Annual Financial Report

RNS Number : 4125X

Schroder Oriental Income Fund Ltd

24 November 2017

 

24 November 2017

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its annual financial report for the year ended 31 August 2017 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 August 2017 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpage http://www.schroders.co.uk/orientalincome. Please click on the following link to view the document: 

http://www.rns-pdf.londonstockexchange.com/rns/4125X_-2017-11-23.pdf

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

Enquiries:

Louise Richard

Schroder Investment Management Limited                 Tel: [phone]

Chairman's Statement

I am pleased to be able to report on another successful year for your Company. The NAV per share generated a total return of 20.6% in the financial year, building on the gain of over 32% the prior year. The share price followed suit, returning 20.7%, to reach an all-time high of £2.61 at the financial year end.

Some of these exceptional gains over the past two years reflect the depreciation of sterling against other currencies following the Brexit vote. However, Asian equity markets have also performed strongly. That said, the gains this year were of a different character to last year. This year the strength of Asian equity indices was driven by a much narrower range of fashionable "high growth" stocks, particularly in the e-commerce and technology sectors. The low yield of these types of stocks constrains how much a company with a mandate like yours can invest in them. The core strategy of your portfolio is to always seek out companies that generate strong, consistent and predictable earnings, which are attractively priced and which pay a regular and well covered dividend.

So it is no surprise that the Company has underperformed the wider Asian equity markets this year. Neither your Board nor the Manager makes any apology for this. The Company's track record over the past 12 years, where it has generated an annualised return of 13.3%, comfortably outperforming the Asian markets, demonstrates the value of the investment approach. The approach won't be flavour of the month all the time but therein lies opportunity for future gains when investors' focus returns once again to the value embedded in the companies that the Company owns. In the meantime, your Company waits and enjoys robust and growing dividends.

The Company's own dividend payments have also continued to grow strongly. With an underpin of revenue earnings per share rising by 10.1% to 9.94 pence this year, total dividends of 9.20 pence per share for the year ended 31 August 2017 represent growth of 8.2% since last year. Dividends have now increased for the 11th consecutive year and the Association of Investment Companies has listed the Company as a "Next Generation Dividend Hero".

The fact that the Company's shares have traded at a small premium to NAV for much of the year shows the value that shareholders place upon the Company's approach, consistency and dividend growth. Feedback from our shareholders regularly confirms that the Company has an important place in their portfolios in both global income and Asian equity contexts.

The Board recognises the value that shareholders place upon stability of the share price relative to the intrinsic value of the shares and, as a result, the Company has issued 8,161,450 new shares during the year at a slight premium to NAV. A further 3,855,000 shares have been issued since the financial year end. As well as assisting with the stability of the premium, this issuance has the additional benefit of further reducing the Ongoing Charges per share by spreading fixed costs more widely. For the latest financial year, Ongoing Charges reduced to 0.85%, from 0.89% last year. At the forthcoming Annual General Meeting ("AGM"), to be held on 15 December 2017, the Board is seeking to renew the existing authorities to issue shares on a non-pre-emptive basis and to buy back shares for cancellation or holding in treasury.

Also at the AGM, all continuing Directors will be presenting themselves for re-election, in accordance with the Board's policy of annual re-election. However, in line with our refreshment plans, Fergus Dunlop will not be offering himself for re-election, having served nine years as a Director. On behalf of the Board, I would like to thank Fergus for his invaluable contribution during this time.

Your Board is committed to progressive refreshment, balancing fresh perspectives with the benefits of continuity. A search is currently underway to replace Fergus and his retirement follows the appointment of Paul Meader in January 2016 succeeding Chris Sherwell. Another of the long serving directors will retire at the AGM in 2018. Through this process the Board has agreed that four directors is optimal to meet the Company's needs, although this number may vary during periods of refreshment.

Since the year end, your Board has undertaken its annual review of fees payable to the Manager. While the Board remains supportive of the structure of the fee arrangements, which it believes are well aligned to the interests of shareholders, it has reassessed the scale of the performance fee in providing value to shareholders as the Company grows. Consequently, I am pleased to report that the Manager has agreed to reduce the cap on the performance fee from 1.0% to 0.75% of the net assets of the Company calculated at the end of any one accounting period, effective from 1 September 2017. Full details of the performance fee calculation may be found on page 20 of the 2017 Annual Report.

Regulatory change continues apace, with the Manager's response bringing further financial benefits to the Company. The turn of 2017 will see the implementation of MIFID II. There are two consequences for the Company. Firstly, the Manager will issue a Key Information Document about the Company which will be maintained on its webpages. The second relates to the explicit charging for the costs of investment research. Schroders has, however, announced that it does not intend to continue to charge external research costs to its clients, including your Company, and will instead bear this expense itself from 1 January 2018. Your Board welcomes this development in managing the Company's costs for the benefit of shareholders.

Looking forward, whilst "income investing" may have fallen out of fashion temporarily, overall earnings growth in Asia is strong, driven by the first period of synchronised global economic growth since the financial crisis. The Manager's Review on pages 5 to 7 of the 2017 Annual Report notes the value in the portfolio's holdings and how their higher cash flows are being reflected in higher dividends. As has been a general theme during the 12 years since inception of the Company, the Board believes that this will, in due course, be reflected in long-term capital gains, as well as enable us to meet the Company's record of increasing the Company's dividends each year. The Company's fortunes are, of course, always buffeted by the swings of sentiment in global equity markets. However, the Company's mandate towards solid, well managed companies with strong cash flows in one of the world's most dynamic and vibrant economic regions remains as relevant today as at its launch.

I look forward to reporting to you again in the half year report to be published next June.

Robert Sinclair

Chairman

23 November 2017

Manager's Review

The NAV per share of the Company recorded a total return of 20.6% over the 12 months to the end of August 2017.

It has been another strong year for Asian stock markets, registering a rise of just over a quarter in sterling terms. There was understandable uncertainty for the region in the wake of Mr Trump's victory in the US presidential election last November. However, the consequent fears over greater protectionism and heightened geopolitical tension proved to have only a brief impact on the region. From the beginning of 2017, a number of more positive developments came into play. These included increasing evidence of a co-ordinated recovery in the global economy, with leading indicators in the overwhelming majority of developed economies moving into positive territory, mirrored also by similar developments across Asia itself. After a number of years of stagnation, global trade flows have responded, with total trade in dollar terms reaching record highs.

Supported by the benign environment, earnings estimates for Asian companies have been rising consistently over the year, with expectations for 2017 rising from around 10% growth to over 20% relative to 2016. This has been in contrast to the pattern of the previous three years, and has clearly been very supportive for investor sentiment. Free cash flow has also been rising sharply across the region as capital spending remains generally disciplined, underpinning healthy dividend growth.

The period saw a number of potentially troubling geo-political developments, most notably the increasingly belligerent stance of the Democratic People's Republic of Korea, further threatening to destabilise the always delicate relationship between China and the US. Investors have, thus far, been remarkably calm; indeed the market with arguably the greatest proximity to the epicentre, that of South Korea, ended the fiscal year within 5% of all-time highs.

China remained an important determinant of sentiment. Although the external environment was supportive to trade growth, the economy has not shown the same pick up in momentum evident elsewhere. To an extent, this has been a deliberate thrust of policy on the part of the Beijing authorities, reflecting confidence that the measure of stimulus taken in late 2015 could be withdrawn without undue threat to all-important "stability". Consequently, monetary stimulus was gradually reduced through the summer, augmented by policies to rein in the residential property market and greater regulatory scrutiny of unorthodox financing vehicles and off-balance sheet exposures in the banking sector.

In the event, the gentle tightening in China has done no harm to local market returns, although a large measure of the outperformance has been thanks to a strong showing from a relatively small number of large capitalisation internet stocks. Taiwan and Korea have been the other strong performers, with the higher export exposure favouring returns. In contrast, more domestically-oriented markets such as the emerging ASEAN markets did not perform well.

Positioning and performance

The Company has registered a very solid absolute return over the financial year, but has significantly lagged the returns on the reference index which rose 25.8%. The biggest single factor has been the underweighting and stock selection in China, and more particularly the very strong returns from large cap internet stocks which, with minimal, if any, dividend yield, are never likely to feature largely in an income portfolio. Furthermore, a number of markets with relatively low dividend yields (Korea being the most notable) performed well, and in distinct contrast to higher yielding markets such as Thailand and New Zealand.

Hong Kong, Australia, China, Taiwan and Singapore remain the main country exposures in the portfolio, with allocations between 5% and 10% in Thailand and Korea. Key sector exposures are financials, real estate, information technology, materials and telecoms. In terms of changes to the portfolio, we added to Australia, Korea and China, and to a lesser extent to Japan and Singapore, balanced by reductions in Taiwan, Hong Kong and the sale of our sole Indian holding.

Investment outlook

Over the last 12 months, investors have taken a relatively sanguine view of global equity markets. The stance has been rewarded and Asian equities have more than participated in this strength. The scale and extent of returns naturally raises the question of whether enough is enough, and at least a pause for breath, or a correction, is imminent.

Perhaps the first point to make is that many fundamental supports to equity markets remain in force. PMI data (Purchasing Managers' Indices) paints a picture of an impressively co-ordinated upturn in global growth, with 80% of countries solidly in expansion territory. Equity valuations relative to bonds remain in extremely attractive territory, and there have been few of the usual signals that surround a market peak such as narrowing market breadth, widening credit spreads or excess investment by corporates. This suggests that the outlook for the region's exporters remains relatively sound, although the pace of expansion is likely to moderate over coming quarters as comparisons get more demanding.

As regards the external environment for Asia, the extent of any tapering following on from recent Federal Reserve and European Central Bank announcements must be taken seriously. However, the $300bn projected withdrawal by the Federal Reserve over the next 12 months must be seen against a total central bank balance sheet expansion globally of $11trn since 2009, and in aggregate Central Bank balance sheets are likely to still grow until Q4 2018. The key will remain inflation expectations, and the risks here surround tightening labour markets (including a surge in Euro area companies reporting labour shortages) and the impact of supply curtailments in China.

As regards domestic conditions in Asia, the impact of the self-induced (and hopefully controlled) slowdown in Chinese growth will need to be closely monitored. Our calculation is that this can be smoothly managed, aided by the broadly helpful global environment in terms of liquidity (aided by a gently weaker US dollar) and robust trade flows. The October political transition in China has seen a smooth entrenchment of President Xi, but accompanied by the departure of a number of more pro-reform cadres. In all probability, the prospect of real reform has receded, with the exception of supply curtailments in a number of basic industries driven by the pressing need to tackle pollution. Credit growth will remain a key lever of State economic control. Although there must be an eventual end to the process, we believe it is too early to incorporate the serious long-term consequences of the debt build up given that China continues to enjoy a strong external balance and growth is gradually shifting towards services and the consumer.

As we reported at the half way stage, we also take heart from the fact that the corporate sector around the region is generally in robust health. Outside sectors and companies whose investment patterns are determined by state and government-led priorities, capital spending discipline remains impressive, resulting in a strong expansion in underlying cash flows and stronger balance sheets. We continue to see an encouraging flow of positive dividend news. It may be difficult for an income-oriented company such as this to access the high growth low yield areas of the market so much in favour over the last 18 months, but we see solid value across the income universe in Asia.

Schroder Unit Trusts Limited

23 November 2017

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 company and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in November 2017.

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

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review, except in respect of cyber risk relating to the Company's service providers, which has now been extended beyond the custodian. Cyber risk relating to all of the Company's key service providers is considered an increased threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the Board is seeking enhanced reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.

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

Risk	Mitigation and management
Strategic
The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives monitored. Share price relative to NAV per share monitored and use of buy back authorities considered on a regular basis. Marketing and distribution activity actively reviewed.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	Ongoing competitiveness of all service provider fees subject to periodic benchmarking against competitors. Annual consideration of management and performance fee levels.
Investment management
The Manager's investment strategy and levels of resourcing, 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 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.
Financial and currency
The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in regional equity markets could have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in assets which are denominated in a range of currencies, its exposure to changes in the exchange rate between sterling and other currencies has the potential to have a significant impact on returns.	Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets or currency discussed with the Manager. The Company has no formal policy of hedging currency risk but may use foreign currency borrowings or forward foreign currency contracts to limit exposure.
Custody
Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.	Depositary reports on safe custody of the Company's assets, including cash and portfolio holdings, independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. Annual report from the Depositary on its activities, including matters arising from custody operations.
Gearing and leverage
The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of the Company's net assets.
Accounting, legal and regulatory
Breaches of the UK Listing Rules, the Companies (Guernsey) Law, 2008 (as amended) or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, subject to stringent review processes. Procedures established to safeguard against disclosure of inside information.
Service provider
The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls, including as a result of cyber hacking, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting by key service providers and monitoring of the quality of services provided. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 44 to 49 of the 2017 Annual Report.

Viability statement

The Directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 August 2017 and the potential impacts of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 14 and 15 of the 2017 Annual Report. In particular the Directors have stress-tested a very severe fall in market prices. They have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time 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

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

Statement of Directors' Responsibilities

The Directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.

Guernsey company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors should:

-        select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors, and then apply them consistently;

-        present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

-        provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards ("IFRS") is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance;

-        state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

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

-        make judgements and estimates that are reasonable and prudent.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies (Guernsey) Law, 2008 (as amended). They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Each of the Directors, whose names and functions are listed on pages 17 and 18 of the 2017 Annual Report, confirms that, to the best of their knowledge:

-        the financial statements, which have been prepared in accordance with IFRS as adopted in the EU and with the Companies (Guernsey) Law, 2008 (as amended), give a true and fair view of the assets, liabilities, financial position and the net return of the Company;

-        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; and

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

Statement of Comprehensive Income

for the year ended 31 August 2017

			2017			2016
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments at fair value through profit or loss		-	94,537	94,537	-	123,772	123,772
Net foreign currency losses		-	(963)	(963)	-	(8,116)	(8,116)
Income from investments		28,197	446	28,643	24,811	244	25,055
Other income		11	-	11	10	-	10
Total income		28,208	94,020	122,228	24,821	115,900	140,721
Management fee		(1,258)	(2,935)	(4,193)	(997)	(2,326)	(3,323)
Performance fee		-	(6,355)	(6,355)	-	(5,287)	(5,287)
Other administrative expenses		(775)	(5)	(780)	(685)	(5)	(690)
Profit before finance costs
and taxation		26,175	84,725	110,900	23,139	108,282	131,421
Finance costs		(223)	(518)	(741)	(271)	(632)	(903)
Profit before taxation		25,952	84,207	110,159	22,868	107,650	130,518
Taxation		(2,013)	(36)	(2,049)	(1,572)	-	(1,572)
Net profit and total comprehensive income		23,939	84,171	108,110	21,296	107,650	128,946
Earnings per share		9.94p	34.97p	44.91p	9.03p	45.66p	54.69p

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The "Revenue and Capital" columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

The Company does not have any income or expense that is not included in net profit for the year. Accordingly the "Net profit" for the year is also the "Total comprehensive income" for the year.

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

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Statement of Changes in Equity

for the year ended 31 August 2017

		Treasury	Capital
	Share	share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2015	148,880	(6,286)	39	150,374	95,104	21,979	410,090
Issue of shares	1,371	-	-	-	-	-	1,371
Reissue of shares from treasury	-	6,286	-	-	1,083	-	7,369
Net profit	-	-	-	-	107,650	21,296	128,946
Dividends paid in the year	-	-	-	-	-	(19,114)	(19,114)
At 31 August 2016	150,251	-	39	150,374	203,837	24,161	528,662
Issue of shares	19,825	-	-	-	-	-	19,825
Net profit	-	-	-	-	84,171	23,939	108,110
Dividends paid in the year	-	-	-	-	-	(21,131)	(21,131)
At 31 August 2017	170,076	-	39	150,374	288,008	26,969	635,466

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Balance Sheet

at 31 August 2017

		2017	2016
		£'000	£'000
Non current assets
Investments at fair value through profit or loss		654,213	534,093
Current assets
Receivables		2,908	3,178
Cash and cash equivalents		29,881	33,859
		32,789	37,037
Total assets		687,002	571,130
Current liabilities
Payables		(51,536)	(42,395)
Derivative financial instruments at fair value through profit or loss		-	(73)
		(51,536)	(42,468)
Net assets		635,466	528,662
Equity attributable to equity holders
Share capital		170,076	150,251
Capital redemption reserve		39	39
Special reserve		150,374	150,374
Capital reserves		288,008	203,837
Revenue reserve		26,969	24,161
Total equity shareholders' funds		635,466	528,662
Net asset value per share		258.63p	222.56p

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Cash Flow Statement

for the year ended 31 August 2017

	2017	2016
	£'000	£'000
Operating activities
Profit before finance costs and taxation	110,900	131,421
Add back net foreign currency losses	963	8,116
Less gains on investments at fair value through profit or loss	(94,537)	(123,772)
Net (purchases)/sales of investments at fair value through profit or loss	(25,219)	20,287
Less amortisation of discount on fixed interest securities	-	(7)
Decrease/(increase) in receivables	296	(188)
Increase in payables	2,341	5,497
Overseas taxation paid	(2,074)	(1,473)
Net cash (outflow)/inflow from operating activities before interest	(7,330)	39,881
Interest paid	(739)	(926)
Net cash (outflow)/inflow from operating activities	(8,069)	38,955
Financing activities
Bank loans drawn down	44,254	91,095
Bank loans repaid	(38,192)	(106,141)
Reissue of shares from treasury	-	7,369
Issue of shares	19,825	1,371
Dividends paid	(21,131)	(19,114)
Net cash inflow/(outflow) from financing activities	4,756	(25,420)
(Decrease)/increase in cash and cash equivalents	(3,313)	13,535
Cash and cash equivalents at the start of the year	33,859	18,259
Effect of foreign exchange rates on cash and cash equivalents	(665)	2,065
Cash and cash equivalents at the end of the year	29,881	33,859

Dividends received during the year amounted to £27,608,000 (2016: £24,706,000) and bond and deposit interest receipts amounted to £1,005,000 (2016: £449,000).

The notes on pages 37 to 50 of the 2017 Annual Report form an integral part of these accounts.

Notes to the Accounts

for the year ended 31 August 2017

1.         Accounting policies

Basis of accounting

The accounts have been prepared in accordance with the Companies (Guernsey) Law, 2008 and International Financial Reporting Standards, which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC"), that remain in effect and to the extent that they have been adopted by the European Union ("IFRS").

Where consistent with the requirements of IFRS, the Directors have sought to prepare the accounts on a basis compliant with presentational guidance set out in the statement of recommended practice for investment trust companies (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in January 2017.

The policies applied in these accounts are consistent with those applied in the preceding year.

2.       Taxation

			2017			2016
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Irrecoverable overseas tax		2,013	36	2,049	1,572	-	1,572

The Company has been granted an exemption from Guernsey taxation under the Income Tax (Exempt Bodies) Guernsey Ordinance 1989, for which it is charged an annual exemption fee of £1,200 (2016: £1,200).

3.       Dividends

Dividends paid and declared

	2017	2016
	£'000	£'000
2016 fourth interim dividend of 3.80p (2015: 3.40p)	9,068	8,017
First interim dividend of 1.60p (2016: 1.50p)	3,818	3,541
Second interim dividend of 1.70p (2016: 1.60p)	4,074	3,777
Third interim dividend of 1.70p (2016: 1.60p)	4,171	3,779
Total dividends paid in the year	21,131	19,114
	2017	2016
	£'000	£'000
Fourth interim dividend declared of 4.20p (2016: 3.80p)	10,320	9,027

Under the Companies (Guernsey) Law 2008, the Company may pay dividends out of both capital and revenue reserves, subject to passing a solvency test. However all dividends paid and declared to date have been paid, or will be paid, out of revenue profits. The Company has passed the solvency test for all dividends paid to date.

The fourth interim dividend declared in respect of the year ended 31 August 2016 differs from the amount actually paid due to shares issued after the balance sheet date but prior to the share register record date.

4.         Earnings per share

	2017	2016
	£'000	£'000
Net revenue profit	23,939	21,296
Net capital profit	84,171	107,650
Net total profit	108,110	128,946
Weighted average number of shares in issue during the year	240,721,945	235,746,033
Revenue earnings per share	9.94p	9.03p
Capital earnings per share	34.97p	45.66p
Total earnings per share	44.91p	54.69p

5.       Share capital

	2017	2016
	£'000	£'000
Ordinary shares of 1p each, allotted, called-up and fully paid:
Opening balance of 237,541,574 (2016: 233,071,574) shares	150,251	142,594
Issue of 8,161,450 (2016: 600,000) shares	19,825	1,371
Reissue of nil (2016: 3,870,000) shares from treasury	-	6,286
Closing balance of 245,703,024 (2016: 237,541,574) shares	170,076	150,251

No shares were held in treasury at the year end (2016: nil).

During the year a total of 8,161,450 shares, nominal value £81,615 were issued to the market to satisfy demand, at an average price of 242.91p per share, for a total consideration received of £19,825,000.

6.         Net asset value per share

	2017	2016
Net assets attributable to shareholders (£'000)	635,466	528,662
Shares in issue at the year end	245,703,024	237,541,574
Net asset value per share	258.63p	222.56p

7.         Disclosures regarding financial instruments measured at fair value

The Company's portfolio of investments, comprising investments in equities, equity linked securities and government bonds and any derivatives are carried in the balance sheet at fair value. Other financial instruments held by the Company comprise amounts due to or from brokers, dividends and interest receivable, accruals, cash at bank and drawings on the credit facility. For these instruments, the balance sheet amount is a reasonable approximation of fair value.

The investments are categorised into a hierarchy comprising the following three levels:

Level 1 - valued using quoted prices in active markets.

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted market prices included within Level 1.

Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

Details of the valuation techniques used by the Company are given in note 1(c) on page 37, and note 1(i) on page 38 of the 2017 Annual Report.

At 31 August 2017, the Company's investment portfolio was categorised as follows:

		2017
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Investments in equities, equity linked securities and government bonds		654,213	-	-	654,213
Total		654,213	-	-	654,213

		2016
		Level 1	Level 2	Level 3	Total
		£'000	£'000	£'000	£'000
Investments in equities, equity linked securities and government bonds		534,093	-	-	534,093
Derivative financial instrument - forward foreign currency contract		-	(73)	-	(73)
Total		534,093	(73)	-	534,020

There have been no transfers between Levels 1, 2 or 3 during the year (2016: nil).

8.         Status of announcement

2016 financial Information

The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 31 August 2016 and do not constitute the statutory accounts for that year. The 2016 Annual Report and Accounts included the Report of the Independent Auditor, which was unqualified.

2017 financial Information

The figures and financial information for 2017 are extracted from the Annual Report and Accounts for the year ended 31 August 2017 and do not constitute the statutory accounts for the year. The 2017 Annual Report and Accounts include the Report of the Independent Auditor, 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 webpages or website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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