Final Results

RNS Number : 1369I

Schroder Oriental Income Fund Ltd

22 November 2018

 

22 November 2018

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its annual results for the year ended 31 August 2018. 

The information set out in this announcement is the content in the Company's annual financial report (audited) for the year ended 31 August 2018 (the "AFR") required to be communicated to the media in unedited full text pursuant to DTR 6.3.5 R (2). The AFR is expected to be printed and posted to all shareholders in November 2018 and the Company will make a further announcement once the AFR has been uploaded to the Company's webpages and to the National Storage Mechanism.

Enquiries:

Louise Richard

Schroder Investment Management Limited                    

Tel: [phone]

Chairman's Statement

Dear Shareholder

It is 13 years since the launch of the Company and this will be my final report to you as chairman. As I noted in my half year statement, I will not be standing for re-election at the forthcoming annual general meeting. I discuss board succession in more detail below but, before discussing this and other matters from the last financial year, I wanted to spend a moment reflecting on the Company's progress since I became chairman.

In those 13 years the Company's NAV total return to shareholders has been 333%, an annualised return of 13%. By comparison, the broad Asia ex Japan equity markets (as measured by the MSCI AC Pacific ex Japan Total Return Index in sterling terms) have returned 260%. It is, of course, gratifying that the Company has outperformed the equity markets of the region. This demonstrates the value that Schroders has added as investment manager and validates the income-orientated approach taken by the Company. More startling, however, is the sheer quantum of total return. Further, this period spans the financial crisis of 2008/2009 and subsequent smaller tremors in 2013 and 2015. So it is through a period of bull markets and bear markets alike.

The success of the Company's strategy has been replicated in its own growth in shareholder equity. Through C share issuance and tap issuance, the Company has grown from a market capitalisation of £161 million at launch to £600 million at the time of writing.

The final key attribute that the Company has demonstrated since its launch in 2005 has been consistent dividend growth, with the dividend having grown year on year. Indeed, this track record has led to the Company being named a 'Next Generation Dividend Hero' by the Association of Investment Companies this year.

The point of these observations is not to suggest hubris or complacency. Rather it is to demonstrate that, if ever evidence were needed that Asia is the economic powerhouse of the world and that patience and a long-term perspective are key attributes of successful investment, they are all contained here.

Investment markets and sentiment wax and wane; economies ebb and flow. Some years will, inevitably, will be more successful than others for the Company. But it seems clear that investment in companies in Asia with strong governance and good, sustainable dividends should continue to enable you, as our shareholders, to reap attractive returns in the long-term.

Returning now to the shorter term and the last financial year, performance has, indeed, been more muted. The NAV total return for the financial year to 31 August 2018 was 1.5%, in contrast to the prior year in excess of 20%. Two factors account for this lower return. Firstly, the weakness of sterling against Asian currencies following the Brexit referendum result was staunched and, indeed, so far in 2018 sterling has strengthened. Secondly, Asian equity markets have been less buoyant, mostly reflecting fears over the mounting trade rhetoric between the US and China, the imposition of tariffs and the impact of rising US interest rates.

Despite this, dividend growth from our underlying investments has remained robust and this has allowed the Company to grow its own dividend once again. During the financial year, the Company paid total dividends of 9.40 pence (2017: 8.80 pence) per share representing a yield of 3.8% on the share price as at 31 August 2018. Further, once again, as in previous years, the dividend was more than fully covered from income and so we added once again to the revenue reserve, which is available to supplement distributions in future years.

Despite this robust dividend flow, the share price produced a negative total return of -0.6%. This reflects the fact that, as at the financial year end, the shares were trading at a small discount to NAV of 1.2% versus a small premium of 0.9% at the same point last year. However, the shares have traded at a small premium during most of the year and close to NAV at all times, which is a characteristic upon which the board appreciates that shareholders place considerable value. This has enabled further issuance of 8,395,000 ordinary shares during the year under review, always on terms accretive to existing shareholders. This issuance is beneficial more generally because it improves the liquidity of shares and modestly reduces ongoing charges per share.

As I noted earlier, I will not be standing for re-election at the forthcoming AGM, to be held on 20 December 2018. This is as a part of an ongoing, orderly succession plan that commenced several years ago. In managing succession, the board has been mindful of maintaining the right mix and diversity of skills, experience and independence of thought whilst balancing fresh perspectives with corporate memory. The process to appoint a new director is well underway and I am confident that, by the end of 2018, we will be able to announce the appointment of a director who greatly complements the existing board, bringing fresh perspectives and broadening its diversity.

Following consultation with a number of shareholders, I am pleased to announce that my successor as chairman will be Peter Rigg, to facilitate effective succession planning in accordance with the provisions of the 2018 UK Corporate Governance Code. Peter has also served on the board since the inception of the Company and brings huge ability and experience to bear. Peter will seek to serve as chairman for the next two to three years before he too retires from the board.

So I finish my final report to you where I started it. The short-term outlook for investment markets, Asia included, is uncertain as geo-political rhetoric rises and headwinds are felt from rising US interest rates and the potential currency effects of Brexit. However, the long-term outlook for Asia remains as strong as ever: it is one of the most innovative and vibrant regions of the world and equity valuations are not demanding. The companies in which we invest are strong and well managed.

So, as in the past, whatever the short-term lumps and bumps, patience seems likely to be rewarded.

It has been my pleasure to serve you as chairman. I know that I leave you in capable hands. I will continue to watch the Company's progress with great interest, though in future from afar as a shareholder, like you.

Robert Sinclair
Chairman
21 November 2018

Manager's Review

The net asset value per share of the Company recorded a total return of 1.5% over the 12 months to end August 2018.

Echoing the Chinese curse, it has been an interesting time in Asian markets over the year. Minimal overall progress in both sterling and local currency terms for the reference index, the MSCI All Countries Pacific ex Japan Index, disguised considerable volatility over the period, not least in the value of sterling. A recovery in the pound on Brexit optimism in late-2017 largely cancelled out local currency strength in regional markets; conversely in the second half of the fiscal year sterling's retracement masked significant weakness in underlying indices in 2018.

The reasons for the second half weakness will be familiar to many shareholders. Foremost was the rapid deterioration in Sino-US relations, with initial assumptions that this represented a mere trade dispute giving way to realisation of much more fundamental differences. Rising US interest rates, a stronger dollar and tightening credit conditions also contributed to downbeat sentiment across the whole region, allied to signs of economic slowdown in developed markets outside the US, emerging market volatility (Turkey, Argentina), and fading momentum in global trade. The slowing of economic activity in China has been a particular focus. To an extent, this is a result of a deliberate policy on the part of the Beijing authorities to rein in credit growth and instil greater investment discipline, partly through a shift towards the private sector and away from government led infrastructure spending. However, a more hostile global environment has injected an unwelcome degree of uncertainty surrounding a soft landing in the region's most important economy.

Unsurprisingly, amongst the major regional markets China has underperformed, while others such as Hong Kong, Singapore and Korea have clustered near the average. The striking outliers have been among the more emerging ASEAN markets. Both the Philippines and Indonesia experienced considerable currency weakness. In Indonesia's case, the chronic current account deficit and heavy liquidation of bonds by overseas investors were the key factors, while the Philippine peso reflected an over-heating economy and insufficient policy tightening from the central bank, the BSP. In contrast, investors welcomed the return of Mahathir Mohammed (aged 93) as Malaysian prime minister, ending over 60 years of UMNO-led coalition government, while Thailand benefitted from a strong energy sector and its defensive nature given a sizeable current account surplus.

Positioning and performance

Similarly to the reference index, which produced a total return of 1.8% in GBP terms, the Company's NAV total return ended the year fractionally in positive territory. Relative performance recovered somewhat in the second half as highly priced/low yielding sectors such as heavyweight internet stocks reversed their first half strength. In country terms, stock selection was strong in China, Taiwan and Thailand, offset by weakness in Hong Kong, Korea and New Zealand. Country positioning was helpful thanks to the underweight in China and Indonesia and overweights in Thailand and Singapore. In sector terms, selection was strong in information technology, telecoms, real estate and consumer discretionary, partly offset by selection in materials and a nil weight in health care.

Hong Kong, Australia and Taiwan remain significant exposures, with a wealth of good quality companies offering attractive yields. Over the year, we added to both China and Korea, which have become appreciable portfolio exposures comprising over a fifth of the Company's assets on a combined basis. We also added to Japan and Thailand.

Investment outlook

Arguably all purely financial forecasts and considerations are trumped (pardon the pun) by major, and by their nature unpredictable, political considerations. The most prominent surrounds the current poor relations between the US and China, which go far beyond mere trade considerations. However, other imponderables include whether Italy will ever have the political will to do what it takes to create a competitive economy (rather than muddle through), Brexit, and, most critically, whether the Chinese leadership holds the line accepting lower trend growth as the price for long-term financial sustainability.

Some or all of these issues may be amenable to at least short-term outcomes that are better than the consensus would suggest. However, the global economic and financial fundamentals are troubling, namely an unbalanced growth picture between the US and the rest, tightening liquidity, and the rising risk of more systemic financial shocks resulting from mis-priced risk eg loan funds, peer-to-peer lending, ETFs, remarkably low spreads in the high yield market, and multi-layered "risk free" infrastructure funds.

A stronger dollar, rising interest rates, trade tariff pressure from the biggest bilateral trade partner, and related faltering in investor and corporate confidence are not a great combination for the relatively trade-dependent and open economies of Asia. In general, the vulnerability to external financial shocks is lower across the region, certainly when compared with the 1997/98 crisis, and with 2013 during the "Taper Tantrum".

We have made little change to our positioning based on pure tariff considerations, not least because we have never been keen on low-margin labour cost arbitrage business models which will be most disrupted by tariffs. Our focus will remain on value-added players in what are complex supply chains that are unlikely to be easily substitutable, particularly in the US where labour constraints and skills shortages are becoming increasingly apparent.

Of greater concern are the prospects or otherwise for a smooth transition to a lower, but more sustainable, growth model for China. Our central view remains that the authorities can manage a soft landing consistent with its desire for a less credit intensive growth model. Attacks from Washington are certainly not making the process any easier. However, it is also being made more complicated by less favourable country-specific factors including a shift towards a current account deficit, elevated levels of domestic credit, and increasing vulnerability to capital flight. Combinations of marginal credit loosening, modest rise in spending and a gradual depreciation of the Renminbi accompanied by discouragement of capital outflows may still do the trick, but in our opinion scope for a more marked stimulus package looks limited.

Having said all that, regional markets are within a few per cent of the valuation lows seen in late 2015/early 2016, suggesting that investor caution is already elevated. A destabilising event in China remains a possibility rather than an imminent likelihood, and some progress on US/China relations is not out of the question. Consequently, the Company remains modestly geared, while the region's underlying attractiveness as a diversified source of income remains. We also take comfort from the fact that, at least across the companies held in the Company's portfolio, cash flows are robust and balance sheets are generally in good shape.

Schroder Unit Trusts Limited
21 November 2018

Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal controls 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 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 subject to robust assessment at least annually. The last review took place in November 2018.

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

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review. Cyber risk relating to all of the Company's key service providers is considered an ongoing threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the board receives 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.	The appropriateness of the Company's investment remit is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. Share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. Marketing and distribution activity is actively reviewed. Proactive engagement with investors.
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 and performance fee levels is undertaken.
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 whether appropriate strategies are 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 and the sterling value of dividend income from underlying investments.	The risk profile of the portfolio is considered and appropriate strategies to mitigate any negative impact of substantial changes in markets or currency are 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 safekeeping and cashflow monitoring agent, including cyber hacking.	The safekeeping and cashflow monitoring agent reports on the safe custody of the Company's assets, including cash and portfolio holdings, which are independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the safekeeping and cashflow monitoring agent on its activities, including matters arising from custody operations is reviewed.
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 are 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 is reviewed. Shareholder documents and announcements, including the Company's published Annual Report, are subject to stringent review processes. Procedures are established to safeguard against the 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 reports are provided by key service providers and the quality of their services is monitored. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, is undertaken.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the system of internal controls 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.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 43 to 48 of the 2018 annual report.

Viability statement

The directors have assessed the viability of the Company over a five year period, taking into account the Company's current financial position, its cash flows and its liquidity, along with an assessment of any material uncertainties and events that might cast significant doubt upon the Company's ability to continue as a going concern.

The board believes that a period of five years reflects a suitable time horizon for strategic planning, taking into account the long-term nature of the investment policy of the Company, the inherent characteristics and volatility profile of the securities held by it and the potential impact of economic and market cycles.

In their assessment, the directors have considered each of the principal risks and uncertainties detailed on pages 13 and 14 of the 2018 annual report. In particular the directors have considered a stress test which represents a severe but plausible scenario based on the volatility of equity investments over the long term. This scenario involves a fall in equity prices of 50% and a reduction in dividend yield of 50% during the first year of the review period with no subsequent recovery in either prices or income during the balance of the viability period. It is assumed that the Company continues to pay an annual dividend in line with current levels and that the borrowing facility remains available and remains drawn, subject to the gearing cap. Foreign exchange rates are assumed to be stable throughout the period in this scenario.

The Company's investments comprise highly liquid, large, listed companies and so its assets are readily realisable securities and could be sold to meet funding requirements or the repayment of the gearing facility should the need arise. There is no expectation that the nature of the investments held within the portfolio will be materially different in the future.

The expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position. Furthermore, the Company has no employees and consequently no redundancy or other employment related liabilities.

Although there continue to be material regulatory changes which could increase costs or impact revenue, the directors do not believe that this would be sufficient to affect its viability.

The board reviews the performance of the Company's service providers regularly, including the Manager, along with internal controls reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. The board also considers the business continuity arrangements of the Company's key service providers.

The board has assumed that the business model of a closed ended investment company, as well as the Company's investment objective, will continue to be attractive to investors.

Based on the above, along with the 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 period to 31 August 2023.

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, and 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 16 and 17 of the 2018 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, are fair, balanced and understandable and provide 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 2018

	2018			2017
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments at fair value through profit or loss	-	(13,193)	(13,193)	-	94,537	94,537
Net foreign currency losses	-	(895)	(895)	-	(963)	(963)
Income from investments	31,257	1,033	32,290	28,197	446	28,643
Other income	22	-	22	11	-	11
Total income/(loss)	31,279	(13,055)	18,224	28,208	94,020	122,228
Management fee	(1,365)	(3,184)	(4,549)	(1,258)	(2,935)	(4,193)
Performance fee	-	-	-	-	(6,355)	(6,355)
Other administrative expenses	(813)	(4)	(817)	(775)	(5)	(780)
Profit/(loss) before finance costs and taxation	29,101	(16,243)	12,858	26,175	84,725	110,900
Finance costs	(334)	(777)	(1,111)	(223)	(518)	(741)
Profit/(loss) before taxation	28,767	(17,020)	11,747	25,952	84,207	110,159
Taxation	(2,346)	(29)	(2,375)	(2,013)	(36)	(2,049)
Net profit/(loss) and total comprehensive income	26,421	(17,049)	9,372	23,939	84,171	108,110
Earnings/(losses) per share	10.52p	(6.79)p	3.73p	9.94p	34.97p	44.91p

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.

Statement of Changes in Equity

for the year ended 31 August 2018

		Capital
	Share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2016	150,251	39	150,374	203,837	24,161	528,662
Issue of ordinary shares	19,825	-	-	-	-	19,825
Net profit and total comprehensive income	-	-	-	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
Issue of ordinary shares	21,462	-	-	-	-	21,462
Net (loss)/profit and total comprehensive income	-	-	-	(17,049)	26,421	9,372
Dividends paid in the year	-	-	-	-	(23,589)	(23,589)
At 31 August 2018	191,538	39	150,374	270,959	29,801	642,711

Balance Sheet

at 31 August 2018

	2018	2017
	£'000	£'000
Non current assets
Investments at fair value through profit or loss	668,985	654,213
Current assets
Receivables	3,794	2,908
Cash and cash equivalents	39,165	29,881
	42,959	32,789
Total assets	711,944	687,002
Current liabilities
Payables	(69,233)	(51,536)
Net assets	642,711	635,466
Equity attributable to equity holders
Share capital	191,538	170,076
Capital redemption reserve	39	39
Special reserve	150,374	150,374
Capital reserves	270,959	288,008
Revenue reserve	29,801	26,969
Total equity shareholders' funds	642,711	635,466
Net asset value per share	252.94p	258.63p

Cash Flow Statement

for the year ended 31 August 2018

	2018	2017
	£'000	£'000
Operating activities
Profit before finance costs and taxation	12,858	110,900
Add back net foreign currency losses	895	963
Losses/(gains) on investments at fair value through profit or loss	13,193	(94,537)
Net purchases of investments at fair value through profit or loss	(29,608)	(25,219)
Less amortisation of discount on fixed interest securities	(27)	-
Decrease in receivables	571	296
(Decrease)/increase in payables	(7,431)	2,341
Overseas taxation paid	(2,527)	(2,074)
Net cash outflow from operating activities before interest	(12,076)	(7,330)
Interest paid	(1,104)	(739)
Net cash outflow from operating activities	(13,180)	(8,069)
Financing activities
Bank loans drawn down	46,415	44,254
Bank loans repaid	(21,275)	(38,192)
Issue of ordinary shares	21,462	19,825
Dividends paid	(23,589)	(21,131)
Net cash inflow from financing activities	23,013	4,756
Increase/(decrease) in cash and cash equivalents	9,833	(3,313)
Cash and cash equivalents at the start of the year	29,881	33,859
Effect of foreign exchange rates on cash and cash equivalents	(549)	(665)
Cash and cash equivalents at the end of the year	39,165	29,881

Dividends received during the year amounted to £32,614,000 (2017: £27,608,000) and bond and deposit interest receipts amounted to £234,000 (2017: £1,005,000).

Notes to the Accounts

for the year ended 31 August 2018

1.       Accounting Policies

Basis of accounting

The accounts have been prepared in accordance with The Companies (Guernsey) Law, 2008 (as amended) and International Financial Reporting Standards ("IFRS"), 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.

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 February 2018.

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

2.       Taxation

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 (2017: £1,200).

3.       Dividends

Dividends paid and declared

	2018	2017
	£'000	£'000
2017 fourth interim dividend of 4.20p (2016: 3.80p)	10,477	9,068
First interim dividend of 1.70p (2017: 1.60p)	4,254	3,818
Second interim dividend of 1.70p (2017: 1.70p)	4,284	4,074
Third interim dividend of 1.80p (2017: 1.70p)	4,574	4,171
Total dividends paid in the year	23,589	21,131
	2018	2017
	£'000	£'000
Fourth interim dividend declared of 4.50p (2017: 4.20p)	11,434	10,320

Under The Companies (Guernsey) Law 2008 (as amended), 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 2017 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/(losses) per share

		2018	2017
		£'000	£'000
Net revenue profit		26,421	23,939
Net capital (loss)/profit		(17,049)	84,171
Net total profit		9,372	108,110
Weighted average number of shares in issue during the year		250,958,435	240,721,945
Revenue earnings per share		10.52p	9.94p
Capital (loss)/earning per share		(6.79)p	34.97p
Total earnings per share	3.73p		44.91p

5.       Share capital

	2018	2017
	£'000	£'000
Ordinary shares of 1p each, allotted, called-up and fully paid:
Opening balance of 245,703,024 (2017: 237,541,574) shares	170,076	150,251
Issue of 8,395,000 (2017: 8,161,450) shares	21,462	19,825
Closing balance of 254,098,024 (2017: 245,703,024) shares	191,538	170,076

No shares were held in treasury at the year end (2017: nil).

During the year a total of 8,395,000 shares, nominal value £83,950 were issued to the market to satisfy demand, at an average price of 255.65p per share, for a total consideration received of £21,462,000, net of transaction costs of £54,000.

6.       Net asset value per share

	2018	2017
Net assets attributable to shareholders (£'000)	642,711	635,466
Shares in issue at the year end	254,098,024	245,703,024
Net asset value per share	252.94p	258.63p

7.       Disclosures regarding financial instruments measured at fair value

The Company's portfolio of investments, which may comprise investments in equities, equity linked securities, government bonds and derivatives, are carried in the balance sheet at fair value. Other financial instruments held by the Company may 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 36, and note 1(i) on page 37 of the 2018 annual report.

At 31 August 2018, the Company's investment portfolio and derivative financial instrument were categorised as follows:

	2018
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Investments in equities and equity linked securities	668,985	-	-	668,985
Total	668,985	-	-	668,985

	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

There have been no transfers between Levels 1, 2 or 3 during the year (2017: nil).

8.         Status of announcement

2017 Financial information

The figures and financial information for 2017 are extracted from the published annual report for the year ended 31 August 2017 and do not constitute the statutory accounts for that year. The 2017 annual report included the Independent Auditor's Report, which was unqualified.

2018 Financial information

The figures and financial information for 2018 are extracted from the annual report for the year ended 31 August 2018 and do not constitute the statutory accounts for the year. The 2018 annual report includes the Independent Auditor's Report, 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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