Annual Financial Report

RNS Number : 9012F

Schroder Income Growth Fund PLC

10 November 2022

 

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its annual report for the year ended 31 August 2022 as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's annual report and accounts for the year ended 31 August 2022 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpages  www.schroders.co.uk/incomegrowth .  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/9012F_1-2022-11-9.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:

Paula Lockwood

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

Revenue and dividends

I am pleased to report that the Company was able to increase its dividend for the 27^th year running. Dividends per share for the year of 13.2p represent a 3.1% increase on the previous year. Given the high and accelerating level of inflation during the year, the Company was unable to increase the dividend in real terms, however it has continued to fulfil its primary objective of 'real growth of income' above the levels of inflation over the last five and ten years. The income earned by the Company recovered over the last year as companies gradually began to increase their dividends. Earnings per share for the Company increased by 15.6% to 13.96 pence per share.

A transfer of £527,000 will be made to the Company's revenue reserve, allowing £7.96 million to be carried forward, which amounts to 87% of this year's total proposed dividends.

Performance

During a volatile period for global equity markets the Company returned -2.7% in NAV and -4.7% in share price terms. This compares to a return of 1.0% for the FTSE All Share Total Return index. The largest detractors to performance during the period were underweights to banks and energy companies which benefitted from rising interest rates and elevated energy prices, respectively. For more details of performance please refer to the Manager's Review.

Share price discount

The Company's share price discount to NAV has averaged 1.1% during the year and ended the year at 2.1%. The Company was not able issue any shares during the period and did not buy back any shares.

Board Succession

As outlined in the last annual report I have reached my nine year tenure on the board and I will be retiring at the forthcoming AGM and not standing for re-election. Following a recommendation from the Nomination Committee, the board has appointed Mr Ewen Cameron Watt as Chairman. He has been a non executive director since 2017 and senior independent director since 2021 and will use his significant experience and expertise to chair the board. We recommend that shareholders vote in favour of his election at the AGM. His biography can be found on page 19.

Following a rigorous selection process using an external search agency, the board is very pleased to have announced the appointment of Ms June Aitken, as a non-executive director, effective from 1 January 2023. June is an experienced investment trust director who will bring extensive experience and a broad skillset to the board.

Ms Victoria Muir will assume the position of senior independent director following the AGM.

Gearing

The Company has in place a £32.5 million revolving credit facility with Sumitomo Mitsui Banking Corporation Europe Limited ("SMBC"), expiring on 23 September 2023. The drawdown on the loan facility has averaged £29.0 million during the year and we estimate that this has contributed 1.6p per share to the revenue return, but this was offset by a greater 3.1p per share negative impact on the capital return. As at 7 November 2022, the level of gearing was 11.3%.

Annual General Meeting and results webinar

The AGM will be held at 12.00 pm on Thursday, 15 December 2022. We encourage shareholders to either cast their votes by proxy, or to attend in person. The AGM will provide an opportunity for shareholders to ask questions of the board and the Manager although, as per previous years, the Manager's presentation will also be posted as a separate webinar in order to make it accessible to a wider number of shareholders many of whom who find coming to London difficult. The Manager's webinar will be broadcast on 24 November 2022 at 3pm, and all shareholders are encouraged to sign up, to hear the fund manager's view, and to ask questions of your Manager. To sign up please visit https://registration.duuzra.com/form/SCFAnnualResults .

In addition, the board would like to invite shareholders to get in touch via the Company Secretary with any questions or comments in advance of the AGM. To email, please use: [e-mail] or write to us at the Company's registered office address (Company Secretary, Schroder Income Growth Fund plc, 1 London Wall Place, London EC2Y 5AU).

Outlook

 Unfortunately the headwinds laid out in the Company's interim results have strengthened. A toxic combination of rising inflation, interest rates and squeezed incomes make a global slowdown and UK recession fairly inevitable. Furthermore, heavy losses in fixed income markets have raised the cost of capital for companies.

Central bank policy is seeking to combat inflation risk through slowing monetary growth and, higher interest rates. These are not a great combination for equity investment returns.

At the same time, currency weakness has made the UK equity market ever more attractive as a destination for overseas corporations looking to grow their UK operations through acquisition. This weakness has also helped UK companies with significant overseas profits increase cash flows and dividends when measured in sterling.

Deep fundamental research is vital in identifying companies that can withstand the current headwinds and deliver positive long-term returns to investors. Your manager's long track record of navigating market cycles and the considerable resources it has available should give investors comfort at this time. The continued stewardship of Sue Noffke, which now exceeds a decade of managing the Company's portfolio, should provide investors with further reassurance.

The board will continue to work closely with your Portfolio Manager to deliver the Company's long-term objective of real dividend growth over the long term, as well as capital growth. While this will undoubtedly be difficult in an environment of sustained elevated inflation your board remains confident of achieving this outcome for shareholders in the long-term as the economic environment stabilises. I wish the Company all success in the future.

Bridget Guerin

Chairman

9 November 2022

Manager's Review

 The net asset value per share total return in the 12 months to 31 August 2022 was -2.7%. This compares to 1.0% from the FTSE All Share Total Return Index. The share price total return was -4.7% (source: Schroders/Morningstar).

Revenue after tax for the Company rose 15.9%, which exceeded our earlier expectations. Income benefitted from several factors, including the earnings growth of portfolio holdings and a boost from the strong dollar for international businesses. Nearly all of the holdings generated income in the 12-month period (the exceptions being National Express and newly formed Haleon which demerged from GSK in July) as the impact of the pandemic restrictions eased, enabling companies in the leisure, hospitality and real estate sectors to return to more normal operations.

For the second consecutive year, large payments made by mining holdings BHP Billiton, Rio Tinto and Anglo American were the most significant contributors to portfolio income over the period. Special dividends were again a feature from Rio Tinto and Anglo American but at reduced levels compared to the prior period. Income from Shell increased more than threefold as we built our position over the period, together with a significant 44% increase in dividend payments compared to the prior year when the company cut payments significantly. A diverse range of holdings saw dividend growth in excess of 20%. This included companies where the passing of the pandemic had reopened operations (property businesses student accommodation provider Unite and SME business unit provider Workspace) or enabled management to reduce their cautious approach to payments (construction and infrastructure group Balfour Beatty). Meanwhile, a number of portfolio holdings resumed strong dividends having previously cut them, such as oil and gas giant Shell, Asian life insurance company Prudential and interdealer broker TP ICAP. Other holdings which had significant dividend increases from growth in their businesses included private capital investors 3i, private equity investment firm Intermediate Capital Group, international employment recruiter SThree, pet care business Pets at Home, diversified miner BHP Billiton and payments provider Paypoint. A number of other holdings increased dividend payments by 10% or more, including luxury fashion house Burberry, food retailer Tesco, biopharma company AstraZeneca, speciality chemical business Johnson Matthey, diversified miner Anglo American and power generator Drax. A small number of holdings saw dividend payments fall. These included Bunzl, where the comparison of 2021 was inflated by a catch-up dividend payment from the prior year, GSK, which rebased its dividend payment down after the demerger of Haleon, and Unilever, where the dividend in sterling fell due to Euro weakness against sterling earlier in the period. The remainder of the Company's holdings posted income gains in the range up to 10%.

Market background

 UK equities were more resilient than many other world markets over this 12-month period, which represented a particularly challenging time for global equities more broadly. Shortages and supply chain issues were an enduring theme as activity bounced back sharply following pandemic lockdowns. This contributed to inflation hitting multi-decade highs in many developed economies, exacerbated by soaring energy and food costs following Russia's invasion of Ukraine.

In response, all the major developed central banks increased interest rates materially, led by the Bank of England. In late 2021 it, became the first of the G7 monetary authorities to hike rates. The US Federal Reserve, however, has taken the most aggressive approach, with a series of large interest rate increases and after making an early start to unwinding quantitative easing (QE) measures, through quantitative tightening (QT).

The prospect of rising interest rates heavily influenced the investor mindset, perhaps best illustrated by a clear preference for large companies capable of returning cash to them today as dividends. The UK's more mature and slower growing banking, oil and tobacco sectors all performed very well, which has helped underpin the valuation of the broader UK equity market. Healthcare was another notable bright spot and dollar strength was a positive for most of these sectors given significant overseas earnings.

In contrast, fears around the impact of rising energy bills on consumer discretionary spending weighed heavily on retailers, travel and leisure, construction and other domestically focused companies. These trends contributed to the marked underperformance of UK small and mid-cap equities versus large caps, to an extent rare in history. This area of the market is also home to many fast-growing companies in new and emerging industries, whose valuations have come under particular pressure amid rising interest rates.

Portfolio performance

 The NAV per share total return underperformed the FTSE All-Share Index total return over the period, with sector allocation the main driver of negative relative returns.

One of the main drivers of underperformance over the period was being underexposed, relative to the index, to the strongly performing oil and banking sectors. The strength of the economic recovery from the Covid-induced recession initially boosted demand for oil and gas producers, while the Russia Ukraine conflict exacerbated prices further. Not owning oil company BP, which strongly outperformed, was detrimental. Bond yields rose as expectations for interest rate rises increased, supporting banks. Subsequently, not owning large Asian-focused bank HSBC notably weighed on relative performance, albeit that our position in another Asian bank, Standard Chartered, which also performed strongly, partly mitigated this. Not holding tobacco stocks, such as British American Tobacco, whose defensive characteristics were rewarded, also weighed on performance.

Other notable detractors included our large holding in Pets at Home, one of the portfolio's top performers over the prior financial year, which suffered from a derating in its shares despite continued, strong operational delivery. Concern that the stock was a "Covid winner", which would struggle to sustain growth levels, was exacerbated by the announcement of senior management changes. We remain optimistic about the company's longer term prospects given the strong track record of growth in its retail business and significant opportunity for its vets practice division. Household spending on pets has also shown resilience in prior recessions which adds to our confidence in the holding given the current squeeze on household incomes.

 Our decision to invest in betting and gaming group company 888 has proved costly over the past year. Share price weakness has been acute as the market has focused on the extent and cost of the debt associated with the group's acquisition of William Hill's UK assets. We believe the deal has strategic merit as it diversifies the business by geography and product, with scope for cost savings and the potential for revenue synergies as cross-selling opportunities exist between gaming (888) and sports (William Hill).

On the positive side, our position in power generation company Drax performed strongly. Drax has switched its focus from coal to biomass renewable fuels and has longer-term attractions of the potential to deploy carbon capture and storage technology to become a leading carbon negative energy business.

Our longstanding position in education content provider Pearson contributed to performance as, under the new CEO, strategy was better articulated and executed. Meanwhile, defence services business QinetiQ experienced share price volatility during the 12-month period. The shares fell sharply in the autumn of 2021, due to disclosure of an uncharacteristic problem contract that emanated from supply chain issues. Following engagement with the company, we believed that the negative sentiment and share price reaction was overdone and we added to our position. The subsequent share price recovery on a larger holding generated a positive impact. Lastly, not holding closed-ended investment vehicles, such as Scottish Mortgage Investment Trust, was also a positive.

 Five top/bottom relative performers

		Weight	Relative
	Portfolio	relative to	perfor-
	weight	index	mance	Impact
Security	(%)1	(%)1	(%)2	(%)3
 Drax	2.1	2.0	56.1	0.6
Standard Chartered	2.2	1.7	32.8	0.5
Pearson	2.6	2.3	14.2	0.4
QinetiQ	2.0	1.9	1.8	0.4
Scottish Mortgage IT	-	-0.6	-42.1	0.3

		Weight	Relative
	Portfolio	relative to	perfor-
	weight	index	mance	Impact
Security	(%)1	(%)1	(%)2	(%)3
 HSBC	0.2	-3.9	41.6	-1.3
BP	-	-3.0	54.3	-1.3
888 (Gibraltar)	1.0	0.9	-70.7	-1.1
Pets At Home	2.8	2.7	-35.7	-1.1
British American Tobacco	-	-2.9	34.8	-0.8

 Source: Schroders, Factset, for Schroder Income Growth investment portfolio, 12 months to end August 2022.

1. Average weights over period.

2. Total return of the stock relative to the FTSE All-Share TR over the period.

3. Contribution to performance relative to the FTSE All-Share TR.

The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Portfolio activity

 Turnover in the portfolio has been influenced by our view of increased and enduring inflation risks and associated rises in bond yields, as well as higher interest rates and the squeeze on consumer incomes, which have led us to establish new positions in stocks we believe are set to benefit from this environment, as well as adding to holdings which we believe will prove resilient in this situation.

Significant additions were made mainly in our banks and oil & gas allocations, financed by reductions in the portfolio's exposure to the mining sector and certain consumer discretionary areas which, in our view, were potentially vulnerable to the squeeze on consumer incomes from higher interest rates and inflationary pressures.

Starting with banks, we initiated new positions in UK domestic bank, Lloyds, and Asian bank, Standard Chartered, at the start of the period and added to them early in 2022. Lloyds is well-capitalised and focused on lower-risk mortgage lending. Furthermore, like all UK banks, Lloyds has provisioned very conservatively through the pandemic and retains a strong capital position. We believe the company is well placed to benefit from higher interest rates. Asian-focused bank, Standard Chartered, is exposed to US interest rate rises. We believe Standard Chartered currently trades at an attractive valuation, which we would expect to be lifted as profitability improves. We continued to add to the Company's position in the banking sector over the period as it became clear that central banks were on a sustained trend of raising interest rates to combat persistent inflationary pressures. We subsequently broadened our holdings to include another attractively-valued and well-capitalised domestic bank, Natwest, as well as large, diversified Asian banking business, HSBC.

Having cut positions in oil majors in the autumn of 2019 and start of 2020 on the belief that they would struggle to manage the energy transition while supporting shareholder returns, we have continued to reassess the situation and have become more optimistic. In 2019, BP and Shell were heavily committed to paying dividends and buying back stock from shareholders. Additionally, they had ongoing obligations to service their significant debt levels. At that time, combining these commitments with the significant required investments in renewable energy sources did not seem, in our view, to add up. We constantly review the investment case for companies and are always open to changing our minds. This is often on the basis of valuations, which are now more appealing than prior to the pandemic. We have subsequently rebuilt the portfolio's position size in Shell, following a reassessment of the number of significant changes to the company and the outlook for the both the oil price and demand. Dividends were rebased to more sustainable levels in 2020 and improved disclosures give us a sense of what is required to implement their transition strategies. The oil price has strengthened from the lows of early 2020, which enables investment, has boosted cashflows and reduced debt. Shell has a good mix of downstream and gas assets - the integrated gas and marketing business puts the company in a good place to monetise the recovery in demand from Covid and the dislocations between emerging markets and developed markets through its trading activities. Dividends are now growing, supplemented by capital returns to shareholders in the form of share buy backs.

Within the mining sector, we exited our position in BHP, as the stock had performed better around its delisting from the premium segment of the UK market in order to consolidate its listing on the Australian Index. The past three years have seen strong operational and share price performance across the sector. In our view, future shareholder returns and valuations appear more attractive in oils and banks.

As mentioned earlier, we also made reductions in certain consumer discretionary areas which, in our view, were potentially vulnerable to the squeeze on consumer incomes from higher interest rates and inflationary pressures. These included exits from positions in housebuilder Taylor Wimpey and builders merchant Travis Perkins. Additionally, we were unconvinced by the rationale and details of an acquisition of another property business proposed by Workspace and exited our position, reinvesting proceeds into our existing position in private patient practice property company Assura.

Meanwhile, corporate activity again featured as a driving rationale for stocks exiting the portfolio - we sold our holding in Avast following receipt of a bid from US peer NortonLifeLock, while a take-private transaction removed publishing and risk business Daily Mail and General Trust, which has been held in the portfolio for some years.

Outlook

 More recently we have seen a continuation of the appreciation of the US dollar against most major currencies including the pound to add to existing inflation worries. The decline in sterling allied to rising rates will translate into higher import and borrowing costs for many UK companies, with energy, in particular, priced in dollars. While the UK government's energy packages should cushion the impact on households and businesses for a period, and have a helpful knock-on effect on the inflation rate we acknowledge the current unprecedented squeeze on consumer incomes that a combination of higher inflation, energy and mortgage costs is having on consumers.

The UK is not alone in harbouring recessionary fears, as both the US and Europe are also showing signs of economic deterioration. Ultimately, these challenges will fade at some point in the future and we remain focused on companies' long-term fundamental prospects and their income generation ability. It is worth highlighting that the UK market includes many companies which are overseas earners, whose profits, dividends, revenues and valuations could all potentially benefit from a falling pound. Meanwhile, we continue to have a section of the portfolio invested in domestically-focused areas, composed of companies which have significant opportunities to benefit from weaker competition going out of business.

 Investment policy

 Regardless of external conditions, our aims and our investment approach remain constant: to construct a diversified portfolio of mispriced opportunities capable of delivering both real growth of income and attractive capital returns.

The market volatility in 2022 has been yet another reminder of the importance of diversification when constructing portfolios. We remain bottom-up stock pickers looking for idiosyncratic investment opportunities in individual companies. We continue to see an attractive opportunity set of mispriced assets in the UK equity market, as the market as a whole has been, and continues to be, out of favour with international investors. Subsequently, we will continue to utilise our ability to use gearing to potentially enhance returns.

Schroder Investment Management Limited

11 November 2021

 The securities referred to above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Strategic Review

 Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and Risk Committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust assessment at least annually. The last assessment took place in October 2022.

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.

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 period, the board also discussed and monitored a number of risks which could affect the valuations of investee companies. Two particular market risks were considered, political risk and climate change risk. The board receives updates from the portfolio managers, Company Secretary and other service providers on other potential risks that could affect the Company.

Political risk includes the impact of geopolitical risk, regional tensions, trade wars and sanctions against companies. During the period, the board noted that the invasion of Ukraine impacted political tensions, supply chains, interest rates and in particular higher inflation in the UK and globally. The board is also mindful that changes to financial and public policy 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 considers that both political risks and climate risks referred to above are covered in the risk matrix under market risks.

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 success of the Company in meeting its stated objectives is monitored. 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 its 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, including resources and key personnel risk.
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.	 The risk profile of the portfolio is considered and appropriate strategies to mitigate any negative impact of substantial changes in markets are discussed with the Manager.
Currency  Currency risk is the risk that changes in foreign currency exchange rates impact negatively the value or level of dividend of the Company's investments.	 The Manager monitors the impact of foreign currency movements on the portfolio and is able to rebalance the portfolio towards stocks which are less impacted by changes in foreign currency exchange rates if required.
Custody  Safe custody of the Company's assets may be compromised through control failures by the depositary.	 The depositary reports on the safe custody of the Company's assets, including cash and portfolio holdings, which are independently reconciled with the Manager's records. The review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the depositary on its activities, including matters arising from custody operations is reviewed.
Gearing  The Company utilises a credit facility. This arrangement increases 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 are 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.	 The confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published annual report are subject to stringent review processes. Procedures have been 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 services provided are monitored. Audited internal controls reports from key service providers, including confirmation of business continuity arrangements, are reviewed annually.
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. In addition, the board received presentations from the Manager, the registrar and the safekeeping agent and custodian on cyber risk.

 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 19 to the accounts on pages 50 to 53.

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 2022 and the potential impacts of the principal risks and uncertainties it faces for the review period. 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.

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 16 and 17 and in particular the impact of a significant fall in UK equity markets on the value of the Company's investment portfolio. The directors have 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 and on that basis consider that five years is an appropriate time period. The directors also considered the beneficial tax treatment the Company is eligible for as an investment trust. If changes to these taxation arrangements were to be made it would affect the viability of the Company to act as an effective investment vehicle.

Whilst the Company's articles of association require that a proposal for the continuation of the Company be put forward at the AGM in 2025, the Directors have no present reason to believe such a resolution will not be passed by shareholders.

The Directors have 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. On that basis consider that five years is an appropriate time period.

The directors also considered a stress test in which the Company's NAV dropped by 50% and noted that, based on the assumptions in the test, the Company would continue to be viable over a five year period. 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

 The directors have assessed the principal risks, the impact of the emerging risks and uncertainties and the matters referred to in the viability statement. The board have considered climate risk, political risk and external market factors in their assessment. Based on the work the directors have performed, they have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the period assessed by the directors, being the period to 30 November 2023 which is at least 12 months from the date the financial statements were authorised for issue.

By order of the board

Schroder Investment Management Limited

Company Secretary

 9 November 2022

 Statement of Directors' Responsibilities in respect of the Annual Report and Accounts

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

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;

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

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

-   prepare the financial statements on the 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.

The directors 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 Company's webpages. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Each of the directors, whose names and functions are listed on pages 19 and 20, confirm that to the best of their knowledge:

-   the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

-   the Strategic Report 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.

By order of the board

Bridget Guerin
Chairman

 9 November 2022

Income Statement 

for the year ended 31 August 2022

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
 (Losses)/gains on investments held at fair value through profit or loss	 -	(16,596)	(16,596)	-	47,565	47,565
 Net foreign currency (losses)/gains	 -	(1)	(1)	-	5	5
Income from investments	 10,954	1,707	12,661	9,432	1,832	11,264
 Other interest receivable and similar income	 8	-	8	-	-	-
 Gross return/(loss)	 10,962	(14,890)	(3,928)	9,432	49,402	58,834
Investment management fee	 (527)	(527)	(1,054)	(592)	(592)	(1,184)
 Administrative expenses	 (523)	-	(523)	(382)	-	(382)
 Net return/(loss) before finance costs and taxation	 9,912	(15,417)	(5,505)	8,458	48,810	57,268
 Finance costs	 (202)	(202)	(404)	(88)	(88)	(176)
 Net return/(loss) before taxation	 9,710	(15,619)	(5,909)	8,370	48,722	57,092
 Taxation	 (13)	-	(13)	-	-	-
 Net return/(loss) after taxation	 9,697	(15,619)	(5,922)	8,370	48,722	57,092
 Return/(loss) per share	 13.96p	(22.49)p	(8.53)p	12.08p	70.33p	82.41p

 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 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 August 2022

	Called-up		Capital	Warrant	Share
	share	Share	redemption	exercise	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
 At 31 August 2020	 6,904	8,270	2,011	1,596	34,936	105,137	11,470	170,324
Issue of new shares	 42	1,179	-	-	-	-	-	1,221
Net return on ordinary activities	 -	-	-	-	-	48,722	8,370	57,092
 Dividends paid in the year	 -	-	-	-	-	-	(8,722)	(8,722)
 At 31 August 2021	 6,946	9,449	2,011	1,596	34,936	153,859	11,118	219,915
Net (loss)/return on ordinary activities	 -	-	-	-	-	(15,619)	9,697	(5,922)
 Dividends paid in the year	 -	-	-	-	-	-	(8,893)	(8,893)
 At 31 August 2022	 6,946	9,449	2,011	1,596	34,936	138,240	11,922	205,100



Statement of Financial Position

at 31 August 2022

	2022	2021
	£'000	£'000
 Fixed assets
Investments at fair value	230,497	234,811
Current assets
Debtors	2,737	2,796
 Cash at bank and in hand	2,305	7,718
	5,042	10,514
Current liabilities
 Creditors: amounts falling due within one year	(30,439)	(25,410)
 Net current liabilities	(25,397)	(14,896)
Total assets less current liabilities	205,100	219,915
Net assets	205,100	219,915
 Capital and reserves
Called-up share capital	6,946	6,946
Share premium	9,449	9,449
Capital redemption reserve	2,011	2,011
Warrant exercise reserve	1,596	1,596
Share purchase reserve	34,936	34,936
Capital reserves	138,240	153,859
 Revenue reserve	11,922	11,118
 Total equity shareholders' funds	205,100	219,915
 Net asset value per share	295.26p	316.59p

 These accounts were approved and authorised for issue by the board of directors on 9 November 2022 and signed on its behalf by:

Bridget Guerin
Chairman

Notes to the accounts

for the year ended 31 August 2022

1.  Accounting Policies

  Basis of accounting

 Schroder Income Growth Fund plc ("the Company") is registered in England and Wales as a public company limited by shares. The Company's registered office is 1 London Wall Place, London EC2Y 5AU.

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Accounting Standards, including 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 July 2022. All of the Company's operations are of a continuing nature.

In preparing these financial statements the directors have considered the impact of climate change risk as an emerging risk as set out on pages 16 and 17, and have concluded that it does not have a material impact on the Company's investments. In line with UK GAAP investments are valued at fair value, which for the Company are quoted prices for the investments in active markets at the Balance Sheet date and therefore reflect market participants view of climate change risk.

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 until 30 November 2023, which is at least 12 months from the date the financial statements were authorised for issue. 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, other geopolitical events and climate change on going concern. 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 and uncertainties heading on page 16 of the annual report.

The Company has not presented a statement of cash flows, as it is not required for an investment trust which meets certain conditions; in particular that substantially all of the Company's investments are highly liquid and carried at market value.

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 2021.

Other than the directors' assessment of going concern and the accounting treatment of special dividends, no significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial year.

2.  Taxation

	2022	2021
	£'000	£'000
(a) Analysis of charge in the year:
 Irrecoverable overseas tax	13	-
 Tax charge for the year	13	-

(b)  Factors affecting tax charge for the year

 The tax assessed for the year is higher (2021: lower) than the Company's applicable rate of corporation tax for the year of 19.0% (2021: 19.0%).

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

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
 Net return/(loss) on ordinary activities before taxation	9,710	(15,619)	(5,909)	8,370	48,722	57,092
 Net return/(loss) on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2021: 19.0%)	1,845	(2,968)	(1,123)	1,590	9,257	10,847
Effects of:
Capital loss/(return) on investments	-	3,153	3,153	-	(9,038)	(9,038)
Tax relief on overseas tax suffered	-	-	-	(4)	-	(4)
Income not chargeable to corporation tax	(1,978)	(324)	(2,302)	(1,726)	(348)	(2,074)
 Unrelieved expenses	133	139	272	140	129	269
 Tax charge for the year	13	-	13	-	-	-

(c)  Deferred taxation

 The Company has an unrecognised deferred tax asset of £8,589,000 (2021: £8,229,000) based on a main rate of corporation tax of 25% (2021: 25%). In its 2021 budget, the UK government announced that the main rate of corporation tax (for all profits except ring fence profits) for the fiscal year beginning on 1 April 2023 would increase to 25%.

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 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

	2022	2021
	£'000	£'000
 2021 fourth interim dividend of 5.3p (2020: 5.1p)	3,682	3,521
First interim dividend of 2.5p (2021: 2.5p)	1,737	1,732
Second interim dividend of 2.5p (2021: 2.5p)	1,737	1,732
 Third interim dividend of 2.5p (2021: 2.5p)	1,737	1,737
Total dividends paid in the year	 8,893	8,722

	2022	2021
	£'000	£'000
 Fourth interim dividend declared of 5.7p (2021: 5.3p)	3,959	3,682

 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 £9,697,000 (2021: £8,370,000).

	2022	2021
	£'000	£'000
 First interim dividend of 2.5p (2021: 2.5p)	1,737	1,732
Second interim dividend of 2.5p (2021: 2.5p)	1,737	1,732
Third interim dividend of 2.5p (2021: 2.5p)	1,737	1,737
 Fourth interim dividend of 5.7p (2021: 5.3p)	3,959	3,682
 Total dividends of 13.2p (2021: 12.8p) per share	9,170	8,883

4.  Return/(loss) per share

	2022	2021
	£'000	£'000
 Revenue return	9,697	8,370
 Capital (loss)/return	(15,619)	48,722
 Total (loss)/return	(5,922)	57,092
 Weighted average number of ordinary shares in issue during the year	69,463,343	69,279,644
Revenue return per share	13.96p	12.08p
 Capital (loss)/return per share	(22.49)p	70.33p
 Total (loss)/return per share	(8.53)p	82.41p

5.  Called-up share capital

	2022	2021
	£'000	£'000
 Ordinary shares allotted, called-up and fully paid:
Ordinary shares of 10p each
Opening balance of 69,463,343 (2021: 68,038,343) shares	6,946	6,904
 Issue of nil (2021: 425,000) new shares	-	42
 Total of 69,463,343 (2021: 69,463,343) shares	6,946	6,946

6.  Net asset value per share

	2022	2021
 Net assets attributable to shareholders (£'000)	205,100	219,915
 Shares in issue at the year end	69,463,343	69,463,343
 Net asset value per share	295.26p	316.59p

7.  Related party transactions

 Details of the remuneration payable to directors are given in the Directors' Remuneration Report on page 30 of the annual report and details of directors' shareholdings are given in in the Directors' Remuneration Report on page 30 of the annual report. Details of transactions with the Manager are given in note 16 of the annual report. There have been no other transactions with related parties during the year (2021: nil).

8.  Disclosures regarding financial instruments measured at fair value

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

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

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

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

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 42 of the annual report.

At 31 August 2022, all investments in the Company's portfolio are categorised as Level 1 (2021: same).

9. Status of announcement

2022 Financial Information

The figures and financial information for 2022 are extracted from the Report and Accounts for the year ended 31 August 2022 and do not constitute the statutory accounts for the year. The 2022 Report and Accounts include the Report of the Independent Auditors which is unqualified.

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

 

 

ACSBKCBBFBDDODK