 January 2015, our named co-manager from 2011 and was part of the investment team before that. Fiona Yang joined the team in 2017 from Goldman Sachs. The investment process, which the Manager has consistently applied over the long-term, is best described as a search for companies whose shares trade at a significant discount to fair value. The mandate is to invest predominantly in listed companies in Asia ex Japan. Long-term performance remains strong with the Company returning 119.5% over the ten years to 30 April 2020 on a NAV total return basis versus the 87.6% from our benchmark index.*
Your Board continues to consider the investment case for Invesco Asia Trust plc to be compelling and sustainable.
Corporate Proposition
The Company’s Corporate Proposition was first introduced in the Half-Yearly Financial Report to 31 October 2018. Since then the Board has continued to review and adopt measures intended to create additional demand for the Company’s shares, both from existing and new shareholders, and to reduce the discount. We have been careful to ensure that the measures chosen are in the best interests of all shareholders. The intention is that the gains from each will combine to make the corporate proposition as compelling as the investment case.
Continuation Vote
The Board was pleased by the result of the continuation vote held at last year’s Annual General Meeting, with a large majority of shareholders voting in favour of the Company continuing for another three years. As was explained at the time, the Directors’ recommendation that the Company should continue was founded upon a firm belief in the strong investment case and the corporate proposition on offer – and that belief still holds true today. We are fully supportive of Ian, Fiona and their team and have confidence that they have the necessary skills and experience to deliver good portfolio performance for the benefit of shareholders on an ongoing basis. Nevertheless, we are not complacent, and recognise that outperformance of the benchmark on a sustained basis will be required if we are to count on shareholder support for continuation at the next vote in 2022 and for the Company to have the opportunity to flourish over the longer term.
Engaging more individual shareholders
We see that an increasing proportion of our shareholders are individuals, with the proportion of investors who hold shares of Invesco Asia Trust plc via execution only platforms doubling in the last six years. Over the same period IFA holdings increased from near zero to 3.3%. The Board aims to engage more directly with individual investors. Working closely with the Manager, we continue to raise the profile of the Company through new direct investor information, commentary and events which will provide access to the thoughts and views of Ian and Fiona, their team and the Directors. These activities complement the ongoing engagement with a broad range of professional investors. These are online and available to access at www.invesco.co.uk/invescoasia
February this year saw the relaunch of our website offering an improved experience and much more content such as videos and articles by our Manager and his team. Please take a look at www.invesco.co.uk/invescoasia where you can register to receive printed copies of the Half-Yearly and Annual Financial Reports. You can also see third party research (by Edison Investment Research and Kepler Partners) and register for monthly factsheet alerts.
You can also contact us by email at IAT@invesco.com
Access to Invesco Expertise
Ian Hargreaves is Invesco’s lead Portfolio Manager of Asian accounts for institutional investors and manages £3 billion of institutional assets. Invesco Asia Trust plc is the only vehicle available to UK retail investors who wish to access Ian’s track record. Ian manages it with a high degree of commonality to his institutional portfolios although he will continue to include some of the best smaller company opportunities. Fiona works closely with Ian in the portfolio management, research process and marketing of the Company.
Dividend Policy
The Company plans to increase the dividend per share each year, utilising the Company’s revenue and capital reserves if necessary**. This is a distinguishing feature of investment trusts. We can use first our revenue reserves then, if necessary, our capital reserves to smooth dividend payments in years when they are not covered by available revenue.
As announced in the Company’s Half-Yearly Financial Report, the Board took the decision to bring forward the timing of dividend payments in order to align more closely with receipt of income into the Company’s portfolio, thus paying two dividends in respect of each financial year in November and April, rather than in January and September. The first interim dividend of 3.40p was paid to shareholders on 26 November 2019 and a second interim dividend of 3.60p was paid to shareholders on 20 April 2020.
The total dividend for the year to 30 April 2020 of 7.00p per share represents an increase of 22.80% on 2019’s 5.70p. This represents a dividend yield of 2.8% based on the 30 April 2020 closing share price.
The full-year revenue return per share was 7.81p (2019: 5.55p). Revenue reserves at 30 April 2020, after payment of the second interim, grew by 17% and now represent 84% of the full year’s dividend. Although the balance sheet for 2020 shows a decrease in the revenue reserve from 2019, this is as a result of paying the second interim dividend (in lieu of a final) before the year end (2019: final dividend was paid after the year end).
A Resolution inviting shareholders to approve the Company’s dividend payment policy will be put to shareholders at the forthcoming AGM. The Resolution is advisory.
Environmental, Social and Governance Matters (ESG)
Investors and investment managers are paying greater attention to environmental, social and governance matters for reasons including regulatory change and the growing public discourse on climate change.
The Board recognises the importance of ESG considerations and on page 22 we explain our approach. We continue to monitor closely developments in this space. The Manager is well-placed with ample resource to assess the risks and opportunities which may result from accelerating ESG-driven change. The Manager’s Global ESG function, based in Henley, inputs into the research process and provides a formal ESG oversight process including meetings with the Portfolio Managers and analysts to review the portfolio from an ESG perspective.
The Manager is a Tier 1 signatory of the Financial Reporting Council’s Stewardship Code and maintains an active seat on the Board of the UK Sustainable Investment and Finance Association. In addition, the Manager achieved a global ‘A+’ rating for the third consecutive year from United Nations sponsored Principles of Responsible Investment (PRI) for Strategy and Governance. In 2019 the MSCI upgraded the Manager’s ESG rating from BBB to A and under its membership of the Carbon Disclosure Project it reports annually on its carbon footprint.
Gearing
The Company intends to use gearing (or borrowings) actively to take advantage of its closed-end structure. At the year end the Company had net gearing of 4.3%.
Buyback Authority
During the year the Company repurchased into treasury 3,616,188 shares (representing 5.4% of total ordinary shares outstanding at year-end) at an average price of 279.80p per share. The Company’s shares traded during the year at an average discount to NAV including income, marginally in excess of the target, at 11.0% (2019: 10.4%).
The Board has a stated average discount target of less than 10% of NAV calculated on a cum-income basis over the Company’s financial year, although the Directors are cognisant of the fact that the Company’s share rating at any particular time will reflect a combination of various factors, a number of which are beyond the Board’s control. Share buybacks will only occur where and when we consider (in conjunction with our broker) that such buybacks will be effective, taking into account market factors and the discounts of comparable funds.
The key driver behind an improving share rating will almost invariably be good portfolio performance over a prolonged period; this therefore remains the primary means by which the Board expects the Company’s discount to narrow over time. The Board is however seeking buyback authority from shareholders at the forthcoming AGM, so that it retains the ability to undertake share repurchases if and when it believes that to do so would have a meaningful positive effect upon the discount at which the Company’s shares trade. Special Resolution 13 seeks shareholders’ approval to renew the Company’s authority to purchase up to 14.99% of its share capital; this is explained in more detail on page 34 in the annual financial report.
Board Composition
As reported in the Half-Yearly Financial Report, Vanessa Donegan was appointed as a Non-Executive Director of the Company with effect from 17 October 2019. Vanessa brings to the Board 37 years of fund management experience investing institutional and retail portfolios in Asian stock markets. Tom Maier, having served on the Board since 2009, will retire from the Board at the conclusion of the forthcoming AGM and will not stand for re-election. On behalf of the Board I would like to thank Tom for his service to the Company and wish him well for the future. In compliance with the AIC Corporate Governance Code all other Directors shall stand for re-election or election at the forthcoming AGM. We require all our Directors to be independent.
Ongoing Charges and Fees
As a Board we are responsible for managing the level of charges to shareholders. Our intention is to seek to reduce gradually the level of ongoing charges over time. The main component of the 1.02% p.a. ongoing charges is the investment management fee of 0.75% p.a. paid to Invesco, with a marginal rate 0.65% on assets over £250m.
Directors’ Shareholdings
Institutional investors often follow and ask for information on Directors’ holdings of shares in the Company. These are shown on page 43 and we are required to notify any changes to the stock market by regulatory announcement. Additionally, our Portfolio Manager, Ian Hargreaves and Fiona Yang are both shareholders in the Company and can confirm that their remuneration by the Manager is partly determined by the performance of Invesco Asia Trust plc.
Outlook
The Covid-19 induced recession really is unprecedented in its combination of speed and depth of economic impact. Our benchmark index fell 43% from its mid-January peak within a two-month period. Perhaps the most startling economic data point was that China’s economy shrank by 6.8% in Q1, the first fall since 1976. The severity and length of lockdowns has varied from country to country. For example, Hong Kong, South Korea and Taiwan appear to have had a relatively less severe crisis which some attribute to their prior experience of SARS or the high propensity of their populations to wear face masks. Even now as factories across Asia start to resume production, the demand for their exports in Europe and America has not yet recovered.
Stock markets are still struggling to adjust to the new normal. There is not yet a vaccine nor agreement on which drugs are most effective in treating the virus. Will there be a second wave? Will it mutate? Will it fade away? News channels praise New Zealand’s lockdown and criticise Sweden’s more relaxed approach. But what if there isn’t a vaccine or a cure? It will be at least a year before we can look back and say who was right and who had the best policies. Meanwhile, survival is key at the corporate level too: our investments need to have the balance sheet strength to reach the other side. Valuation is important as there is a greater margin of safety in cheaper valuations. Those companies with stable or growing revenues are in much better positions and good company management is vital too, the G or Governance part of ESG investing is too often overlooked. Whatever the outcome, things are going to be different and it is at times like these an active management style should prosper.
Update
From 30 April 2020 to 3 July 2020, the NAV has increased by 14.9% and the index by 11.8%. The share price has increased by 9.1%, meaning that the discount to NAV on a cum-income basis has moved from 9.2% to 13.8%. So far we have outperformed the recovery from the March lows.
Neil Rogan
Chairman
6 July 2020
* Benchmark index is the MSCI AC Asia ex Japan Index from 1 May 2015 and was the MSCI AC Asia Pacific ex Japan Index before then.
** Please be aware that the Board provides no guarantees of future dividends and that all future dividend payments will be at the Directors’ discretion.
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Portfolio Manager’s Report
Q&A
Q How has the Company performed in the year under review?
A The Company’s net asset value fell by 10.2% (total return, in sterling terms) over the twelve months to 30 April 2020, which compares to a fall of 4.1% for the benchmark MSCI AC Asia ex Japan Index (total return, in sterling terms). The investment environment has been challenging due to the Covid-19 outbreak, a ‘black swan’ event that the portfolio was not positioned for. The NAV performance, in both absolute and relative terms, has been disappointing.
At the end of 2019, after two years of slowing global growth, there was mounting evidence that conditions were beginning to reverse, supported by the lagged effect of global policy easing. Trade tensions between the US and China had also been improving. We believed that this would lead to a recovery in earnings momentum and a broadening out of market performance, with the portfolio positioned to benefit from this turn in the cycle. The Covid-19 pandemic has turned this prospect on its head, or at the very least delayed it.
The portfolio’s tilt towards more economically sensitive sectors – particularly financials – which could benefit from a recovery, has cost us in terms of relative performance as these areas sold off, in some cases indiscriminately. Exposure to technology, health care and internet stocks has offered some reprieve, but not enough. However, we have been running Asian portfolios for decades and although every market crisis is different, Asia has historically been able to bounce back and deliver good positive returns from current valuations levels. From a bottom-up perspective, we believe that the Company currently holds a good balance of significantly undervalued businesses.
Q What have been the biggest contributors and detractors to performance?
A The performance differential between economically sensitive (or cyclical) stocks and internet/technology has been significantly in favour of the latter. Stock selection in financials was a key detractor from relative performance, particularly our exposure to ASEAN banks where there are legitimate concerns over the near-term outlook for loan growth and asset quality, with margins under pressure due to interest rate cuts. Markets appear to be pricing in a worst case scenario for the banking sector at large, overlooking the strong capital positions in many cases. The Indian market has underperformed as concerns have grown over the potential impact of Covid-19 just as the economy was emerging from years of balance sheet repair within the banking system. Real estate developer Sobha and agrochemical company UPL were amongst the biggest detractors. Oil price weakness has negatively impacted Chinese oil & gas major CNOOC, while China BlueChemical faced a weaker price environment for its two main products methanol and urea. Meanwhile, Samsonite International, the luggage manufacturer, faced concerns over debt covenants and the impact of tariff increases in the US before the coronavirus crisis struck, although we have been impressed by actions taken to strengthen liquidity, control costs and manage cash flow.
On the other hand, internet and technology stocks have been significant contributors. Working from home has accelerated the demand for online services and hardware. Unsurprisingly, online gaming companies have outperformed in the current environment, with NetEase and Tencent seeing little disruption to their core businesses. Chinese e-commerce company JD.com has also made strong gains, with recent investment in warehousing and logistics meaning it was perfectly positioned to continue delivering more orders to its growing number of customers. MediaTek saw its share price pull back slightly in early 2020 after a strong period of performance for the semiconductor design company, but the shares have been strong again recently with the company reiterating its earnings guidance for FY 2020 supported by strength of demand for its higher margin 5G chips, while there is also some excitement over its new high-end AI ASIC chip, a next generation microprocessor that helps process AI (artificial intelligence) tasks faster, using less power. Finally, an overweight position in Samsung Electronics has contributed positively given signs of restocking as we appeared to be nearing the bottom of the downturn in the memory chip cycle, with improvements in their mobile phone business also supporting the share price.
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Key
Contributors |
Total
impact % |
Year End
Portfolio % |
| NetEase | 1.6 | 4.3 |
| MediaTek | 1.6 | 4.2 |
| JD.com | 1.2 | 3.4 |
| Samsung Electronics | 0.5 | 7.4 |
| Tencent | 0.5 | 7.8 |
|
Key
Detractors |
Total
impact % |
Year End
Portfolio % |
| Sobha | –1.1 | 0.2 |
| Samsonite International | –0.9 | 0.5 |
| China BlueChemical | –0.9 | 1.0 |
| Bangkok Bank | –0.9 | 1.2 |
| PT Bank Negara Indonesia Persero | –0.8 | 0.8 |
Q How has gearing impacted performance and what is your strategy going forward?
A The use of gearing is a function of our valuation-led investment process. Towards the end of 2019 we felt that the outlook for Asian equity markets was as good as it had been for several years, with the valuation of the overall market meaningfully below its long-term historic average in terms of price-to-book (P/B). Regrettably, the portfolio’s gearing amplified our underperformance in the downturn, just as it had started to contribute positively. Looking forward, we remain comfortable with the current level of gearing, reflecting Asia’s low valuation levels relative to history as well as the stock specific undervalued opportunities we have been identifying. In other words, we do not wish to sacrifice our ability to outperform when the market recovers. There’s not a great deal we can be certain about at the current time, but Covid-19 will eventually pass and the economic cycle will return. In the meantime, our holdings have the balance sheet to withstand further weakness with the vast majority having net cash positions. Our strategy is to hold the best mix of upside potential and downside protection.
Q Has the crisis changed your approach at all?
A No, there has not been any change in the way we manage money or how we analyse companies. We believe the best approach is to invest in companies that are worth more than the market believes. The value of a company remains the present value of its future cash flows and we believe that buying these at a discount is the most sustainable way to make money for investors over the long term.
We have had to take into account the significant disruption caused by the crisis by re-examining our investment case for every single holding in the portfolio. Some businesses will take time to get profits back to the level they achieved in 2019. I’m thinking here about those in more economically sensitive areas, such as the autos or energy sector. In cases such as these, the market appears to be pricing in very limited expectations of recovery for high quality businesses. We see this as a source of opportunity.
The key questions for us during this period of uncertainty are as follows. Is the business robust enough to withstand the current economic downturn? Is the business worth much more than what is currently reflected in the share price, while making sure we are being conservative in our assumptions about the next three years? And finally, what is the best way to position the portfolio in order to limit further downside risk, without compromising the upside potential longer term? Balance sheet strength also remains an important consideration, and over 75% of the portfolio (excluding financials) is currently held in companies with net cash positions.
Q What have been the major changes to the portfolio over the period?
A The most significant change since the Covid-19 outbreak has been a reduction in our exposure to financials. Interest rates are likely to remain lower for longer and there is clearly potential for some asset quality deterioration. Accordingly we sold Shinhan Financial in Korea and reduced other holdings such as China Life Insurance (Taiwan). Having re-appraised the outlook we continue to have exposure to those companies in the sector that we believe offer value. Our focus is on very well capitalized banks that have the potential to absorb losses, particularly in under-banked parts of Asia like India. The market may be struggling to ascertain what the asset quality risk may be, but private sector banks such as ICICI Bank have proven that they are able to handle what may come thanks to the strong profitability of their core business, while they also continue to have attractive medium-term growth potential taking market share from undercapitalized state banks. ICICI Bank’s position is further strengthened by its stakes in listed insurance companies that it is prepared to sell should it ever need to raise capital.
Prior to Covid-19, we had been adding exposure to companies that could benefit from an improvement in growth momentum. However, we felt that the recovery would be more gradual than in previous cycles, as China was not easing as aggressively as it had done in the past. As such, we were keen to retain a well balanced portfolio with exposure to companies that are less sensitive to the global manufacturing cycle. We found several opportunities that filled that criteria in India, where a soft patch in growth had seen the valuation of some high-quality well-run businesses fall to levels we felt were compelling. We introduced: Mahindra & Mahindra, a conglomerate with a highly profitable tractor business; and Larsen & Toubro, another conglomerate, whose core construction and engineering business we felt was primed to gain market share as construction activity improves after several years of underinvestment in India. Recent market weakness has provided us with further opportunity to add to some of these.
The portfolio continues to have exposure to a consumer-related theme, and we have a new holding in Tencent Music Entertainment, a livestreaming and music subscription company. It has more than twice Spotify’s monthly active users but only a quarter of its market value and we believe the market is underestimating its ability to convert its users into paying subscribers. We have also introduced Suofeiya Home Collection, which manufactures and sells customised wardrobes and cabinets. New homes in China are mostly sold as a shell, without these items fitted as standard. The industry is very fragmented, but Suofeiya is a leading player with the automation and scale to benefit from consolidation. Furthermore, while industry growth has slowed in recent years due to a weak real estate market and more intense competition, the construction completion cycle is now more favourable, meaning there is potential for a strong recovery.
Meanwhile, we have taken advantage of recent market volatility, identifying several companies which we believe have been hit indiscriminately and have scope to do well in a rebound. For example, Genting Singapore, an integrated resorts operator with a strong balance sheet and material upside potential over a three-year horizon, in our view. We think that its growth prospects are being significantly undervalued, even if earnings are negatively impacted by Covid-19 shutdowns, we still expect positive cashflow in 2020. It also has over 30% of its market cap in net cash and a dividend yield of almost 6% which is unlikely to be cut.
Q How does your approach account for ESG factors and its impact on valuation? Can you provide an example of how it has changed your decisions on stocks/size of holdings?
A In our search for new investment ideas, we tend to be drawn to companies that have fallen out of favour and de-rated due to a temporary glitch that we believe can be overcome. Of course, not all contrarian ideas are worthy of investment but the likelihood of identifying undervalued businesses in unloved areas of the market is greater. ESG factors are increasingly important as they have an ability to materially change the market’s perception of fair value, which is why we factor that into our analysis. In some cases, a company’s valuation can be explained by its poor ESG credentials. By ensuring that any written initiation on a prospective investment features a thorough analysis of environmental, social and governance factors, our assessment of fair value is enhanced as this helps us identify areas of potential risk, but also opportunities to create value by engaging with companies as active managers.
Our recent investment in Mahindra & Mahindra is a good example of this. Our initial investment thesis was based on a belief that concerns over a downturn in the tractor cycle were overdone, and that the cycle would reverse, taking comfort in the company’s significant cost restructuring, the diversified nature of its business model and its healthy balance sheet. An area of lingering uncertainty however was losses stemming from its shareholding in Korean car manufacturer SsangYong, an issue we had raised at an early stage in our engagement with the company and that limited the size of position initiated. When it emerged that they had been asked to plough another $400m into a subsidiary clearly in irretrievable decline, I directly emailed senior management to reiterate our concerns. Their subsequent decision not to invest was a positive development which increased our conviction in the investment case prompting us to take advantage of recent share price weakness and add to our position.
Q Where else do you see opportunity?
A We invest in a broad mix of Asian companies and new opportunities are constantly emerging. The portfolio’s biggest positions are in technology and internet companies. These have performed very well in recent years and although not immune from general macroeconomic uncertainty, we see companies in this area emerging stronger, particularly those that continue to invest and innovate. There are clear cycles in technology, with the rollout of 5G, growth of AI and the ‘internet of things’ likely to have only been interrupted, with demand likely to recover. Working from home has also led to increased demand for PC-related equipment and cloud capacity. Chinese internet companies have benefited from an acceleration in the trend towards online shopping and gaming, and in recent years have demonstrated a willingness to focus on core-profitability, with some significant restructuring having taken place. These are enduring themes that are well represented in the portfolio and will remain so for as long as valuation levels permit.
The portfolio continues to have a cyclical bias. Valuations in more cyclical sectors are low by historical standards and in many cases appear to be pricing in a more pessimistic outlook than we think likely. We have used the market downturn to narrow the focus of the cyclical exposure on sectors that we expect to experience a small impact on medium term earnings as a result of the economic downturn. We are also prioritising strong balance sheets as this offers an element of downside protection. These include companies in the consumer discretionary sector such as Mahindra & Mahindra, MINTH, Hyundai Motor and Suofeiya Home Collection and also those in the industrial sector like Larsen & Toubro and Pacific Basin Shipping. These increases have been funded primarily from reductions in the financials exposure where we expect to see a more sustained effect on earnings power.
Q What is your outlook beyond the next twelve months?
A As governments start to lift restrictions, the global economy can start to get back to normal, supported by a demand recovery. This is likely to be a gradual process, with the risk of a second wave of infections a concern, particularly given that renewed lockdowns would likely lead to a protracted global recession. We also need to remain mindful of second-order financial effects of the lockdowns, which could lead to broader solvency issues. However, history has repeatedly shown that investing in good quality companies at low valuations leads to very good subsequent returns. The policy response in developed markets has also been unprecedented in size and speed of implementation and will eventually provide enough impetus for an economic and earnings recovery.
Finally, there is potential for a re-escalation in US-China tensions, with the relationship between these two likely to remain tense for the foreseeable future. While we need to consider the potential impact of trends such as de-globalisation, as companies seek to ensure that their supply-chains are less reliant on China, we are also cognisant of the fact that the contest between these two super-powers may have positive effects on growth, innovation and productivity. For example, with both sides determined not to give up an opportunity to take a lead in science and technology research and development there is likely to be even greater levels of government investment in these areas. Innovative Asian companies stand to benefit, and we remain alert to new opportunities that may emerge.
Q Why invest in Asia now?
A The current valuation of Asian equity markets is attractive not just in absolute terms, but relative to history and to developed markets, particularly given the region’s better growth prospects. This is especially true since Asia’s underlying economic and corporate fundamentals are generally sound. Most countries enjoy a healthy fiscal position, while governments across the region continue to actively pursue reform. At the corporate level, there has been a marked improvement since the Asian Financial Crisis as companies have by and large kept capital expenditure plans and costs under control. In part, this reflects lower structural growth, but it also demonstrates that Asian companies are more cautious, focused and better managed than they were historically, and suggests that better returns on capital are sustainable. In a less certain growth environment, it is also positive that there are few industries with significant excess capacity risk. Less capital-intensive companies have also been generating stronger free cash flow. The challenge has been how to better allocate that capital. With management facing growing pressure from minority shareholders to pay better dividends, there is an increasingly strong dividend growth story in Asia.
As can be seen in the table below, while Asia compares favourably to world markets in terms of valuation, dividend yield and free cash flow yield, our portfolio compares favourably with Asia on all these metrics.
Finally, although the current investment environment is challenging, it is likely that the Asian economies can continue to outperform over the medium term. The region remains the biggest driver of global growth, with strong structural trends such as rising disposable incomes, increased urbanisation and the growth of the middle class. These will continue to be key drivers in unlocking the vast potential of Asia’s consumer demand, reducing its reliance on manufactured exports as being the primary driver of earnings growth.
Underlying characteristics
| Current | Forward |
Forward
Dividend |
Free Cash | |
| 30 April 2020 | P/B, x | P/E, x | Yield, % | Flow, % |
| Invesco Asia Trust plc | 1.1 | 12.3 | 2.9 | 12.0 |
| MSCI Asia ex Japan Index | 1.5 | 13.7 | 2.8 | 7.8 |
| MSCI World Index | 2.1 | 17.2 | 2.8 | 6.9 |
| S&P 500 Index | 3.2 | 19.9 | 2.2 | 5.7 |
Source: Style Research as at 30 April 2020.
Portfolio Manager
Ian Hargreaves was promoted to Co-Head of the Asian & Emerging Markets Equities team in September 2018. Ian manages pan-Asian portfolios and covers the entire Asian region in his remit. He started his investment career with Invesco Asia Pacific in Hong Kong in 1994 as an investment analyst where he was responsible for coverage of Indonesia, South Korea and the Indian sub-continent, as well as managing several regional institutional client accounts. Ian returned to the UK to join Invesco’s Asian Equities team in 2005, working on the portfolio as part of the investment team. He was appointed as joint Portfolio Manager in 2011 and became the sole Portfolio Manager on 1 January 2015.
Ian Hargreaves
Portfolio Manager
6 July 2020
.
BUSINESS REVIEW
Purpose, Business Model and Strategy
Invesco Asia Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.
The Company’s purpose is to provide shareholders with long-term capital growth by investing in a diversified portfolio of Asian and Australasian companies. The business model the Company has adopted to achieve its investment objective has been to contract out investment management and administration to appropriate external service providers, which are overseen by the Board. The principal service provider is Invesco Fund Managers Limited, which throughout this report is referred to as ‘the Manager’. Invesco Asset Management Limited, an associate company of the Manager, manages the Company’s investments and acts as Company Secretary under delegated authority from the Manager.
The Manager provides company secretarial, marketing and general administration services including accounting and manages the portfolio in accordance with the Board’s strategy. Ian Hargreaves is the Portfolio Manager responsible for the day-to-day management of the portfolio.
The Company also has contractual arrangements with Link Asset Services to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.
Investment Objective
The Company’s objective is to provide long-term capital growth by investing in a diversified portfolio of Asian and Australasian companies. The Company aims to achieve growth in its net asset value (NAV) in excess of the Benchmark Index, the MSCI AC Asia ex Japan Index (total return, in sterling terms).
Investment Policy
Invesco Asia Trust plc invests primarily in the equity securities of companies listed on the stock markets of Asia (ex Japan) including Australasia. It may also invest in unquoted securities up to 10% of the value of the Company’s gross assets, and in warrants and options when it is considered the most economical means of achieving exposure to an asset.
The Company is actively managed and the Manager has broad discretion to invest the Company’s assets to achieve its investment objective. The Manager seeks to ensure that the portfolio is appropriately diversified having regard to individual stock weightings and the geographic and sector composition of the portfolio.
Investment Limits
The Board has prescribed limits on the investment policy, including:
– exposure to any one company may not exceed 10% of total assets;
– exposure to group-related companies may not exceed 15% of total assets;
– the Company may not invest more than 10% of total assets in collective investment funds;
– the Company may not invest more than 10% in aggregate in unquoted investments;
– the Company may invest in warrants and options up to a maximum of 10% of total assets. Apart from these and currency hedges, other derivative instruments are not permitted; and
– the Company may use borrowings up to 25% of net assets.
With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so if considered appropriate.
All the above limits are applied at the time of acquisition, except gearing which is monitored on a daily basis.
Borrowing and Debt
The Company’s borrowing policy is determined by the Board. The level of borrowing may be varied in accordance with the Portfolio Manager’s assessment of risk and reward, subject to the overall limit of 25% of net assets and the availability of suitable finance.
Performance and Key Performance Indicators
The Board reviews performance by reference to a number of Key Performance Indicators which include the following:
• the net asset value (NAV) and share price;
• peer group performance;
• discount;
• dividend; and
• ongoing charges ratio.
A chart showing the total return NAV and share price performance compared to the Company’s benchmark index can be found on page 5.
Peer group performance is monitored in relation to eight other investment trust companies that in the opinion of the Board form the peer group of the Company, being trusts that invest for growth in the Asia excluding Japan sector, as these most closely match the Company’s investment objective and capital structure. As at 30 April 2020, in total return NAV terms the Company was ranked 7th over one and three years and 4th over five years.
The discount of the shares is monitored on a daily basis. During the year the shares traded at a discount to NAV (cum income) in a range of 6.4% to 17.8% with an average discount of 11.0%. This is shown in the below graph which plots the discount over the two years to 30 April 2020. At the year end the discount to the NAV (cum income) stood at 9.2%.
The Board considers it desirable that the Company’s shares do not trade at a significant discount to NAV and believes that, in normal market conditions, the shares should trade at a price which on average represents a discount of less than 10% to NAV on a cum income basis. To enable the Board to take action to deal with any material overhang of shares in the market it seeks authority from shareholders annually to buy back shares. Shares may be repurchased when, in the opinion of the Board, the discount is wider than desired and shares are available in the market. The Board considers that the repurchase of shares at a discount will enhance net asset value for remaining shareholders and may also assist in addressing the imbalance between the supply of and demand for the Company’s shares and thereby reduce the scale and volatility of the discount at which the shares trade in relation to the underlying net asset value.
The ten year record for dividends can be found on page 5, and the ongoing charges ratio for the last two years on page 4. This year, the Board introduced the payment of two interim dividends, payable in November and April.
Results and Dividend
For the year ended 30 April 2020 the net asset value total return was –10.2% compared to the return on the benchmark index of –4.1%. The Portfolio Manager’s Report on pages 11 to 14 reviews the results.
As set out in the Company’s Half-Yearly Financial Report for the six months to 31 October 2019, the Board plans to increase the dividend per share each year, utilising the Company’s revenue and capital reserves if necessary.**
The Board announced in October 2019 its decision to change the timing of dividend payments in order to align closely with the receipt of income in the Company’s portfolio. Thus, the Company has paid two interim dividends in respect of the financial year; a first interim dividend of 3.40p per ordinary share was paid on 26 November 2019 to shareholders on the register on 25 October 2019. The second interim dividend of 3.60p per ordinary share was paid on 24 April 2020 to shareholders on the register on 20 March 2020. The Board expects each interim dividend to represent approximately half of the years’ total dividend.
The Board’s dividend payment policy is for the Directors to declare two interim dividends in respect of each accounting year, with payments made in November and April. Whilst the two interim dividends are not subject to a resolution at the forthcoming AGM, a Resolution for shareholders to approve the Company’s dividend payment policy, will be put to shareholders at the AGM on 3 September 2020.
Financial Position and Borrowing
The Company’s balance sheet on page 55 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 11 to the financial statements, with interest paid (finance costs) shown in note 5.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report of this Strategic Report. Further details of the principal risks affecting the Company are set out in the section: ‘Principal Risks and Uncertainties’ on pages 20 and 21.
Investment Process
At the core of the Manager’s philosophy is a belief in active investment management. Fundamental principles drive an active investment approach, which aims to deliver attractive total returns over the long term. The investment process emphasises pragmatism and flexibility, active management, a focus on valuation and the combination of top-down and bottom-up fundamental analysis. Bottom-up analysis forms the basis of the investment process. It is the key driver of stock selection and is expected to be the main contributor to alpha generation within the portfolio. Portfolio construction at sector level is largely determined by this bottom-up process but is also influenced by top-down macro economic views.
Research provides a detailed understanding of a company’s key historical and future business drivers, such as demand for its products, pricing power, market share trends, cash flow and management strategy. This allows the Manager to form an opinion on a company’s competitive position, its strategic advantages/disadvantages and the quality of its management. Each member of the portfolio management team travels to the region between three and four times per year and therefore the team has contact with several hundred companies during each year. The Manager will also use valuation models selectively in order to understand the assumptions that brokers/analysts have incorporated into their valuation conclusions and as a structure into which the Manager can input its own scenarios.
Risk management is an integral part of the investment management process. Core to the process is that risks taken are not incidental but are understood and taken with conviction. The Manager controls stock-specific risk effectively by ensuring that the portfolio is appropriately diversified.
Also, in-depth and constant fundamental analysis of the portfolio’s holdings provide the Manager with a thorough understanding of the individual stock risk taken. The Manager’s internal Performance & Risk Team, an independent team, ensures that the Manager adheres to the portfolio’s investment objectives, guidelines and parameters. There is also a culture of challenge and debate within the portfolio management team regarding portfolio construction and risk.
Internal Control and Risk Management
The Directors have overall responsibility for the Company’s system of internal controls and are responsible for reviewing the effectiveness of these controls. This includes safeguarding of the Company’s assets. The following sets out how the Directors have carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
The Audit Committee (the ‘Committee’), on behalf of the Board, has established an ongoing process for identifying and undertaking a robust assessment of the risks and emerging risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place, and monitoring and reporting of relevant information to it.
As part of the process, the Committee has identified four risk categories: strategic; investment management; third party service providers; and regulation and corporate governance. An explanation of these categories follows.
Strategic Risk
The Board sets the strategy including objectives of the Company and how these should be achieved. The Board assesses the performance of the Company in the context of the market and macro issues, and gives direction, and monitors, the Manager and other third parties for the actions they take on behalf of the Company.
Investment Management Risk
Investment management covers management of the portfolio together with cash management, gearing and hedging i.e. the items which the Portfolio Manager has control of, and which generate the Company’s performance.
Third Party Service Providers Risk
The Company has no employees and its Directors are appointed on a non-executive basis. The Company is reliant on third party service providers (TPP) for its executive functions. The Company’s most significant TPP is the Manager – to which portfolio management, company secretarial and administrative services are delegated. Other significant TPPs are the broker, depositary, custodian, registrar and auditor.
Regulation and Corporate Governance Risk
The Company is required to comply with many regulations including the provisions of the Companies Act 2006, the UK Listing Rules, the Alternative Investment Fund Managers Directive, the Market Abuse Regulation, the FCA’s Disclosure Guidance and Transparency Rules, tax regulation as an investment trust, the UK Corporate Governance Code and Accounting Standards.
The resultant ratings of the mitigated risks, in the form of a risk control matrix, enable the Directors to concentrate on those risks that are most significant and also forms the basis of the list of principal risks and uncertainties.
The Company’s oversight and its control environment is based on the Company’s relationship with its third party service providers, all of which have clearly defined lines of responsibility, delegated authority, and control procedures and systems. The Company uses the three lines of defence model, which is also embedded into the Manager’s risk management systems.
The effectiveness of the Company’s internal control and risk management system is reviewed at least annually by the Committee. The Committee has received satisfactory reports on the operations and systems of internal control of the Manager, custodian and registrar from the Manager’s Compliance and Internal Audit representatives. Reports on the Manager encompassed all the areas the Manager is responsible for: investment management, company secretarial and general administration. The Committee also received a comprehensive, and satisfactory, report from the depositary at the year end Committee meeting.
Due diligence is undertaken before any contracts are entered into with any third party service provider. The Manager regularly reviews, against agreed service standards, the performance of all third party providers through formal and informal meetings, and by reference to third party independently audited service organisation control reports. The results of the Manager’s reviews are reported to and reviewed by the Committee. These various reports did not identify any significant failings or weaknesses during the year and up to the date of this annual financial report. If any had been identified, the required remedial action would have been taken. In particular the Board formally reviews the performance of the Manager annually and informally at every Board meeting. No significant failings or weaknesses occurred throughout the year ended 30 April 2020 and up to the date of this annual financial report.
Reporting to the Board at each board meeting comprises, but is not limited to: financial reports, including any hedging and gearing; performance against the benchmark and the Company’s peer group; the Portfolio Manager’s review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against investment guidelines. The Portfolio Manager is permitted discretion within these guidelines, which are set by the Board. Compliance with the guidelines is monitored daily. Any proposed variation to these guidelines is referred to the Board.
Principal Risks and Uncertainties
The Board has carried out a robust assessment of the risks facing the Company, including emerging risks. These include those that would threaten its business model, future performance, solvency and liquidity. The principal risks that follow are those identified by the Board after consideration of mitigating factors.
| Category and Principal Risk Description | Mitigating Procedures and Controls |
| Strategic Risk | |
|
Market Risk
The Company’s investments are traded on Asian and Australasian stock markets as well as the UK. The principal risk for investors in the Company is a significant fall and/or a prolonged period of decline in these markets. This could be triggered by unfavourable developments within the region or events outside it. The extreme volatility experienced in March 2020 from the market reaction to the Covid-19 virus exemplifies this risk, which has had a marked effect on both the valuation of the Company’s portfolio of investments and the discount to net asset value at which the Company’s shares trade. |
The Company has a diversified investment portfolio. However, there are few ways to mitigate market risk because it is influenced by factors which are outside the control of the Board and the Manager. These factors include the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, changes to legislation, and changing investor demand. Such factors may give rise to high levels of volatility in the prices of investments held by the Company. |
|
Investment Objectives
The Company’s investment objectives and structure are no longer meeting investors’ demands. |
The Board receives regular reports from both the Manager and the Company’s broker on the Company’s share price performance, level of share price discount to NAV and recent trading activity in the Company’s shares. It may seek to reduce the volatility and absolute level of the share price discount to NAV for shareholders through buying back shares within the stated limit (outlined in Resolution 13 on page 34). The Board also receives regular reports on marketing meetings with shareholders and prospective investors and works to ensure that the Company’s investment proposition is actively marketed through relevant messaging across many distribution channels. |
|
Wide Discount
Lack of liquidity and lack of marketability of the Company’s shares leading to stagnant share price and wide discount. Persistently high discount may lead to buybacks of the Company’s shares and resulting in the shrinkage of Company. |
The Board receives regular reports from both the Manager and the Company’s broker on the Company’s share price performance, level of share price discount to NAV and recent trading activity in the Company’s shares. It may seek to reduce the volatility and absolute level of the share price discount to NAV for shareholders through buying back shares within the stated limit (outlined in Resolution 13 on page 34). The Board also receives regular reports on marketing meetings with shareholders and prospective investors and works to ensure that the Company’s investment proposition is actively marketed through relevant messaging across many distribution channels. |
| Investment Management Risk | |
|
Performance
Portfolio Manager consistently underperforms the benchmark and/or peer group over 3-5 years. |
The Board regularly compares the Company’s NAV performance over both the short and long term to that of the benchmark and peer group as well as reviewing the portfolio’s performance against benchmark (attribution) and risk adjusted performance (volatility, beta, tracking error, Sharpe ratio) of the Company and its peers. The Board also receives reports on and reviews: the portfolio, transactions in the period, active positions, gearing position and, if applicable, hedging. |
|
Key Person Dependency
The Portfolio Manager (Ian Hargreaves) ceases to be Portfolio Manager or is incapacitated or otherwise unavailable. |
The Portfolio Manager works within, and is Co-Head of Invesco’s Asian & Emerging Markets Equities team with William Lam. Ian is supported by Fiona Yang and the wider team. |
|
Currency Fluctuation Risk
Exposure to currency fluctuation risk negatively impacts the Company’s NAV. The movement of exchange rates may have an unfavourable or favourable impact on returns as nearly all of the Company’s assets are non-sterling denominated. |
With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so should the Portfolio Manager or the Board feel this was appropriate. Contracts are limited to currencies and amounts commensurate with the asset exposure. The foreign currency exposure of the Company is reviewed at Board meetings. |
| Third Party Service Providers Risk | |
|
Unsatisfactory Performance of Third Party Service Providers
Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operations of the Company and could affect the ability of the Company to successfully pursue its investment policy and expose the Company to reputational risk. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position. |
Details of how the Board monitors the services provided by the Manager and other third party service providers, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on page 19. |
|
Information Technology Resilience and Security
The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers (TPPs). This cyber risk includes fraud, sabotage or crime perpetrated against the Company or any of its TPPs. |
As well as regular review of TPPs’ audited service organisation control reports by the Audit Committee, the Board receives regular updates on the Manager’s information and cyber security. The Board monitors TPPs’ business continuity plans and testing – including the TPPs and Manager’s regular ‘live’ testing of workplace recovery arrangements. |
|
Operational Resilience
The Company’s operational capability relies upon the ability of its TPPs to continue working throughout the disruption caused by a major event such as the Covid-19 pandemic. |
The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements. As the impact of Covid-19 continues, the Manager has mandated work from home arrangements and implemented split team working for those whose work is deemed necessary to be carried out on business premises. Any meetings are held virtually or via conference calls. Other similar working arrangements are in place for the Company’s third-party service providers. The Board receives regular update reports from the Manager and TPPs on business continuity processes. |
Other Risks Facing the Company
As a result of Brexit, the UK Government’s ongoing trade deal negotiations with the European Union are due to be concluded by 31 December 2020. The Company’s investments are limited in their direct exposure to the UK market and the lack of a comprehensive trade agreement is not expected to pose a material risk. However, as the Company is priced in sterling, movements between Asian currencies and sterling exchange rate, which may arise from any consequence of no comprehensive trade agreement, could affect the Company's net asset value. The exposure to foreign currency and sensitivity of foreign currency movements are shown on pages 64 to 66 of the financial statements. Separately, investor sentiment might lead to increased or reduced demand for the Company's shares, in light of trade agreement uncertainty, which would be reflected in a narrowing or widening of the discount at which the Company's shares trade relative to their net asset value.
Viability Statement
The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets out the long-term nature of the returns from the portfolio and this is the view taken by both the Directors and the Portfolio Manager in the running of the portfolio. The Company is required by its Articles to have a vote on its future every three years, the next vote being at the Annual General Meeting in 2022. The Directors remain confident in the Company’s Corporate Proposition and Investment Case, as detailed on pages 8 and 9, to deliver against the Company’s investment objectives. On this basis and notwithstanding the continuation vote in 2022, the Directors consider that ‘long term’ for the purpose of this viability statement is three years, albeit that the life of the Company is not intended to be limited to this period.
In their assessment of the Company’s viability, the Directors have performed a robust assessment of the emerging and principal risks. The Directors considered the risks to which it is exposed, as set out on pages 20 and 21, together with mitigating factors. Their assessment considered these risks, as well as the Company’s investment objective, investment policy and strategy, the investment capabilities of the Manager and the business model of the Company, which has withstood several major market downcycles since the Company’s inception in 1995. Their assessment also covered the current outlook for the Asian economies and equity markets, especially so during the Covid-19 disruption this year, demand for and buybacks of the Company’s shares, the Company’s borrowing structure, the liquidity of the portfolio and the Company’s future income and annual operating costs. The current outlook for Asian markets is challenging and the recovery of the global economy is likely to be gradual, however the Directors as well as the Manager, are confident that Asia remains the biggest driver of growth for the global economy. Lastly, whilst past performance may not be indicative of performance in the future, the sustainability of the Company can be demonstrated to date by there having been no material change in the Company’s investment objective since its launch in 1995.
The Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for the three year period from the signing of the balance sheet.
Duty to Promote the Success of the Company (s.172)
In accordance with the Companies (Miscellaneous Reporting) Regulations 2018, the below details how the Directors have discharged their duties under section 172 of the Companies Act 2006 during the year under review. The Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests. However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment trust the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. In doing so, it has due regard to the impact of its actions on shareholders and the wider community. The Board has a responsible governance culture and has due regard for broader matters so far as they apply. A formal schedule of matters reserved for decision by the Board details the responsibilities of the Board. The main responsibilities include: setting the Company’s objectives, policies and standards; ensuring that the Company’s obligations to shareholders and others are understood and complied with; approving accounting policies and dividend policy; managing the capital structure; setting long-term objectives and strategy; assessing risk; reviewing investment performance; approving loans and borrowing; and controlling risks. The Schedule of Matters Reserved for the Board and the Terms of Reference for its Committees are reviewed at least annually and are published on the Company’s web page.
The Board engages with the Manager at every Board meeting and receives updates from the Portfolio Managers on a regular basis outside of these meetings. The Management Engagement Committee reviews its relationships with the Manager and other third party service providers at least annually. The Manager holds regular service review meetings with the Company's Registrar, Depositary, Broker, Fund Accountant and Custodian; and reviews their performance against various service level agreements. Summaries of these reviews are presented to the Board on a regular basis and the Manager acts on feedback as appropriate. At every Board meeting the Directors receive an investor relations update from the Manager, which details any significant changes in the Company's shareholder register, shareholder feedback, as well as notifications of any publications or press articles.
Some of the key discussions and decisions the Board made during the year were:
• To appoint an additional director to enable long term succession planning and ensure that the Board had a balance of skills;
• To introduce interim dividend payments to closely align with the receipt of income in the Company’s portfolio.
• To manage the discount as far as possible in the best interests of all shareholders.
The Company communicates with shareholders at least twice a year providing information about shareholder meetings, dividend payments and financial results. The Company’s page on the Manager’s website provides all shareholder information and regularly hosts video presentations (vlogs) and articles by the Portfolio Manager and the wider Asian Equities team. The Company holds its Annual General Meeting in London; this provides shareholders with the opportunity to listen to a presentation by the Portfolio Manager and meet with Directors and representatives of the Manager. In normal circumstances, shareholders are invited to attend the AGM but this year shareholders will not be permitted to attend the AGM and should lodge their questions to the Company Secretary at IAT@invesco.com or, in hard copy, to 43-45 Portman Square, London W1H 6LY. Any questions received related to the business of the AGM or the Company in general will be passed onto the Chairman and will be replied to by the Company Secretary on behalf of the Board after the AGM. Furthermore, the Manager provides a schedule of regional meetings with institutional investors and analysts to gather the views and thoughts of institutional investors.
Environment, Social and Governance (ESG) Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited direct application. In relation to the portfolio, the Company has delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments in the financial interests of shareholders.
The Manager is committed to being a responsible investor and applies, and is a signatory to, the United Nations Principles for Responsible Investment, which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency. The Manager is also a signatory to the FRC Stewardship Code 2012, which seeks to improve the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.
The Henley based Invesco Asian equities team, of which the Portfolio Manager is a part, incorporates ESG considerations in its investment process as part of the evaluation of new primary and secondary market opportunities, with identified ESG concerns feeding into the final investment decision and assessment of relative value. The investment team is fully integrated into the Manager’s proprietary approach to ESG, whereby ESG considerations form part of the evaluation of ideas, company dialogue and portfolio monitoring. ESG flags may arise from the team’s proprietary research or from an external ESG rating provider. These flags highlight issues for further analysis and engagement with company management by members of the team independently, or in partnership with the ESG team. Additionally, the Manager’s ESG team provides formalised ESG portfolio monitoring. This is a rigorous semi-annual process where the portfolio is reviewed from an ESG perspective. This ensures a circular process for identifying flags and monitoring of improvements over time.
During the year to 30 April 2020, the Manager engaged with a number of companies in the portfolio to discuss their own sustainable practices. The Manager believes that proxy voting is the hallmark of active ownership and serves as a powerful mechanism to drive responsible investment, engagement and investment stewardship. Reports on proxy voting for the Company’s portfolio, the Manager’s Stewardship Code and the Manager’s Global ESG Stewardship Report can be obtained via the Manager’s website at www.invesco.co.uk.
Modern Slavery
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers or employees. Accordingly, the Directors consider that the Company is not within the scope of the UK Modern Slavery Act 2015.
Board Diversity
The Board takes into account many factors, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors. The Board has considered the recommendations of the Davies and Hampton-Alexander review as well as the Parker review, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five non-executive directors, three of whom are male and two of which are female, thereby constituting 40% female representation. There are no set targets in respect of diversity, including gender. However, diversity forms part of both the Nominations Committee and main Board’s deliberations when considering new appointments. The Company’s success depends on suitably qualified candidates who are willing, and have the time, to be a director of the Company. Summary biographical details of the Directors are set out on page 30. The Company has no employees.
The Strategic Report was approved by the Board of Directors on 6 July 2020.
Invesco Asset Management Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 30 APRIL 2020
Ordinary shares unless stated otherwise
†The industry group is based on MSCI and Standard & Poor’s Global Industry Classification Standard.
| At Market | ||||
| Value | % of | |||
| Company | Industry group† | Country | £000 | Portfolio |
| TencentR | Media & Entertainment | China | 15,400 | 7.8 |
| Samsung Electronics | Technology Hardware & Equipment | South Korea | ||
| ordinary shares | 8,487 | 7.4 | ||
| preference shares | 5,948 | |||
| Taiwan Semiconductor Manufacturing | Semiconductors & Semiconductor Equipment | Taiwan | 11,407 | 5.8 |
| Alibaba – ADS | Retailing | China | 11,356 | 5.8 |
| NetEase – ADR | Media & Entertainment | China | 8,360 | 4.3 |
| MediaTek | Semiconductors & Semiconductor Equipment | Taiwan | 8,205 | 4.2 |
| AIA | Insurance | Hong Kong | 6,774 | 3.4 |
| JD.com – ADR | Retailing | China | 6,635 | 3.4 |
| ICICI – ADR | Banks | India | 6,201 | 3.2 |
| China MobileR | Telecommunication Services | China | 6,061 | 3.1 |
| Top Ten Holdings | 94,834 | 48.4 | ||
| China Pacific InsuranceH | Insurance | China | 5,782 | 3.0 |
| Aurobindo Pharma | Pharmaceuticals, Biotechnology & Life Sciences | India | 4,581 | 2.4 |
| CK Hutchison | Capital Goods | Hong Kong | 3,986 | 2.1 |
| United Overseas Bank | Banks | Singapore | 3,974 | 2.0 |
| Hyundai Motor | Automobiles & Components | South Korea | 3,968 | 2.0 |
| preference shares | ||||
| CNOOCR | Energy | China | 3,967 | 2.0 |
| Delta Electronics | Technology Hardware & Equipment | Taiwan | 3,743 | 1.9 |
| HDFC Bank | Banks | India | 3,555 | 1.7 |
| Mahindra & Mahindra | Automobiles & Components | India | 3,249 | 1.7 |
| Hon Hai Precision Industry | Technology Hardware & Equipment | Taiwan | 3,166 | 1.6 |
| Top Twenty Holdings | 134,805 | 68.8 | ||
| LG | Capital Goods | South Korea | 3,127 | 1.6 |
| ASUSTeK Computer | Technology Hardware & Equipment | Taiwan | 3,121 | 1.6 |
| KB Financial | Banks | South Korea | 3,067 | 1.6 |
| Jiangsu Yanghe BreweryA | Food, Beverage & Tobacco | China | 3,027 | 1.5 |
| Korean Reinsurance | Insurance | South Korea | 2,932 | 1.5 |
| Dongfeng MotorH | Automobiles & Components | China | 2,838 | 1.5 |
| Larsen & Toubro | Capital Goods | India | 2,613 | 1.3 |
| POSCO | Materials | South Korea | 2,592 | 1.3 |
| Shriram Transport Finance | Diversified Financials | India | 2,476 | 1.3 |
| Bangkok Bank | Banks | Thailand | 2,363 | 1.2 |
| Top Thirty Holdings | 162,961 | 83.2 | ||
| Suofeiya Home CollectionA | Consumer Durables & Apparel | China | 2,348 | 1.2 |
| Infosys – ADR | Software & Services | India | 2,262 | 1.1 |
| Tencent Music EntertainmentA | Media & Entertainment | China | 2,112 | 1.1 |
| China BlueChemicalH | Materials | China | 2,004 | 1.0 |
| Pacific Basin Shipping | Transportation | Hong Kong | 1,964 | 1.0 |
| QBE Insurance | Insurance | Australia | 1,935 | 1.0 |
| Industrial & Commercial Bank Of ChinaH | Banks | China | 1,933 | 1.0 |
| Baidu – ADR | Media & Entertainment | China | 1,910 | 1.0 |
| Chroma ATE | Technology Hardware & Equipment | Taiwan | 1,639 | 0.8 |
| PT Bank Negara Indonesia Persero | Banks | Indonesia | 1,485 | 0.8 |
| Top Forty Holdings | 182,553 | 93.2 | ||
| Beijing Capital International AirportH | Transportation | China | 1,452 | 0.7 |
| Kasikornbank | Banks | Thailand | 1,433 | 0.7 |
| HKR International | Real Estate | Hong Kong | 1,188 | 0.6 |
| UPL | Materials | India | 1,182 | 0.6 |
| Genting Singapore | Consumer Services | Singapore | 1,083 | 0.6 |
| BitAuto – ADR | Media & Entertainment | China | 1,054 | 0.5 |
| Korea Electric Power | Utilities | South Korea | 1,012 | 0.5 |
| EVA Precision Industrial | Capital Goods | Hong Kong | 978 | 0.5 |
| Samsonite International | Consumer Durables & Apparel | Hong Kong | 937 | 0.5 |
| MINTH | Automobiles & Components | Hong Kong | 778 | 0.4 |
| Top Fifty Holdings | 193,650 | 98.8 | ||
| Invesco Liquidity Fund plc | Money Market Fund | Ireland | 738 | 0.4 |
| US Dollar | ||||
| China Life Insurance (Taiwan) | Insurance | Taiwan | 519 | 0.3 |
| British American Tobacco (Malaysia) | Food, Beverage & Tobacco | Malaysia | 476 | 0.2 |
| Sobha | Real Estate | India | 409 | 0.2 |
| Lime Co. (formerly Finetex EnE)UQ | Capital Goods | South Korea | 123 | 0.1 |
| Total Holdings 55 (2019: 54) | 195,915 | 100.0 |
UQ Unquoted investment.
ADR/ADS: American Depositary Receipts/Shares – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.
H: H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
A: A-shares are shares that denominated in Renminbi and traded on the Shanghai and Shenzhen stock exchanges.
CLASSIFICATION OF INVESTMENTS BY COUNTRY/SECTOR
AT 30 APRIL 2020
| 2020 | 2019 | |||
| At Market Value | % of | At Market Value | % of | |
| £000 | Portfolio | £000 | Portfolio | |
| Australia | ||||
| Insurance | 1,935 | 1.0 | 3,499 | 1.6 |
| 1,935 | 1.0 | 3,499 | 1.6 | |
| China | ||||
| Automobiles & Components | 2,838 | 1.5 | 3,030 | 1.4 |
| Banks | 1,933 | 1.0 | 7,459 | 3.3 |
| Consumer Durables & Apparel | 2,348 | 1.2 | — | — |
| Energy | 3,967 | 2.0 | 5,628 | 2.5 |
| Food, Beverage & Tobacco | 3,027 | 1.5 | 2,532 | 1.1 |
| Insurance | 5,782 | 3.0 | 5,470 | 2.4 |
| Materials | 2,004 | 1.0 | 3,968 | 1.8 |
| Media & Entertainment | 28,836 | 14.7 | 20,916 | 9.4 |
| Retailing | 17,991 | 9.2 | 11,463 | 5.1 |
| Telecommunication Services | 6,061 | 3.1 | 3,811 | 1.6 |
| Transportation | 1,452 | 0.7 | 5,587 | 2.5 |
| 76,239 | 38.9 | 69,864 | 31.1 | |
| Hong Kong | ||||
| Automobiles & Components | 778 | 0.4 | 625 | 0.3 |
| Capital Goods | 4,964 | 2.6 | 7,045 | 3.1 |
| Consumer Durables & Apparel | 937 | 0.5 | 3,069 | 1.4 |
| Insurance | 6,774 | 3.4 | 8,045 | 3.6 |
| Real Estate | 1,188 | 0.6 | 1,457 | 0.6 |
| Technology Hardware & Equipment | — | — | 702 | 0.3 |
| Transportation | 1,964 | 1.0 | 2,101 | 0.9 |
| 16,605 | 8.5 | 23,044 | 10.2 | |
| India | ||||
| Automobiles & Components | 3,249 | 1.7 | — | — |
| Banks | 9,756 | 4.9 | 16,852 | 7.5 |
| Capital Goods | 2,613 | 1.3 | — | — |
| Diversified Financials | 2,476 | 1.3 | — | — |
| Materials | 1,182 | 0.6 | 4,338 | 1.9 |
| Pharmaceuticals, Biotechnology & Life Sciences | 4,581 | 2.4 | 5,982 | 2.7 |
| Real Estate | 409 | 0.2 | 3,576 | 1.6 |
| Software & Services | 2,262 | 1.1 | 4,333 | 1.9 |
| 26,528 | 13.5 | 35,081 | 15.6 | |
| Indonesia | ||||
| Banks | 1,485 | 0.8 | 3,501 | 1.6 |
| 1,485 | 0.8 | 3,501 | 1.6 | |
| Ireland | ||||
| Money Market Fund | 738 | 0.4 | – | – |
| 738 | 0.4 | – | – | |
| 2020 | 2019 | |||
| At Market Value | % of | At Market Value | % of | |
| £000 | Portfolio | £000 | Portfolio | |
| Japan | ||||
| Energy | — | — | 3,828 | 1.7 |
| Media & Entertainment | — | — | 1,364 | 0.6 |
| — | — | 5,192 | 2.3 | |
| Malaysia | ||||
| Food, Beverage & Tobacco | 476 | 0.2 | 2,808 | 1.2 |
| 476 | 0.2 | 2,808 | 1.2 | |
| Philippines | ||||
| Real Estate | — | — | 2,645 | 1.2 |
| — | — | 2,645 | 1.2 | |
| Singapore | ||||
| Banks | 3,974 | 2.0 | 7,536 | 3.4 |
| Consumer Services | 1,083 | 0.6 | — | — |
| 5,057 | 2.6 | 7,536 | 3.4 | |
| South Korea | ||||
| Automobiles & Components | 3,968 | 2.0 | 5,978 | 2.7 |
| Banks | 3,067 | 1.6 | 7,472 | 3.3 |
| Capital Goods | 3,250 | 1.7 | 122 | — |
| Insurance | 2,932 | 1.5 | 3,416 | 1.5 |
| Materials | 2,592 | 1.3 | 3,266 | 1.5 |
| Technology Hardware & Equipment | 14,435 | 7.4 | 12,933 | 5.7 |
| Utilities | 1,012 | 0.5 | 1,947 | 0.9 |
| 31,256 | 16.0 | 35,134 | 15.6 | |
| Taiwan | ||||
| Insurance | 519 | 0.3 | 3,191 | 1.4 |
| Semiconductors & Semiconductor Equipment | 19,612 | 10.0 | 16,300 | 7.2 |
| Technology Hardware & Equipment | 11,669 | 5.9 | 8,855 | 3.9 |
| 31,800 | 16.2 | 28,346 | 12.5 | |
| Thailand | ||||
| Banks | 3,796 | 1.9 | 8,284 | 3.7 |
| 3,796 | 1.9 | 8,284 | 3.7 | |
| Total | 195,915 | 100.0 | 224,934 | 100.0 |
.
INCOME STATEMENT
FOR THE YEAR ENDED 30 APRIL
| 2020 | 2019 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| return | return | return | return | return | return | ||
| Notes | £000 | £000 | £000 | £000 | £000 | £000 | |
| Losses on investments held at fair value | 9 | — | (27,538) | (27,538) | — | (1,944) | (1,944) |
| Losses/(gains) on foreign exchange | — | (22) | (22) | — | 480 | 480 | |
| Income | 2 | 7,120 | 86 | 7,206 | 5,440 | — | 5,440 |
| Investment management fee | 3 | (393) | (1,180) | (1,573) | (408) | (1,224) | (1,632) |
| Other expenses | 4 | (595) | (2) | (597) | (528) | (4) | (532) |
| Net return before finance costs and taxation | 6,132 | (28,656) | (22,524) | 4,504 | (2,692) | 1,812 | |
| Finance costs | 5 | (47) | (139) | (186) | (15) | (47) | (62) |
| Return on ordinary activities before taxation | 6,085 | (28,795) | (22,710) | 4,489 | (2,739) | 1,750 | |
| Tax on ordinary activities | 6 | (731) | — | (731) | (562) | — | (562) |
| Return on ordinary activities after taxation for the financial year | 5,354 | (28,795) | (23,441) | 3,927 | (2,739) | 1,188 | |
| Return per ordinary share | 7 | 7.81p | (41.99)p | (34.18)p | 5.55p | (3.87)p | 1.68p |
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.
.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 30 APRIL
| Capital | |||||||
| Share | Redemption | Special | Capital | Revenue | |||
| Capital | Reserve | Reserve | Reserve | reserve | Total | ||
| Notes | £000 | £000 | £000 | £000 | £000 | £000 | |
| At 30 April 2018 | 7,500 | 5,624 | 46,203 | 166,502 | 7,423 | 233,252 | |
| Return on ordinary activities | — | — | — | (2,739) | 3,927 | 1,188 | |
| Dividends paid | 8 | — | — | — | — | (5,877) | (5,877) |
| Shares bought back and held in treasury | 12 | — | — | (1,188) | — | — | (1,188) |
| At 30 April 2019 | 7,500 | 5,624 | 45,015 | 163,763 | 5,473 | 227,375 | |
| Return on ordinary activities | — | — | — | (28,795) | 5,354 | (23,441) | |
| Dividends paid | 8 | — | — | — | — | (6,798) | (6,798) |
| Shares bought back and held in treasury | 12 | — | — | (10,188) | — | — | (10,188) |
| At 30 April 2020 | 7,500 | 5,624 | 34,827 | 134,968 | 4,029 | 186,948 |
.
BALANCE SHEET
AT 30 APRIL
| 2020 | 2019 | ||
| Notes | £000 | £000 | |
| Fixed assets | |||
| Investments held at fair value through profit or loss | 9 | 195,915 | 224,934 |
| Current assets | |||
| Debtors | 10 | 441 | 477 |
| Cash and cash equivalents | 1,623 | 2,582 | |
| 2,064 | 3,059 | ||
| Creditors: amounts falling due within one year | 11 | (11,031) | (618) |
| Net current (liabilities)/assets | (8,967) | 2,441 | |
| Net assets | 186,948 | 227,375 | |
| Capital and reserves | |||
| Share capital | 12 | 7,500 | 7,500 |
| Other reserves: | |||
| Capital redemption reserve | 13 | 5,624 | 5,624 |
| Special reserve | 13 | 34,827 | 45,015 |
| Capital reserve | 13 | 134,968 | 163,763 |
| Revenue reserve | 13 | 4,029 | 5,473 |
| Shareholders’ funds | 186,948 | 227,375 | |
| Net asset value per ordinary share | 14 | 279.6p | 322.7p |
The financial statements were approved and authorised for issue by the Board of Directors on 6 July 2020.
Signed on behalf of the Board of Directors
Neil Rogan
Chairman
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
A summary of the principal accounting policies, all of which have been consistently applied throughout this and the preceding year is set out below:
(a) Basis of Preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (‘UK GAAP’)), including FRS 102, and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (‘SORP’). The financial statements are issued on a going concern basis.
The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 9 with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.
As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets the following conditions:
• substantially all investments are highly liquid;
• substantially all investments are carried at market value, and
• a statement of changes in equity is provided.
(ii) Going concern
The financial statements have been prepared on a going concern basis. The Company’s Articles of Association require that every three years the Directors propose an ordinary resolution to release them from the obligation to wind up the Company, or they must put forward proposals to wind up the Company. Shareholders voted to release the Directors from the obligation to wind up the Company at the 2019 AGM, and therefore the next resolution in respect of this will be at the AGM in 2022.
The Directors performed an assessment of the Company’s ability to meet its liabilities as they fall due. In performing this assessment, the Directors took into consideration the uncertain economic outlook in the wake of the Covid-19 pandemic including:
• the level of borrowings, cash balances and the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments;
• the net current liability position of the Company, driven by the drawn-down borrowings;
• the ability of the Company to meet all of its liabilities and ongoing expenses from its assets;
• revenue and operating cost forecasts for the forthcoming year;
• the ability of third-party service providers to continue to provide services; and
• potential downside scenarios including a fall in the valuation of the investment portfolio or levels of investment income.
Based on this assessment, the Directors are satisfied that the Company has adequate resources to continue in operational existence for at least twelve months after signing the balance sheet and the financial statements have therefore been prepared on a going concern basis.
(iii) Significant Accounting Estimates and Judgements
The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. Except for the functional and presentation currency as noted below, there have been no other significant judgements, estimates or assumptions for the current or preceding year.
(b) Foreign Currency
(i) Functional and presentation currency
The Company’s investments are made in several currencies, however, the financial statements are presented in sterling, which is the Company’s functional and presentational currency. In arriving at this conclusion, the Directors considered that the Company’s shares are listed and traded on the London Stock Exchange, the shareholder base is predominantly in the United Kingdom and the Company pays dividends and expenses in sterling.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(c) Financial Instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments, which is explained below.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company offsets financial assets and financial liabilities in the financial statements if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
Financial assets
The Company’s investments are held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with documented investment strategy and this is also the basis on which information about the investments is provided internally to the Board. Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments that are actively traded in organised financial markets, is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded and where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including last traded price, broker quotes and price modelling.
Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(d) Cash and Cash Equivalents
Cash and cash equivalents may comprise short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and have a maturity of no more than three months.
(e) Income
All dividends are taken into account on the date investments are marked ex-dividend, and UK dividends are shown net of any associated tax credit. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent of the cash dividend is recognised as income in the revenue account and any excess in value of the shares received over the amount of the cash dividend is recognised in capital. Interest income and expenses are accounted for on an accruals basis. Other income from investments is accounted for on an accruals basis. Deposit interest receivable is accounted for on an accruals basis.
(f) Expenses and Finance Costs
Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 75% to capital and 25% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.
Investment transaction costs are recognised in capital in the income statement. All other expenses are allocated to revenue in the income statement.
(g) Dividends
Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed final dividends are recognised in the period in which they are either approved by or paid to shareholders.
(h) Taxation
The liability to corporation tax is based on net revenue for the period. The tax charge is allocated between the revenue and capital accounts on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.
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 tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.
2. Income
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2020 | 2019 | |
| £000 | £000 | |
| Income from investments: | ||
| UK dividends | — | 144 |
| Overseas dividends | 6,946 | 4,939 |
| Overseas special dividends | 163 | 266 |
| Scrip dividends | — | 69 |
| Total dividend income | 7,109 | 5,418 |
| Other income: | ||
| Deposit interest | 11 | 22 |
| Total income | 7,120 | 5,440 |
Special dividends of £86,000 were recognised in capital during the year (2019: nil).
3. Investment Management Fee
This note shows the investment management fee due to the Manager which is calculated and paid quarterly.
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Investment management fee | 393 | 1,180 | 1,573 | 408 | 1,224 | 1,632 |
Details of the investment management and secretarial agreement are given on page 31 in the Directors’ Report.
At 30 April 2020, £352,000 (2019: £416,000) was accrued in respect of the investment management fee.
4. Other Expenses
The other expenses, including those paid to Directors and the auditor, of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Directors’ remuneration (i) | 128 | – | 128 | 122 | – | 122 |
| Auditor’s fees (ii): | ||||||
| for audit of the financial statements | 26 | – | 26 | 24 | – | 24 |
| Other expenses (iii) | 441 | 2 | 443 | 382 | 4 | 386 |
| 595 | 2 | 597 | 528 | 4 | 532 | |
(i) Directors’ fees authorised by the Articles of Association are £150,000 per annum. The Director's Remuneration Report provides further information on Directors’ fees.
(ii) Auditor’s fees exclude VAT. The VAT is included in other expenses.
(iii) Other expenses include:
-
£12,000 (2019: £11,000) of employer’s National Insurance payable on Directors’ remuneration. As at 30 April 2020, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £13,000 (2019: £10,000); and
-
custodian transaction charges of £2,000 (2019: £4,000) which are charged to capital.
-
other expenses also include a separate fee paid to the Manager for secretarial and administrative services which is subject to annual adjustment in line with the UK Retail Price Index. During the year the Company paid £97,000 (2019: £93,000) for these services.
5. Finance Costs
Finance costs arise on any borrowing the Company has utilised in the year. The Company has a committed £20 million revolving credit facility (see note 11 for further details).
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Commitment fees due on loan facility | 7 | 21 | 28 | 9 | 28 | 37 |
| Interest on loan facility | 38 | 113 | 151 | 6 | 19 | 25 |
| Overdraft interest | 2 | 5 | 7 | – | – | – |
| 47 | 139 | 186 | 15 | 47 | 62 | |
6. Tax on Ordinary Activities
As an investment trust the Company pays no tax on capital gains. The Company suffers no tax on income arising on UK and certain overseas dividends. The Company’s tax charge arises solely from irrecoverable tax on overseas (generally non-EU) dividends. This note also clarifies the basis for the Company having no deferred tax liability.
(a) Current tax charge
| 2020 | 2019 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Overseas tax | 731 | – | 731 | 562 | – | 562 |
The overseas tax charge consists of irrecoverable withholding tax.
(b) Reconciliation of current tax charge
| 2020 | 2019 | |
| £000 | £000 | |
| Return on ordinary activities before taxation | (22,710) | 1,750 |
| Theoretical tax at UK Corporation tax rate of 19% (2019: 19%) | (4,315) | 332 |
| Effects of: | ||
| - Non-taxable UK dividends | — | (27) |
| - Non-taxable scrip dividends | — | (13) |
| - Non-taxable overseas dividends | (1,364) | (978) |
| - Non-taxable losses on investments | 5,232 | 369 |
| - Non-taxable losses/(gains) on foreign exchange | 4 | (91) |
| - Excess of allowable expenses over taxable income | 442 | 407 |
| - Disallowable expenses | 1 | 1 |
| - Overseas taxation | 731 | 562 |
| Tax charge for the year | 731 | 562 |
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to obtain the necessary approval in the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax changes
The Company has cumulative excess management expenses of £21,169,000 (2019: £18,845,000) that are available to offset future taxable revenue.
A deferred tax asset of £4,022,000 (2019: £3,204,000) at 19% (2019: 17%) has not been recognised in respect of these expenses since tax is recoverable only to the extent that the Company has sufficient future taxable revenue. On 11 March 2020 it was announced (and substantively enacted on 17 March 2020) that the UK corporation tax rate would remain at 19% and not reduce to 17% (the previously enacted rate) from 1 April 2020.
7. Return per Ordinary Share
Return per share is the amount of gain or loss generated for the financial year divided by the weighted average number of ordinary shares in issue.
| 2020 | 2019 | |
| £000 | £000 | |
| Return per ordinary share is based on the following: | ||
| Revenue return after taxation | 5,354 | 3,927 |
| Capital return after taxation | (28,795) | (2,739) |
| Total return after taxation | (23,441) | 1,188 |
| 2020 | 2019 | |
| Weighted average number of ordinary shares | ||
| in issue during the year: | ||
| basic | 68,583,306 | 70,798,406 |
8. Dividends on Ordinary Shares
Dividends represent a return of income to shareholders for investing in the Company’s shares. These are determined by the Directors and paid twice a year.
| Dividends paid in the year: | ||||
| 2020 | 2019 | |||
| Pence | £000 | Pence | £000 | |
| Dividends paid and recognised in the year: | ||||
| Final dividend in respect of previous year | 2.90 | 2,028 | 5.50 | 3,900 |
| First interim dividend paid | 3.40 | 2,363 | 2.80 | 1,986 |
| Second interim dividend paid | 3.60 | 2,407 | – | - |
| 9.90 | 6,798 | 8.30 | 5,886 | |
| Return of unclaimed dividends from previous years | – | – | – | (9) |
| 9.90 | 6,798 | 8.30 | 5,877 | |
| Dividends payable in respect of the year: | ||||
| 2020 | 2019 | |||
| Pence | £000 | Pence | £000 | |
| First interim dividend paid | 3.40 | 2,363 | 2.80 | 1,986 |
| Second interim/final* dividend paid | 3.60 | 2,407 | 2.90 | 2,028 |
| 7.00 | 4,770 | 5.70 | 4,014 |
* During the year, the Directors resolved to pay two interim dividends (2019: interim and final dividend paid).
9. Investments at Fair Value
The portfolio comprises investments which are predominantly listed and traded on regulated stock exchanges. The investments of the Company are registered in the name of the Company or in the name of nominees and held to the order of the Company.
Gains and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost on those investments still held at the year end.
| 2020 | 2019 | |
| £000 | £000 | |
| Opening valuation | 224,934 | 226,623 |
| Movements in the year: | ||
| Purchases at cost | 73,329 | 51,929 |
| Sales – proceeds | (74,810) | (51,674) |
| Losses on investments in the year | (27,538) | (1,944) |
| Closing valuation | 195,915 | 224,934 |
| Closing book cost | 182,469 | 175,322 |
| Closing investment holding gains | 13,446 | 49,612 |
| Closing valuation | 195,915 | 224,934 |
The Company received £74,810,000 (2019: £51,674,000) from investments sold in the year. The book cost of these investments when they were purchased was £66,182,000 (2019: £42,415,000) realising a gain of £8,628,000 (2019: gain £9,259,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
The transaction costs included in gains on investments amount to £62,000 (2019: £50,000) on purchases and £130,000 (2019: £106,000) for sales.
10. Debtors
Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold, income which has been earned (accrued) but not yet received and any taxes that are recoverable.
| 2020 | 2019 | |
| £000 | £000 | |
| Overseas withholding tax recoverable | 145 | 91 |
| VAT recoverable | 24 | 21 |
| Prepayments and accrued income | 272 | 365 |
| 441 | 477 |
11. Creditors: amounts falling due within one year
Creditors are amounts which must be paid by the Company and they are all due within 12 months of the balance sheet date.
The bank loan facility provides a specific amount of capital, up to £20 million, over a specified period of time (364 days). Unlike a term loan, the revolving nature of the facility allows the Company to drawdown, repay and re-draw loans.
| 2020 | 2019 | |
| £000 | £000 | |
| Bank facility | 10,354 | — |
| Amounts due to brokers | 112 | — |
| Accruals | 565 | 618 |
| 11,031 | 618 |
The committed unsecured 364 day multi-currency revolving credit facility with The Bank of New York Mellon, has an interest rate based on LIBOR plus a margin of 0.80% (2019: 0.85%). Any undrawn amounts under the facility attract a commitment fee of 0.2%. The facility covenants are based on the lower of 25% of net asset value and £20 million, renewable on 1 August 2020, and require total assets to not fall below £80 million. At the year end, a loan position of £10,354,000 was drawn down (2019: nil).
12. Share Capital
Share capital represents the total number of shares in issue. Any dividends declared will be paid on the shares in issue on the record date.
The Directors’ Report on page 32 sets out the share capital structure, restrictions and voting rights.
Share capital represents the total number of shares in issue, including treasury shares.
(a) Allotted, called-up and fully paid
| 2020 | 2019 | |
| £000 | £000 | |
| Share capital: | ||
| Ordinary shares of 10p each | 6,685 | 7,047 |
| Treasury shares of 10p each | 815 | 453 |
| 7,500 | 7,500 |
(b) Share movements
| 2020 | 2019 | |||
| Ordinary | Treasury | Ordinary | Treasury | |
| number | number | number | number | |
| Number at start of year | 70,469,475 | 4,530,406 | 70,914,475 | 4,085,406 |
| Shares bought back and held in treasury | (3,616,188) | 3,616,188 | (445,000) | 445,000 |
| 66,853,287 | 8,146,594 | 70,469,475 | 4,530,406 | |
During the year the Company bought back, into treasury, 3,616,188 ordinary shares at an average price of 279.80p, excluding costs.
Since the year end and to the date of this annual financial report, no shares have been bought back or issued.
(c) Winding-up provisions
The Directors are obliged to convene an Extraordinary General Meeting (‘EGM’) to consider a special resolution to wind up the Company every third year from the date of the AGM at which the Directors were released from such obligation. At the AGM in 2019 the Directors were released from their obligation to convene an EGM and a resolution to release the Directors from their obligation to convene an EGM will be put to shareholders at the AGM in 2022.
13. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The capital redemption reserve maintains the equity share capital arising from the buy-back and cancellation of shares and is non-distributable. The special reserve arose from the cancellation of the share premium account and is available as a distributable reserve to fund any future tender offers and share buybacks.
The capital reserve includes investment gains and losses, expenses allocated to capital and special dividends received that are classified as capital in nature, the revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.
14. Net Asset Value
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.
The net asset values attributable to each share in accordance with the Company's Articles are set out below.
| 2020 | 2019 | |
| Ordinary shareholders’ funds | £186,948,000 | £227,375,000 |
| Number of ordinary shares in issue, excluding treasury shares | 66,853,287 | 70,469,475 |
| Net asset value per ordinary share | 279.6p | 322.7p |
There is no dilution in this or the prior year and therefore no diluted net asset value per ordinary share has been disclosed.
15. Financial Instruments
Financial instruments comprise the Company’s investment portfolio, derivative financial instruments (if the Company had any), as well as any cash, borrowings, debtors and creditors. This note sets out the risks arising from the Company’s financial instruments in terms of the Company’s exposure and sensitivity, and any mitigation that the Manager or Board can take.
Risk Management Policies and Procedures
The Company’s portfolio is managed in accordance with its investment objective, which is set out in the Strategic Report on page 17. The Strategic Report then proceeds to set out the Manager’s investment process and the Company’s internal control and risk management systems as well as the Company’s principal risks and uncertainties. Risk management is an integral part of the investment management process and this note expands on certain of those risks in relation to the Company’s financial instruments, including market risk.
The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured. The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Strategic Report.
As an investment trust the Company invests in equities and other investments for the long-term so as to meet its investment objective and policies. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the policies the Company used to manage these are summarised below and have remained substantially unchanged for the two years under review.
15.1 Market Risk
Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (15.1.1), interest rate risk (15.1.2) and other price risk (15.1.3).
The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed in the Board Responsibilities on page 38. Borrowing is used to enhance returns, however, this will also increase the Company’s exposure to market risk and volatility.
15.1.1 Currency Risk
As nearly all of the Company’s assets, liabilities and income are denominated in currencies other than sterling, movements in exchange rates will affect the sterling value of those items.
Management of the Currency Risk
The Manager monitors the Company’s exposure to foreign currencies on a daily basis and reports to the Board on a regular basis. With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so should the Portfolio Manager or the Board feel this was appropriate. Contracts are limited to currencies and amounts commensurate with the asset exposure.
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and received.
Foreign Currency Exposure
The fair values of the Company’s monetary items that have currency exposure at 30 April are shown below. Where the Company’s investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis so as to show the overall level of exposure.
Year ended 30 April 2020
|
Debtors
(due from brokers and dividends) |
Cash and cash equivalents | Overdrafts and loans | Creditors (due to brokers and accruals) | Foreign currency exposure on net monetary items |
Investments
at fair value through profit or loss |
Total net foreign currency exposure | |
| Currency | £000 | £000 | £000 | £000 | £000 | £000 | £000 |
| Australian dollar | – | – | – | – | – | 1,935 | 1,935 |
| Chinese yuan | – | – | – | – | – | 5,375 | 5,375 |
| Hong Kong dollar | 43 | – | – | (112) | (69) | 56,042 | 55,973 |
| Indian rupee | – | – | – | – | – | 18,064 | 18,064 |
| Indonesian rupiah | – | – | – | – | – | 1,485 | 1,485 |
| Malaysian ringgit | – | – | – | – | – | 476 | 476 |
| Singapore dollar | – | – | – | – | – | 5,058 | 5,058 |
| South Korean won | 108 | – | – | – | 108 | 31,256 | 31,364 |
| Taiwan dollar | 145 | 238 | – | – | 383 | 31,800 | 32,183 |
| Thai baht | 102 | – | – | – | 102 | 3,797 | 3,899 |
| US dollar | – | 1,278 | (10,354) | – | (9,076) | 40,627 | 31,551 |
| 398 | 1,516 | (10,354) | (112) | (8,552) | 195,915 | 187,363 |
Year ended 30 April 2019
|
Debtors
(due from brokers and dividends) |
Cash and cash equivalents | Creditors (due to brokers and accruals) |
Foreign
currency exposure on net monetary items |
Investments
at fair value through profit or loss |
Total net foreign currency exposure | |
| Currency | £000 | £000 | £000 | £000 | £000 | £000 |
| Australian dollar | – | – | – | – | 3,499 | 3,499 |
| Chinese yuan | – | – | – | – | 2,532 | 2,532 |
| Hong Kong dollar | 48 | – | – | 48 | 68,133 | 68,181 |
| Indian rupee | – | 475 | – | 475 | 30,748 | 31,223 |
| Indonesian rupiah | 4 | – | – | 4 | 3,501 | 3,505 |
| Japanese yen | 48 | – | – | 48 | 5,192 | 5,240 |
| Malaysian ringgit | – | – | – | – | 2,808 | 2,808 |
| Philippine peso | – | – | – | – | 2,645 | 2,645 |
| Singapore dollar | – | – | – | – | 7,536 | 7,536 |
| South Korean won | 100 | – | – | 100 | 35,134 | 35,234 |
| Taiwan dollar | 87 | 137 | – | 224 | 28,346 | 28,570 |
| Thai baht | 155 | – | – | 155 | 8,284 | 8,439 |
| US dollar | – | 1,726 | – | 1,726 | 26,576 | 28,302 |
| 442 | 2,338 | – | 2,780 | 224,934 | 227,714 |
The amounts shown are not representative of the exposure to risk during the year, because the levels of foreign currency exposure change significantly throughout the year.
Foreign Currency Sensitivity
The following table illustrates the sensitivity of the returns after taxation for the year with respect to the Company’s financial assets and liabilities.
If sterling had strengthened by the amounts shown in the second table below, the effect on the assets and liabilities held in non-sterling currency would have been as follows:
| 2020 | 2019 | |||||
| Total | Total | |||||
| Revenue | Capital | loss | Revenue | Capital | loss | |
| return | return | after tax | return | return | after tax | |
| £000 | £000 | £000 | £000 | £000 | £000 | |
| Australian dollar | (5) | (72) | (77) | (2) | (66) | (68) |
| Chinese yuan | (30) | (134) | (164) | 1 | (41) | (40) |
| Hong Kong dollar | (37) | (1,566) | (1,603) | (35) | (1,226) | (1,261) |
| Indian rupee | (8) | (614) | (622) | (5) | (718) | (723) |
| Indonesian rupiah | (4) | (55) | (59) | – | (88) | (88) |
| Japanese yen | – | – | – | (1) | (93) | (94) |
| Malaysian ringgit | (2) | (11) | (13) | (1) | (31) | (32) |
| Philippine peso | – | – | – | (2) | (56) | (58) |
| Singapore dollar | (8) | (111) | (119) | (2) | (98) | (100) |
| South Korean won | (23) | (625) | (648) | (17) | (562) | (579) |
| Taiwan dollar | (26) | (801) | (827) | (9) | (342) | (351) |
| Thai baht | (10) | (114) | (124) | (4) | (182) | (186) |
| US dollar | (10) | (883) | (893) | (4) | (481) | (485) |
| (163) | (4,986) | (5,149) | (81) | (3,984) | (4,065) | |
If sterling had weakened by the same amounts, the effect would have been the converse.
The following movements in the assumed exchange rates are used in the above sensitivity analysis:
| 2020 | 2019 | |
| % | % | |
| £/Australian dollar | +/–3.7 | +/–1.9 |
| £/Chinese yuan | +/–2.5 | +/–1.6 |
| £/Hong Kong dollar | +/–2.8 | +/–1.8 |
| £/Indian rupee | +/–3.4 | +/–2.3 |
| £/Indonesian rupiah | +/–3.7 | +/–2.5 |
| £/Japanese yen | — | +/–1.8 |
| £/Malaysian ringgit | +/–2.3 | +/–1.1 |
| £/Philippine peso | — | +/–2.1 |
| £/Singapore dollar | +/–2.2 | +/–1.3 |
| £/South Korean won | +/–2.0 | +/–1.6 |
| £/Taiwan dollar | +/–2.5 | +/–1.2 |
| £/Thai baht | +/–3.0 | +/–2.2 |
| £/US dollar | +/–2.8 | +/–1.7 |
These percentages have been determined based on the market volatility in exchange rates during the year. The sensitivity analysis is based on the Company’s foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts that offset the effects of changes in currency exchange rates. The effect of the strengthening or weakening of sterling against foreign currencies is calculated by reference to the volatility of exchange rates during the year using one standard deviation of currency fluctuations from the average exchange rate.
In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole since the level of foreign currency exposure varies.
15.1.2 Interest Rate Risk
The Company is exposed to interest rate risk through income receivable on cash deposits and interest payable on variable rate borrowings. When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian, Bank of New York Mellon (International) Limited.
The Company has a credit facility (the ‘facility’) for which details and year end drawn down amounts are shown in note 11. The Company uses the facility when required at levels approved and monitored by the Board. At the maximum possible gearing of £20 million, the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s total income of £200,000. At the year end, £10,354,000 of the loan facility was drawn down (2019: £nil).
The Company also has available a bank overdraft arrangement with the custodian for settlement purposes. At the year end there was no overdrawn amount (2019: £nil). Interest on the bank overdraft is payable at the custodian’s variable rate.
The Company’s portfolio is not directly exposed to interest rate risk.
15.1.3 Other Price Risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the Manager to manage the portfolio to achieve the best possible return.
The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies and to review investment performance.
The Company’s portfolio is the result of the Manager’s investment process and as a result is not wholly correlated with the Company’s benchmark or the markets in which the Company invests. The value of the portfolio will not move in line with the markets but will move as a result of the performance of the shares within the portfolio.
If the value of the portfolio rose or fell by 10% at the balance sheet date, the profit after tax for the year would increase or decrease by £19.6 million (2019: £22.5 million) respectively.
15.2 Liquidity Risk
This is the risk that the Company may encounter difficulty in meeting its obligations associated with financial liabilities i.e. when realising assets or raising finance to meet financial commitments.
A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale. This is minimised as the majority of the Company’s investments comprise a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary, cash held and the loan facility provides for additional funding flexibility. The financial liabilities of the Company at the balance sheet date are shown in note 11.
15.3 Credit Risk
Credit risk comprises the potential failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered; it includes, but is not limited to: lost principal and interest, disruption to cash flows or the failure to pay interest.
Credit risk is minimised by using:
(a) only approved counterparties, covering both brokers and deposit takers;
(b) a custodian that operates under BASEL III guidelines. The Board reviews the custodian’s annual, externally audited, service organisation controls report and the Manager’s management of the relationship with the custodian. Following the appointment of a depositary, assets and cash held at the custodian are covered by the depositary’s restitution obligation, accordingly the risk of loss is remote; and
(c) the Invesco Liquidity Funds plc – US Dollar (formerly Short Term Investment Companies (Global Series) plc), a money market fund, which is rated AAAm by Standard & Poor’s and AAAmmf by Fitch.
In addition, cash balances are limited to a maximum of 2.5% of net assets with any one deposit taker and a maximum of 6% of net assets in the Invesco Liquidity Funds plc. These limits are at the discretion of the Board and are reviewed on a regular basis. As at the year end, the sterling equivalent of £1,623,000 (2019: £2,582,000) was held at the custodian and £738,000 (2019: £nil) was held in Invesco Liquidity Funds plc (formerly Short Term Investment Companies (Global Series) plc “STIC”).
16. Fair Value of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. Under accounting standards there are three levels of fair value based on whether there is an active market (Level 1) or, if not, Levels 2 and 3 where other methods have been employed to establish a fair value. This note sets out the aggregate amount of the portfolio in each level, and why.
Financial assets and financial liabilities are either carried at their fair value (investments), or at a reasonable approximation of their fair value. The valuation techniques used by the Company are explained in the accounting policy note. FRS102 as amended for fair value hierarchy disclosures (March 2016) sets out three fair value levels. Categorisation into a level is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The investments held by the Company at the year end are shown on pages 24 and 25. Except for one Level 2 and one Level 3 investments described below, all of the Company’s investments at the year end were deemed to be Level 1 with fair values for all based on unadjusted quoted prices in active markets for identical assets.
Level 2 investments are investments for which inputs are other than quoted prices included within Level 1 that are observable (i.e. developed using market data). Invesco Liquidity Funds – US Dollar, a money market fund comprised of short dated bonds, was the only Level 2 investment in the portfolio at the year end and was valued at £738,000 (2019: £nil).
Level 3 investments are investments for which inputs are unobservable (i.e. for which market data is unavailable). Lime Co. (formerly Finetex EnE) was the only Level 3 investment in the portfolio at the year end and was valued at £123,000 (2019: one investment: Lime Co. (formerly Finetex EnE) valued at £122,000).
17. Capital Management
This note is designed to set out the Company’s objectives, policies and processes for managing its capital. This capital being funded by monies invested in the Company by shareholders (both initial investment and retained amount) and any borrowings by the Company.
The Company’s total capital employed at 30 April 2020 was £197,302,000 (2019: £227,375,000) comprising borrowings of £10,354,000 (2019: £nil) and equity share capital and other reserves of £186,948,000 (2019: £227,375,000).
The Company’s total capital employed is managed to achieve the Company’s investment objective and investment policy as set out on page 17. Borrowings may be used to provide gearing up to the lower of £20 million or 25% of net asset value. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 20 and 21. These also explain that the Company is able to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1158 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the credit facility, by the terms imposed by the lender, details of which are given in note 11. The Board regularly monitors, and the Company has complied with, these externally imposed capital requirements.
18. Contingencies, Guarantees and Financial Commitments
Any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring, would be disclosed in this note if any existed.
There were no contingencies, guarantees or other financial commitments of the Company as at 30 April 2020 (2019: nil).
19. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors and their dependents as related parties. The Directors’ remuneration and interests have been disclosed on pages 42 to 44 with additional disclosure in note 4. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Director’s Report on page 31, note 3 and note 4(iii) to the financial statements.
20. Post Balance Sheet Events
Any significant events that occurred after the balance sheet date but before the signing of the balance sheet will be shown here.
The economic outlook following from Covid-19 and its impact on the Company’s investment portfolio continues to be uncertain. As at close of business on 3 July 2020, the Company’s NAV, share price and discount were 321.3p, 277.0p and 13.8% respectively. There are no other significant post balance sheet events requiring disclosure.
This Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 30 April 2020 have been agreed with the auditors and are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2019 and 2020 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s498 of the Companies Act 2006. The financial information for 2019 is derived from the statutory accounts for 2019 which have been delivered to the Registrar of Companies. The 2020 accounts will be filed with the Registrar of Companies in due course.
The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the offices of Invesco, 43-45 Portman Square, London W1H 6LY. A copy of the Annual Financial Report will be available from Invesco on the following website: www.invesco.co.uk/invescoasia in due course.
The Annual General Meeting of the Company will be held at 12.00 noon on 3 September 2020 at 43-45 Portman Square, London, W1H 6LY.
Shareholders are reminded that under the current Stay Alert and Stay Safe Social Distancing measures, shareholders will not be able to attend the AGM.
The information contained within this announcement is deemed by the Company to constitute inside information under the Market Abuse Regulation (EU) No. 596/2014.
By order of the Board
Invesco Asset Management Limited
Company Secretary
6 July 2020
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