Annual Financial Report

RNS Number : 6446J

Schroder Asian Total Retn InvCo PLC

15 April 2020

 

15 April 2020

ANNUAL REPORT AND ACCOUNTS

Schroder Asian Total Return Investment Company plc (the "Company") hereby submits its Annual Report for the year ended 31 December 2019 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 2019 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/6446J_1-2020-4-14.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism .

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

In this my final report to shareholders as Chairman, I am delighted to report another year of satisfactory performance.

During the year ended 31 December 2019 the Company produced a net asset value ("NAV") total return of 15.7% performing better than the total return of 14.6% from the Reference Index, also outperforming the total return of 13.6% from the average peer group NAV. The share price produced a total return of 13.1%. In the period from Schroders' appointment in March 2013 to 31 December 2019, the NAV and share price produced total returns of 89.3% and 92.5%, respectively, both outperforming the Reference Index total return of 60.5%.

As a result of the sharp fall in markets caused by COVID-19, since the year end, and as at 7 April 2020, the NAV per share had decreased to 323.70p and the share price to 327.00p. Further comment on performance and investment policy may be found in the Portfolio Managers' review.

Earnings and dividends

The revenue return from the portfolio for the year increased when compared to the previous year, from 7.18p per share in 2018 to 8.10p per share for the year under review. This is due to increases in dividend rates and purchases of higher yielding stocks.

The board has recommended a final dividend of 6.50p per share for the year ended 31 December 2019, an increase of 4.8% over the final dividend of 6.20p 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, the board is proposing that it will be payable as a final dividend, subject to shareholder approval at the Annual General Meeting. The dividend will be paid on 22 May 2020 to shareholders on the register on 14 April 2020.

Promotion and share issuance

At the AGM on 10 May 2019, shareholders granted the board authority to issue shares, including out of treasury. The share price traded mostly at a premium throughout the year. Accordingly, during the year, the Company issued 6,495,000 shares at an average premium to NAV of 1.39%. A resolution to renew the authorities will be proposed at the AGM, details of which can be found on page 74 of the 2019 annual report.

The Company will continue to implement a discount management policy, which continues to target 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 has also to be considered in any decision to buy back shares. However, the board continues to be of the view that a mixture of good marketing and good performance is the best way to sustain a narrow discount/premium in the long term. Since the year end, we clearly have not been in normal market conditions and intraday volatility has been very high. The board closely monitors the situation and since the year end has purchased 12,500 shares for treasury.

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. Gearing stood at 2.2% at the end of the year, compared to 0.9% net cash 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.

Since the year end, the board has agreed a renewal of the Company's £25 million revolving credit facility for another year. The Company also has access to a £25 million overdraft with HSBC Bank plc.

The new facility will expire on 6 April 2021. As at 7 April 2020, gearing was at 7.6%.

Environmental, Social and Governance issues ("ESG")

The issue of how investment managers deal with ESG issues is increasingly important to shareholders. During the year, the board has spent time understanding more about our Portfolio Managers' integration of ESG analysis into their investment process. The board will continue to review ESG issues on a regular basis during portfolio reviews with the Manager.

Annual General Meeting

The AGM will be held at 10.00 a.m. on Tuesday, 19 May 2020 at the Manager's offices at 1 London Wall Place, London EC2Y 5AU. In light of the rapidly evolving situation and recent government guidance regarding the outbreak of COVID-19, the board has taken the decision to alter the format of the Company's AGM.

The formalities of the meeting, as required by the Companies Act 2006 and the Company's Articles of Association, will still take place.

The safety and security of our shareholders, service providers, officers and guests is of paramount importance to us. While the Government's "Stay at Home Measures" are in force public gatherings of more than two people are prohibited. Shareholders are therefore asked not to attend the AGM in person but instead to vote by proxy. We also ask shareholders to follow the current advice of the Government and Public Health England, noting the current guidance on travel and the limits on numbers at public gatherings.

All shareholders should vote by proxy. Proxy votes can be submitted electronically through the registrar's portal, and also by email. Details are included with the proxy forms and on the Company's webpages.

In the event that shareholders have a question for the board, please contact the Company Secretary by email ( [e-mail] ) or telephone [phone]), and we will arrange for a response to be provided to you. A presentation by the Portfolio Managers will be made available on the Company's webpages.

Outlook

The sudden outbreak of COVID-19 has completely transformed the economic environment. Investors had been expecting another year of improving economic activity, few inflationary pressures, low interest rates and ample credit. Equity markets were selling on rich valuations reflecting this benign environment. They are now facing a range of outcomes where the extent of the disruption to the global economy is unknown. We can only hope for all our sakes that the most pessimistic predictions are wide of the mark. Meanwhile, our Portfolio Managers are not virologists and can only continue to concentrate on the longer term fundamentals of companies and seek opportunities that may present themselves during this period of market turbulence.

The Portfolio Managers have provided an update on their current thinking in their report. The fall in the Company's NAV per share and share price after the balance sheet date has been recorded as a post-balance sheet event in Note 23 to the Accounts on page 73 of the 2019 annual report.

Board succession and refreshment

I retire as your Chairman at the AGM. It has been a great pleasure and privilege to serve as a board member and Chairman and I would like to thank my colleagues past and present and the team at Schroders for their support.

I am pleased to report that following a selection process led by the senior independent director, the board has accepted the nomination committee's recommendation that Sarah MacAulay be appointed as Chairman of the Company following my retirement at the AGM. I am certain that the Company will continue to serve its shareholders well under her leadership.

David Brief

Chairman

14 April 2020

Portfolio Managers' Review

Market Review

After a difficult second half of 2018, Asian equity markets enjoyed a strong start to 2019 following a shift in sentiment as the US Federal Reserve and the Chinese authorities moved to a more accommodative policy stance. After a 15% bounce (in US$ terms) to mid-April, markets then mostly consolidated, moving largely on sentiment surrounding US- China tensions and Trump tweets on trade talks. Asian markets finished the year on a relatively high note on expectations that the US and China were set to sign a phase one trade deal in January 2020.

Chinese stock markets led gains in the region. Consumer discretionary stocks were notably positive thanks in part to Alibaba's secondary listing in Hong Kong and the incremental inclusion of China-A shares by MSCI towards the end of the year. The Taiwanese market also outperformed as the large semiconductor and technology stocks were re-rated amid optimism of an improving medium term demand outlook led by 5G telecom-related expenditure. Hong Kong domestic stocks lagged significantly due to the prolonged period of social unrest initially caused by a proposed and contentious extradition bill, which then spiralled into a protest against many of the underlying tensions regarding Hong Kong's long-term future. The social unrest has had a significant negative impact on local activities in Hong Kong and caused investors to ponder the longer-term implications for Hong Kong and its role as Asia's leading financial and trading centre.

Elsewhere, India underperformed as economic momentum and confidence remained weak despite the temporary boost to market sentiment by the re-election of its ruling party in the general election in Q2. Korea was also a laggard with domestic sectors, autos and cyclicals performing poorly which offset the strong performance from the technology sector. ASEAN markets had a relatively muted performance and trailed the region over the year - economic growth continues to disappoint and the structural outlook for growth even before the outbreak of COVID-19 was increasingly being called into question.

Performance Analysis

In 2019 the NAV total return was 15.7%, which compares with the Reference Index which rose 14.6% in sterling. The outperformance principally came from avoiding or minimising exposure to some of the sectors facing disruption due to technological change. In particular the Company had minimal exposure to banks (outside India where the private sector bank exposure did well), and broadly avoided cyclical areas (those sensitive to the business cycle), all of which performed poorly. The Company also had little exposure to the ASEAN markets which were the worst performing in the region as markets finally started to realise, with domestic growth challenged, the earnings outlook for many companies was relatively muted.

Despite the Company's good gains, your Portfolio Managers feel it has been a somewhat frustrating year. Given that we avoided many of the pitfalls, shouldn't we have done better? The Company had large weightings in large cap tech and internet stocks which did well (Taiwan Semiconductor Manufacturing, Alibaba, Samsung Electronics), but did not have exposure to newer, emerging and less proven internet names like Meituan and Pinduoduo where we were cautious about the ability of the business models to generate cash flow. With markets in a bullish mood and looking for the "next new thing" the newer internet stocks performed strongly. The other parts of the market we "missed" were China-A shares and Taiwan technology stocks (outside Taiwan Semiconductor Manufacturing), where there were some extraordinary moves in 5G plays and to a lesser extent some of the Chinese consumer-related stocks. Valuations in these areas even after the COVID-19 related correction are expensive and we are happy to remain on the side-lines.

The other key negative for performance was the portfolio's exposure to Hong Kong blue chip companies like Jardine, Swire Pacific and Hang Lung. As discussed above, the Hong Kong protests caused a big correction in Hong Kong domestic stocks. The positions in technology, exporters and China consumer upgrading stocks are balanced by holdings in good quality, high-yielding stocks in Hong Kong, Singapore and Australia, and whilst most of these stocks (outside Hong Kong) made positive returns they lagged in strongly rising markets.

In summary, the Company had a good year in both absolute and relative terms, although underperformance in December amid increasingly bullish market sentiment pared overall gains versus the Reference Index. The portfolio has largely been correct on what not to own. However, our more blue chip, established business models started to underperform as markets turned more euphoric and increasingly thematic in Q4. The hedging overlay (to reduce the risk of adverse price movements) was also a small drag on performance in the rising market. This mostly came in Q1 and Q4, which was in contrast to Q3, when the overlays helped performance as we had puts (options to sell assets at an agreed price) on the Hong Kong and China indices. Overall, given the extent of market rises in 2019, we are comfortable how the capital preservation strategies played out, helping to reduce the volatility of returns without a significant cost to performance.

Portfolio Activities

We took some profits during the rally early in the year, trimming some China holdings and reducing banking exposure in Hong Kong given the deteriorating outlook for net interest margins and fee income. In the second half we used a bounce during a hiatus in the protests to reduce exposure to Hong Kong property and domestic consumption stocks, selling out of Chow Sang Sang, Sun Hung Kai Properties and Hong Kong Land. We now view the issues in Hong Kong as partly structural and have reappraised the long-term outlook for the economy.

Over the year we rotated some of the proceeds from sales into the more defensive stocks with attractive dividend yields such as Woodside Petroleum and Tabcorp in Australia. We have also added to select new economy stocks in China which continue to benefit from the upgrading story, both in terms of the secular shift in domestic consumption patterns and product competitiveness over peers. This remains a key focus for the portfolio, rather than picking stocks where the investment case is reliant on a pick-up in headline GDP growth rates and inflation both globally and in Asia. Even before COVID-19 we believed neither was likely to happen.

Investment trends and outlook

Our original report was written in early February and it discussed in some detail the long-term investment views behind the Company's current positions. As we are long-term investors (and not viral experts) we have kept the bulk of the original note below in the section titled "Longer term trends". Given the widening impact of COVID-19, as we sit locked down in our flats in early April, it is clear a more detailed discussion of what the short- and long-term impact of COVID-19 on the Company's Asian holdings might be and how we are adapting the fund's strategies.

The first point to highlight is that any discussion of the impact of COVID-19 is bordering on the realms of speculation. If the virus impact is 3 months and we relatively quickly return to normal then the long-term implications whilst still significant may be less serious. If the virus continues to spread globally and restrictive measures to restrain the virus remain in place till the end of year clearly the implications are much greater.

So what are we doing to protect the Company's investments? Firstly we are trying not to constantly watch the depressing news headlines but instead to take a step back and think. The world will materially change post COVID-19. The depth and speed of the change will depend on how long-lasting the measures to contain the virus are. Regardless of this we now believe that the crisis will mark a significant structural change in economic policy - and for historians will mark the end of the 1980-2020 period of effectively unfettered capitalism in the West. Before our eyes we can see massive government intervention in private sector operations, whether it be compulsory orders for landlords to offer rent-free periods, instructions for banks to cancel dividends, and Government directed bank lending. All of these mark the end of the mostly unfettered operation of Mr Smith's invisible hand that your fund managers have known throughout their combined 50-year investment careers.

It is also possible at a macro policy level that we are moving to a different era in most countries. The fusion of fiscal and monetary policy is about to become the norm and the independence of central banks, quantitative easing policies, the financialisation of assets (where policy drives asset prices not the economy) and the belief that relatively unfettered capitalism is the best approach to economic management is coming to an end in most countries. We are in our view moving to a new era for policy making.

Whilst short-term collapsing economies are likely to be deflationary and we could see government bond yields fall further, we think the policies to offset the severe slowdown caused by COVID-19 are likely to be similar, ultimately, to some form of MMT (Modern Monetary Theory - basically where fiscal expenditure is primarily financed by the printing of money). These policies may ultimately signal the end of deflation and the secular stagnation we have seen since the global financial crisis in 2008.

Other trends are likely to combine with this, including:

-  The end of rising globalisation and the optimisation of supply chains. Globalisation was already starting to reverse (trade as a % of global GDP) as countries increasingly questioned an excessive reliance on China, and the complexity and risks of relying on supply chains in multiple far-flung places. Onshoring will become the increasing norm. This will call into question the development model currently pursued by many emerging economies.

-  Big Government will be the new popular mantra. Again like the trend in Globalisation this was starting anyway. Whether it be Mr Trump in the US with his populist policies or the new conservative government in the UK with their plans for a better society. Millennials and Gen Z are clearly much more open to Big Government and populism versus the Boomers and Gen X generations who remember the woes of the 1970s. Big Government will mean governments increasing control and direct capital investment, research and development expenditure, and governments owning or controlling key critical economic infrastructure (transport, utilities, telecoms, banks).

-  Higher taxes - the rich will be expected to pay more, whether via income tax, sin taxes, capital gains, wealth taxes, property taxes - governments can be innovative, when it comes to taxes at least. Minimum income guarantees may also become entrenched in many countries especially those that have effectively introduced them due to the COVID-19 crisis.

-  Crony capitalism will be out. Buy backs will be penalised as will CEO compensation that is set at extreme levels. The trend where CEO pay goes to ever-higher multiples of average employee earnings will reverse (thank goodness).

-  The Euro is finally stabilised/saved as Germany agrees to fiscal largesse and we move to a Federal Europe - without this the Euro will probably collapse if the current crisis is prolonged. MMT style policies may then engender the need for capital controls/financial repression (the forced holding of government bonds by domestic institutions such as banks and insurance companies) in many countries in order to ensure governments are not beholden to markets.

Clearly the above is speculation but we are fairly convinced by the direction of travel on the above issues albeit not the speed. In reality the world in two years time may look more like the post WW2 period when governments in the West faced with huge debt burdens and exhausted, war weary populations, looked to the policies above to create a fairer society and to inflate away unsustainable debt burdens. It also interestingly set up a policy regime not so different from that which prevails in China today, albeit with no democracy and a lack of the basic liberal freedoms we know in the West.

Moving on - what does this mean for investment? If we are correct on our thesis above it is not a backdrop in which assets generally do well. Clearly cash and bonds are unlikely to do well. Some areas of property and equities should be a better inflation hedge - but key will be to be focus on those areas less prone to government intervention.

Asian equities themselves strike your Portfolio Managers as one of the better places to be as the crisis unfolds and the policy response comes through. Starting government debt levels in Asia are much lower than in the West so the extent of the policy reset above may be less in Asia. Whilst not immune from the structural changes above we are less worried about the impact of the new "Big Government" on our asset class, and of course in China "Big Government" is already the norm.

Going back to the current situation in Asia what investment decisions are we taking within the Company given the unfolding crisis? Key at the moment when analysing investments is cash - in a crisis cash is always king. The second key is the balance sheet and in particular the level of debt, the terms of the debt (covenants etc.) and the maturity of the debt. Your Portfolio Managers have been working with the Schroder analysts, setting out worst-case scenarios, in order to gauge the financial strength of each individual holding in the fund. This has resulted in the sale of a couple of stocks we felt uncomfortable with if, as we now expect, the economic situation continues to deteriorate.

However the good news is most holdings in the Company have net cash on their balance sheets. One of the positive consequences of operating in a region that is volatile and has faced several crisis over the last 20 years (Asian financial crisis, TMT bust, SARS, Global Financial Crisis) is listed corporates in Asia don't trust banks and tend not to rely heavily on debt for their financial needs. They are mostly family owned corporates in Asia run with conservative balance sheets and fund investment and dividends from underlying cash flows. As highlighted by Chart 1 on page 9 of the 2019 annual report debt levels within the listed Asian equity markets are the lowest of any major asset class, and interest cover is good.

This is not to say investing in Asian Equities is without risks. As the second chart on page 10 of the 2019 annual report highlights bond issuance has grown over the last few years, and in particular US$ bond issuance has spiked and often this is mismatched on a currency basis as it has been for bond issues by food, beverage and tobacco companies (FBT), or property companies, that earn their revenues in local Asian currencies. We are cautious in particular on Chinese property stocks and ASEAN companies carrying US$ debt.

Other than reviewing corporate balance sheets with a fine toothcomb what action are we taking within the portfolio? With markets having collapsed in March we are starting to see some good opportunities to pick up favoured stocks. Two of the valuation indicators used in the portfolio are pointing to crisis level valuations. These are shown in chart 3 on page 10 of the 2019 annual report. Both our top down indicator (CVI) and the bottom down indicator (BVI) are now at the "buy" trigger level. This is the level at which we normally remove any capital preservation strategies (futures and options) and potentially look to deploy gearing.

At the time of writing we are gradually rolling off remaining hedges (our put options) and starting to deploy a little gearing as we pick up blue chip companies that we feel are oversold. Given the unfolding crisis we are only doing this gradually. The virus impact will pass and the world will return to some kind of normality but clearly we have no idea on the shape and timing of recovery. Our feeling is we have time on our hands, we expect plenty of volatility to come and lots of rights issues and fund raisings as the worst of the excesses in the high yield corporate bond market in particular unfold.

So what kind of businesses are we looking to buy - and does this crisis change any of our long-held views?

-  We are looking to buy quality, growth businesses - we are not looking to buy value stocks (for the reasons highlighted in the section of our original report below). We think the current crisis may cause the trends around disruption to accelerate. A crisis is likely to mean the death of many old business models and ways of doing business. Necessity will be the mother of invention.

-  We are principally looking at businesses in areas of secular growth where technology change and/or changes in consumer behaviour are driving their business. Companies we have been accumulating on weakness are companies like Cochlear (hearing aids where technology is growing the addressable market), SEA (on-line shopping in ASEAN - where the crisis we think has led to a structural step up in e-commerce activity), Mediatek (chip designer benefiting from the rise of auto electronics, factory automation, 5G handsets, and greater use of sensors), Seek (on-line recruitment in Asia and cloud based HR services).

-  What aren't we buying? We are in general avoiding/cautious on ASEAN and Indian stocks. We discuss in some detail in the original report below our reasons for structural caution on these economies so we won't rehash our arguments here. But it is quite clear to us that if this crisis continues to worsen you want to invest in economies with stronger, effective governments and a good institutional framework. This favours Singapore, Australia, Taiwan, Hong Kong and China. India and the Philippines' very inept handling of the COVID-19 crisis so far demonstrates how a crisis can potentially lead to disaster and social unrest (we hope it doesn't come to this but are worried at time of writing).

-  We also remain very cautious on banks and property. Banks as usual are likely to become the whipping boys in a crisis even if this time round they are not the major cause of the crisis (this is credit markets/ funds, in our view) and have much better balance sheets. They are going to be required to do national service. As appears to increasingly be the case for those evil, capitalist hoarders like landlords - will rent free periods for retailers and food and beverage operators become the norm we wonder?

-  Other trends we think may accelerate because of the current crisis are online learning, home working, less commuting, e-commerce, less materialism, less foreign direct investment (putting paid to some emerging countries' growth models), more onshoring of factories to the country where their products are sold (helping some specialist capital expenditure plays in Asia).

In summary then we think the current crisis will mark a sea change in both popular attitudes and government policy making and will go down in history as potentially the end of the 1980 to 2020 period of relatively unhindered global capitalism. If we are correct that we ultimately move to MMT style policies, big government, financial repression and inflation - equities may be the least bad place to be. Within this Asian equities with much lower corporate gearing and less top down policy risk stack up reasonably well. We expect very significant volatility to come but do see good opportunities emerging in some of our favoured investment areas. We are looking to gradually accumulate our favoured companies into the current volatility and may look to gradually use gearing if valuations become even more compelling.

Longer term investment trends

1. China outlook - slower but better growth?

2. Why we have little exposure to ASEAN and India

3. Value stocks, internet stocks and disruption

4. Where we see the best opportunities and ESG in Asia

1. China outlook - slower but better growth?

Our views on the China economy are, broadly speaking, for more of the same (assuming COVID-19 impact is limited). We do not see the economy accelerating and expect no major stimulus measures. This is based on the assumption that the People's Bank of China (PBOC) keeps the upper hand and continues to work on dealing with the excesses of the past - the huge credit bubble and subsequent bad debts created by the monetary largesse following the Global Financial Crisis (GFC).

As Chart 4 on page 12 of the 2019 annual report highlights, China now appears to have contained the credit bubble and credit is growing at a more sustainable level. To give credit to the authorities, they have also started to deal with bankrupt banks and bad debts, and we are also seeing some defaults, as well as smaller bad banks being merged with larger banks. In our view this process is likely to be gradual and ongoing. While we would, perhaps, prefer a shorter, sharper shock (which might throw up volatility and opportunities), this is clearly not the way of the world in China, or elsewhere, these days. The PBOC clearly wants to deal with the mess gradually without risking panic, deposit flight, and a potential capital account and/or currency crisis. With the better banks likely to remain part of the solution, and interest rates likely to stay very low as the workout continues, we continue to avoid Chinese financials despite their apparent low valuations.

So, what does this mean for the Chinese economy and profitability? Deleveraging and excessive debt levels are disinflationary (i.e. lowering inflation) and this, combined with ageing demographics and current trends in industrial disruption (which we believe are also disinflationary), are likely to mean that growth in China will slow further (Chart 5 on page 12 of the 2019 annual report). We see no reason to expect a pick-up in growth over the medium term and, despite the optimism in the stock market, we do not expect to see a rapid improvement in profitability; instead, we expect the trend in Chart 5 to continue, albeit with a material variation across sectors in China.

Why then is about half the portfolio still in China stocks? As Chart 6 on page 13 of the 2019 annual report highlights, there are some structural trends in China which we think are very supportive of growth; as a result, while old China - the banking, property, heavy industrial, oil, and cyclical sectors - may struggle, new China can still grow. While we are often critical of the Chinese authorities, sometimes command economies can quickly get good outcomes. The education system has rapidly improved over the last 20 years - whether measured by university rankings or the numbers of well-qualified graduates (Chart 6). A smaller but better educated and hungry workforce should mean productivity growth continues and entrepreneurship remains strong in China.

This, when combined with infrastructure that is superefficient and a rapid move to a more efficient, mobile-based economy, provides a further boost to productivity growth in China in both the industrial and service sectors. On our trips to China, we continue to be amazed by how rapidly key parts of the economy are progressing - large Chinese cities look and feel much more like first world cities than a typical city in a middle income Asian country.

The other facet of China we continue to be surprised by is the upgrading of product quality in the industrial and service sectors. China now spends as much as the Eurozone on research and development ("R&D") (Chart 7 on page 13 of the 2019 annual report) and is increasingly a leader in many technologies; the days of China just being the low-cost factory of the world are passing. We believe Chinese companies to be key players/leaders in areas such as telecoms infrastructure, electric vehicles, white goods, electronic products, renewable power, internet gaming, and e-commerce (where Amazon is rapidly losing out in most Asian markets to competitors backed by Alibaba and Tencent). Our focus within the portfolio is, therefore, not to fixate on Chinese growth and politics but to focus on the major structural changes and the companies that are likely to benefit from this.

2. Why we have little exposure to ASEAN and India

Despite the main stock markets in ASEAN - Malaysia, Thailand, Indonesia, and the Philippines - posting relatively poor performance over the last 12 months, the portfolio continues to have effectively zero exposure to ASEAN (except for Singapore). The portfolio also has only 6% exposure to India as we struggle to justify the high valuations that Indian blue chip stocks trade on. Why is this? Charts 8 and 9 on page 14 of the 2019 annual report perhaps explain why.

The more we look at ASEAN, the more we believe the region is stuck in a classic middle-income trap. Measures of corruption and the ease of doing business remain poor across ASEAN and India (see Chart 8). Politics appears to be deteriorating, with vested interests and questionable elements increasingly prevalent in Thailand, Indonesia and the Philippines. Populism in ASEAN is on the rise, as in much of the world. As shown in Chart 9, the rule of commercial law, whether it be the ease of paying taxes or enforcing property rights, is poor in much of ASEAN (especially the Philippines and Indonesia); India however comes right at the bottom of the heap, particularly in terms of the ease of paying taxes.

The consequences are disappointing investment rates, poor productivity growth and sluggish economic growth (Chart 10 on page 15 of the 2019 annual report).

Our conclusion, therefore, is that, without change, the middle-income ASEAN countries and India will continue to experience disappointing growth and will end up in middle income traps similar to those of much of Latin America. The current sluggishness of many Asian economies is in our view primarily due to structural factors, not cyclical issues.

What does this mean for ASEAN stock markets? Given that most markets have been weak, are these issues at least partly reflected in prices? We are not convinced. Markets in ASEAN are heavily weighted towards banks, property and energy stocks and have almost no exposure to new economy or growth stocks such as technology and internet stocks, that is, the disruptors. Given the subdued growth outlook, and the structurally poor positioning of many companies to disruption and technological change, we find ASEAN markets expensive. We are not saying that we will not invest in ASEAN - there are some very well run companies there - but we need stock prices to reflect the more challenging domestic outlook.

India raises more debate. Ignoring the increasingly questionable 'edge' to Mr Modi's policies, we would accept that he has undertaken some sensible policy initiatives and that India is at a different, and earlier, stage of development to ASEAN. The country should, therefore, be able to produce reasonable growth. As Chart 11 (page 16 of the 2019 annual report) highlights, however, we are not seeing this at the moment.

We are not sure if the weakness in the economy is all cyclical (given the problems in the banking system) or partly structural. The consensus, especially among the Indian stockbroking community, is it is primarily cyclical and we will see a strong rebound this year. We are less convinced - playing nationalist cards and controlling the press does not engender business confidence - and it is clear from Charts 8, 9 and 10 that, while the Prime Minister may be doing some things right (increasing infrastructure spending, cutting taxes and reducing red tape), he has not addressed many of the key issues to create a vibrant economy.

The market, however, has made decision-making easier. India is the most expensive market in Asia despite the challenging backdrop and the deterioration in returns on equity. Profits have, in the main, consistently disappointed over the last five years and we see little prospect of a sustained turnaround. Unless we see a significant correction in our favoured bluechip stocks, exposure to India is likely to remain below 10%.

3. Value stocks, internet stocks and disruption

Prior to the COVID-19 pandemic the biggest point of debate among the Asian investors at Schroders was whether 2020 would be the year when value investing finally came back after a decade of underperformance?

We do not expect the trends around disruption to reverse; indeed, we think quite the opposite in many areas of Asia, particularly finance and retail, where we forecast an acceleration in disruptive trends. Hence, we worry much of the value universe is a 'trap'. In particular, we are cautious on traditional automobile companies in Asia. When we visit them, the perception remains that car ownership will follow historic trends (Chart 14 on page 17 of the 2019 annual report) despite evidence to the contrary and dreadful traffic jams. We would not be surprised if we are close to peak car ownership globally. Also, we struggle to see how most of the manufacturers will make money from electric vehicles and we expect margins on traditional internal combustion engine cars to remain under severe pressure. This is a sector we continue to avoid.

Asian banks are more interesting. Yields are attractive and the better banks are trying to adapt and roll out digital banks while addressing legacy cost issues. We have some exposure to banks in India (namely, the best private sector banks) and Singapore (which will benefit from Hong Kong's woes); however, in general, we think banking in Asia will be a tough place. We expect margins to remain under pressure as interest rates stay low and digital banks take market share (as Chart 15 on page 18 of the 2019 annual report shows, consumers are perhaps more open and trusting of digital banks than incumbents think). In much of emerging Asia, we think consumers who are often unbanked will skip directly to digital banks, foregoing traditional banking which often offers a poor legacy service. Therefore, we are not giving up on traditional banks but seemingly cheap valuations cannot be the only criteria to own them - they also need a niche and the ability to adapt. Well-funded digital banks and fintech start-ups may not make much money but they have the potential to be very disruptive.

Does this mean the portfolio is just full of 'sexy' internet stocks? Definitely not, as it is becoming clear that not all internet stocks are winners. As Chart 16 (page 18 of the 2019 annual report) shows, some internet stocks - such as Uber, Trip Advisor and WeWork) have not yet seen the benefits of scale drop to the bottom line.

Perhaps this is not surprising; as Chart 16 says, "did travel agents and taxis ever make great returns?" Could low barrier to- entry industries in the bricks-and-mortar world remain low barrier to entry in the internet universe? This means we want to focus on internet stocks that can get scale and high user stickiness. For the moment, the Company is sticking with its core positions in Tencent Holdings (Chart 17 on page 19 of the 2019 annual report), whose social media and gaming platforms have high, and sticky, market shares and, like terrestrial TV in the old days, being the industry leader, garners all the revenue share; and Alibaba which has done well, and is well positioned given its stakes in key growth assets such as Alibaba Web Services (in cloud computing) and Ant Financial.

4. Where we see the best opportunities and ESG in Asia

Where do we see the best investment opportunities in the region?

Chart 18 on page 19 of the 2019 annual report has a summary of the key holdings. There is a mix of stocks using their comparative advantages to gain market share - stocks such as Resmed, one of the world's leading sleep apnea companies that has used new technologies to improve product effectiveness and grow revenues. Another example is Techtronics, a key holding for many years, which has benefited from rapid improvements in motor, and particularly battery technology, enabling the company to hugely expand its product range and the quality of its power tools. Techtronics' latest battery advances have enabled the company to move into the heavy industrial segment, introducing battery-power saws, jackhammers and pile drivers which can replace dirty, unreliable petrol tools (Chart 19 on page 20 of the 2019 annual report). A visit to the company's main R&D and manufacturing hub in Guangdong is always one of the year's most insightful visits.

Other areas of focus are Asian companies with strong entrenched niches in areas of growth. These includes companies such as Chroma ATE, which has a strong niche in specialised semiconductor inspection and testing equipment. It should benefit from the capital equipment upgrade required for 5G chip fabrication, as well as higher capital expenditure as China tries to develop its semiconductor industry. In China, we like companies such as Wuxi Biologics which has proved it can be a global leader in a very high barrier-to-entry, high-growth industry (Chart 20, page 21 of the 2019 annual report). With Chinese pharmaceutical companies massively increasing R&D spending, we think the biologics industry will grow rapidly.

We expect Wuxi Biologics to be the partner of choice in China and one of the three largest global players in biologics outsourcing.

The portfolio's other focus is the green circles in Chart 18 - stocks that play off domestic demand growth in Asia. This primarily revolves around domestic demand and upgrading in China. As highlighted in the China section earlier, we are confident the Chinese economy can continue to grow at a modest rate. We expect much of this to come from productivity gains, which should fuel consumer wealth growth via salary gains. We see recent structural trends continuing so have kept the long-term holdings in stocks such as Midea (which operates in the white goods industry), Ping An Insurance and AIA (health insurance and savings plans), Galaxy Entertainment (Macau gaming), and TAL Education (tutoring and online education).

Holdings in the growth areas of the Company are balanced by more 'value'-based stocks, and stocks where we anticipate the bulk of returns will come from dividends (assuming COVID-19's impact on corporate cash flows is not prolonged). This includes the two remaining Hong Kong-listed property companies - Hang Lung and Swire Properties. As shown in Chart 21 (page 22 of the 2019 annual report), both are trading close to their all-time low discounts to NAV and offer attractive yields. The stocks are deeply out of favour due to worries about their Hong Kong retail exposure. We think the market is missing the fact that both have assets in China that are doing very well; in Hang Lung's case, its properties there are now over half of NAV. Moreover, for Swire Properties, the key Hong Kong office portfolio is proving resilient, particularly the new non-central business district development in Island East.

Governance, in particular, has always been at the heart of our research process: in Asia, we are nearly always minority investors, either to governments or founding families, and the protection of minority investors' rights in most countries is poor.

Environmental factors, and the sustainability of business models have also long been considered in our investment thinking and are now getting increasing prominence, particularly as we expect political and policy pressure on emissions standards to ratchet up in Asia. The portfolio has never had much exposure to carbon-intensive industries and given rising risks of an even greater backlash, we are unlikely to invest in them. However, the Company is not an ESG fund so we do not have specific exclusions to sectors such as oil & gas and mining. Chart 22 (page 23 of the 2019 annual report) provides detail on exposure to sensitive sectors and how we approach investment in these areas.

Robin Parbrook, Lee King Fuei

For Schroder Investment Management Limited

14 April 2020

Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

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 regular, robust review. The last review took place in March 2020.

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.

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.

Emerging risks and uncertainties

During the year, the board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were political risk and climate change risk. The board has determined they are not currently material for the Company. The board receives updates from the Manager, Company Secretary and other service providers on potential other risks that could affect the Company.

Political risk includes Brexit, trade wars and regional tensions. The board continues to monitor developments for the UK's departure from the European Union and to assess the potential consequences for the Company's future activities. However, currency rates and borrowings drawn down by the Company may be affected by geopolitical developments. The board is also mindful that changes to public policy in the UK, or in the Asia Pacific region, could impact the Company in the future.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The board notes the Manager has integrated ESG considerations, including climate change, into the investment process. The board will continue to monitor this.

The board also reviewed the risks arising from the COVID-19 pandemic. It will continue to affect the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has triggered a sharp fall in global stock markets and created uncertainty around future dividend income. The fall in the Company's NAV per share and share price after the balance sheet date has been highlighted as a post-balance sheet event in Note 23 to the Accounts on page 73 of the 2019 annual report. The board notes the Portfolio Managers' investment process is unaffected by the COVID-19 pandemic and they continue to focus on long-term company fundamentals and detailed analysis of current and future investments. COVID-19 also affected the Company's service providers, who have implemented business continuity plans and are working almost entirely remotely. The board continues to receive regular reporting on operations from the Company's major service providers and does not anticipate a fall in the level of service.

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.	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, 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.
Cyber
The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information or disrupt operations.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack.

Risk assessment and internal controls review by the board

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. The board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company is set out in note 21 to the accounts on pages 68 to 73 of the 2019 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 2019 and the potential impact of the principal risks and uncertainties it faces for the review period. They have also reviewed the impact of the COVID-19 pandemic on the Company as further detailed in the Chairman's Statement, Portfolio Managers' Review and Emerging Risks sections of this report. The directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively, following the implementation of their business continuity plans as required by COVID-19.

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 31 and 33 of the 2019 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.

Going concern

Having assessed the principal risks, the impact of the COVID-19 pandemic 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 35 and 36 of the 2019 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	2019 Capital	Total	Revenue	2018 Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	47,073	47,073	-	(29,709)	(29,709)
Net losses on derivative contracts	-	(4,390)	(4,390)	-	(72)	(72)
Net foreign currency gains/(losses)	-	319	319	-	(869)	(869)
Income from investments	9,417	666	10,083	7,883	32	7,915
Other interest receivable and similar income	32	-	32	33	-	33
Gross return/(loss)	9,449	43,668	53,117	7,916	(30,618)	(22,702)
Investment management fee	(559)	(1,677)	(2,236)	(496)	(1,489)	(1,985)
Performance fee	-	(2,838)	(2,838)	-	-	-
Administrative expenses	(646)	-	(646)	(630)	-	(630)
Net return/(loss) before finance costs and taxation	8,244	39,153	47,397	6,790	(32,107)	(25,317)
Finance costs	(113)	(339)	(452)	(106)	(317)	(423)
Net return/(loss) on ordinary activities before taxation	8,131	38,814	46,945	6,684	(32,424)	(25,740)
Taxation on ordinary activities	(478)	-	(478)	(381)	-	(381)
Net return/(loss) on ordinary activities after taxation	7,653	38,814	46,467	6,303	(32,424)	(26,121)
Return/(loss) per share	8.10p	41.10p	49.20p	7.18p	(36.91)p	(29.73)p

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 2019

	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 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
Issue of shares	325	23,054	-	-	-	-	23,379
Net return on ordinary activities	-	-	-	-	38,814	7,653	46,467
Dividend paid in the year	-	-	-	-	-	(5,758)	(5,758)
At 31 December 2019	4,895	60,135	11,646	29,182	234,828	17,185	357,871

Statement of Financial Position

at 31 December 2019

		2019	2018
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		368,537	291,427
Current assets
Debtors		454	323
Cash at bank and in hand		4,202	14,709
Derivative financial instruments held at fair value through profit or loss		477	596
		5,133	15,628
Current liabilities
Creditors: amounts falling due within one year		(15,799)	(12,657)
Derivative financial instruments held at fair value through profit or loss		-	(615)
		(15,799)	(13,272)
Net current (liabilities)/assets		(10,666)	2,356
Total assets less current liabilities		357,871	293,783
Net assets		357,871	293,783
Capital and reserves
Called-up share capital		4,895	4,570
Share premium		60,135	37,081
Capital redemption reserve		11,646	11,646
Special reserve		29,182	29,182
Capital reserves		234,828	196,014
Revenue reserve		17,185	15,290
Total equity shareholders' funds		357,871	293,783
Net asset value per share		365.57p	321.43p

Cash Flow Statement

for the year ended 31 December 2019

	2019	2018
	£'000	£'000
Net cash inflow from operating activities	6,697	652
Investing activities
Purchases of investments	(127,719)	(115,706)
Sales of investments	97,782	106,368
Net cash flows on derivative instruments	(4,886)	321
Net cash outflow from investing activities	(34,823)	(9,017)
Net cash outflow before financing	(28,126)	(8,365)
Financing activities
Dividends paid	(5,758)	(4,064)
Interest paid	(461)	(413)
Net bank loans drawn down/(repaid)	695	(4,345)
Issue of new shares	23,379	21,697
Reissue of shares out of treasury	-	7,847
Repurchase of the Company's own shares into treasury	-	(2)
Net cash inflow from financing activities	17,855	20,720
Net cash (outflow)/inflow in the year	(10,271)	12,355

Cash at bank and in hand at the beginning of the year	14,709	2,315
Net cash (outflow)/inflow in the year	(10,271)	12,355
Exchange movements	(236)	39
Cash at bank and in hand at the end of the year	4,202	14,709

Dividends received during the year amounted to £9,913,000 (2018: £7,842,000) and deposit interest receipts amounted to £30,000 (2018: £29,000).

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 October 2019. 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 directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts. In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's low level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; and that the Company's assets comprise cash and readily realisable securities quoted in active markets. In forming this opinion the directors have also considered any potential impact of the COVID-19 pandemic on the viability of the Company. Further details of directors' considerations regarding this are given in the Chairman's Statement, Portfolio Managers' Review, Going Concern Statement, Viability Statement and under the Emerging Risks heading on page 31 of the 2019 annual report.

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 2018.

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

2.  Income

	2019	2018
	£'000	£'000
Income from investments:
Overseas dividends	9,292	7,863
Overseas special dividends	122	20
Stock dividend	3	-
	9,417	7,883
Other interest receivable and similar income
Deposit interest	32	33
	9,449	7,916
Capital:
Special dividend allocated to capital	666	32

3.  Investment management fee

		2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment management fee	559	1,677	2,236	496	1,489	1,985
Performance fee	-	2,838	2,838	-	-	-
	559	4,515	5,074	496	1,489	1,985

The basis for calculating the investment management and performance fees are set out in the Directors' Report on page 38 of the 2019 annual report and details of all amounts payable to the Manager are given in note 18 on page 67 of the 2019 annual report.

4.  Dividends

Dividends paid and declared	2019	2018
	£'000	£'000
2018 final dividend of 6.2p (2017: 4.8p), paid out of revenue profits 1	5,758	4,064

	2019	2018
	£'000	£'000
2019 final dividend proposed of 6.5p (2018: 6.2p), to be paid out of revenue profits 2	6,363	5,667

¹ The 2018 final dividend amounted to £5,667,000. However the amount actually paid was £5,758,000 as new shares were issued, after the accounting date but prior to the dividend Record Date.

² The proposed final dividend amounting to £6,363,000 (2018: £5,667,000) 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 £7,653,000 (2018: £6,303,000).

5.  Return/(loss) per share

	2019	2018
	£'000	£'000
Revenue return	7,653	6,303
Capital return/(loss)	38,814	(32,424)
Total return/(loss)	46,467	(26,121)
Weighted average number of shares in issue during the year	94,433,447	87,843,677
Revenue return per share	8.10p	7.18p
Capital return/(loss) per share	41.10p	(36.91)p
Total return/(loss) per share	49.20p	(29.73)p

6.  Called-up share capital

	2019	2018
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 5p each:
Opening balance of 91,400,159 (2018: 82,987,055) shares	4,570	4,149
Issue of 6,495,000 (2018: 6,195,347) new shares	325	310
Reissue of nil (2018: 2,217,757) shares out of treasury	-	111
Total of 97,895,159 (2018: 91,400,159) shares	4,895	4,570

During the year, 6,495,000 new shares, nominal value £324,750, were issued to the market at a premium to NAV per share to satisfy demand. These shares were issued at an average price of 359.95p per share and the total consideration received amounted to £23,379,000.

7.  Net asset value per share

	2019	2018
Total equity shareholders' funds (£'000)	357,871	293,783
Shares in issue at the year end	97,895,159	91,400,159
Net asset value per share	365.57p	321.43p

8.  Transactions with the Manager

Under the terms of the Alternative Investment Fund Manager Agreement, the Manager is entitled to receive management, secretarial and performance fees. Details of the basis of these calculations are given in the Directors' Report on page 38 of the 2019 annual report. If the Company invests in funds managed or advised by the Manager, any fees earned by the Manager are rebated to the Company. The management fee payable in respect of the year ended 31 December 2019 amounted to £2,236,000 (2018: £1,985,000) of which £586,000 (2018: £467,000) was outstanding at the year end.

The secretarial fee payable for the year amounted to £76,000 (2018: £75,000) of which £19,000 (2018: £19,000) was outstanding at the year end. A performance fee amounting to £2,838,000 (2018: nil) is payable in respect of the year, and the whole of this amount was outstanding at the year end.

No director of the Company served as a director of any company within the Schroder Group at any time during the year.

9. Post balance sheet event

The occurrence of the coronavirus pandemic after the balance sheet date has triggered a sharp fall in global stock markets. At 7 April 2020, the latest practicable date, the Company's published NAV per share had fallen to 323.70p, and the share price to 327.00p. Further details relating to the impact of COVID-19 on the Company are given in the Chairman's Statement, Portfolio Managers' Review, Going Concern Statement, Viability Statement and under the Emerging Risks heading on page 31 of the 2019 annual report.

10. Status of announcement

2018 Financial Information

The figures and financial information for 2018 are extracted from the published annual report and accounts for the year ended 31 December 2018 and do not constitute the statutory accounts for that year. The 2018 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.

2019 Financial Information

The figures and financial information for 2019 are extracted from the annual report and accounts for the year ended 31 December 2019 and do not constitute the statutory accounts for the year. The 2019 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 2019 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

 

 

FR FLFLDSLISLII