Final Results

RNS Number : 0183S

Schroder Oriental Income Fund Ltd

11 November 2021

 

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its Annual Report and Accounts for the year ended 31 August 2021, as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1.

The Company's Annual Report and Accounts for the year ended 31 August 2021 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/orientalincome .  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/0183S_1-2021-11-10.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism, and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

Enquiries:

Matthew Riley

Schroder Investment Management Limited  

Tel: [phone]

________________________________________________________________________________________________________________________

Chairman's Statement

Dear Shareholder

It is with pleasure that I present my report for the financial year to 31st August 2021.

The year saw strong performance, both in absolute terms and relative to the reference index. However, it was very much a year of two halves. The first six months saw strong gains in equity markets across the globe and Asia was no exception. Immense fiscal and monetary stimulus combined last autumn with the roll out of vaccines to drive strong reflationary gains in equities. The Company's net asset value (NAV) total return for the first six months was 20.6%. The second six months saw NAV total return gains of 1.2% which brought the total return for the year to 21.9%. This more muted return in the second half reflected growing unease in markets regarding Chinese social and economic policy, Asia's slower vaccine programmes and some tempering of economic growth as lockdowns persisted in the region.

Equity markets may have risen on a tide that floated all boats but, encouragingly, the Investment Manager's approach saw significant outperformance of the reference index: the MSCI Pacific ex Japan total return index in Sterling terms rose by 12.3% during the financial year; and the Company's NAV grew by 17.4%. This outperformance was derived from a number of factors including the notable underweight to the Chinese market and the absence from the portfolio of the once highly rated Chinese internet names. However, I believe that it is primarily a reflection of the inherent strengths of the Manager's approach, where the paramount concern is to invest in quality companies with sustainable and growing earnings. This approach has served shareholders well for the last sixteen years, continued to do so through the choppy waters of the pandemic and is likely to remain as valid as ever in the future.

Whilst Asian economic growth may have slowed since the spring, the long term outlook and growth themes for the region remain intact. However, the change in "tone" from the Chinese authorities suggests that some of the best opportunities may well, in the near-term, lie elsewhere in the region. The Company's mandate allows for flexibility to invest across a wide range of markets and companies of all sizes. It does seem likely that some of the smaller Asian markets may benefit from policy shifts in China. The Company and Schroders investment team are well placed to grasp those opportunities.

The initial reaction from many companies to the economic uncertainty created by the pandemic was to cut or even cease dividend payments. Furthermore, in some sectors, such as banking or insurance, this was mandated by regulators. Subsequently, as confidence has returned and economies stabilised, so dividend payments have gradually resumed. That said, many companies have sought to ensure that they have a bird in the hand, in the form of earnings growth, before they have had the confidence to increase investor payouts significantly. So there are lags in the system and that, last year, was why your Board was willing to use a small amount of the Company's reserves to maintain the dividend that we pay to our Shareholders. This year, earnings growth is back in most sectors and the outlook continues to improve. So we are delighted to have been able to increase our dividend to our Shareholders to 10.50 pence per share, the 16th year of dividend growth for Shareholders, funded both by earnings, and a small contribution from the revenue reserve. That the dividend has grown for such a prolonged period, accompanied by strong capital growth (in excess of the index returns from the region) is testament to Schroders' approach and capabilities.

Our performance has been strong in absolute terms, relative to the reference index and against our peers. However, the sector has generally traded at a discount to NAV and SOIF is no exception. As buy-backs at a discount are accretive to Shareholder value, we have been more than willing to repurchase shares when there is a clear imbalance in the market. During the year the Company repurchased 2,800,000 shares at an average discount of 5.0%, and a further 2,325,000 shares at an average discount of 4.2% have been repurchased since the financial year end.

Earlier in my statement, I referred to the fact that the Manager's approach is to identify companies with sustainable and growing earnings. Unsurprisingly, to gain confidence that any company has earnings that are sustainable requires consideration of a wide range of factors, including those related to governance, social impact and environment. Thus "ESG" has been an inherent part of the Company's DNA since long before the recent trend towards "sustainable investment". This Company does not set out its stall as a "sustainable fund" but these factors are hugely important in the construction of our portfolio and I would encourage you to read the report on page 13 of the 2021 Annual Report which addresses how the Manager's investment philosophy and process integrates ESG factors. In this, our direct portfolio management team of Richard Sennitt and Abbas Barkhordar explain how the wider Schroders team supports their specific investment decision  making for this Company.

The transition to Richard and Abbas from Matthew Dobbs at the turn of the year has been very successful and it is evident to the Board that we have the full benefits of continuity alongside fresh eyes.

I am also delighted to welcome Isabel Liu as a director. Isabel brings a wealth of experience and a different perspective to the Board and we very much look forward to her contribution over the coming years.

In my last report, in the late spring, I wondered whether markets might benefit from "a pause that refreshes". Asian markets have most certainly paused in the subsequent months. Of course, we are always subject to short term vagaries: investor sentiment, markets and politics to name just a few. However, the fundamental premise of the Company remains as sound today as it was when Matthew Dobbs pioneered the idea in 2005. The Board remains confident that shareholders will see further growing income alongside capital growth over the medium to long term.

In closing, it is clear that business is now finally getting back to face-to-face meetings. I hope to meet as many of you as possible over the coming year. Accordingly, I would encourage you to attend the Company's Annual General Meeting. This is being held at 2pm on 15th December at Schroders' offices in London where my board colleagues, the Investment Manager and I would be delighted to meet you and

answer any questions that you may have. In addition, a shareholder focused webinar will be presented by the portfolio manager on 1 December 2021 at 11.30 am. To register please visit https://www.schroders.co.uk/orientalincome.

Manager's Review

The net asset value per share of the company recorded a total return of +21.9% over the twelve months to end August 2021. Four interim dividends have been declared totalling 10.50 pence (10.30 pence last year).

As the chart in the 2021 Annual Report illustrates, equity markets made strong progress through the latter part of last year and the start of 2021, buoyed by improving earnings revisions, expectations of greater fiscal stimulus following the US elections, strong liquidity, a weakening dollar and progress on the development of a number of vaccines for COVID-19. However, in the second half of the period Asian markets lagged global markets. This was in large part due to a significant increase in regulatory announcements coming out of China. Although the biggest market impact was felt amongst the 'internet' names, regulations also impacted a number of other sectors with the authorities becoming much more vocal with regard to 'common prosperity'. Further outbreaks of COVID across the region added to volatility given the relatively low levels of vaccinations compared to some Western economies.

The divergence of returns across the regional markets continued to be high with technology-heavy Korea and Taiwan both up strongly over the period, benefiting from upward earnings revisions driven by ongoing strong export demand for semiconductors and technology products. Australia and Singapore also performed well, aided by a strong recovery in the financials and materials sectors. Of the larger markets, China was the clear underperformer. It started the period robustly as growth names did well, but a marked increase in regulation across a number of sectors impacted the market. Although bouts of regulation in China are not unusual, and areas such as financial stability and national security have always been heavily regulated, there was a significant increase in policy announcements associated with promoting the government's 'common prosperity' agenda. This led to a broad-based sell-off. Smaller ASEAN markets continued to lag, in part hampered by concerns over their relatively low vaccination rates combined with further outbreaks of COVID.

Sector returns across the region also saw a large spread of returns, in part reflecting the recovery in growth seen globally. More economically sensitive sectors such as information technology, materials and industrials as well as some financials did well. Although some of the defensive long duration names in sectors such as healthcare and staples did lag, towards the end of the period we did see some of the more thematic growth names do well as people questioned whether global growth had peaked. The consumer discretionary sector was the worst performing sector in large part due to its heavy weighting in some of the low yielding Chinese e-commerce names which were at the forefront of new regulatory announcements.

Although the broad backdrop points to a recovery in earnings this year, the dividend payment picture across the period was more mixed given its tendency to lag that of earnings. In general, North Asian payments were relatively more robust reflecting the better economic backdrop and exposure to sectors that had not been hit as hard by COVID, such as technology stocks. Financials generally through 2020 were impacted by falling interest rates and uncertainty over credit costs relating to COVID, which, together with regulatory limits imposed on shareholder returns in some countries, saw the sector under pressure from a dividend perspective. This resulted in dividend cuts for financials in a number of markets including Singapore and Australia, although as growth has started to recover these restrictions have started to be lifted and dividends raised. The other headwind for dividends has been the uncertainty over the pace of any recovery given second and third waves of COVID globally, as well as flare-ups regionally, which have resulted in sporadic localised lockdowns, all of which unsurprisingly has prioritised caution. In Taiwan for instance an outbreak did see a number of AGMs being postponed resulting in a delay to some companies' payments of dividends.

Positioning and Performance

The Company's positive NAV total return of 21.9% over the period compared favourably with that of the reference benchmark which rose 12.3% over the period. The increased expectations for a global recovery benefitted the fund as it saw earnings revisions broaden out from a narrow set of growth names. This saw our stock selection in and allocations to Korea and Taiwan adding value, helped by our overweight positions in information technology. Stock selection in Australia and New Zealand contributed positively thanks to overweights in the diversified resource and other materials companies. The other major contributor to relative performance was the significant underweight to China where the regulatory clampdown impacted returns. Here the internet names (where we don't have any exposure as they pay little or no dividend) bore the brunt of this. In Singapore, stock selection was a headwind with many of the Real Estate Investment Trust ("REIT") names lagging as rate expectations ticked up and ongoing impacts of COVID delayed 'normalisation', which was also the case with Macau gaming which detracted given the delays to the opening up of international travel. The underweights to the smaller markets of Malaysia, Indonesia and the Philippines as well as overweight Singapore were positive.

The geographic exposure in the Company's portfolio continues to be mainly spread between Taiwan, Hong Kong, Australia, Korea, China and Singapore. China remains a substantial underweight but is, in part, offset by the overweight to Hong Kong. Moves over the period have tended to take advantage of the increased valuation spread that we saw through last year, reducing those stocks that performed particularly strongly and now look more fully valued in favour of those names that have lagged and look more attractive from a valuation perspective. This involved adding to financials, including in some of the South East Asian markets such as Thailand and Indonesia, and taking profits on some of the more growth orientated names in North Asia that had done particularly well, including some of the information technology names. However, increased volatility during the latter part of the period, in part due to ongoing COVID disruptions, did provide some opportunity to add back to attractive names in the sector. Information technology remains the biggest sectoral exposure in the fund. Real estate also remains an important exposure, but we have taken a very selective approach both in terms of the nature of the underlying asset and also balance sheet strength. For instance, our Hong Kong exposure is predominantly to the commercial property companies who are growing their China portfolios, rather than the residential developers. During the period we took some profits in property names that had outperformed, rotating into some financials that had lagged.

Investment Outlook

Asian markets have lagged global ones over the last year. In part this has been driven by what's going on in China both from a regulatory and economic perspective. Regulatory announcements have accelerated to encompass more and more areas of the economy with the mention of 'common prosperity' becoming increasingly common in speeches and the press. This is being driven by concerns over growing inequality being seen across China, where growth may have all but eliminated 'extreme poverty', but the spoils of that growth are not being shared equally. Many of the measures that have been announced are looking to address this and in particular rebalance the benefits of growth towards labour and SMEs and reduce the 'costs' of property, education and healthcare for ordinary people. Although many of these objectives are laudable, for us as investors, the increased regulatory uncertainty makes it harder to assess the future returns that a business can potentially make and, therefore, what valuation we should attach to it. Thus far the direct impact has been mainly on areas of the market where little is available in the way of income such as the internet and education sectors but more recently concerns have arisen in areas including Macau gaming (which saw us selling our Macau name post Company year end) and property stocks. Although we don't believe that the authorities are seeking to eliminate the profitability of the private sector or indeed stop foreign investment into China, it does leave us circumspect in our approach there until we get greater clarity. We are of course still looking for new opportunities that are relatively unaffected by the regulatory changes but have been unfairly caught up in its fallout.

Outside of regulation in China there continue to be concerns over the indebtedness of some property companies, especially the residential developer Evergrande. Given the closed capital account and that the state effectively controls the banks and  state owned developers, we believe the issue is manageable. However, policy error remains a risk given the importance of property to GDP and that, unlike many other countries, China has been deliberately keeping policy relatively tight post the COVID crisis. Therefore, given China's economy is slowing, we would expect to see some easing going forward.

Elsewhere in the region there continue to be signs of shortages and rising costs, so a company's ability to pass through cost pressures is key. With price rises being seen globally in many areas, the question of whether inflation will be transitory or more structural remains and it is likely that we will see renewed concerns over tightening and tapering going forward. Although most economies in Asia remain better placed than in 2013 when we last saw a prolonged tapering episode, valuations in some 'high growth' areas may come under scrutiny. Perhaps the biggest risk of rising prices, especially energy costs, is that they have a greater impact on consumer spending than currently expected thus reducing demand for Asian products. In the information technology sector we continue to see some strong long term drivers for growth around digitisation and the roll out of 5G and the 'Internet of Things' but in the near term some areas have disproportionately benefitted from increased demand for product in areas such as work from home.

Whilst vaccination rates for many Asian countries have lagged those of the likes of the UK, we have more recently seen rates increase materially and in some cases surpass that of the UK. Hopefully, this will allow economies to increasingly open up as we go into next year which, aside from the humanitarian benefit, should reduce the number of lockdowns and lost output as well as bringing benefits to countries more dependent on tourism, such as Thailand.

Looking at dividends more broadly, although earnings are recovering there is still some uncertainty as to where near term payments will go given the path of COVID, especially for companies that benefit from increased mobility. However, we still believe that in most cases this is more a matter of timing rather than these companies' ability to pay. Where dividends had been squeezed in places such as Australia, we have seen payments resume or tick up and in Singapore the banks that had been previously restricted have been allowed to raise their dividends from last year's levels. From an overall fund distribution perspective, the other dynamic to be cognisant of is Sterling whose direction will obviously impact the size of translated dividends, with a stronger Sterling acting as a headwind. Still, it should not be forgotten that overall payout ratios in Asia do not look extended versus some other markets and corporates in Asia remain relatively lowly geared. Furthermore, it should also be remembered that whilst inflation rising faster than expected is not great for equities in the short-term, longer term real asset income sources should look attractive versus the 'return-free risk' that is fixed income.

To conclude, markets have recovered materially from their COVID lows in part due to the recovery that has been seen in global growth. So although markets are trading above their long term average aggregate historic valuations, this reflects the fact that earnings have been revised up significantly during the course of 2021. In the near term we believe further upside to the market is relatively limited given the ongoing regulatory overhang, where valuations sit and given we are at or close to maximum monetary and fiscal accommodation. However, this remains at an aggregate level and when we look across the different industries and sectors there is a much wider range of valuations on offer, as well as a number of companies with attractive and growing distributions. Therefore, a focus on attractive bottom up ideas, in our view, remains essential.

Schroder Investment Management Limited

10 November 2021

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and Risk Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last assessment took place in November 2021.

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.

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 arrows in the Change column indicate if the Board thinks the risk has increased, decreased or stayed the same during the year.

Emerging risks and uncertainties

During the year, the Board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. The most significant was climate change risk. The Board has determined that this risk is worthy of close monitoring.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The Board notes the Manager has integrated ESG considerations, including climate change, into the investment process. The Board will continue to monitor this as an emerging risk.

*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 or decreased, and dashes show risks as stable.

Risk	Mitigation and management	Change (post mitigation and management)*
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. The Manager also reported on the impact of COVID-19 on the Company's portfolio, and the market generally. Annual review of the ongoing suitability of the Manager, including resources and key personnel risk. Regular review of NAV and share price performance including discount against the peer group. The Manager and Corporate Broker monitor discount/premium and Board considers this at each meeting.	-
Environmental, social and governance ("ESG") Underestimating the increasing impact of ESG factors on investment performance, and potentially demand for the Company's shares.	The Manager has implemented a comprehensive ESG policy which is outlined in detail on pages 13 to 16 of the 2021 Annual Report . The Manager reports on its ESG engagement at regular board meetings. The Board ensures that ESG factors are incorporated into reports to shareholders.	é Scrutiny of ESG issues has increased, together with the potential for these to affect the value of invested companies.
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 mandate and the long-term investment strategy 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 by the Board as a key performance indicator and is reviewed against the Company's peers on a regular basis. The use of buy back authorities is considered on a regular basis. The Manager and Corporate Broker monitor market feedback and the Board considers this at each quarterly meeting. Marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.	-
The Company's cost base could become uncompetitive against its peer group and against open-ended alternatives	The Board reviews income forecast at each meeting. The Board approves significant non-routine expenses. The Management Engagement Committee reviews fees paid to the Manager at least annually. Ongoing monitoring of fees charged by other service providers takes place alongside an annual review of the Company's Ongoing Charges figure*.	-
Political Political developments globally might materially affect the ability of the Company to achieve its investment objective.	The Board monitored key political developments, including the potential impact of Brexit and noted that the portfolio's investments in the Asia Pacific region limited the direct impact from Brexit other than through shareholders' exposure principally to exchange rate fluctuations against sterling. The Board also monitored key political developments in the Asia Pacific region including US/China tension, the political situation in Hong Kong, Taiwan and Singapore, and political developments in mainland China. The Board and the portfolio manager periodically meet with the Manager's economists to gauge the likelihood and impact of certain political changes.	é Political developments, including in China prompted an increase in the level of this 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 underlying corporate earnings and/or 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 Manager seeks to invest in companies with strong balance sheets. The Company has no formal policy of hedging currency risk but may use foreign currency borrowings or forward foreign currency contracts to limit exposure.	Ü The extreme market volatility seen during the early stages of the Covid-19 pandemic has subsided, prompting a reduction in this the level of this risk.
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.	-
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 fraud, 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, including an annual presentation to the Audit and Risk Committee chair and other directors from key risk and internal controls personnel at the Company's main service providers. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, is undertaken. Service providers internal controls reports continue to be robust, as businesses gradually return to physical workplaces.	-
Cyber The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information, unauthorised payments or inability to carry out operations in a timely manner.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack. In addition, the Board received presentations from the Manager, the registrar, and the safekeeping agent and custodian on cyber risk.	-

Risk assessment and internal controls review by the Board

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit and Risk Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

No significant control failings or weaknesses were identified from the Audit and Risk Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The Board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company is set out in note 20 to the accounts on pages 57 to 62 of the 2021 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 2021 and the potential impact of the principal risks and uncertainties it faces for the review period. They have also reviewed the impact of the COVID-19 pandemic on the Company as further detailed in the Chairman's Statement, and Manager's Review sections of this report. The directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively, following the implementation of their business continuity plans.

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

In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 20 to 22 of the 2021 Annual Report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio. The directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

The directors have also considered a stress test which represents a severe but plausible scenario along with movement in foreign exchange rates. This scenario assumes a severe stock market collapse and/or exchange rate movements at the beginning of the five year period, resulting in a 50% fall in the value of the Company's investments and investment income and no subsequent recovery in either prices or income in the following five years. 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 limit.

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 operating costs 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.

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 monitors the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls at its quarterly meetings.

Although there continue to be 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 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. 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.

Based on the above 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. 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 10 November 2022 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

10 November 2021

Statement of Directors' Responsibilities

in respect of the Annual Report and Accounts

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 24 and 25 of the 2021 Annual Report , confirms that, to the best of their knowledge:

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

-  the Strategic Review 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.

So far as each of the directors are aware, there is no relevant audit information of which the Company's auditor is unaware, and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

By order of the Board

Paul Meader

Chairman

10 November 2021

Statement of Comprehensive Income

for the year ended 31 August 2021

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments at fair value
through profit or loss	-	121,017	121,017	-	(33,379)	(33,379)
Net foreign currency gains	-	395	395	-	3,536	3,536
Income from investments	32,394	219	32,613	31,421	164	31,585
Other income	1	-	1	12	-	12
Total income/(loss)	32,395	121,631	154,026	31,433	(29,679)	1,754
Management fee	(1,584)	(3,697)	(5,281)	(1,355)	(3,163)	(4,518)
Performance fee	-	(5,636)	(5,636)	-	-	-
Other administrative expenses	(1,033)	(5)	(1,038)	(1,051)	(4)	(1,055)
Profit/(loss) before finance costs and taxation	29,778	112,293	142,071	29,027	(32,846)	(3,819)
Finance costs	(94)	(220)	(314)	(235)	(528)	(763)
Profit/(loss) before taxation	29,684	112,073	141,757	28,792	(33,374)	(4,582)
Taxation	(2,002)	-	(2,002)	(2,255)	-	(2,255)
Net profit/(loss) and total comprehensive income	27,682	112,073	139,755	26,537	(33,374)	(6,837)
Earnings/(losses) per share	10.30p	41.70p	52.00p	9.86p	(12.40)p	(2.54)p

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 2021

		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 2019	212,786	-	39	150,374	267,230	31,375	661,804
Issue of ordinary shares	21,561	-	-	-	-	-	21,561
Repurchase of ordinary shares into treasury	-	(2,155)	-	-	-	-	(2,155)
Net (loss)/profit	-	-	-	-	(33,374)	26,537	(6,837)
Dividends paid in the year	-	-	-	-	-	(27,674)	(27,674)
At 31 August 2020	234,347	(2,155)	39	150,374	233,856	30,238	646,699
Repurchase of ordinary shares into treasury	-	(7,345)	-	-	-	-	(7,345)
Net profit	-	-	-	-	112,073	27,682	139,755
Dividends paid in the year	-	-	-	-	-	(27,690)	(27,690)
At 31 August 2021	234,347	(9,500)	39	150,374	345,929	30,230	751,419

Balance Sheet

at 31 August 2021

	2021	2020
	£'000	£'000
Non current assets
Investments at fair value through profit or loss	774,425	672,184
Current assets
Receivables	6,881	5,234
Cash and cash equivalents	16,147	17,028
	23,028	22,262
Total assets	797,453	694,446
Current liabilities
Payables	(46,034)	(47,747)
Net assets	751,419	646,699
Equity attributable to equity holders
Share capital	234,347	234,347
Treasury share reserve	(9,500)	(2,155)
Capital redemption reserve	39	39
Special reserve	150,374	150,374
Capital reserves	345,929	233,856
Revenue reserve	30,230	30,238
Total equity shareholders' funds	751,419	646,699
Net asset value per share	280.94p	239.28p

These accounts were approved and authorised for issue by the Board of Directors on 10 November 2021 and signed on its behalf by:

Paul Meader

Director

Registered in Guernsey as a company limited by shares

Company registration number: 43298

Cash Flow Statement

for the year ended 31 August 2021

	2021	2020
	£'000	£'000
Operating activities
Profit/(loss) before finance costs and taxation	142,071	(3,819)
Add back net foreign currency gains	(395)	(3,536)
(Gains)/losses on investments at fair value through profit or loss	(121,017)	33,379
Net sales/(purchases) of investments at fair value through profit or loss	16,858	(9,030)
Increase in receivables	(1,719)	(194)
Increase in payables	5,753	70
Overseas taxation paid	(2,131)	(2,143)
Net cash inflow from operating activities before interest	39,420	14,727
Interest paid	(310)	(767)
Net cash inflow from operating activities	39,110	13,960
Financing activities
Bank loans drawn down	-	87,067
Bank loans repaid	(5,304)	(80,351)
Issue of ordinary shares	-	21,561
Repurchase of ordinary shares into treasury	(6,402)	(2,155)
Dividends paid	(27,690)	(27,674)
Net cash outflow from financing activities	(39,396)	(1,552)
(Decrease)/increase in cash and cash equivalents	(286)	12,408
Cash and cash equivalents at the start of the year	17,028	5,043
Effect of foreign exchange rates on cash and cash equivalents	(595)	(423)
Cash and cash equivalents at the end of the year	16,147	17,028

Dividends received during the year amounted to £30,823,000 (2020: £30,561,000) and bond and deposit interest receipts amounted to £1,000 (2020: £14,000).

Notes to the Accounts

1.   Accounting Policies

(a)   Basis of accounting

The accounts have been prepared in accordance with the Companies Guernsey Law 2008 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 October 2019.

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

The Company's share capital is denominated in sterling and this is the currency in which its shareholders operate and expenses are generally paid. The Board has therefore determined that sterling is the functional currency and the currency in which the accounts are presented. Amounts have been rounded to the nearest thousand.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation 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 for 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 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 principal accounting policies adopted are set out below.

2.  Taxation

(a)   Analysis of tax charge for the year

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Irrecoverable overseas tax	2,002	-	2,002	2,255	-	2,255
Taxation for the year	2,002	-	2,002	2,255	-	2,255

The Company became resident in the United Kingdom for tax taxation purposes, with effect from 1 September 2020. The Company has no corporation tax liability for the year ended 31 August 2021. For the year ended 31 August 2020 and prior years, the Company was resident in Guernsey for taxation, but was granted an exemption from Guernsey taxation, under the Income Tax (Exempt Bodies) Guernsey Ordinance 1989, for which it was charged an annual exemption fee of £1,200.

(b)   Factors affecting tax charge for the year

The tax assessed for the year ended 31 August 2021 is lower than the Company's applicable rate of corporation tax for that year of 19.0%. The factors affecting the tax charge for the year are as follows:

	2021
	Revenue	Capital	Total
	£'000	£'000	£'000
Net return before taxation	29,684	112,073	141,757
Net return before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0%	5,640	21,294	26,934
Effects of:
Capital returns on investments	-	(23,068)	(23,068)
Revenue not chargeable to corporation tax	(5,568)	(42)	(5,610)
Tax relief on overseas tax suffered	-	-	-
Expenses disallowed	-	1	1
Unrelieved expenses	-	1,772	1,772
Double Tax Relief	(72)	43	(29)
Irrecoverable overseas tax	2,002	-	2,002
Taxation for the year	2,002	-	2,002

(c)   Deferred taxation

The Company has an unrecognised deferred tax asset of £2,332,000 (2020: nil) based on a main rate of corporation tax of 25%. In its 2021 budget, the UK government announced that the main rate of corporation tax would increase to 25% for the fiscal year beginning on 1 April 2023.

The deferred tax asset has arisen due to the 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.

The Company was granted status as an investment trust company by HMRC effective from 1 September 2020, and intends to continue to meet the conditions required to retain that status. Therefore, no provision has been made for deferred UK capital gains tax on any capital gains or losses arising on the revaluation or disposal of investments.

3.  Dividends

Dividends paid and declared

	2021	2020
	£'000	£'000
2020 fourth interim dividend of 4.60p (2019: 4.60p)	12,404	12,274
First interim dividend of 1.90p (2020: 1.90p)	5,100	5,127
Second interim dividend of 1.90p (2020: 1.90p)	5,097	5,138
Third interim dividend of 1.90p (2020: 1.90p)	5,089	5,135
Total dividends paid in the year	27,690	27,674
	2021	2020
	£'000	£'000
Fourth interim dividend declared of 4.80p (2020: 4.60p)	12,838	12,432

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 2020 differs from the amount actually paid due to shares repurchased and cancelled after the balance sheet date but prior to the share register record date.

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

The Company was granted status as an investment trust company by HMRC effective from 1 September 2020, and intends to continue to meet the minimum distribution requirements of Section 1158, in order to retain that status. Those requirements 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 £27,682,000.

	2021
	£'000
First interim dividend of 1.90p	5,100
Second interim dividend of 1.90p	5,097
Third interim dividend of 1.90p	5,089
Fourth interim dividend of 4.80p	12,838
Total dividends of 10.50p	28,124

4.  Earnings/(losses) per share

	2021	2020
	£'000	£'000
Revenue profit	27,682	26,537
Capital profit/(loss)	112,073	(33,374)
Total profit/(loss)	139,755	(6,837)
Weighted average number of Ordinary shares in issue during the year	268,751,860	269,200,852
Revenue earnings per share	10.30p	9.86p
Capital earning/(loss) per share	41.70p	(12.40)p
Total earning/(loss) per share	52.00p	(2.54)p

5.  Share capital

	2021	2020
	£'000	£'000
Ordinary shares of 1p each, allotted, called-up and fully paid:
Opening balance of 270,268,024 (2020: 262,683,024) shares, excluding shares held in treasury	232,192	212,786
Repurchase of 2,800,000 (2020: 965,000) shares into treasury	(7,345)	(2,155)
Issue of nil (2020: 8,550,000) shares	-	21,561
Subtotal of 267,468,024 (2020: 270,268,024) shares, excluding shares held in treasury	224,847	232,192
3,765,000 (2020: 965,000) shares held in treasury	9,500	2,155
Closing balance of 271,233,024 (2020: 271,233,024) shares	234,347	234,347

The ordinary shares rank pari passu, and each share carries one vote in the event of a poll at a general meeting. The Company has authority to issue an unlimited number of ordinary shares.

During the year, the Company purchased 2,800,000 of its own shares, nominal value £28,000. to hold in treasury for a total consideration of £7,345,000 representing 1.0% of the shares outstanding at the beginning of the year. The reason for these share purchases was to seek to manage the volatility of the share price discount to net asset value per share.

6.  Net asset value per share

	2021	2020
Net assets attributable to shareholders (£'000)	751,419	646,699
Shares in issue at the year end	267,468,024	270,268,024
Net asset value per share	280.94p	239.28p

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 48 of the 2021 Annual Report, and note 1(j) on page 49 of the 2021 Annual Report.

At 31 August 2021, the Company's investment portfolio was categorised as follows:

	2021
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Investments in equities and equity linked securities	769,397	-	5,028	774,425
Total	769,397	-	5,028	774,425

Level 3 investments comprise one holding. in global depositary receipts which delisted during the year. There were no other transfers between Levels 1, 2 or 3 during the year.

	2020
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Investments in equities and equity linked securities	672,184	-	-	672,184
Total	672,184	-	-	672,184

There were no transfers between Levels 1, 2 or 3 during the year ended 31 August 2020.

Status of announcement

2021 Financial Information

The figures and financial information for 2021 are extracted from the Annual Report and Accounts for the year ended 31 August 2021 and do not constitute the statutory accounts for the year. The 2021 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified.

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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