Annual Financial Report

RNS Number : 3893U

Schroder Asian Total Retn InvCo PLC

29 March 2019

 

29 March 2019

ANNUAL REPORT AND ACCOUNTS

Schroder Asian Total Return Investment Company plc (the "Company") hereby submits its Annual Report for the year ended 31 December 2018 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 December 2018 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroders.co.uk/satric.  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/3893U_1-2019-3-28.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited              

Tel: [phone]

Chairman's Statement

Following the substantial gains produced by the portfolio in 2017, 2018 was a more difficult year for investors. During the year ended 31 December 2018, the Company produced a net asset value ("NAV") total return of -8.1%, performing better than the total return of -8.6% from the Reference Index, but trailing the total return of -6.6% from the average peer group NAV. The share price produced a total return of -7.3%. Some of our major contributors to performance in 2017 encountered significant profit taking, and the derivative strategy did not provide enough protection to offset these falls.

Further comment on performance and investment policy may be found in the Portfolio Managers' Review.

I am pleased to report that we have received industry awards in two separate categories during the year under review. The Company won "Best Asian Equity ex. Japan" trust at the FT Advisor Awards and the board picked up "Best board" at the Citywire Investment Trust Awards. This reflects the hard work and efforts of both our portfolio managers, as well as the promotional support from Schroders and the efforts that the board has made.

At the Annual General Meeting ("AGM"), we will be proposing a resolution that the Company should continue as an investment trust for a further three year period and the board unanimously recommends that shareholders vote in favour of this resolution. Since switching the mandate to Schroders in March 2013, the Company has produced a NAV total return of 63.6% and a share price total return of 70.3%, outperforming the reference index which produced a total return of 40.1%, and we have materially improved the liquidity of the shares through the reissue of treasury shares and the issue of new equity.

Earnings and dividends

The revenue return from the portfolio for the year increased substantially when compared to the previous year, from 5.48p per share in 2017 to 7.18p per share for the year under review. This was mainly due to an increase in higher yielding stocks in the portfolio, although this could change in the future. As a consequence, the board has recommended a final dividend of 6.20p per share for the year ended 31 December 2018, an increase of 29.2% over the final dividend of 4.80p per share paid in respect of the previous financial year.

In order to provide shareholders with the opportunity to vote on the quantum of the dividend, it will be payable as a final dividend, subject to shareholder approval at the AGM. The dividend will be paid on 15 May 2019 to shareholders on the register on 12 April 2019.

Promotion and share issuance

The board's focus on promotion of the Company's shares has continued to yield positive results. Last year I reported that the share price had progressed from trading at a discount to trading at a premium and I am pleased to report that, except for a few days, the share price has remained at a premium throughout the year.

The board continues to believe that a mixture of sustained out performance of the market together with a successful strategy for promotion, is key to maintaining the premium rating of the share price.

At the AGM held on 9 May 2018, shareholders granted the board authority to issue shares, including out of treasury. During the year, the Company issued all of its 2.2 million remaining treasury shares, at an average premium to NAV of 2.6%. In addition, the Company issued 6.2 million shares at an average premium to NAV of 1.94% and since the year end, a further 835,000 shares, at an average premium to NAV of 2.0%, as demand for the Company's shares has continued. A resolution to renew the authorities will be proposed at the AGM, details of which can be found on page 60 of the 2018 annual report.

Should the need arise, the Company will continue to implement a discount management policy, which targets a discount to NAV of no more than 5% in normal market conditions. The board believes that overall liquidity and the relative discount to the Company's peers should also be considered in any decision to buy back shares.

Gearing and the use of derivatives

Gearing continues to be utilised by the portfolio managers. The Company may use gearing to enhance performance but net gearing will not exceed 30% of NAV. The board has agreed a disciplined framework for gearing to increase market exposure, based on a number of valuation indicators. Net cash stood at 0.9% at the end of the year, compared to 4.5% gearing at the beginning of the year. Shareholders should be aware that the use of borrowings must be seen in the context of the use of derivative hedging instruments to reduce the volatility of the portfolio.

Board succession and refreshment

The board continues to consider its ongoing refreshment in line with the policy set out in my statement in the 2016 annual report. I am pleased to welcome Andrew Cainey to the board following his appointment on 7 March 2019. Mr Cainey's biographical details can be found on page 22 of the 2018 annual report. In accordance with the Company's articles of association, a resolution to elect him as a director of the Company will be proposed at the forthcoming AGM.

The 2018 UK Corporate Governance Code, against which the Company will report for the 2019 annual report, states that the Chairman should not remain in post beyond nine years from the date of their first appointment to the board. The board acknowledges that my tenure is not in line with the provisions of the 2018 Code as I have been a director for 11 years. When considering my appointment as Chairman, the board took the view that a five year term was an appropriate period to allow for continuity and stability while the board delivered its succession plan. This term is due to expire at the AGM in 2020. I am delighted to report that we have successfully refreshed the board over the last four years to ensure that, on my retirement in 2020, the board will be comprised of effective directors providing diversity of skills, experience, gender and length of service.

Annual General Meeting

The AGM will be held at 12.00 noon on Friday, 10 May 2019 at the Manager's new offices at 1 London Wall Place, London EC2Y 5AU, and I encourage you to attend. One of the portfolio managers will present on the Company's investment strategy and prospects for Asia. The AGM will be followed by a buffet lunch.

Outlook

"It is a very uncertain outlook and one in which our strategy should have a place in an investor's portfolio..."

The sharp correction in markets in December and their subsequent recovery in the early months of 2019 demonstrate investors' sensitivity to tightening monetary conditions following a period of ultra low interest rates and abundant liquidity. Central banks have backed away from further tightening for now in the light of market weakness and signs of slower global growth. It remains to be seen if this halt is only temporary. Equity investors also must contend with slowing earnings growth and a continuing background of geo-political issues from US-China trade wars to Brexit. It is a very uncertain outlook and one in which our strategy should have a place in an investor's portfolio, focusing as it does on long-term valuation of equities and hedging to provide some protection against market declines.

David Brief

Chairman

28 March 2019

Portfolio Managers' Review

Market background

Stockmarket falls in Asia were broad-based both by country and sector in 2018. On a sector basis technology, internet and export stocks suffered the largest falls as worries over the slowing global economy and high valuations (in the case of internet names) led to a sell off. Trade tensions with the USA and a slowing economy caused a big downturn in local and foreign investor sentiment towards the Chinese stockmarket. The situation was not helped by policies from the mainland authorities (more regulation, policies to favour state-owned enterprises over the private sector, increasing state control over many aspects of the economy) which were considered by investors as unfriendly to the long-term outlook for Chinese capital markets.

Those Asian markets that performed best over the year tended to be those with a more domestically-focused make up of earnings like India, the smaller ASEAN markets and New Zealand. India was also helped by the constant flow of local money into domestic mutual funds on belief in the "magic" of Mr Modi's policies. This was despite the constant disappointments in Indian profits, and the significant problems that have emerged in the state banks and non-bank financial sectors. Whilst not a bubble we do think the Indian equity market is vulnerable if the ruling party, the BJP, does poorly in the 2019 elections.

It has been a frustrating year for your portfolio managers. We did get some things right - we were cautious at the beginning of the year and correctly trimmed the portfolio's technology and internet positions. However, this has not resulted in material outperformance versus the portfolio's Reference Index (the NAV total return fell 8.1% versus an 8.6% fall in the Reference Index).

The key area of losses has been stock selection in China where we bought back stocks too early (catching the proverbial falling knife), and hedging where policies were less effective than we would have hoped (hedging Taiwan did not prove good protection at a time when the heaviest falls were in Hong Kong and China). Your portfolio managers have reviewed the process and remain confident that after 11 years of managing the Asian Total Return strategy (and five years of managing the Company's strategy), no major changes are required, though we may look to make some minor tweaks to the hedging process going forward.

As mentioned above, stock selection in China has been the key drag on performance over the year, as the slowing economy and rising tensions with the USA hit some stocks hard. Internet stocks in particular posted sharp falls on the back of earnings disappointments and worries over increasing government regulations and interference in the sector (including Tencent and Alibaba which, whilst we trimmed positions, remained large holdings). Other Hong Kong and China names that hurt performance were the auto part holdings (Johnson Electric and Nexteer) which dropped on worries over weak car sales in China. The white goods related holdings (Midea and Sanhua) also suffered sharp falls on concerns over the housing cycle in China.

Technology stocks also tumbled across the region. Fortunately the portfolio had no material exposure to Apple related and smartphone related component names having sold out at the end of 2017 on increasing worries that the sector was mature and lacks the "next big thing". However we continued to hold large weightings in Samsung Electronics, TSMC, ASM Pacific and Chroma ATE, all of which fell in 2018 on worries over the slowdown in the technology sector and US-China trade tensions. We used weakness to add to positions as we continue to see these names as a good way to play those areas of technology where we believe secular growth trends remain intact.

Capital protection strategies in the portfolio had a mixed time, which was disappointing in a weak year. Good money was made on put options on the Korean index and the sale of Taiwanese index futures in the second half of the year (both financial instruments designed to hedge part of the capital value if prices fall). However this was partly offset by losses on Taiwanese and Australian put options in the first nine months of the year. Overall the positives and negatives balanced each other out, which was frustrating to say the least given that there was around 14% protection on the portfolio in a falling year.  At the end of 2018 the portfolio continued to have a small amount of capital protection via put options and also has a partial currency hedge on the Chinese currency exposure against tail risks in the Chinese financial sector.

Portfolio activity

As mentioned earlier we did trim back internet and technology exposure in the portfolio at the beginning of the year. We also sold some of the Chinese holdings where we believe the new regulatory outlook has fundamentally altered the prospects for the business like New Oriental Education (tutoring), Hangzhou Hikvision (surveillance), and Netease (gaming). We used the proceeds from sales to add mostly to the portfolio's existing positions like Samsung Electronics, Jardine Strategic and ASM Pacific which we felt during the weakness in the second half of 2018 had become quite oversold. We also added to two Singapore retail related REITS (CapitaLand Mall Trust and Mapletree Commercial) where we felt the market was too gloomy on their prospects and was failing to differentiate between good and bad mall assets.

Investment trends and outlook

Our views as we start 2019 remain pretty much unchanged from those at the beginning of 2018.

We expect global liquidity to continue to tighten as it has for the last 18 months. Even if we see a quick reversal from the Federal Reserve (unlikely, though clearly a pause is possible), the lag from past tightening is likely to mean further economic weakness and result in a headwind for stock markets. The growth in base money (currency in circulation plus short-term deposits) has slowed to almost zero. With the Federal Reserve still aiming to shrink its balance sheet and the European Central Bank keen to end quantitative easing we don't see any immediate let-up. This is likely to remain a significant headwind for Asian markets as the lagged effects (slower economic activity and weaker corporate profitability) feed through.

We remain sceptical of any real let-up in US and China tensions despite President Trump's desperate tweets that he has brokered a deal. It is clear that US-China tensions are not just about trade but something much bigger. It involves US perceptions around China's intellectual property theft, cyber-crime, the way China projects its political and financial power via One Belt One Road, and China's desire to dominate key industries via massive state subsidies (Made in China 2025). These issues are much harder to resolve to say the least!

We suspect there has been material front-loading of exports prior to the threatened 25% tariffs and if we are correct this is likely to mean a weak start to the year for Asian exports (in addition to a general slowing picture). Asian exports actually held up pretty well in 2018. However, the outlook appears distinctly cloudy. This backdrop suggests a weak picture for Asian earnings given the high historic correlation between Asian earnings and exports. Samsung's recent earnings announcement - we suspect - is just an indication of what is to come.

The scope for China to undertake major stimulus measures is now much more limited, unless they wish to suspend the effective currency peg. We expect the Chinese economy to continue to slow given the authorities' (correct) desire to rein in excessive leverage and bring shadow banking (unregulated entities) back on balance sheets. Given the pegged currency, a current account no longer in surplus and a leaky capital account, we view monetary options as limited assuming devaluation is not considered an option (which would cause market chaos and global deflation). The monetary situation is much more finely balanced than in the past. We do expect some fiscal measures to boost consumption but given the size of the economy and high housing and auto ownership rates, such measures are likely to have limited efficacy compared to the past. Our base case is for the Chinese economy to slow but with debt effectively internalised, the immediate triggers for a financial crisis are unlikely to come to pass. But one of the major tail risks we see for the region is a messy unwinding of the Chinese currency peg.

Structurally we think the world remains deflation prone. As we have discussed many times over the last 10 years, the combination of the 4Ds (debt, demographics, disruption, disparity in income) means the world is likely to remain deflationary. We expect this to continue to mean that economic numbers surprise on the downside (and as they have in Japan for 25 years!). The key question your portfolio managers are mulling over is: given this backdrop, does this mean talk of a renewal of quantitative easing starts again by the end of the year and what does this mean for markets? Does it provide the usual sugar rush, or do we move into a Japan twilight world where the stock market becomes increasingly irrelevant, or do we instead in the West at least move towards financial repression as quantitative easing does not work so policymakers look at more extreme measures to create inflation/write off debt? We suspect the latter is the ultimate endgame.

Some good news for investors, however, is that excluding China, debt increases in Asia have been negligible and government and corporate balance sheets look in pretty good shape. Corporate gearing has been coming down in Asia, and many Asian companies are sitting on ample cash. Asian companies are in the main well positioned for a more difficult economic backdrop.

Headline valuations also look reasonable after the falls in 2018. The issue as ever is that when we strip out Chinese banks, Samsung, Hynix etc. where earnings are questionable (banks) or at short-term highs, then valuations for what we really want to own are much more expensive. There are pockets of value in Asia but it is not broad based and certainly not in the favoured defensive sectors (those where business should hold up well during weak times, like consumer staples). It is also the case that after the euphoria which heralded the start of 2018, we suspect earnings forecasts for 2019 remain too high. We would accept this is hopefully at least partially discounted by markets, but investors should be wary of any market commentators claiming Asia is "cheap" using what are optimistic consensus forecasts.

So pulling all the above together, how are we positioning the portfolio? We remain cautious but not outright defensive. Assuming the tail risks outlined above are avoided (RMB devaluation/financial stress in China, US credit blow ups), then we expect markets in Asia to offer moderate gains (low headline valuations offset by a relatively weak earnings outlook). We continue to hold a moderate number of hedges against tail risks in China and are keeping some cash to take advantage of what we expect to be volatile market conditions.

We are likely to use rallies to trim positions in China if stocks exceed fair value, and proceeds are most likely to be reinvested in blue chip stocks in more developed markets (Hong Kong, Singapore and Australia) with sustainable yields. With growth slowing and interest rates likely to peak this year, we expect yield plays to come back into focus. Historically 67% of total returns in Asia came from reinvesting dividends and with better corporate governance and dividend policies, this favours the bigger more "sensible" Asian stock markets.

Yield stocks have also underperformed for quite a prolonged period as investor focus has been on growth and new economy names. Whilst we are not forecasting a crisis, we do believe selective yield names can offer good defensive returns even if stock market conditions are difficult.

To end on a positive note - how sustainable are dividend yields in Asia? Profit margins in Asia have remained healthy and cashflow strong. With balance sheets relatively lowly geared, there is ample scope in Asia for more generous payouts despite the weak outlook. Our focus at the moment is very much on those companies where we are confident cashflow will remain strong and management is focused on a sensible balance between returning capital to shareholders and investing in the future growth of their business.

Robin Parbrook, Lee King Fuei

For Schroder Investment Management Limited

28 March 2019

Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the audit and risk committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in March 2019.

Although the board believes that it has a robust framework of internal controls in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review. Cyber risk relating to all of the Company's key service providers is considered an ongoing threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the board receives reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.

Actions taken by the board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Risk	Mitigation and management
Strategic
The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. The share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against their competitors. Annual consideration of management fee levels.
Investment management
The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of: the Manager's compliance with its agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager is undertaken.
Financial and currency
The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in regional equity markets or substantial currency fluctuation could have an adverse impact on the market value of the Company's underlying investments.	The risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets are discussed with the Manager. The derivative strategy employed by the Manager is subject to review by the board. The board considers the overall hedging policy on a regular basis.
Custody
Safe custody of the Company's assets may be compromised through control failures by the depositary, including cyber hacking.	The depositary reports on safe custody of the Company's assets, including cash, and portfolio holdings independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. An annual report from the depositary on its activities, including matters arising from custody operations is received.
Gearing and leverage
The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 30% of net asset value. The board oversees the Manager's use of derivatives.
Accounting, legal and regulatory
In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Service providers give regular confirmation of compliance with relevant laws and regulations. Shareholder documents and announcements, including the Company's published annual report, are subject to stringent review processes. Procedures established to safeguard against disclosure of inside information.
Service provider
The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, depositary and registrar. Failure of controls, including as a result of cyber hacking, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reports are provided by key service providers and the quality of their services is monitored. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, and follow up of remedial actions as required.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the audit and risk committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

No significant control failings or weaknesses were identified from the audit and risk committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 21 to the accounts on pages 53 to 58 of the 2018 annual report.

Viability statement

The directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 December 2018 and the potential impact of the principal risks and uncertainties it faces for the review period.

The board believes that a period of five years reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 19 and 20 of the 2018 annual report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio. The directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

Based on the Company's processes for monitoring operating costs, the board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

In reaching this decision, the board has taken into account the Company's continuation vote, on the assumption that it will be passed at the forthcoming AGM.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' Responsibilities

The directors are responsible for preparing the annual report, and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the return or loss of the Company for that period. In preparing these financial statements, the directors are required to:

-        select suitable accounting policies and then apply them consistently;

-        make judgements and accounting estimates that are reasonable and prudent;

-        state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

-        notify the Company's shareholders in writing about the use of disclosure exemptions in FRS 102, used in the preparation of the financial statements; and

-        prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Manager is responsible for the maintenance and integrity of the webpage dedicated to the Company. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are listed on pages 22 and 23 of the 2018 annual report, confirm that to the best of their knowledge:

-        the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company;

-        the Strategic Report contained in the report and accounts includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

-        the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Income Statement

for the year ended 31 December 2018

		Revenue	2018 Capital	Total	Revenue	2017 Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments held at fair value through profit or loss		-	(29,709)	(29,709)	-	78,351	78,351
Net losses on derivative contracts		-	(72)	(72)	-	(8,866)	(8,866)
Net foreign currency (losses)/gains		-	(869)	(869)	-	1,665	1,665
Income from investments		7,883	32	7,915	5,483	30	5,513
Other interest receivable and similar income		33	-	33	11	-	11
Gross return/(loss)		7,916	(30,618)	(22,702)	5,494	71,180	76,674
Investment management fee		(496)	(1,489)	(1,985)	(428)	(1,283)	(1,711)
Performance fee		-	-	-	-	(4,177)	(4,177)
Administrative expenses		(630)	-	(630)	(646)	-	(646)
Net return/(loss) before finance costs and taxation		6,790	(32,107)	(25,317)	4,420	65,720	70,140
Finance costs		(106)	(317)	(423)	(78)	(235)	(313)
Net return/(loss) on ordinary activities before taxation		6,684	(32,424)	(25,740)	4,342	65,485	69,827
Taxation on ordinary activities		(381)	-	(381)	(159)	-	(159)
Net return/(loss) on ordinary activities after taxation		6,303	(32,424)	(26,121)	4,183	65,485	69,668
Return/(loss) per share - basic and diluted		7.18p	(36.91)p	(29.73)p	5.48p	85.78p	91.26p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

Statement of Changes in Equity

for the year ended 31 December 2018

	Called-up		Capital
	share	Share	redemption	Special	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2016	4,260	5	11,646	29,182	137,783	12,141	195,017
Repurchase of the Company's own shares into treasury	-	-	-	-	(334)	-	(334)
Reissue of shares out of treasury	-	12,340	-	-	21,008	-	33,348
Net return on ordinary activities	-	-	-	-	65,485	4,183	69,668
Dividend paid in the year	-	-	-	-	-	(3,273)	(3,273)
At 31 December 2017	4,260	12,345	11,646	29,182	223,942	13,051	294,426
Repurchase of the Company's own shares into treasury - prior year stamp duty	-	-	-	-	(2)	-	(2)
Issue of shares	310	21,387	-	-	-	-	21,697
Reissue of shares out of treasury	-	3,349	-	-	4,498	-	7,847
Net (loss)/return on ordinary activities	-	-	-	-	(32,424)	6,303	(26,121)
Dividend paid in the year	-	-	-	-	-	(4,064)	(4,064)
At 31 December 2018	4,570	37,081	11,646	29,182	196,014	15,290	293,783

Statement of Financial Position

at 31 December 2018

		2018	2017
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		291,427	311,798
Current assets
Debtors		323	269
Cash at bank and in hand		14,709	2,315
Derivative financial instruments held at fair value through profit or loss		596	594
		15,628	3,178
Current liabilities
Creditors: amounts falling due within one year		(12,657)	(20,330)
Derivative financial instruments held at fair value through profit or loss		(615)	(220)
		(13,272)	(20,550)
Net current assets/(liabilities)		2,356	(17,372)
Total assets less current liabilities		293,783	294,426
Net assets		293,783	294,426
Capital and reserves
Called-up share capital		4,570	4,260
Share premium		37,081	12,345
Capital redemption reserve		11,646	11,646
Special reserve		29,182	29,182
Capital reserves		196,014	223,942
Revenue reserve		15,290	13,051
Total equity shareholders' funds		293,783	294,426
Net asset value per share		321.43p	354.79p

Cash Flow Statement

for the year ended 31 December 2018

		2018	2017
		£'000	£'000
Net cash inflow from operating activities		652	572
Servicing of finance
Interest paid		(413)	(310)
Net cash outflow from servicing of finance		(413)	(310)
Investment activities
Purchases of investments		(115,706)	(111,024)
Sales of investments		106,368	86,511
Cash flows on derivative instruments		321	(6,558)
Net cash outflow from investment activities		(9,017)	(31,071)
Dividends paid		(4,064)	(3,273)
Net cash outflow before financing		(12,842)	(34,082)
Financing
Bank loan repaid		(4,345)	(3,905)
Reissue of shares out of treasury		7,847	33,348
Issue of new shares		21,697	-
Repurchase of the Company's own shares into treasury		(2)	(334)
Net cash inflow from financing		25,197	29,109
Net cash inflow/(outflow) in the year		12,355	(4,973)

Notes to the Accounts

1.       Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in February 2018. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2017.

No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial years.

2.       Taxation on ordinary activities

The Company has no corporation tax liability for the year ended 31 December 2018 (2017: nil). Please refer to note 7 on page 47 of the 2018 annual report.

3.       Dividends

Dividends paid and declared	2018	2017
	£'000	£'000
2017 final dividend of 4.80p (2016: 4.50p), paid out of revenue profits1	4,064	3,273

	2018	2017
	£'000	£'000
2018 final dividend proposed of 6.20p (2017: 4.80p), to be paid out of revenue profits2	5,667	3,983

¹The 2017 final dividend amounted to £3,983,000. However the amount actually paid was £4,064,000 as shares were reissued out of treasury, after the accounting date but prior to the dividend Record Date.

²The proposed final dividend amounting to £5,667,000 (2017: £3,983,000) is the amount used for the basis of determining whether the Company has satisfied the distribution requirements of Section 1158 of the Corporation Tax Act 2010. The revenue available for distribution by way of dividend for the year is £6,303,000 (2017: £4,183,000).

4.       Return/(loss) per share

	2018	2017
	£'000	£'000
Revenue return	6,303	4,183
Capital (loss)/return	(32,424)	65,485
Total (loss)/return	(26,121)	69,668
Weighted average number of shares in issue during the year	87,843,677	76,336,740
Revenue return per share	7.18p	5.48p
Capital (loss)/return per share	(36.91)p	85.78p
Total (loss)/return per share	(29.73)p	91.26p

There is no dilution to the above returns per share when the diluted returns are calculated in accordance with the requirements of IAS 33, as is required by FRS 102.

5.       Called-up share capital

	2018	2017
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 5p each:
Opening balance of 82,987,055 (2017: 72,749,141) shares	4,149	3,637
Reissue of 2,217,757 (2017: 10,357,914) shares out of treasury	111	518
Issue of 6,195,347 (2017: nil) new shares	310	-
Repurchase of nil (2017: 120,000) shares into treasury	-	(6)
Subtotal of 91,400,159 (2017: 82,987,055) shares	4,570	4,149
Nil (2017: 2,217,757) shares held in treasury	-	111
Closing balance1	4,570	4,260

¹Represents 91,400,159 (2017: 85,204,812) shares of 5p each, including nil (2017: 2,217,757) held in treasury. During the year, the entire total of 2,217,757 shares held in treasury, nominal value £110,888, were reissued to the market to satisfy demand, at an average price of 353.83p per share, for a total consideration of £7,847,000. In addition 6,195,347 (2017: nil) new shares were issued to the market to satisfy demand, at an average price of 350.21p per share, for a total consideration of £21,697,000.

6.       Net asset value per share

	2018	2017
Total equity shareholders' funds (£'000)	293,783	294,426
Shares in issue at the year end, excluding any shares held in treasury	91,400,159	82,987,055
Net asset value per share	321.43p	354.79p

7.       Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	2018	2017
	£'000	£'000
Total (loss)/return on ordinary activities before finance costs and taxation	(25,317)	70,140
Less capital loss/(return) on ordinary activities before finance costs and taxation	32,107	(65,720)
(Increase)/decrease in prepayments and accrued income	(78)	65
Decrease/(increase) in other debtors	8	(10)
(Decrease)/increase in other creditors	(4,245)	1,746
Special dividend allocated to capital	32	30
Management fee allocated to capital	(1,489)	(1,283)
Performance fee allocated to capital	-	(4,177)
Taiwanese withholding tax recovered	-	183
Overseas withholding tax deducted at source	(366)	(402)
Net cash inflow from operating activities	652	572

8.       Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value include its investment portfolio and derivative financial instruments.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 44 and 1(g) on page 45 of the 2018 Annual Report.

The following table sets out the fair value measurements using the FRS 102 hierarchy at 31 December:

	2018
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments and derivative financial instruments	285,465	-	-	285,465
Participatory notes1	-	5,943	-	5,943
Total	285,465	5,973	-	291,408

	2017
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments and derivative financial instruments	286,995	-	-	286,995
Participatory notes1	-	25,177	-	25,177
Total	286,995	25,177	-	312,172

¹Participatory notes are valued using the quoted bid prices of the underlying securities and have been allocated to Level 2 as, strictly, they are not identical assets.

9.       Status of announcement

2017 Financial Information

The figures and financial information for 2017 are extracted from the published Annual Report and Accounts for the year ended 31 December 2017 and do not constitute the statutory accounts for that year. The 2017 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2018 Financial Information

The figures and financial information for 2018 are extracted from the Annual Report and Accounts for the year ended 31 December 2018 and do not constitute the statutory accounts for the year. The 2018 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2018 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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