Annual Financial Report

RNS Number : 8992W

Schroder Income Growth Fund PLC

20 November 2017

 

20 November 2017

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its Annual Report for the year ended 31 August 2017 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 August 2017 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/incomegrowth.  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/8992W_1-2017-11-17.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:

Andrea Davidson

Schroder Investment Management Limited                      

Tel: [phone]

Chairman's Statement

Revenue, dividends and performance

Your Company's record of declaring a rising dividend each year since launch remained unbroken in the year ended 31 August 2017, with a total distribution of 11.20 pence per share, representing a rise of 5.7% over the previous year. This increase also compares favourably to the rise of 2.9% in the Consumer Price Index ("CPI") over the same period - and has helped the Company to continue meeting one of its primary objectives: to provide real growth of income, being growth of income in excess of the rate of inflation.

Over the same period the revenue return per share increased by 9.8%, reflecting a strong rise in the dividends from your Company's underlying holdings - in some part due to the benefit of sterling weakness on the overseas earnings of portfolio companies. This, in turn, enabled 2.06 pence per share to be added to the revenue reserve, which has increased to 9.76 pence per share, after accounting for the fourth interim dividend, providing a valuable buffer for the Company to draw upon in less favourable times.

In addition, the Company's net asset value ("NAV") progressed by 14.3% in total return terms - and in so doing matched the rise in the FTSE All-Share Index.

Detailed commentary on the portfolio and its performance during the year may be found in the Manager's Review on pages 5 to 7 of the 2017 Annual Report.

Share price discount and buy-backs

Your Company's share price increased by 18.8% in total return terms during the year, as the share price discount to NAV continued to narrow, falling from 10.2% to 6.9% (while the average discount over the year was 8.4%). Although this is still higher than in the recent past, it is encouraging to see an improving trend arising from increased investor interest in the Company's shares.

The Board continues to closely monitor the level of the discount relative to its peer group average and to consider whether it would be appropriate to buy back shares, while taking into account prevailing market conditions. In the event, no shares were bought back during the year. However, the Board continues to believe that retaining the ability to do so is a valuable potential tool in reducing the volatility of the share price relative to NAV and will therefore be seeking to renew the existing authority through the resolution set out in the Notice of Annual General Meeting.

Gearing

During the year, the Company's three year term loan of £20 million with Scotiabank Europe Plc expired and was not replaced. Instead, the existing £10 million revolving credit facility with the lender was increased to £20 million, increasing the flexibility of borrowings.

Gearing stood at 8.4% at the beginning of the year and had decreased to 5.8% as at 31 August 2017.

Research costs

Schroders has announced that, from 1 January 2018, it will no longer charge external research costs to its clients, including your Company, and will instead bear this cost. Your Board welcomes this development in managing the costs of the Company to provide value for shareholders.

Board composition and succession planning

In my half year statement I reported that the Board was recruiting a further Director as part of its planned refreshment. The Nomination Committee has undertaken an external search and your Board is now pleased to propose the election of Mr Ewen Cameron Watt as a non-executive Director at the forthcoming Annual General Meeting.

Mr Cameron Watt's entire career has been in the investment industry, during which time he held a number of senior roles, most notably as a consultant and senior adviser at Blackrock, Senior Director at the Blackrock Investment Institute - and from 2011 to 2016 their Chief Investment Strategist. Mr Cameron Watt is currently an independent adviser to a number of endowments and pension funds. He was an independent adviser to the Bank of England Pension Fund from 2000 to 2006. He began his career as an analyst at EB Savory Miln in 1978.

Mr Cameron Watt brings significant experience and expertise to the Board and we recommend that shareholders vote in favour of his election.

At the same time, Mr Keith Niven, a long-standing Director, will retire at the Annual General Meeting and will not seek re-election. I would like to take this opportunity, on behalf of the Board, to thank Mr Niven for his invaluable contribution to the deliberations of the Directors during his tenure.

Your Board continues to review its composition, balance and diversity, as well as its progressive refreshment, in its ongoing succession planning.

Annual General Meeting

The Company's Annual General Meeting will be held on Monday 18 December 2017 at 12 noon. As in previous years, the meeting will include a presentation by the Manager on the Company's investment strategy and market prospects, and shareholders are encouraged to attend.

Outlook

While politics is not always a dominant factor in financial markets, its influence is currently particularly material - arising primarily from uncertainties over the Brexit negotiations, a domestic political scene made less clear by the June 2017 general election, and a global backdrop that includes a more protectionist US and a threatening North Korea. On top of that, monetary policy in the UK, US and Europe all seem to be on the cusp of a change from the loose conditions of the last nine years. 

One reassuring feature amidst all this is that the Company's foundational goal - growing its dividend faster than inflation - is still possible. While this year's increase in investment income was boosted by the Brexit-triggered fall in sterling and while there is still a contribution from special dividends that may not be repeated, the portfolio holdings continue to benefit from a reassuringly healthy cash-flow.

While I can claim no special insight into any of the geopolitical and economic challenges that currently face the world, I believe that any share - like your Company's - that yields nearly 4% p.a. and that can grow its dividend faster than inflation, should merit a place in many investors' portfolios. Our Manager has the challenge of making sure that this growth continues.

Ian Barby
Chairman

17 November 2017

Manager's Review

The Company's net asset value total return in the 12 months to 31 August 2017 was 14.3%, ahead of the AIC UK Equity Income peer group average of 13.0% and in line with the FTSE All-Share Index total return of 14.3%. The share price total return was 18.8%.

Investment income grew 8.3% during the year. Special dividends were again a significant feature, but this was below last year's record level. These special dividends came from a range of companies that have seen strong returns (Taylor Wimpey, Halfords, ITV, John Laing and Lloyds Bank).

Foreign exchange gains from sterling's depreciation after the Brexit referendum for companies that declare dividends in dollars or euros (e.g. AstraZeneca, HSBC, RELX, Royal Dutch Shell) were more than sufficient to offset the cut to Pearson's dividend and the reduction from the components of ICAP, which demerged into NEX and TP ICAP. Additionally, several domestic and mid cap companies also increased their dividend substantially (e.g. ITV, John Laing, Micro Focus, Bellway).

Market background

The start of the period was dominated by the US presidential election and the surprise victory of Donald Trump. His pro-growth agenda helped to shift the global policy discussion away from a sole reliance on monetary stimulus. However, the failure to pass revisions to healthcare legislation planted doubts about the administration's ability to implement its policies. US economic data remained largely encouraging and inflation remained muted. At the end of the period, the US Federal Reserve signalled its intention to continue normalising monetary policy.

In Europe, the economic recovery gathered strength. Inflation continued to fall below the European Central Bank's (ECB) target but worries over deflation receded. Political concerns were allayed with centrist candidates winning the Dutch and French elections.

It was a slightly different story in the UK, with below trend GDP growth persisting as the household sector struggled to cope with higher inflation, which was largely a result of sterling's weakness following the Brexit vote. The Bank of England kept monetary policy unchanged, taking the view that higher inflation would pass once the effect of weaker sterling dropped out of annual comparisons. Uncertainty over Brexit continued. Prime Minister Theresa May called a general election in June, at which the Conservative Party lost its parliamentary majority.

Portfolio performance

The portfolio performed in line with the FTSE All-Share Index, with positive stock selection being offset by negative sector allocation, whilst the use of gearing aided returns.

Performance attribution

	Impact
	(%)
FTSE All-Share Index	+14.3
Stock selection	+1.2
Sector allocation	-1.4
Costs	-1.0
Gearing	+1.2
NAV total return	+14.3%

Source: Schroders, 12 months to 31 August 2017.

Stock selection within Financials (notably Nordea Bank and life insurance companies Legal & General and Aviva) was the key positive. Shares in Nordea Bank benefited from the Trump-inspired optimism earlier in the period. Legal & General and Aviva were two of the main detractors last financial year and we have been vindicated in maintaining our conviction in them. We had highlighted their attractive and sustainable yields and potential for future dividend growth.

The portfolio also benefited from its exposure and stock selection within Consumer Goods, in particular Bellway and Taylor Wimpey, Burberry and Unilever. Housebuilders Taylor Wimpey and Bellway detracted from returns last year after the Brexit vote, on fears over a potential collapse in consumer confidence hitting housing. We believed that supply/demand dynamics remained favourable, government support for the sector was likely to be maintained in the form of Help to Buy and low mortgage rates, so valuations and dividend yield remained attractive.

We added luxury goods company Burberry last year, having highlighted its potential for faster-growing dividends, with the shares having de-rated to attractive levels as the market focused on near-term trading issues and a slowdown in key emerging markets. The shares were boosted after the investment vehicle of a Belgian financier disclosed a stake.

On the negative side, ITV suffered amid concerns over advertising revenues and the challenge to TV viewing posed by the likes of Netflix and Amazon. Education and publishing company Pearson warned that it did not expect to meet its profit goal for 2018 and has cut its dividend. We continue to hold the position whilst our patience has been tested as the US higher education courseware business transitions towards a digital proposition. The company has the potential to cut costs further, make additional disposals of non-core assets, and return capital to shareholders.

Resource sectors performed strongly following the commodity upturn. Despite holding Rio Tinto, the single largest contributor to relative performance, the portfolio suffered from not owning Glencore, and being underweight the mining sector.

Our position in BT has also disappointed, with the share price falling on revelations of fraud in their Italian division, as well as a tougher regulatory environment.

Top and bottom stock performers

			Relative
	Portfolio	Active	perform-
	weight	weight	ance	Impact
Security	(%)	(%)	(%)	(%)
Rio Tinto	3.8	2.2	57.1	+1.0
Shire	0.0	-1.8	-33.4	+0.7
Nordea Bank	2.0	2.0	25.6	+0.5
Bellway	1.8	1.6	29.3	+0.4
Burberry	1.9	1.6	26.9	+0.4

			Relative
	Portfolio	Active	perform-
	weight	weight	ance	Impact
Security	(%)	(%)	(%)	(%)
Glencore	0.0	-1.4	94.2	-0.9
BT	3.0	1.7	-34.9	-0.8
ITV	2.3	2.0	-30.4	-0.6
Pearson	1.4	1.1	-40.0	-0.6
Greencore	1.1	1.0	-41.7	-0.4

Source: Schroders, 31 August 2016 to 31 August 2017. Portfolio weight is the average over the period. Active weight is the difference between the average weight of the stock in the FTSE All-Share Index and in the portfolio. The impact of ICAP and NEX Group pre and post-demerger has been aggregated.

Portfolio activity

Early in the period we reduced a number of defensive positions that had performed well. These included tobacco company Imperial Brands and software firm Sage. We also exited positions where we believe the investment case has played out, such as insurance company Direct Line, travel leisure company Carnival and Italian oil and gas company ENI. Direct Line shares have re-rated to levels in line with peers whilst we are likely to have seen the best of the distribution of reserve releases in the form of dividends and special dividends. Carnival had performed well as the management had executed better yield management, whilst benefiting from buoyant US consumer confidence and low oil prices. We have concerns regarding future growth/margin pressures from a reversal in oil prices and future industry capacity growth. ENI shares had re-rated with the recovery in the oil price to a valuation which left us preferring Royal Dutch Shell and Galp.

Proceeds of these sales were used to add to our holdings in banks Lloyds, HSBC and Nordea given attractive valuations and the steeper yield curve, as well initiating holdings in industrials and defence stocks IMI and BAE Systems. BAE was trading at a significant discount to US defence peers. Additionally, the outlook for defence spending is improving in the US and UK. Purchases were made prior to the US election, whilst a Trump victory has further improved the outlook for defence spending. We established a holding in engineering business IMI as a combination of self-help measures together with a stabilisation in its markets is positive for profits. The shares have valuation appeal whilst the company has a strong balance sheet, attractive dividend yield and a currency tailwind. Lastly, we initiated a new issue holding in beverages firm Diageo. The company has been losing share in the US vodka market but we believe a revitalised management is beginning to tackle this issue. Cost cutting to address the margin differential versus peers and a reinvigorated portfolio of brands creates the potential for more consistent growth and we will look for further opportunities to build this holding.

Outlook

The global economy has continued along its path of sustained growth and muted inflation. The decision by the Federal Reserve and the ECB to slow their stimulus programmes signals another step to normality after the global financial crisis. Even so, global liquidity is still expected to rise, largely supported by the Bank of Japan, and this continues to provide support to equities. However, given the optimism within markets, and as the pace of liquidity expansion slows, we continue to be selective in looking for new opportunities.

The UK continues to fare better than the majority of forecasters predicted after the referendum. This, in combination with the recent CPI inflation rate of 2.9%, has led the Bank of England to increase interest rates in November. This has caused bond yields to rise, which is generally positive for financials, and should benefit, among others, our holding in Lloyds.

Despite this economic backdrop, low unemployment has still not translated into wage growth. Our conversations with companies confirm that they remain concerned about the UK consumer. This and the impact of higher input costs keep us cautious on this area of the market.

This caution has been justified by examples of UK domestic shares performing poorly after disappointing profit announcements. Pub and restaurant operators, for example, have generally reported weaker trading than expected, while Dixons Carphone, Provident Financial and Carillion (none of which are in the portfolio) are further examples of domestic shares punished for disappointing profits. These were all companies that the market considered to be on cheap valuations, reminding us that we should continue to be very selective with new ideas even when valuations appear attractive. We are particularly mindful of companies with low gross margins and relatively little pricing power, making it difficult to offset cost pressure. We also continue to keep a firm eye on balance sheet risk.

Opportunities will present themselves, as UK domestic stocks remain relatively unloved. JD Wetherspoon and Next are examples of companies whose shares have performed well as their trading statements were better than investors had feared. Profits of UK domestic companies have improved whilst share prices in aggregate continue to underperform.

Dividend outlook

The Company's total income was up 8.3% year-on-year, while dividend income, excluding special dividends, grew at a faster pace of 12.6%; reflecting the full impact of sterling's post referendum devaluation compared to last year's partial impact. The contribution to total income from special dividends fell from last year's record high of 8.6% to a still significant 4.9% - a level more in line with the prior years. The Company's income will remain sensitive to exchange rate movements in either direction - boosted by further sterling weakness or reduced by sterling strength against the US dollar and to a lessor extent the Euro. On a more cautionary note, while dividend pay-out ratios remain high, the economic impact of Brexit is not likely to be fully felt until 2018 or later, and so the longer-term outlook for income growth is somewhat more uncertain. Lastly, given the Company's aim to provide real growth of income it is important to consider UK inflation. The CPI rose by 2.9% in the year to end August 2017 and we expect inflation to moderate as the effects of sterling's Brexit vote devaluation and commodity price rises will have worked their way through the system. The Bank of England may seek to increase interest rates over the next year by 0.25 - 0.50% but overall we expect it to retain loose monetary policy to help support the UK economy through its exit from the EU.

Investment policy

We remain disciplined investors using a long-term fundamental approach and the team's long investment experience. We are acutely conscious of the need to balance the risks relative to the potential reward from opportunities that can be thrown up in such unpredictable markets. Our investment process focuses on building a diversified portfolio within a risk-controlled framework, aiming to deliver attractive levels of income growth in real terms.

Five largest overweight stocks

	Portfolio	Index1	Difference
Security	(%)	(%)	(%)
Aviva	3.8	0.9	+2.9
Rio Tinto	4.6	1.9	+2.7
Micro Focus	2.8	0.2	+2.6
Lloyds Banking	4.4	1.9	+2.5
Nordea Bank	2.3	0.0	+2.3

Source: Schroders, as at 31 August 2017.

1 FTSE All-Share Index.

We continue to actively monitor the holdings and the investment universe to identify mispriced opportunities. We are working closely with our in-house analysts who provide proprietary research to help to identify attractive investment candidates and to assess the validity of the investment case for current holdings. We continue to prioritise balance sheet strength and sustainable dividend yields, and have kept faith in stocks with short-term issues provided we have conviction in the long-term investment case.

Schroder Investment Management Limited

17 November 2017

The securities shown above are for illustrative purposes only and are not to be considered recommendations 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 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 November 2017.

Although the Board believes that it has a robust framework of internal control 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, except in respect of cyber risk relating to the Company's service providers, which has now been extended beyond the custodian. Cyber risk relating to all of the Company's key service providers is considered an increased threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the Board is seeking enhanced 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 these risks and uncertainties, are set out 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.	Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives monitored. Share price relative to NAV per share monitored and use of buy back authorities considered on a regular basis. Marketing and distribution activity actively reviewed.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	Ongoing competitiveness of all service provider fees subject to periodic benchmarking against 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 the agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager.
Market
The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.	Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager.
Custody
Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.	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. Annual report from the Depositary on its activities, including matters arising from custody operations.
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 25% of shareholders' funds.
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.	Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, 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 appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting by key service providers and monitoring of the quality of services provided. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements.

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 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 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 19 on pages 41 to 45 of the 2017 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 August 2017 and the potential impact of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen as the Board believes that this 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 12 and 13 of the 2017 Annual Report and in particular the impact of a significant fall in the UK equity market 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 share price discount, the Manager's compliance with the investment objective, asset allocation, the portfolio risk profile, 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 to 31 August 2022.

In reaching this decision, the Board has taken into account the Company's next continuation vote, on the assumption that it will be passed in 2020.

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 Financial Reporting Council ("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, Strategic Report, the Directors' Report, the Corporate Governance Statement, the Remuneration 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 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 judgments and accounting estimates that are reasonable and prudent;

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

-        prepare the financial statements on 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 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 Directors are responsible for the maintenance and integrity of the Company's webpages. 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 15 and 16 of the 2017 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 August 2017

			2017			2016
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss		-	19,489	19,489	-	7,866	7,866
Net foreign currency (losses)/gains		-	(9)	(9)	-	91	91
Income from investments		10,553	-	10,553	9,746	175	9,921
Other interest receivable and similar income		-	-	-	6	-	6
Gross return		10,553	19,480	30,033	9,752	8,132	17,884
Investment management fee		(834)	(834)	(1,668)	(757)	(757)	(1,514)
Administrative expenses		(302)	-	(302)	(343)	-	(343)
Net return before finance costs and taxation		9,417	18,646	28,063	8,652	7,375	16,027
Finance costs		(243)	(243)	(486)	(273)	(273)	(546)
Net return on ordinary activities before taxation		9,174	18,403	27,577	8,379	7,102	15,481
Taxation on ordinary activities		(67)	-	(67)	(80)	-	(80)
Net return on ordinary activities after taxation		9,107	18,403	27,510	8,299	7,102	15,401
Return per share		13.26p	26.79p	40.05p	12.08p	10.34p	22.42p

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.

The notes on pages 34 to 45 of the 2017 Annual Report form an integral part of these accounts.

Statement of Changes in Equity

for the year ended 31 August 2017

	Called-up share capital £'000	Share premium £'000	Capital redemption Reserve £'000	Warrant exercise reserve £'000	Share purchase reserve £'000	Capital reserves £'000	Revenue reserve £'000	Total £'000
At 31 August 2015	6,869	7,404	2,011	1,596	34,936	128,122	7,227	188,165
Net return on ordinary activities	-	-	-	-	-	7,102	8,299	15,401
Dividends paid in the year	-	-	-	-	-	-	(7,076)	(7,076)
At 31 August 2016	6,869	7,404	2,011	1,596	34,936	135,224	8,450	196,490
Net return on ordinary activities	-	-	-	-	-	18,403	9,107	27,510
Dividends paid in the year	-	-	-	-	-	-	(7,282)	(7,282)
At 31 August 2017	6,869	7,404	2,011	1,596	34,936	153,627	10,275	216,718

The notes on pages 34 to 45 of the 2017 Annual Report form an integral part of these accounts.

Statement of Financial Position

at 31 August 2017

		2017	2016
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		228,315	211,730
Current assets
Debtors		1,982	1,862
Cash at bank and in hand		7,349	3,557
		9,331	5,419
Current liabilities
Creditors: amounts falling due within one year		(20,928)	(20,659)
Net current liabilities		(11,597)	(15,240)
Total assets less current liabilities		216,718	196,490
Net assets		216,718	196,490
Capital and reserves
Called-up share capital		6,869	6,869
Share premium		7,404	7,404
Capital redemption reserve		2,011	2,011
Warrant exercise reserve		1,596	1,596
Share purchase reserve		34,936	34,936
Capital reserves		153,627	135,224
Revenue reserve		10,275	8,450
Total equity shareholders' funds		216,718	196,490
Net asset value per share		315.51p	286.06p

The notes on pages 34 to 45 of the 2017 Annual Report form an integral part of these accounts.

Notes to the Accounts

1.       Accounting policies

(a)     Basis of accounting

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 January 2017. 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 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 August 2016.

2.       Taxation on ordinary activities

	2017	2016
	£'000	£'000
(a) Analysis of charge in the year:
Irrecoverable overseas tax	67	80
Tax charge for the year	67	80

(b) Factors affecting tax charge for the year

The tax assessed for the year is lower (2016: lower) than the Company's applicable rate of corporation tax for the year of 19.58% (2016: 20.00%).

The factors affecting the current tax charge for the year are as follows:

		2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return on ordinary activities before taxation	9,174	18,403	27,577	8,379	7,102	15,481
Net return on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.58% (2016: 20.00%)	1,796	3,603	5,399	1,676	1,420	3,096
Effects of:
Capital return on investments	-	(3,814)	(3,814)	-	(1,591)	(1,591)
Income not chargeable to corporation tax	(2,050)	-	(2,050)	(1,942)	(35)	(1,977)
Unrelieved expenses	254	211	465	266	206	472
Irrecoverable overseas tax	67	-	67	80	-	80
Tax charge for the year	67	-	67	80	-	80

(c)      Deferred taxation

The Company has an unrecognised deferred tax asset of £4,432,000 (2016: £4,266,000) based on a prospective corporation tax rate of 17% (2016: 18%). The reduction in the standard rate of corporation tax was substantively enacted in September 2016 and is effective from 1 April 2020.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company's intention to continue to meet the conditions required to retain its status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

3.       Dividends

(a) Dividends paid and declared

	2017	2016
	£'000	£'000
2016 fourth interim dividend of 4.6p (2016: 4.3p)	3,160	2,954
First interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Second interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Third interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Total dividends paid in the year	7,282	7,076
	2017	2016
	£'000	£'000
Fourth interim dividend declared of 5.2p (2016: 4.6p)	3,572	3,160

The Directors declared a fourth interim dividend of 5.2p per share in respect of the year ended 31 August 2017 and which was paid on 31 October 2017 to the shareholders on the Register on 6 October 2017. The fourth interim dividend has not been included in these accounts in accordance with the Company's accounting policy to account for dividends in the year in which they are paid.

All dividends paid and declared to date have been paid, or will be paid, out of revenue profits.

(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("Section 1158")

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £9,107,000 (2016: £8,299,000).

	2017	2016
	£'000	£'000
First interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Second interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Third interim dividend of 2.0p (2016: 2.0p)	1,374	1,374
Fourth interim dividend of 5.2p (2016: 4.6p)	3,572	3,160
Total dividends of 11.2p (2016: 10.6p) per share	7,694	7,282

4.       Return per share

	2017	2016
	£'000	£'000
Revenue return	9,107	8,299
Capital return	18,403	7,102
Total return	27,510	15,401
Weighted average number of ordinary shares in issue during the year	68,688,343	68,688,343
Revenue return per share	13.26p	12.08p
Capital return per share	26.79p	10.34p
Total return per share	40.05p	22.42p

5.       Called-up share capital

	2017	2016
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
68,688,343 (2016: 68,688,343) shares of 10p each	6,869	6,869

6.       Net asset value per share

	2017	2016
Net assets attributable to the ordinary shareholders (£'000)	216,718	196,490
Shares in issue at the year end	68,688,343	68,688,343
Net asset value per share	315.51p	286.06p

7.       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 comprise its investment portfolio.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below. Note that the criteria used to categorise investments include an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016, and which the Company has early adopted.

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.

At 31 August 2017, all investments in the Company's portfolio are categorised as Level 1 (2016: all Level 1).

8.       Status of announcement

2016 Financial Information

The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 31 August 2016 and do not constitute the statutory accounts for that year. The 2016 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.

2017 Financial Information

The figures and financial information for 2017 are extracted from the Annual Report and Accounts for the year ended 31 August 2017 and do not constitute the statutory accounts for the year. The 2017 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 2017 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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