Final Results

Schroder Income Growth Fund PLC

26 October 2023

 

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its final results for the year ended 31 August 2023.

The Company's annual report and accounts for the year ended 31 August 2023 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/3229R_1-2023-10-25.pdf

Enquiries:

Shilla Pindoria

Schroder Investment Management Limited 

Tel: [phone]

Highlights for the year ended 31 August 2023

• Dividend per share for the year rose by 4.6% to 13.80p (31 August 2022: 13.20p), reflecting the Company's principal objective of delivering real income growth in excess of inflation - marking the 28th consecutive year of dividend growth.
• NAV total return increased by 4.03% to 220.6p (31 August 2022: 211.7p), whilst NAV per share rose to 4.2% (31 August 2022: 2.7%) despite a volatile period for UK equity markets, although underperformed versus the FTSE All-Share Index.
• The Company renewed its £30m revolving credit facility with SMBC for a further year, effective from 22 September 2023.
• Earnings per share fell by 5.9% to 13.14p due to reduced dividends from mining shares and corporate management pivoting from special dividends towards share buybacks.
• Six new holding were added to the portfolio including Glencore and XPS Pensions with seven existing holdings sold.  Exposure to property was reduced whilst exposure to international banks was increased.  
• As at 31 August 2023, the Company held £1.56m in cash.
• The Manager will report on the year ended 31 August 2023 and outline views on the future direction of the portfolio, in a webinar on 20 November 2023 at 2pm.
• The Company's Annual General Meeting (AGM) will be held at 12:30pm on Wednesday, 13 December 2023 at Schroders' offices.

Chairman's Statement

I am pleased to present the first set of annual results of Schroder Income Growth Fund plc since becoming Chairman in December 2022. Rising interest rates and sluggish global growth have made navigating equity markets a challenging task during the year. Your Manager has not allowed these distractions to alter their fundamental and well tested investment philosophy.

Revenue and dividends

Despite difficult conditions, your Company was able to increase your dividend for the 28th year running. Dividends per share for the year of 13.80p represent a 4.6% increase on the previous year, in accordance with the Company's objective to increase the dividend in line with inflation over the longer term. In this respect we define the medium term as five years and the longer term as ten.

Earnings per share fell by 5.9% to 13.14p. The dividend of 13.80p was 95.2% covered by earnings. After payment of the fourth interim dividend on 3 November 2023, the revenue reserve will be £7.5 million, representing 10.80p per ordinary share or over nine months of the annual dividend. The ability to smooth income by judicious use of revenue reserves remains a particular advantage of investment trusts over open ended funds.

Income earned by the Company came under pressure during the year for two main reasons. Firstly, lower commodity prices led to a notable reduction in earnings and dividends from mining shares. Secondly corporate managements pivoted from special dividends towards share buybacks thus reducing income for the market and your Company. The reduction in earnings per share masks very strong dividend growth across many stocks held in the portfolio.

In tandem with much higher inflation the Company was consequently unable to increase the dividend in real terms this year without drawing heavily on reserves. Such outcomes have arisen from time to time in the last 28 years of our history. Despite this, we have continued to fulfil the primary objective of 'real growth of income' above the levels of inflation over the longer term.

Performance

During a volatile period for UK equity markets the Company returned 4.2% in net asset value total returns. Share price total returns over the period were -3.0% as compares to a return of 5.2% for the FTSE All-Share total return index. A bias towards medium and smaller sized companies, whose returns lagged those of the larger FTSE100, detracted from short term performance but have added significant value over the longer term. For more details of performance please refer to the Manager's Review.

Share price performance and discount to NAV

The Company's share price discount to NAV averaged 1.60% during the year but widened towards the latter part of the year to end at 8.9%. Whilst the Company did not buy back any shares during the year, your Board continues to monitor the discount closely and will take appropriate action as required.

Gearing

The Company has renewed its £30 million revolving credit facility with Sumitomo Mitsui Banking Corporation Europe Limited ("SMBC") for a further year effective from 22 September 2023. The average gearing level over the year was 12.01% and at the end of the Company's financial year the level of gearing was 13.7%.

Annual General Meeting

The AGM will be held at 12.30pm on Wednesday, 13 December 2023 at Schroders' offices at 1 London Wall Place, London EC2Y 5AU. Your Board strongly encourages shareholders to attend and participate in the meeting. Shareholders will also be able to hear a presentation from the Manager and light refreshments will be served. Please note that all voting will be by poll and we encourage all shareholders to exercise their votes by means of registering them with the Company's registrar ahead of the meeting, online or by completing paper proxy forms, and to appoint the Chairman of the meeting as their proxy. Information on voting can be found in the Notice of Meeting on pages 75 to 78. In the event that shareholders have a question for your Board, please email [e-mail] in advance of the AGM.

Changes to the Articles of Association

One of the resolutions that will be proposed at the AGM is an amendment to the Company's Articles of Association (the "Articles") to allow for flexibility to hold shareholder meetings (wholly or partially) by electronic means. This will allow your Board to hold hybrid or virtual meetings when in the best interests of shareholder safety, for example, in the event of a future pandemic. The amendments will not prevent the Company from holding physical meetings and the Board's intention and strong preference is always to hold a physical general meeting when safe and practical to do so.

Other amendments primarily relate to changes in law and regulation and developments in market practice since the Articles were last adopted. Further details can be found in the Director's Report and a summary of all the changes being introduced can be found in the Annual General Meeting - Recommendations section on pages 72 to 74.

Results Webinar

Please join the Manager for a webinar in which they will report on the year ended 31 August 2023 and outline their thoughts on the future direction of the portfolio. The presentation will be followed by a live Q&A session. The webinar will take place on 20 November 2023 at 2pm. Register for the event at https://registration.duuzra.com/form/SCF2023.

Outlook

Many of the challenges the Company has faced look set to continue into the year ahead. Concerns surrounding inflation and interest rate rises have been a feature of the last year. It seems likely that interest rates will stay higher for longer to help bring inflation into line with Bank of England's and other Central Banks' targets. Concerns over fiscal sustainability have broadened from the UK to the US and Europe leading to falls in government bond markets and consequent pressure on equities.

The UK market continues to face negative investor sentiment, relative to Global and European markets, and investor outflows have been a drag on UK market returns. In addition, geopolitical risks understandably remain front of mind for investors. Such sentiment also creates significant opportunities for the Company over the longer term. The de-rating of UK smaller and medium sized companies is a prime example of this, and it is pleasing to see your Manager actively taking advantage of the valuation dislocations. Company managements seem to agree their shares are good value with a shift towards buybacks and away from dividends.

We cannot ignore the reality that higher interest rates allow savers with an income target choice from a wider range of investments. The abiding feature of equities though is that their profits and dividends grow over the long term in nominal and real terms, a factor sometimes ignored when looking at shorter term cash rates.

For investors real returns matter particularly in periods of rising inflation and interest rates. This is why the principal aim of the Company is to increase income above the rate of inflation over the medium and longer term.

We remain committed to paying an increasing annual dividend and grow income adjusted for inflation over the long term, and I am pleased that we have been able to deliver such increases for 28 years. Whilst we utilised the Company's reserves on this occasion, they remain strong, having added to them in the previous financial year. We continue to monitor the income from the portfolio and remain committed to the sustainability of the Company's dividend.

Whilst it is disappointing the Company's performance over the last year has lagged the broader UK market we are confident in your Manager and their abilities to deploy their investment approach and exploit the market inefficiencies to drive returns over the long term. We base such confidence on the record since Sue Noffke and her team took over managing the portfolio in 2011. In that period the share price total return performance of 126.47% and the NAV total return of 128.46% are both well ahead of the FTSE All-Share Index total return of 103.50%. Investment performance will fluctuate with market cycles but we, as your Board, are focused on ensuring the Company continues to meet its investment objectives over the long term.

Ewen Cameron Watt

Chairman

25 October 2023

Manager's Review

The net asset value total return in the 12 months to 31 August 2023 was 4.2%. This compares to 5.2% from the FTSE All Share Total Return Index. The share price return was -3.0%.  The AIC UK Equity Income median return was 4.4% over the period. It is disappointing to report that your Company's return lagged these comparators over the 12 month period.

Revenue after tax for your Company fell by 5.9% compared to the same period last year. The decline was the result of a fall in income received and a rise in the cost of gearing, as interest costs reflected higher average interest rates in the latest 12 months compared to those in the prior period.

Total income for the Company fell 3.6% compared to the same period last year, due to three factors. The principal reason was a halving of total income from the mining sector. Lower commodity prices, compared to their peak levels of 2021/22, led to a marked reduction in earnings and dividends from the companies in this sector from the extraordinarily high level of the prior two years. Ordinary dividends were lower whilst special dividends, which had been material in the prior period, were absent except for a small special dividend payment by Glencore. Your Company had less invested in the mining sector during the last 12 months compared to the prior period, on the belief that we had passed the peak for the commodity cycle. Whilst the fall in mining sector income had been anticipated, the Company was not able to offset the full reduction despite income from banks holdings increasing by over 50% and from oils by over 30%.

The second reason was the non-payment of a dividend by the insurance company Direct Line Group due to disappointing operating performance, detailed in the performance section. Your Company exited its position in the stock.

Lastly some changes to dividend dates for a few holdings meant being paid in September rather than August this year, resulting in some income being shifted from this period into the Company's next financial year. Contributions to your Company's income from special dividends peaked in the 12-month period to August 2021 and has fallen back, in each of the past two years, to levels that appear normal in historical terms.

Additional factors weighing on income in the year was the split of GlaxoSmithKline into two businesses, the biopharma company, rebasing its dividend to free up funds for investment in research and development. Dividends were around one quarter below their level of the prior period. Gambling company 888 did not pay a dividend in the period as the company prioritised balance sheet leverage resulting from the purchase of William Hill's UK assets. Additionally, movements in dividend dates impacted three of the holdings which last year paid dividends in August and this year switched to September - asset manager M&G, Asian life insurance business Prudential, and student property company, Empiric.

On the positive side a diverse range of holdings saw dividends grow significantly, at more than 20%. Oil majors, Shell and BP, continued to build back their dividend payments to shareholders after the cuts of two years ago. Asian oriented banks, HSBC and Standard Chartered, saw particularly strong growth while domestic bank NatWest Group and financial services infrastructure business TP ICAP also grew robustly. Several of your Company's holdings in the consumer discretionary area rewarded shareholders with excellent dividend growth as their businesses flourished following the pandemic disruptions - Whitbread and Hollywood Bowl saw dividends double and triple respectively, with strong growth from studios and broadcaster ITV and luxury goods company Burberry. Double digit dividend increases were received from domestic bank Lloyds, investment company 3i, financial services provider XPS Pensions, power utilities companies SSE and Drax and infrastructure and construction company Balfour Beatty.

Elsewhere more stable companies - information providers RELX and Pearson, distribution services business Bunzl, retailer Pets at Home, utility company National Grid, GP patient practice business Assura, defence services business QinetiQ, engineering group Spectris, and insurance company Legal & General all increased dividends by mid to high single digits. Companies in the portfolio with low or no dividend growth are typically in a growth phase such as pharmaceuticals company AstraZeneca, telecoms company BT and sustainable technologies company Johnson Matthey, or they have switched preference to share buy backs over dividends as a way of rewarding shareholders, an example of this is food retailer Tesco.

A feature of the market, particularly evident in the mining, banks and oils sectors, has been a trend to favour share buy backs in capital allocation decisions. With resulting dividend payments spread over reduced share counts, this approach, all other things equal, improves the sustainability, and growth, of income for these more cyclical sectors which are particularly sensitive to the economic cycle. Companies and their boards must determine whether the price paid for shares in conducting a share buyback offer attractive returns when benchmarked against other uses of capital, such as investment in projects, research and development, staff, facilities or acquisitions. Several other companies across a range of industries are conducting share buybacks including food retailer Tesco, budget hotel operator Whitbread, luxury fashion house Burberry, consumer goods company Unilever, infrastructure and construction firm Balfour Beatty, TP ICAP and information companies RELX and Pearson. Some 17 of your Company's 43 holdings conducted share buy backs over the period.

At a market level we believe a total shareholder yield in excess of 6% represents an attractive level in absolute terms, relative to other equity markets and other assets - including bonds and cash¹.

¹Total shareholder yield is the sum of a stock's dividend yield (paid over previous twelve months less any special dividends) and the percentage of net share buybacks over the previous twelve months.

Market background

While global economic activity has generally surprised to the upside in 2023, inflation has been stronger and stickier than had been assumed. Central Banks around the world continued to raise interest rates during the period which has pushed up bond yields towards historic averages from the abnormally low levels seen in the post Global Financial Crisis era. In the second half of the period, bond and equity markets have been looking for signs that inflation is under sufficient control for central banks to signal the monetary tightening is done.

At the start of the period in September 2022 UK gilts suffered an especially sharp decline, along with Sterling, leading to stresses in the pensions and fixed income market (LDI) which was driven by the Truss/Kwarteng 'mini budget'. This resulted in Bank of England intervention, criticism from outside authorities including the US government and the International Monetary Fund (IMF), and another change in the UK's Prime Minister and Chancellor. UK bond and stock markets did eventually calm down after many of the policies announced by Kwarteng were subsequently reversed by the new Chancellor, Jeremy Hunt, in his Autumn statement promising the country would tighten its belt in future.

Further afield China loosened its pandemic restrictions, although the boost to economic activity was underwhelming and China has fallen short of original expectations with issues in the real estate sector weighing on activity and confidence. The collapse of Silicon Valley Bank (SVB) in the US in March raised concerns particularly over US regional banks that are subject to less regulation than their global peers. Subsequently in Europe, troubled lender Credit Suisse was subject to an emergency takeover from rival UBS in a deal brokered by the Swiss authorities. Enthusiasm for Artificial Intelligence (AI) drove huge gains in select areas of the US market as investors poured money into the technology sector.

Portfolio performance

Disappointingly the NAV total return underperformed the FTSE All-Share Index. Your Company generated a total return of 4.2% over the 12-month period against 5.2% for the FTSE All-Share Index. Portfolio performance was insufficient to offset the higher cost of gearing in the period.  A bias towards medium and smaller sized companies, whose returns lagged behind those of the larger FTSE100, detracted from performance.

At a sector level the main driver of negative relative returns was stock selection in industrials. Your Company did not own the strongly performing stocks in this sector. Aerospace and defence companies, Rolls Royce, Melrose and BAE Systems, rose as orderbooks strengthened with a strong post covid recovery in civil and defence aerospace end markets. CRH benefitted from a re-rating of the shares in advance of its move to relist on the US stock exchange, whilst Ashtead continued to experience robust demand for equipment rental in the USA.

Additionally having more exposure in basic materials than in the benchmark index detracted from performance with weakness in commodity prices, particularly precious metals, impacting holdings in miner Anglo American and sustainability solutions company Johnson Matthey. Anglo American suffered from a combination of weaker commodity prices and operational difficulties, now resolved. Your Manager continues to find the diversified exposure to forward facing metals and valuation of the business attractive. Lower precious metals prices weighed on Johnson Matthey whilst increased investment across areas of the group have hit profits. New management has begun to execute its strategy and your Manager is encouraged that Standard Industries, a US activist industrial investor, has increased its stake in the business (announced in September 2023) to 10% from its original 5% stake in April 2022.

Property companies suffered the ructions of bond markets in the autumn of 2022 as yields rose sharply. Assura was the largest individual detractor in the period. The shares suffered as bond yields rose and the market fretted about the higher costs of refinancing debt. BT weighed on performance as the market worried about a range of issues from the near-term cash flow impact of significant broadband investment, the impact of higher bond yields on the large company pension scheme and a change in CEO. The incoming CEO has been an independent director on the board of BT for 2 years and is likely to hit the ground running. The group has potential levers to demonstrate value and the valuation of the shares remains compelling. Your Company's position in Direct Line, now sold, was a significant drag on performance over the period. The impact of adverse weather and significant claims inflation was detrimental to profits and capital leading to the company forgoing payment of a dividend until profits and capital have been restored.

Positioning in the two consumer sector positions contributed positively to performance by owning less than the market in consumer staples and owning more than the market in consumer discretionary sectors. Staples companies underperformed over the period as they experienced an unwind of the pandemic boost to volumes of cigarettes and alcohol as well as a headwind to profits from currency moves over the period as the pound staged a part recovery from the lows of September 2022. Not owning British American Tobacco, Imperial Brands or international drinks company Diageo, all of which were weak, was positive for your Company. Consumer discretionary stocks performed strongly as they recovered from the sharp selloff in the summer and early autumn of 2022 on fears over domestic politics and economic prospects and in the face of a mounting cost of living crisis and higher costs of servicing mortgages. Many of your Company's holdings are resilient businesses offering consumers good value for money and they have gained market share in recent years from weaker competitors exiting the market. Your Company's material positions in Whitbread, Hollywood Bowl and Pets at Home, as well as financial investment group 3i (whose main asset is European value for money retailer Action) all had strong operating and share price performances.

Five top/bottom relative performers

		Weight	Relative
	Portfolio	relative to	performance
	weight	index		Impact
	(%)1	(%)1	(%)2	(%)3
British American Tobacco	0.0	-2.9	-23.3	+0.8
Hollywood Bowl	2.0	2.0	40.2	+0.7
Diageo	0.0	-3.5	-17.0	+0.6
3i Group	1.9	1.2	64.2	+0.6
Whitbread	2.2	1.9	35.5	+0.6

		Weight	Relative
	Portfolio	relative to	performance
	weight	index		Impact
	(%)1	(%)1	(%)2	(%)3
Assura	1.7	1.6	-30.6	-0.7
BT Group	2.6	2.2	-23.3	-0.6
Rolls Royce	0.0	-0.5	183.4	-0.5
Direct Line	0.9	0.8	-26.5	-0.5
Johnson Matthey	2.1	1.9	-21.0	-0.5

Source: Schroders, FactSet, for Schroder Income Growth investment portfolio, 12 months to end August 2023.

1 Average weights over the 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

Your Manager has continued to review the portfolio for opportunities to add new investments for attractive medium term total returns, augment existing holdings at compelling levels or exit those where share prices are fully valued or where the investment case and conviction has weakened. During the 12-month period, six new holdings were added to your Company and seven were sold.

At a sector level, the principal changes to your Company were a reduction in exposure to property and additions to existing positions in banks and utilities. Your Manager sold out of purpose-built student accommodation (PBSA) provider Unite Group in September, prior to the significant rise in government bond (gilt) yields arising from the LDI fallout of the UK's autumn statement, viewing the valuation of the shares as close to fair value. Positions in fellow PBSA company, Empiric Student Property, and Assura, were reduced later in the period. Large diversified international bank HSBC was considered attractive given the likelihood of higher for longer interest rates, the stock's low valuation, both relative to history and in absolute terms, the strong capital position and attractive dividend yield together with additional capital returns, in the form of share buy backs. Your Company added to its existing positions in regulated electricity network and renewables company SSE and to electricity and gas transmission and distribution business National Grid. Both businesses have attractive growth pathways investing for the energy transition in renewable electricity in the former and in the electricity grid in both the UK and USA in the latter. Additionally, their dividend yields, and future dividend growth are attractive characteristics.

Whilst maintaining your Company's commodity sector exposures overall your Manager made changes to its preferences within the oil and mining areas. The Company established a new holding in BP through a part reduction in the Company's large position in fellow oil major Shell. At its 2022 results, BP signalled its ambition to grow its dividend, extend share buy backs whilst accelerating investments into both low carbon energy and fossil fuels, and reduce debt. Your Manager believes there is scope for Shell to follow a similar strategy but opted to introduce diversity by owning both companies. The Company sold iron ore producer Rio Tinto and reduced its position in Anglo American, subsequently investing the proceeds into a new holding in diversified miner Glencore. Your Manager is attracted to Glencore's asset mix of forward-facing minerals which are well positioned to benefit as the world moves to decarbonise energy and industry. Extensive research has been conducted on the company, particularly around ethics, governance, climate and social risks. Additionally, several engagements were conducted to understand better the business strategy and the firm's commitment to cultural change associated with the settlement of bribery and corruption fines from the Department of Justice and Senior Fraud Office authorities. Your Manager believes that there is sufficient evidence of culture change and commitment to further improvements which, taken together justifies a position in the portfolio. Rio Tinto was exited due to a view of the greater risks and costs associated with the development of a new iron ore facility in Simandou, Guinea.

Your Company sold out of private assets investment manager Petershill, reinvesting the proceeds into peer Intermediate Capital, which it believes is higher quality and more attractively valued. The holding in National Express (now Mobico) was exited on concerns over availability and cost inflation pressures of bus drivers, together with a stretched balance sheet. Direct Line Insurance was sold in two stages, the first following a disappointing trading update, the remainder following the full year results, and the subsequent announcement of forgoing a dividend. Part of the proceeds were invested in topping up its position in global asset management company M&G. Your Company exited its holding in the mid cap recruitment company SThree, which focuses on the permanent and flexible contract roles in STEM areas across Europe and the US, as in the near term it sees more headwinds as the post Covid hiring has begun to normalise, especially in the company's core areas of technology and healthcare. Your Company also sold its allocation to consumer healthcare business Haleon following its split from GlaxoSmithKline as it was a small holding with a low dividend yield.

Your Manager saw upside potential from ITV's strong cash generation and longer-term digital initiatives and added a new holding in the media group. A new position was also established in Victrex, a world leader in high performance polymer solutions for a range of industrial and medical device applications. The company has strong pricing power, growth potential and balance sheet. Food producer Cranswick has industry leading capabilities and continues to invest at pace into a broad range of growth opportunities for attractive returns. The shares have derated over the past three years whilst the business has grown, expanded new facilities (pork and poultry), developed new capabilities (breaded chicken) and diversified into new areas (pet foods). A new holding was established in XPS Pensions, a leading pensions consulting and administration business with significant organic growth opportunities as it takes share in a large addressable market, the shares offer an attractive and growing dividend yield.

Your Manager continues to add to existing holdings on share price weakness when there is conviction in the investment case, in line with the investment process. Research into other potential investments is conducted continuously, along with risk/reward assessments versus existing portfolio holdings, in a healthy competition for capital. Your Manager is genuinely excited about the companies in the portfolio and see exceptional opportunities within the market to deliver growth in capital and income.

Outlook

Global economic activity in 2023 has surprised on the upside, leading to higher and more stubborn inflation than anticipated by both global Central Banks and markets. However, inflation has moderated from its peak levels. Higher for longer interest rates are now seen as necessary to bring inflation down towards the targets and forecasts of Central Banks. Central Banks are currently at or close to peak rates as the impact of significant rate rises over the past two years, which always work with a lag, appears to be taking effect, cooling both activity and inflation. In addition to economic risks, there are political risks that include a US election and likely a UK election in 2024, ongoing geopolitical tensions between the USA and China, and unresolved conflict between Russia and Ukraine. While the risks of a recession may have diminished, they have not entirely disappeared.

Investing in the UK equity market is not the same as investing in the UK economy. Listed UK equities include a wide array of international firms, many of which are global leaders in their fields and derive the majority of their revenues from overseas. In fact, 77% of FTSE All Share revenues come from outside the UK. However, the negative narrative surrounding the UK economy has heavily impacted investor sentiment in the UK equity market, leading to an acceleration of outflows from the market into mainly global equities and other asset classes.

Since the Brexit vote in 2016, the UK has gained a reputation as a problematic economy among major economies, with political instability generating uncertainty about the nation's future and a lack of confidence from both domestic and overseas investors. However, the economic performance of the UK has been better than feared. While Brexit has weakened supply potential, the UK economy has broadly kept pace with the trends seen across advanced economies over the past seven years. Recent revisions to UK economic data challenge the prevailing view that the UK lags behind all other major industrial economies (the G7) in its economic performance since the Covid pandemic. UK business investment has also been picking up more recently, having initially stalled after the UK's vote to leave the EU and the aftermath of the pandemic. Recent data continues to exceed expectations, and UK corporates have strong balance sheets and liquidity to increase investment spending.

Sentiment towards UK equities has remained very negative, with persistent outflows weighing on market valuations. This has heavily impacted the absolute and relative valuations of listed UK companies, particularly those in the small and medium-sized (SMID) sectors. There has been a significant de-rating of medium and smaller-sized companies over the past two years, both in absolute terms and relative to the largest FTSE 100 companies, due to selling pressures from outflows. However, SMID companies have traditionally outgrown larger companies in the UK and have delivered attractive total returns that have kept pace with the best returns from global equity markets over the long term. The convergence of valuations between SMID and large-cap areas presents a mispriced opportunity.

Negative sentiment has resulted in aggregate valuations of UK equities at multi-year lows. Total shareholder yields are high in absolute terms, relative to other equity markets and other assets, including bonds and cash. Companies across the market, including those in your portfolio, are particularly active in buying back their own shares, as they see compelling returns from investing in their businesses at current prices. Small and medium-sized stocks are subject to ongoing bid activity from overseas and private equity-backed entities. These low valuations are unlikely to persist indefinitely, and there is currently a broad set of investment opportunities within the UK equity market that may well be considered bargains in the future.

Fading political uncertainty, combined with a reassessment of economic performance on growth and inflation, could support a revision of the negative narrative on UK risk assets and be one of the catalysts to address the market's persistent undervaluation. Investing in a market that remains significantly out of favour with investors provides a plethora of opportunities across the market spectrum, which should provide patient investors with highly attractive returns in the medium term.

Sue Noffke

Portfolio Manager

Schroder Investment Management Limited

25 October 2023

Business Review

Principal risks and uncertainties

The Board, through its delegation to the Audit and Risk Committee, 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 2023.

During the year, the Board discussed and monitored a number of risks which could potentially impact the Company's ability to meet its strategic objectives. The Board received updates from the Manager, Company Secretary and other service providers on emerging risks that could affect the Company. The Board was mindful of the following emerging risks during the year; the ongoing conflict in Ukraine, rising inflation and interest rates, the threat of a UK recession and increasing energy prices. These risks were not seen as new principal or emerging risks but those that exacerbate existing risks and have been incorporated in the market risks section in the table below.

Political risk includes the impact of geopolitical risk, regional tensions, trade wars and sanctions against companies. The Board continued to monitor the Russian invasion of Ukraine and its impact on 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 that 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 table below under economic and market risks and ESG and climate change risks respectively.

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.

The "Change" column on the right highlights at a glance the Board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased, decreased or unchanged.

Risk	Mitigation and management	Change
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 Board holds a separate annual strategy meeting to consider the Company's strategy and performance, the appropriateness of the Company's investment remit together with opportunities and threats to its business. Share price relative to NAV per share is monitored at quarterly board meetings and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed and there is proactive engagement with shareholders. The Company holds a continuation vote every five years on whether the Company should continue in its current form. Shareholders will have the opportunity to vote on the continuation of the Company at its AGM in 2025.	Unchanged
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.	Unchanged
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.	Unchanged
Economic and market		Increased
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 portfolio will normally be fairly fully invested and as such will therefore inevitably be exposed to economic and market risk. Changes in general economic and market conditions, such as currency exchange rates, interest rates, inflation rates, industry conditions, tax laws, political events and trends can substantially and adversely affect the value of investments. Market risk includes the potential impact of events which are outside the Company's control, such as pandemics, civil unrest and wars.	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. There are inherent risks involved in stock selection. The Manager is experienced and has a long track record in successfully investing in public equity holdings. 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.	The increased risk reflects the continuing geopolitical concerns globally as well as higher inflation, interest rate rises and the ongoing economic impact of these. The Board continues to monitor these macro events on a regular basis.
Custody Safe custody of the Company's assets may be compromised through control failures by the depositary.	The depositary reports on 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.	Unchanged
Gearing		Increased
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.	The loan was renewed in September 2023 for a further year. Borrowing remains expensive in the current falling market environment However, the Manager optimises the use of gearing to maximise the return to its equity shareholders through appropriate borrowing levels.
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.	Unchanged
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.	Unchanged
Cyber		Increased
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.	The evolving nature of cyber attacks remains prevalent across the industry. While the risk of financial loss is probably small, the risk of reputational damage and loss of sensitive information continues to be significant.
ESG and climate change The failure of the Manager to identify ESG issues, including the impact of climate change, could impact shareholder returns due to valuation issues in investee companies and the Company's shares becoming less attractive to investors.	The Manager's ESG policies, including those relating to climate change, which have been adopted by the Company, are fully integrated into the investment process, as set out in the Strategic Report. Investments are valued at fair value and reflect market participants' views of ESG and climate change risk on the Company's portfolio investments. The Manager regularly reports to the Board on ESG and climate change matters, including engagement with investee companies. Any investor feedback is also taken into consideration by the Board.	Unchanged

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 65 to 69.

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 2023 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.

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 24 to 26 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 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 2024 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

25 October 2023

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.

Directors' Statement

Each of the Directors, whose names and functions are listed on pages 30 and 31, 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

Ewen Cameron Watt
Chairman

 25 October 2023

Income Statement         

for the year ended 31 August 2023

	2023			2022
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	326	326	-	(16,596)	(16,596)
Net foreign currency losses	-	-	-	-	(1)	(1)
Income from investments	10,560	-	10,560	10,954	1,707	12,661
Other interest receivable and similar income	90	-	90	8	-	8
Gross return/(loss)	10,650	326	10,976	10,962	(14,890)	(3,928)
Investment management fee	(422)	(633)	(1,055)	(527)	(527)	(1,054)
Administrative expenses	(552)	-	(552)	(523)	-	(523)
Net return/(loss) before finance costs and taxation	9,676	(307)	9,369	9,912	(15,417)	(5,505)
Finance costs	(546)	(821)	(1,367)	(202)	(202)	(404)
Net return/(loss) before taxation	9,130	(1,128)	8,002	9,710	(15,619)	(5,909)
Taxation	-	-	-	(13)	-	(13)
Net return/(loss) after taxation	9,130	(1,128)	8,002	9,697	(15,619)	(5,922)
Return/(loss) per share (pence)	13.14	(1.62)	11.52	13.96	(22.49)	(8.53)

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 2023

	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 2021	6,946	9,449	2,011	1,596	34,936	153,859	11,118	219,915
Issue of new shares	-	-	-	-	-	-	-	-
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
Net (loss)/return on ordinary activities	-	-	-	-	-	(1,128)	9,130	8,002
Dividends paid in the year	-	-	-	-	-	-	(9,170)	(9,170)
At 31 August 2023	6,946	9,449	2,011	1,596	34,936	137,112	11,882	203,932

Statement of Financial Position

at 31 August 2023

	2023	2022
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	229,714	230,497
Current assets
Debtors	2,557	2,737
Cash at bank and in hand	1,560	2,305
	4,117	5,042
Current liabilities
Creditors: amounts falling due within one year	(29,899)	(30,439)
Net current liabilities	(25,782)	(25,397)
Total assets less current liabilities	203,932	205,100
Net assets	203,932	205,100
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	137,112	138,240
Revenue reserve	11,882	11,922
Total equity shareholders' funds	203,932	205,100
Net asset value per share (pence)	293.58	295.26

These accounts were approved and authorised for issue by the Board of Directors on 25 October 2023 and signed on its behalf by:

Ewen Cameron Watt
Chairman

Notes to the accounts for the year ended 31 August 2023

1.       Accounting Policies

(a)     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 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 July 2022. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating until 30 November 2024, which is at least 12 months from the date of approval of these accounts. In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's low level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; and that the Company's assets comprise cash and readily realisable securities quoted in active markets. The directors have considered the impact of climate change risk and emerging risk and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. 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 Principal Risks and uncertainties in the Strategic 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 2022.

Other than the Director's assessment of going concern, no significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial year.

(b)     Valuation of investments

The Company's investments are classified as fair value through profit and loss in accordance with FRS 102. Upon initial recognition the investments are measured at the transaction price, excluding expenses incidental to purchase which are written off to capital at the time of acquisition. Subsequently the investments are valued at fair value, which are quoted bid prices for investments traded in active markets. Fair value gains or losses are recognised in the capital column of the Income Statement.

All purchases and sales are accounted for on a trade date basis.

(c)      Accounting for reserves

Gains and losses on sales of investments, and the management fee or finance costs allocated to capital, are included in the Income Statement and dealt with in capital reserves within "Gains and losses on sales of investments". Increases and decreases in the valuation of investments held at the year end, are included in the Income Statement and dealt with in capital reserves within "Investment holding gains and losses".

Foreign exchange gains and losses on cash and deposit balances are included in the Income Statement and in capital reserves within "Gains and losses on sales of investments".

(d)     Income

Dividends receivable from equity shares are included in revenue on an ex-dividend basis except where, in the opinion of the Board, the dividend is capital in nature, in which case it is included in capital.

Dividends from overseas companies are included gross of any withholding tax.

Where the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised in revenue. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital.

Deposit interest outstanding at the year end is calculated and accrued on a time apportionment basis using market rates of interest.

(e)     Expenses

All expenses are accounted for on an accruals basis. Expenses are allocated wholly to revenue with the following exceptions:

-        The management fee is allocated 40% to revenue and 60% to capital in line with the Board's expected long-term split of revenue and capital return from the Company's investment portfolio.

-        Expenses incidental to the purchase and sale of an investment are written off to capital at the time of acquisition or disposal. These expenses are commonly referred to as transaction costs and comprise brokerage commission and stamp duty. Details of transaction costs are given in note 10 on page 61.

(f)      Finance costs

Finance costs, including any premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis using the effective interest method in accordance with FRS 102.

Finance costs are allocated 40% to revenue and 60% to capital in line with the Board's expected long-term split of revenue and capital return from the Company's investment portfolio.

(g)     Financial instruments

Cash at bank and in hand may comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.

Other debtors and creditors do not carry any interest, are short-term in nature and are accordingly stated at nominal value, with debtors reduced by appropriate allowances for estimated irrecoverable amounts.

Bank loans and overdrafts are initially measured at transaction price and, subsequently at amortised cost. They are recorded at the proceeds received net of direct issue costs.

(h)     Taxation

The tax charge for the year is based on amounts expected to be received or paid.

Deferred tax is accounted for in accordance with FRS 102.

Deferred tax is provided on all timing differences that have originated but not reversed by the accounting date.

Deferred tax liabilities are recognised for all taxable timing differences but deferred tax assets are only recognised to the extent that it is probable that taxable profits will be available against which those timing differences can be utilised.

Deferred tax is measured at the tax rate which is expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates that have been enacted or substantively enacted at the accounting date and is measured on an undiscounted basis.

(i)      Value added tax ("VAT")

Expenses are disclosed inclusive of the related irrecoverable VAT.

(j)      Foreign currency

In accordance with FRS 102, the Company is required to determine a functional currency, being the currency in which the Company predominantly operates. The Board has determined that sterling is the Company's functional currency and the presentational currency of the accounts.

Transactions denominated in foreign currencies are converted at actual exchange rates as at the date of the transaction. Monetary assets, liabilities and investments held at fair value, denominated in foreign currencies at the year end are translated at the rates of exchange prevailing at the year end.

(k)     Dividends payable

Dividends on equity shares are recognised as a deduction of equity when the liability to pay the dividends arises.

Consequently, interim dividends are recognised when paid and final dividends when approved in the general meeting.

2.       Gains/(losses) on investments held at fair value through profit or loss

	2023	2022
	£'000	£'000
Gains on sales of investments based on historic cost	1,242	6,923
Amounts recognised in investment holding gains and losses in the previous year in respect of investments sold in the year	(2,196)	(10,239)
(Losses) on sales of investments based on the carrying value at the previous balance sheet date	(954)	(3,316)
Net movement in investment holding gains and losses	1,280	(13,280)
Gains/(losses) on investments held at fair value through profit or loss	326	(16,596)

3.       Income

	2023	2022
	£'000	£'000
Income from investments:
UK dividends	8,763	9,406
UK special dividends	196	496
Overseas dividends	1,538	909
Scrip dividends	63	143
	10,560	10,954
Other interest receivable and similar income:
Deposit interest	90	8
	90	8
Total income	10,650	10,962
Capital:
Special dividends allocated to capital	-	1,707

4.       Investment management fee

	2023			2022
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	422	633	1,055	527	527	1,054

The basis for calculating the management fee is set out in the Directors' Report on page 32.

5.       Administrative expenses

	2023	2022
	£'000	£'000
Administration expenses	374	350
Directors' fees	122	119
Auditor's remuneration for the audit of the Company's financial statements1	56	54
	552	523

¹Includes £9,000 (2022: £9,000) irrecoverable VAT.

6.       Finance costs

	2023			2022
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Interest on bank loans and overdrafts	546	821	1,367	202	202	404

7.       Taxation

(a)        Analysis of charge in the year:

	2023	2022
	£'000	£'000
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 lower (2022: higher) than the Company's applicable rate of corporation tax for the year of 21.5% (2022: 19.0%).

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

	2023			2022
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net gain/return on ordinary activities before taxation	9,130	(1,128)	8,002	9,710	(15,619)	(5,909)
Net gain/return on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 21.5% (2022: 19.0%)	1,962	(243)	1,719	1,845	(2,968)	(1,123)
Effects of:
Capital return/loss on investments	-	(70)	(70)	-	3,153	3,153
Income not chargeable to corporation tax	(2,181)	-	(2,181)	(1,978)	(324)	(2,302)
Unrelieved expenses	219	313	532	133	139	272
Irrecoverable overseas tax	-	-	-	13	-	13
Tax charge for the year	-	-	-	13	-	13

(c)      Deferred taxation

The Company has an unrecognised deferred tax asset of £9,207,000 (2022: £8,589,000) based on a main rate of corporation tax of 25% (2022: 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.

8.       Dividends

(a)      Dividends paid and declared

	2023	2022
	£'000	£'000
2022 fourth interim dividend of 5.7p (2021: 5.3p)	3,959	3,682
First interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Second interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Third interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Total dividends paid in the year	9,170	8,893
	2023	2022
	£'000	£'000
Fourth interim dividend declared of 6.3p (2022: 5.7p)	4,376	3,959

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 £9,130,000 (2022: £9,697,000).

	2023	2022
	£'000	£'000
First interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Second interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Third interim dividend of 2.5p (2022: 2.5p)	1,737	1,737
Fourth interim dividend of 6.3p (2022: 5.3p)	4,376	3,959
Total dividends of 13.80p (2022: 13.20p) per share	9,587	9,170

9.       Return/(loss) per share

	2023	2022
	£'000	£'000
Revenue return	9,130	9,697
Capital loss	(1,128)	(15,619)
Total return/(loss)	8,002	(5,922)
Weighted average number of ordinary shares in issue during the year	69,463,343	69,463,343
Revenue return per share	13.14p	13.96p
Capital loss per share	(1.62)p	(22.49)p
Total return/gain per share	11.52p	(8.53)p

10.     Investments held at fair value through profit or loss

	2023	2022
	£'000	£'000
Opening book cost	207,135	187,930
Opening investment holding gains	23,362	46,881
Opening fair value	230,497	234,811
Analysis of transactions made during the year
Purchases at cost	57,193	69,738
Sales proceeds	(58,302)	(57,456)
Gains/(losses) on investments held at fair value	326	(16,596)
Closing fair value	229,714	230,497
Closing book cost	207,268	207,135
Closing investment holding gains	22,446	23,362
Closing fair value	229,714	230,497

All investments are listed on a recognised stock exchange.

Sales proceeds amounting to £58,302,000 (2022: £57,456,000) were receivable from disposal of investments in the year. The book cost of these investments when they were purchased was £57,059,000 (2022: £50,533,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

The following transaction costs, comprising stamp duty and brokerage commission were incurred during the year:

	2023	2022
	£'000	£'000
On acquisitions	236	352
On disposals	30	24
	266	376

11.     Debtors

	2023	2022
	£'000	£'000
Dividends and interest receivable	2,537	2,718
Taxation recoverable	5	5
Other debtors	15	14
	2,557	2,737

The directors consider that the carrying amount of debtors approximates to their fair value.

12.     Creditors: amounts falling due within one year

	2023	2022
	£'000	£'000
Bank loan	29,500	30,000
Other creditors and accruals	399	439
	29,899	30,439

The bank loan comprises £29.5 million (2022: £30 million) drawn down on the Company's revolving credit facility with SMBC Bank International plc. The facility was extended for a further year, effective 22 September 2023.

The facility is unsecured but is subject to covenants and restrictions which are customary for a facility of this nature, all of which have been complied with during the year. Further details of this facility are given in note 19(a)(i).

The Directors consider that the carrying amount of creditors falling due within one year approximates to their fair value.

13.     Called-up share capital

	2023	2022
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Ordinary shares of 10p each
Opening balance of 69,463,343 (2022: 69,463,343) shares	6,946	6,946
Total of 69,463,343 (2022: 69,463,343) shares	6,946	6,946

14.     Reserves

Year ended 31 August 2023

					Capital reserves
					Gains and	Investment
		Capital	Warrant	Share	losses on	holding
	Share	redemption	exercise	purchase	sales of	gains and	Revenue
	premium1	reserve1	reserve1	reserve2	investments2	losses3	reserve4
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	9,449	2,011	1,596	34,936	114,878	23,362	11,922
Gains on sales of investments based on the carrying value at the previous balance sheet date	-	-	-	-	(954)	-	-
Net movement in investment holding gains and losses	-	-	-	-	-	1,280	-
Transfer on disposal of investments	-	-	-	-	2,196	(2,196)	-
Management fee and finance costs allocated to capital	-	-	-	-	(1,454)	-	-
Dividends paid	-	-	-	-	-	-	(9,170)
Retained revenue for the year	-	-	-	-	-	-	9,130
Closing balance	9,449	2,011	1,596	34,936	114,666	22,446	11,882

Year ended 31 August 2022

					Capital reserves
					Gains and	Investment
		Capital	Warrant	Share	losses on	holding
	Share	redemption	exercise	purchase	sales of	gains and	Revenue
	premium1	reserve1	reserve1	reserve2	investments2	losses3	reserve4
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Opening balance	9,449	2,011	1,596	34,936	106,978	46,881	11,118
Losses on sales of investments based on the carrying value at the previous balance sheet date	-	-	-	-	(3,316)	-	-
Net movement in investment holding gains and losses	-	-	-	-	-	(13,280)	-
Transfer on disposal of investments	-	-	-	-	10,239	(10,239)	-
Realised exchange gains on currency balances	-	-	-	-	(1)	-	-
Management fee and finance costs allocated to capital	-	-	-	-	(729)	-	-
Special dividends allocated to capital	-	-	-	-	1,707	-	-
Dividends paid	-	-	-	-	-	-	(8,893)
Retained revenue for the year	-	-	-	-	-	-	9,697
Closing balance	9,449	2,011	1,596	34,936	114,878	23,362	11,922

The Company's Articles of Association permit dividend distributions out of realised capital profits.

¹These reserves are not distributable.

²These are realised (distributable) capital reserves which may be used to repurchase the Company's own shares or distributed as dividends.

³This reserve comprises holding gains on liquid investments (which may be deemed to be realised) and other amounts which are unrealised. An analysis has not been made between those amounts that are realised (and may be distributed as dividends or used to repurchase the Company's own shares) and those that are unrealised.

⁴The revenue reserve may distributed as dividends or used to repurchase the Company's own shares.

15.     Net asset value per share

	2023	2022
Net assets attributable to shareholders (£'000)	203,932	205,100
Shares in issue at the year end	69,463,343	69,463,343
Net asset value per share	293.58p	295.26p

16.     Transactions with the Manager

Under the terms of the AIFM Agreement, the Manager is entitled to receive a management fee. Details of the basis of the calculation are given in the Directors' Report on page 32. Any investments in funds managed or advised by the Manager or any of its associated companies are excluded from the assets used for the purpose of the calculation and therefore incur no fee.

The management fee payable in respect of the year ended 31 August 2023 amounted to £1,055,000 (2022: £1,054,000) of which £259,000 (2022: £259,000) was outstanding at the year end.

Effective from 1 March 2021, the Manager is entitled to receive a further fee to cover administration and company secretarial costs. The secretarial fee payable for the year amounted to £180,000 (2022: £180,000) including VAT, of which £45,000 (2022: £45,000) was outstanding at the year end.

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

17.     Related party transactions

Details of the remuneration payable to Directors are given in the Directors' Remuneration Report on pages 42 to 44 and details of directors' shareholdings are given in in the Directors' Remuneration Report on page 44. Details of transactions with the Manager are given in note 16 above. There have been no other transactions with related parties during the year (2022: nil).

18.     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).

At 31 August 2023, all investments in the Company's portfolio are categorised as Level 1 (2022: same).

19.     Financial instruments' exposure to risk and risk management policies

The Company's objectives are set out on the inside front cover of this report. In pursuing these objectives, the Company is exposed to a variety of financial risks that could result in a reduction in the Company's net assets or a reduction in the profits available for dividends.

These financial risks include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. The directors' policy for managing these risks is set out below. The Board coordinates the Company's risk management policy. The Company has no significant direct exposure to foreign exchange risk on monetary items. The objectives, policies and processes for managing the risks and the methods used to measure the risks that are set out below, have not changed from those applying in the comparative year.

The Company's classes of financial instruments may comprise the following:

-        investments in equity shares which are held in accordance with the Company's investment objectives;

-        short-term debtors, creditors and cash arising directly from its operations; and

-        loans drawn on a facility, the purpose of which are to assist with financing the Company's operations.

(a)      Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises two elements: interest rate risk and other price risk. Information to enable an evaluation of the nature and extent of these two elements of market risk is given in parts (i) and (ii) of this note, together with sensitivity analyses where appropriate. The Board reviews and agrees policies for managing these risks and these policies have remained unchanged from those applying in the comparative year. The Manager assesses the exposure to market risk when making each investment decision and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis.

(i)       Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on variable rate borrowings when interest rates are re-set.

Management of interest rate risk

Liquidity and borrowings are managed with the aim of increasing returns to shareholders. The board's policy is to permit gearing up to 25% where gearing is defined as borrowings used for investment purposes, less cash, expressed as a percentage of net assets. Any amount drawn on the facility would normally be for a one month period, at the end of which the drawdown may be rolled over, adjusted or repaid, and the interest rate is re-set. These amounts have been included in the analysis below, although the exposure to interest rate changes is not significant as any drawings can be repaid at the end of the one month period under the terms of this flexible arrangement.

The Company has arranged a £5m overdraft facility with HSBC Bank plc, this was not utilised during the current or comparative year.

Interest rate exposure

The exposure of financial assets and financial liabilities to floating interest rates, giving cash flow interest rate risk when rates are re-set, is shown below:

	2023	2022
	£'000	£'000
Exposure to floating interest rates:
Cash at bank and in hand	1,560	2,305
Creditors falling due within one year: bank loan	(29,500)	(30,000)
Total exposure	(27,940)	(27,695)

Cash balances earn interest at a floating rate based on the Sterling Overnight Index Average (2022: Sterling Overnight Index Average).

The Company extended its £30 million credit facility with SMBC Bank International plc for a further year, effective from 22 September 2023. Interest payable is calculated at the aggregate of the compounded daily Risk Free Rate ("RFR"), plus a margin. Amounts are normally drawn down on the facility for a one month period, at the end of which it may be rolled over or adjusted. At 31 August 2023, the Company had drawn down £29.5 million (2022: £30 million), for a one month period at an interest rate of 5.91% (2022: 2.52%) per annum.

The above year end amounts are not representative of the exposure to interest rates during the current or comparative year as the level cash balances and drawings on the facility have fluctuated. The maximum and minimum exposure during the year was as follows:

	2023	2022
	£'000	£'000
Minimum debit interest rate exposure during the year - net debt	(21,727)	(17,972)
Maximum debit interest rate exposure during the year - net debt	(27,940)	(27,695)

Interest rate sensitivity

The following table illustrates the sensitivity of the return after taxation for the year and net assets to a 1.5% (2022: 1.5%) increase or decrease in interest rates in regards to the Company's monetary financial assets and financial liabilities. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on the Company's monetary financial instruments held at the balance sheet date which are exposed to interest rate movements, with all other variables held constant.

	2023		2022
	1.5% increase	1.5% decrease	1.5% increase	1.5% decrease
	in rate	in rate	in rate	in rate
	£'000	£'000	£'000	£'000
Income statement - return after taxation
Revenue return	(154)	154	(145)	145
Capital return	(266)	266	(270)	270
Total return after taxation	(420)	420	(415)	415
Net assets	(420)	420	(415)	415

Given the increase in the UK interest rates, the interest rate sensitivity has been updated to 1.5%. The prior year disclosure has been updated to 1.5% to show a direct comparison in the sensitivity. In the prior year report, the sensitivity was calculated using 1.0%, which was representative of the market at 31 August 2022. As disclosed in the prior year annual report, an increase of 1.0% reduced total return after taxation by £277,000 (a decrease of 1.0% had an equal and opposite effect).

In the opinion of the directors, this sensitivity analysis may not be representative of the Company's future exposure to interest rate changes as the level of cash balances and drawings on the facility will fluctuate.

(ii)      Other price risk

Market price risk includes changes in market prices, other than those arising from interest rate risk, which may affect the value of investments.

Management of market price risk

The Board meets on at least four occasions each year to consider the asset allocation of the portfolio and the risk associated with particular industry sectors. The investment management team has responsibility for monitoring the portfolio, which is selected in accordance with the Company's investment objective and seeks to ensure that individual stocks meet an acceptable risk/reward profile.

Market price risk exposure

The Company's total exposure to changes in market prices at 31 August comprised the following:

	2023	2022
	£'000	£'000
Investments held at fair value through profit or loss	229,714	230,497

The above data is broadly representative of the exposure to market price risk during the year.

Concentration of exposure to market price risk

An analysis of the Company's investments is given on page 14. The portfolio principally comprises securities of companies listed on the London Stock Exchange and accordingly there is a concentration of exposure to economic conditions in the UK. However it should be noted that many of these companies conduct much of their business overseas. Furthermore, up to 20% of the portfolio may be listed on overseas stock exchanges.

Market price risk sensitivity

The following table illustrates the sensitivity of the return after taxation for the year and net assets to an increase or decrease of 20% (2022: 20%) in the fair values of the Company's investments. This level of change is considered to be a reasonable illustration based on observation of current market conditions. The sensitivity analysis is based on the Company's exposure through equity investments and includes the impact on the management fee but assumes that all other variables are held constant.

	2023		2022
	20% increase	20% decrease	20% increase	20% decrease
	in fair value	in fair value	in fair value	in fair value
	£'000	£'000	£'000	£'000
Income statement - return after taxation
Revenue return	(83)	83	(104)	104
Capital return	45,819	(45,819)	45,996	(45,996)
Total return after taxation and net assets	45,736	(45,736)	45,892	(45,892)
Change in net asset value	22.4%	(22.4%)	22.4%	(22.4%)

(b)      Liquidity risk

This is the risk that the Company will encounter difficulty in meeting its obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

Management of liquidity risk

Liquidity risk is not significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding requirements if necessary. The facility is also available to provide liquidity at short notice. The Board's policy is for the Company to remain fully invested in normal market conditions. The facility may be used to manage working capital requirements and to gear the Company as appropriate.

Liquidity risk exposure

Contractual maturities of financial liabilities, based on the earliest date on which payment can be required are as follows:

	2023		2022
	Three months		Three months
	or less	Total	or less	Total
	£'000	£'000	£'000	£'000
Creditors: amounts falling due within one year
Securities purchased awaiting settlement	-	-	-	-
Other creditors and accruals	399	399	424	424
Bank loan - including interest	29,645	29,645	30,063	30,063
	30,044	30,044	30,487	30,487

(c)      Credit risk

Credit risk is the risk that the failure of the counterparty to a transaction to discharge its obligations under that transaction could result in loss to the Company.

Management of credit risk

This risk is not significant and is managed as follows:

Portfolio dealing

The Company invests in markets that operate a "Delivery Versus Payment" settlement process which mitigates the risk of losing the principal of a trade during settlement. The Manager continuously monitors dealing activity to ensure best execution, which involves measuring various indicators including the quality of trade settlement and incidence of failed trades. Counterparties must be pre-approved by the Manager's credit committee.

Exposure to the Custodian

The custodian of the Company's assets is HSBC Bank plc which has long-term Credit Ratings of AA- with Fitch and Aa3 with Moody's. The Company's investments are held in accounts which are segregated from the custodian's own trading assets. If the custodian were to become insolvent, the Company's right of ownership of its investments is clear and they are therefore protected. However the Company's cash balances are all deposited with the custodian as banker and held on the custodian's balance sheet. Accordingly, in accordance with usual banking practice, the Company will rank as a general creditor to the custodian in respect of cash balances.

Credit risk exposure

The following amounts shown in the Statement of Financial Position, represent the maximum exposure to credit risk at the current and comparative year end.

	2023		2022
	Balance	Maximum	Balance	Maximum
	sheet	exposure	sheet	exposure
	£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	229,714	-	230,497	-
Current assets
Debtors - dividends and interest receivable and other debtors	2,557	2,557	2,737	2,737
Cash at bank and in hand	1,560	1,560	2,305	2,305
	233,831	4,117	235,539	5,042

No debtors are past their due date and none have been written down or deemed to be impaired.

(d)      Fair values of financial assets and financial liabilities

All financial assets and liabilities are either carried at fair value or the amount in the Statement of Financial Position is a reasonable approximation of fair value.

20.     Capital management policies and procedures

The Company's objectives, policies and processes for managing capital are unchanged from the preceding year.

The Company's debt and capital structure comprises the following:

	2023	2022
	£'000	£'000
Debt
Bank loan	29,500	30,000
Equity
Called-up share capital	6,946	6,946
Reserves	196,986	198,154
	203,932	205,100
Total debt and equity	233,432	235,100

The Company's capital management objectives are to ensure that it will continue as a going concern and to maximise the return to its equity shareholders through an appropriate level of gearing.

The Board's policy is to permit gearing up to 25% where gearing is defined as borrowings used for investment purposes, less cash, expressed as a percentage of net assets.

	2023	2022
	£'000	£'000
Borrowings used for investment purposes, less cash	27,940	27,695
Net assets	203,932	205,100
Gearing	13.7%	13.5%

The Board, with the assistance of the Manager, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:

-        the planned level of gearing, which takes into account the Manager's views on the market;

-        the need to buy back the Company's own shares for cancellation or to hold in treasury, which takes into account the share price discount;

-        the opportunities for issues of new shares; and

-        the amount of dividend to be paid, in excess of that which is required to be distributed.

Status of announcement

2022 Financial Information

The figures and financial information for 2022 are extracted from the published Annual Report and Accounts for the year ended 31 August 2022 and do not constitute the statutory accounts for that year. The 2022 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.

2023 Financial Information

The figures and financial information for 2023 are extracted from the Annual Report and Accounts for the year ended 31 August 2023 and do not constitute the statutory accounts for the year. The 2023 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 2023 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