Annual Financial Report
Securities Trust of Scotland plc (the "company")
Legal Entity Identifier: 549300UZ1Y7PPQYJGE19
Annual Financial Results
Year to 31 March 2019
The financial information set out below does not constitute the company's statutory accounts for the financial year ended 31 March 2019 or financial year ended 31 March 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the Registrar of Companies and those for 2019 will be delivered following the company's annual general meeting.
The auditor's have reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.
A copy of the annual report and accounts has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM.
The annual general meeting of the company will be held at 12.30pm on 17 September 2019, at Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. The full notice of the meeting can be found on the company's website (www.securitiestrust.com).
The unedited full text of those parts of the annual report and accounts for the year ended 31 March 2019, which are required to be published are set out on the following pages.
Financial Highlights
|
Total returns‡# (including reinvested dividends) |
Year ended 31 March 2019 % |
Year ended 31 March 2018 % |
|
Net asset value per share* |
11.4 |
(1.1) |
|
Share price |
9.6 |
0.2 |
|
Peer group† |
8.5 |
(1.8) |
|
Key data |
As at 31 March 2019 |
As at 31 March 2018 |
|
Net asset value per share (cum income) # |
183.21p |
170.02p |
|
Net asset value per share (ex income) # |
181.22p |
168.65p |
|
Share price |
169.50p |
160.50p |
|
Discount # |
7.48% |
5.60% |
|
Average discount for the 12 week period to 31 March** |
4.94% |
4.95% |
|
Net assets |
£191,444,000 |
£187,784,000 |
|
Income |
Year ended 31 March 2019 |
Year ended 31 March 2018 |
|
Revenue return per share |
6.23p |
5.69p |
|
Dividend per share |
6.25p |
6.10p |
|
Ongoing charges# |
Year ended 31 March 2019 |
Year ended 31 March 2018 |
|
Ongoing charges |
0.9% |
0.9% |
Source: Martin Currie Investment Management Limited.
‡ The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or peer group.
# See Alternative Performance Measures in the company's annual report for definitions. Ongoing charges (as a percentage of shareholders' funds) are calculated using average net assets over the period. The ongoing charges figure has been calculated in line with the AIC's recommended methodology.
* Calculated using cum-income NAV with dividends reinvested.
† Please see the company's annual report for details on the company's peer group.
** Based on ex income net asset value.
Five-year record
Annual total returns with dividends reinvested over 12 month periods to 31 March
|
|
2019 |
2018 |
2017 |
2016 |
2015 |
|
Net asset value per share |
11.4% |
(1.1%) |
26.7% |
0.0% |
11.3% |
|
Share Price |
9.6% |
0.2% |
27.7% |
(2.2%) |
3.1% |
Source: Martin Currie Investment Management Limited.
Chairman's Statement
Introduction
The year under review has been characterised by increasing volatility as the period progressed, as markets responded to the evidence of slowing global growth against a backdrop of tightening monetary conditions.
This unappealing cocktail was further spiked by the threat of increased trade barriers, whether Brexit related, or those of a US-China trade war.
Consequently, whilst the overall total returns achieved were good, almost all of the return achieved in the year was made in the first half.
Performance
I am pleased to report that the net asset value ('NAV') total return was 11.4% over the 12-month period. This was substantially better than the peer group median which returned 8.5%. The share price total return was lower, returning 9.6% as the discount to NAV widened, on which I write more below.
Since May 2016, when Mark Whitehead was appointed as portfolio manager, and the company moved to an unconstrained mandate, the NAV total return has been 40.9% and the share price total return 40.3% against the peer group median of 35.2%.
Revenue earnings and dividends
The revenue return per share was 6.23p, an increase of 9.5% over that achieved the previous year (2018: 5.69p). This was driven by a strong increase in investment income, and a reduction in shares in issue due to buy backs, partially offset by lower options income. The increase in investment income is pleasing to see and is a consequence of the portfolio manager's focus on investing in stocks with both income and growth characteristics.
The board is pleased to declare a fourth interim dividend of 1.9p which will be paid on 26 July 2019 to shareholders on the register on 5 July 2019 with an ex-dividend date of 4 July 2019. The total dividend for the year of 6.25p represents a rise of 2.45% on the previous year. This dividend increase is representative of the board's intention to deliver a progressive dividend policy, and its aim is to grow the dividend at least in line with developed market inflation over a five-year rolling period. The annualised dividend growth achieved in the last five years is 5%.
The strong rise in revenue earnings and reduction in shares in issue over the period has meant that there is no reliance on retained capital profits to support the dividend. This is consistent with the board's medium-term strategy to allow the earnings to continue to grow such that they will consistently cover the annual dividend. It is worth noting that the board would be happy to support the dividend by paying out of retained capital reserves, if necessary, in the interests of providing a rising and reliable stream of income to our shareholders.
This ability to pay dividends from capital is one particular advantage of the investment trust structure.
Discount, buy backs and marketing arrangements
The cum income discount widened over the course of the year, finishing the year at 7.5% (2018: 5.6%). The average cum income discount over the course of the year was 7.0% and the company bought back 5,950,544 shares into treasury at an average discount of 7.3%. This represents 5.7% of the company's share capital. Of note here, though, is that 74% of the shares bought back over the 12-month period were bought in the first half of the year, before the new marketing budget, that I reported on in the half yearly report, was put to work.
Whilst it's early days, there is encouraging evidence that this incremental spend on promotional activities, which is being funded by our manager, is increasing demand for your company's shares. The long-term aim of the board is to increase demand, such that the shares might trade again at a premium to NAV. This would allow the company to reissue shares recently bought back, or indeed issue new shares, thus enabling the company to grow its share capital once again.
Board
In October we welcomed Sarah Harvey to the board, as part of ongoing board refreshment. Sarah brings considerable experience in marketing, digital and corporate strategy, as well as business operations. Her input has been most valuable as the company embarks on its refreshed marketing programme. Sarah assumed the role of chairman of the marketing and communications committee on 1 January, when Angus Gordon Lennox took on the role of chairman of the nominations committee. Angus remains as senior independent director.
Having served nine years on the board of Securities Trust of Scotland, I will retire from the board following the AGM in September and John Evans will succeed me as Chairman.
John is a highly experienced director and chairman and I know that shareholders will be very well served under his leadership. I have enjoyed meeting many of our shareholders whilst I have been Chairman and I would like to thank you for your support for the company during this period.
Sustainability and Securities Trust of Scotland
Corporate failures such as Carillion and the cost to shareholders of VW's emissions scandal provide clear evidence of the need to embed non- financial inputs such as environmental, social, and governance considerations (ESG) into the investment process. Your board believes that positive behaviours demonstrated by companies in these areas will add shareholder value over the longer term. In addition, and specific to investment in your company, in order to attract incremental demand from younger savers, it will become increasingly important that companies such as Securities Trust of Scotland can demonstrate that it is indeed investing responsibly.
Stewardship factors are an integral part of Martin Currie's investment philosophy and process and have been for some time: the manager has been a signatory of the Principles for Responsible Investment (PRI) since 2009. I am delighted to report that your manager has, yet again, been awarded the highest possible rating (A+) from the PRI for each of its three top-level categories: strategy and governance, incorporation and active ownership, which places it in the 7th percentile of asset managers globally when considering such matters. More information is provided on our website of how ESG considerations are embedded into the manager's approach to investing, the address of which is provided below.
Managing your income
The credentials of investment companies as vehicles for providing reliable and regular income are well known to investors. Those investors looking to use investment companies to provide monthly income may find the Association of Investment Company's ('AIC') newly launched 'Income Finder' useful to create a virtual portfolio of income paying investment companies and to track their dividend payment dates. Securities Trust of Scotland pays quarterly dividends in the months of April, July, October and January and as mentioned above, advocates a progressive dividend policy. https://www.theaic.co.uk/income-finder/income-builder
Liquidity Considerations
Portfolio liquidity is a topical subject at the moment. Whilst the closed-end structure of an investment trust means that investor redemptions are not a feature, it is reassuring that the STS investment portfolio is constructed from a well spread group of 35-55 listed global equities (44 as at 31 March 2019). Liquidity risk is not considered to be significant, as the company's investments comprise mainly readily realisable securities.
In the event it was required, the managers' expectation is that the current portfolio could be liquidated to the extent of 97% within three trading days, based on a conservative set of assumptions. This measure is updated and reviewed regularly by the investment manager, and presented at all Board meetings.
Outlook
The last year has seen central banks continue to attempt to normalise monetary conditions after the unprecedented accommodative policies following the global financial crisis. Increasing evidence of slowing global growth, and further uncertainties caused by Brexit, and the prospect of a trade stand off between the US and China, has caused policy makers to rethink the pace of normalisation and in the case of China, stimulus has followed. Whilst the market response to such adjustments has been positive, further moves by President Trump to increase pressure on China has provided increased cause for concern.
The earnings outlook is unclear in the near term whilst such uncertainties remain and increased market volatility is to be expected. The scope for outperformance by skilled stock pickers, with a keen eye for quality and value remains, particularly for those investors such as ourselves that are unconstrained by geography, sector and index.
Don't miss our updates
The company's award winning website at securitiestrust.com is a comprehensive source of information and includes regular portfolio manager updates and outlook videos, monthly performance factsheets, interactive market analyses and independent research reports.
I recommend that you subscribe for regular email updates that will keep you abreast of key information and thank you, on behalf of the board, for your continued support.
Rachel Beagles
21 June 2019
Manager's Review
Market review
The 2019 fiscal year for Securities Trust of Scotland started with a rebound after the rather weak start to equity markets in early 2018. As we moved through the summer and into autumn, volatility began to pick up again, and the fourth quarter proved to be a very weak period for equities, followed by a strong rebound in the first quarter of 2019.
There was political upheaval, macro- and micro-economic volatility, combined with tariff threats and implementations - to name just a few of the drivers of meaningful dispersion in equity market performance.
Before we highlight some of the most significant influencing factors, it's important to understand that the global synchronised growth recovery, witnessed for much of 2017, dislocated in 2018. The US remained the best-performing G10 country, with strong real GDP growth, but even this began to wane as we moved deeper into the second half of the year.
This contrasts with the Euro Area, where GDP growth decelerated early last year - a trend that has continued. Elsewhere, Emerging, Pacific and Frontier markets have also struggled with growth slipping.
The strong US dollar, poor budgetary and liquidity conditions, large levels of US dollar-denominated debt and weakening commodities were all highlighted as causes of the slowdown. When combined with higher inflation, this was most acutely felt in countries such as Argentina and Turkey. China has also slowed, no doubt exacerbated by the shock of escalating trade tensions with the US, which had threatened materially to curb GDP growth. Policy interventions, such as tax cuts and looser monetary controls, have been announced and enacted, and the first signs of a pickup in economic activity are becoming evident. This has certainly tarnished sentiment towards Chinese equities, which suffered acutely in the summer, but then rebounded strongly in late 2018 and early 2019.
The speed and magnitude of the collapse in stock markets in December and recovery in January 2019 was breathtaking. For the S&P 500, it was one of the worst Decembers since 1931 and the best January since 1987! Very rarely have we seen such an aggressive fall in markets followed the next month by such a violent reversionary bounce back.
The causes of this dramatic change in market sentiment revolved around the macroeconomic activity witnessed in quarter four. Tightening financial conditions and slowing growth across the world, most notably the more recent deterioration in the US, caused sufficient market disruption, particularly in credit and cash-funding markets, to persuade the Federal Reserve to take a much more dovish tone. Bombed-out equity markets, with investor sentiment at rock bottom in late December, combined with the prospect of looser monetary and fiscal conditions, provided the boost investors needed to drive equity markets back toward long-term fair value by the end of January.
The flip flop in Federal Reserve Chairman Powell's policy was also fascinating. It occurred very quickly, with some arguing that he caved in to Mr. Trump's pressure to rein back his tightening policy path. A cynic might conclude that the volte-face has everything to do with Mr. Trump positioning the economy for another surge of growth as we move deeper into the last half of his first term in office. Certainly, one could argue that it was a response to the deteriorating macroeconomic data, which has been buckling under the weight of the China-US trade war.
What is clear, is that global growth is now rather lacklustre. There have been a decent number of industrial activity indicators and PMI surveys across regions that point to a period of more sluggish growth. It seems that the strength in US activity early last year was enough to offset Emerging Market and Euro Area softness, which allowed the global economy to plough an above-trend growth rate. Unfortunately, the recent slowdown in the US has now taken its toll, driving global growth below trend.
Most recently, in March the US 10-year bond yield fell below the three-month Treasury bill yield for the first time since 2006. Commentators have been quick to point out the significance of this. Since the 1960s, seven out of the eight US yield-curve inversions were followed by a recession.
Germany has also seen its economy stagnate - the trade war has affected auto and component sales (among other exported goods) as China has slowed. Consumer confidence is also waning. Elsewhere, Italy's extreme left-wing and right-wing coalition government doesn't seem to be working all that smoothly. Italy is big enough to destroy both the European Union and the euro, and this risk has certainly risen. European risk asset aversion has risen in tandem and, to make matters worse, Italy is now in a technical recession. Encumbered with far too much debt and a fractured political system, it is unclear how they can wade through their own bureaucracy to stimulate activity through supportive policy. Spain, on the other hand, is the odd one out in Europe, and seems to be operating at robust economic activity levels.
Brexit negotiations continue to prove challenging, most likely driving lower growth across Europe, not just in the UK. The weird anomaly is that despite such turgid UK growth, the economy is running at near-record full employment! This is a lagging indicator, so we may see some weakness in the coming months. It might also be due to British business residing in a state of paralysis until clarity on the exit terms is forthcoming, causing productivity to contract.
Yet global equity markets remain firm and could do well for some time yet. For us, this calls for even greater diligence in stockpicking. We don't expect strong appreciation from here, and bouts of volatility should be anticipated. This should provide a much better backdrop for high-quality, cash-generative businesses that are able to distribute sustainable growing dividends to investors. In other words, the perfect income stocks.
Portfolio Review
The NAV of the fund produced a positive total return of 11.4% in sterling absolute terms for the fiscal year. This put the fund in the second quartile of the composite peer group (which includes over a hundred comparable global equity income products using an open or closed-ended structure) over the same period.
The divergence in regional equity market performance was quite stark, but largely followed the narrative of the relative growth backdrop: lower returns available to shareholders of stocks domiciled in slowing economies. North America was much the best regional market, its stronger performance also a function of delivering the best corporate earnings.
The North American equities in the fund have performed strongly, driving much of the total return for the fund. Indeed, most of the top-ten positive absolute performers over the past twelve months were North American.
The leading sectors for the fund in terms of absolute performance were consumer staples, utilities and communication services. The sectors that produced negative returns included financials, industrials and consumer discretionary. These were more cyclically facing sectors that investors have de-rated in anticipation of earnings coming under pressure should we move into a recession.
The best-performing stock in the portfolio over the past year was Merck, the US healthcare company. Merck's immuno-oncology drug Keytruda at the very least de-risks the growth profile of Merck over the next few years. It likely also offers upside, which immediately makes it attractive relative to peers (whose growth is not de-risked, broadly speaking), in our view. This leaves ample room for upside from the pipeline, which is focused on HIV, vaccines and non-immuno-oncology (especially Lenvima and Lynparza).
Merck comfortably remains our top 'Big Pharma' pick, and it has also benefited from investor sentiment warming to the sector.
DSM, the Dutch vitamin producer, is a great example of a stock we have high conviction in that has produced excellent dividend growth. The company is a leader in nutrition science and is innovating continually to produce cutting-edge products. Just recently, it announced testing of a product to help dairy farmers in New Zealand reduce their cows' methane production. Cows, through the enteric process (burping), are one of the largest producers of this potent greenhouse gas that causes climate change.
Incredibly, 4% of total global greenhouse gas is generated by cows, and DSM's dietary supplement aims to reduce this by 30%. The market for this product could be as much as $1-3billion. The company not only grows strongly, supported by its innovation, but also has a solid capital structure and recently confirmed that it will increase its dividend payment by 25%.
Continental, a consumer company that's perhaps more of an industrial, as it produces tyres and auto components, was the worst performer in absolute terms for the portfolio. The stock announced two profit warnings in 2018. Beyond some weakness in Chinese auto demand and disruption from WLTP emissions regulation (tough new emissions regulations have played havoc with original equipment manufacturers (OEMs') production in the short term), auto demand in developed markets has been robust, far from plunging into recession. But this hasn't deterred investors from selling with impunity. The theme of the market shooting first and asking questions later - on the slightest piece of negative short-term news - has been more prevalent as we near the end of this economic cycle. In the main, defensive names have been performing better in Europe, with Zurich Insurance and Britvic making it into the top-ten absolute contributors for the year.
Activity
During the period, we sold our position in Apple. Contrary to our original investment case in 2016, Apple's Services have grown much faster and Apple iPhone much slower than we expected. We believe future growth is increasingly dependent on one division (services) and is a fraction of the group. For us, this calls into question the sustainability of growth and comes at a time of investor nerves about China (20% of sales and a key manufacturing base), both in terms of trade relations with the US and economic stability.
In October, we sold a number of our more cyclical holdings to insulate the portfolio from any further slide into an economic and earnings recession. The proceeds of these sales were invested across the more defensive positions which have more stable earnings. An example was the sale of DS Smith, a cardboard box manufacturer that we thought could grow revenues and earnings, benefiting from the structural shift to online shopping. However, we worried that this company could prove to be very cyclical, as it proved to be in the last downturn. The company argues otherwise, as it has been winning long-term contracts with the likes of Amazon. When we reviewed the company prior to our sale, we also felt that the innovation the company talks so much about, is not really in evidence. We still receive large Amazon boxes with far too much empty space in them. The paper cycle is also long in the tooth, with consumer activity waning. The stock has gone on to fall another 25% since our sale, so we will take another look at it. But we are doubtful that enough has changed to warrant us revisiting the position.
We have recently purchased a position in Tencent. The investment case for Tencent is threefold; monetisation of its extremely large user base, continued strong execution within gaming, and development (and eventual increasing profitability) within the 'other' divisions. We believe the market is currently overly focused on short-term issues such as macroeconomic fears or a changing regulatory environment, which is presenting a good entry point into a great long-term story.
Tencent is among the most exciting growth stocks globally, and thus growth is one of the key angles to the investment case. Trends towards social platforms, online advertising, gaming on smartphones, cloud computing, and mobile payments should all drive the top line well beyond our investment horizon. Although it is too early to model, Tencent also offers the option of exposure to many nascent areas - for example, autonomous driving. All in, we expect growth over the next five years should carry on in much the same vein as history and expect >20% CAGR.
Outlook
With global macroeconomic data sluggish in most regions, the question is whether or not we are entering economic recession, or this is just a blip in activity caused by the trade wars and tightening fiscal and monetary conditions? In simple terms, have the central banks, particularly the Federal Reserve, got their hawkish policies wrong? The answer would appear to be 'yes'. In response to weaker data, the Federal Reserve has responded by shifting its policy path, so rather than the two further rate rises we expected in 2019, there is now the prospect of rate cuts going into 2020 and the stance of 'easy money' looks set to be extended. The Federal Reserve highlighted the risks investors are well versed in: slower growth in major economies and heightened political uncertainty, including trade tensions and Brexit. This more accommodative stance may well continue to fuel equities throughout the rest of 2019 and in 2020.
The China-US trade dispute continues to rumble on with the focus now on the meeting between Donald Trump and Xi Jinping when the two leaders attend the G20 summit in Japan in late June. There are hopes that the US and China will increase efforts to end their trade war. The question is how this has impaired the long-term economic relationship between the US and China. China is certainly seeing slower growth and is already putting in place its own policy response in the form of its own bank bailout, combined with tax and interest-rate cuts to try to stimulate domestic activity. As a result, we could continue to see a good rebound in Chinese and related equity markets after a terrible year in 2018, as sentiment and activity improve.
In Europe, Brexit is now delayed to October 31. Much will depend on who becomes the next UK Prime Minister and what their stance will be regards this date being immovable. The risks have certainly increased that Britain could be heading for a no-deal Brexit. Were this to be the case we would likely see pressure on sterling and UK domestic equities. The markets, as with business generally, would benefit from more clarity.
German macroeconomic data is bleak, but we assume that politicians will be putting pressure on Brussels to agree a Brexit deal to prevent a slide into recession. Private investment has been weak, and faltering Chinese growth has not been good for exports. A paltry 1.3% GDP growth forecast* for 2019 could improve later in the year if the fiscal backdrop is more favourable.
Global corporate earnings expectations look to have come down a long way since September. This has been driven by a combination of margin pressure, top-line deceleration and the loss of tax stimulus. Earnings estimates are falling, driven by energy, materials and technology sectors. Two negative year-over-year earnings growth quarters would, of course, signal an earnings recession. The market does, however, expect a rebound in earnings later in 2019, but we should not expect that to be too exciting in the face of rising costs for transport/logistics, labour, funding, tariffs and materials.
Now that the S&P 500 has climbed back through fair value, as measured by long-term P/E multiples, we believe we really need to see earnings hit a trough before markets move higher from this point. It is certain that central banks, with a more dovish stance, will hold off on tightening policy and further fiscal stimulus may even be put in place.
In conclusion, the market outlook in our view demands a much more careful stockpicking mentality, a laser focus on corporate margin pressure, and a keen eye on valuation. We don't expect strong moves from here, and bouts of volatility should be expected. This will surely be a much better backdrop for high-quality, cash-generative businesses that are able to distribute sustainable, growing dividends to investors. These may well make up most of the real equity market return for some time.
*German GDP forecast from January 2019 World Economic Forum.
Mark Whitehead
21 June 2019
Portfolio Summary
Portfolio distribution as at 31 March 2018
|
By region (excluding cash) |
2019 % |
2018 % |
|
North America |
46.7 |
48.7 |
|
Developed Europe |
41.5 |
40.8 |
|
Developed Asia Pacific ex Japan |
11.8 |
10.5 |
|
|
100.0 |
100.0 |
|
By sector (excluding cash) |
2019 % |
2018 % |
|
Consumer goods |
19.9 |
17.2 |
|
Financials |
19.2 |
27.5 |
|
Industrials |
16.8 |
16.6 |
|
Technology |
9.6 |
7.2 |
|
Basic materials |
9.0 |
8.0 |
|
Healthcare |
8.3 |
7.3 |
|
Oil & gas |
6.6 |
6.9 |
|
Utilities |
6.4 |
3.1 |
|
Telecommunications |
2.7 |
2.2 |
|
Consumer services |
1.5 |
4.0 |
|
|
100.0 |
100.0 |
|
|
By asset class (including cash and borrowings) |
2019 % |
2018 % |
|
||||
|
|
Equities |
110.4 |
110.3 |
|
||||
|
|
Options |
- |
(0.3) |
|
||||
|
|
Cash |
2.6 |
3.0 |
|
||||
|
|
Less borrowings |
(13.0) |
(13.0) |
|
||||
|
|
|
100.0 |
100.0 |
|
||||
|
Largest 10 holdings |
|
|
|
|||||
|
|
31 March 2019 |
31 March 2019 |
31 March 2018 |
31 March 2018 |
||||
|
Microsoft |
10,625 |
5.0 |
6,438 |
3.1 |
||||
|
WEC Energy Group |
7,757 |
3.7 |
3,790 |
1.8 |
||||
|
Procter & Gamble |
7,540 |
3.6 |
3,583 |
1.7 |
||||
|
Merck & Co |
7,500 |
3.5 |
4,820 |
2.3 |
||||
|
Air Products + Chemicals |
7,254 |
3.4 |
- |
- |
||||
|
Sanofi |
6,646 |
3.1 |
3,758 |
1.8 |
||||
|
Zurich Insurance Group |
6,585 |
3.1 |
- |
- |
||||
|
Crown Castle International |
6,527 |
3.1 |
4,671 |
2.3 |
||||
|
Koninklijke DSM |
6,479 |
3.1 |
5,394 |
2.6 |
||||
|
Taiwan Semiconductor |
5,979 |
2.8 |
5,036 |
2.4 |
||||
|
Portfolio Holdings As at 31 March 2019
|
Sector |
Country |
Market value |
% of total |
|
||
|
North America |
|
|
99,038 |
46.7 |
|
||
|
Microsoft |
Technology |
United States |
10,625 |
5.0 |
|
||
|
WEC Energy Group |
Utilities |
United States |
7,757 |
3.7 |
|
||
|
Procter & Gamble |
Consumer goods |
United states |
7,540 |
3.6 |
|
||
|
Merck & Co |
Healthcare |
United States |
7,500 |
3.5 |
|
||
|
Air Products + Chemicals |
Basic materials |
United States |
7,254 |
3.4 |
|
||
|
Crown Castle International |
Financials |
United States |
6,527 |
3.1 |
|
||
|
Chevron |
Oil & Gas |
United States |
5,522 |
2.6 |
|
||
|
BCE |
Basic materials |
Canada |
5,338 |
2.5 |
|
||
|
Eaton |
Industrials |
United States |
4,934 |
2.3 |
|
||
|
Lockheed Martin |
Industrials |
United States |
4,907 |
2.3 |
|
||
|
Suncor Energy |
Oil & gas |
Canada |
4,311 |
2.0 |
|
||
|
Occidental Petroleum |
Oil & gas |
United States |
4,244 |
2.0 |
|
||
|
Philip Morris International |
Consumer goods |
United States |
4,201 |
2.0 |
|
||
|
Paychex |
Industrials |
United States |
3,958 |
1.9 |
|
||
|
Blackstone Group |
Financials |
United States |
3,818 |
1.8 |
|
||
|
VF Corp |
Consumer goods |
United States |
3,802 |
1.8 |
|
||
|
Leggett Platt |
Consumer goods |
United States |
3,431 |
1.6 |
|
||
|
BB&T Corp |
Financials |
United States |
3,369 |
1.6 |
|
||
|
Developed Europe |
|
|
88,500 |
41.5 |
|||
|
Sanofi |
Healthcare |
France |
6,646 |
3.1 |
|||
|
Zurich Insurance Group |
Financials |
Switzerland |
6,585 |
3.1 |
|||
|
Koninklijke DSM |
Basic materials |
Netherlands |
6,479 |
3.1 |
|||
|
Airbus |
Industrials |
France |
5,974 |
2.8 |
|||
|
Deutsche Telekom |
Telecommunications |
Germany |
5,809 |
2.7 |
|||
|
SSE |
Utilities |
United Kingdom |
5,713 |
2.7 |
|||
|
Britvic |
Consumer goods |
United Kingdom |
5.637 |
2.7 |
|||
|
Danone |
Consumer goods |
France |
5,333 |
2.5 |
|||
|
Unilever |
Consumer goods |
Netherlands |
4,946 |
2.3 |
|||
|
Securitas AB |
Industrials |
Sweden |
4,052 |
1.9 |
|||
|
HSBC Holdings |
Financials |
United Kingdom |
3,910 |
1.8 |
|||
|
Compagnie Financiere Richemont |
Consumer goods |
Switzerland |
3,896 |
1.8 |
|||
|
Koninklijke Philips |
Industrials |
Netherlands |
3,828 |
1.8 |
|||
|
Civitas Social Housing |
Financials |
United Kingdom |
3,407 |
1.6 |
|||
|
Kingfisher |
Consumer services |
United Kingdom |
3,170 |
1.5 |
|||
|
Beazley |
Financials |
United Kingdom |
2,826 |
1.3 |
|||
|
Caixabank SA |
Financials |
Spain |
2,826 |
1.3 |
|||
|
Prudential |
Financials |
United Kingdom |
2,691 |
1.3 |
|||
|
Greencoat UK Wind |
Financials |
United Kingdom |
2,412 |
1.1 |
|||
|
Ibstock |
Industrials |
United Kingdom |
2,351 |
1.1 |
|||
|
Developed Asia Pacific ex Japan |
|
25,140` |
11.8 |
||||
|
Taiwan Semiconductor |
Technology |
Taiwan |
5,979 |
2.8 |
|||
|
Transurban Group |
Industrials |
Australia |
5,662 |
2.7 |
|||
|
Tencent Holdings |
Technology |
Hong Kong |
3,891 |
1.8 |
|||
|
Shanghai Fosun Pharmaceutical |
Healthcare |
Hong Kong |
3,698 |
1.7 |
|||
|
Samsung Electronics |
Consumer goods |
Korea |
3,410 |
1.6 |
|||
|
United Overseas Bank |
Financials |
Singapore |
2,500 |
1.2 |
|||
|
Total portfolio |
|
|
212,678 |
100.00 |
Principal risks and uncertainties
Risk and mitigation
The company's business model is longstanding and resilient to most of the short term uncertainties that it faces, which the board believes are effectively mitigated by its internal controls and the oversight of the investment manager, as described in the table below.
The principal risks and uncertainties are therefore largely longer term and driven by the inherent uncertainties of investing in global equity markets. The board believes that it is able to respond to these longer term risks and uncertainties with effective mitigation so that both the potential impact and the likelihood of these seriously affecting shareholders' interests are materially reduced.
Risks are regularly monitored at board meetings and the board's planned mitigation measures are described in the table below. The board maintains a risk register and also carries out a risk workshop as part of its annual strategy meeting. The board has identified the following principal risks to the company:
Loss of s1158-9 tax status - Loss of S1158-9 tax status would have serious consequences for the attractiveness of the company's shares. The board considers that, given the regular oversight of this risk carried out by the investment manager and reviewed by the board, the likelihood of this risk occurring is minimal. The audit committee regularly reviews the eligibility conditions and the Company's compliance against each, including the minimum dividend requirements and shareholder composition for close company status.
Long-term investment underperformance - The board manages the risk of investment underperformance by relying on good manager stock selection skills within a framework of diversification and other investment restrictions and guidelines.
The board monitors the implementation and results of the investment process with the manager (who attends all board meetings) and reviews data that shows statistical measures of the company's risk profile.
Should investment underperformance be sustained despite the mitigation measures taken by the investment manager, the board would assess the cause and be able to take appropriate action to manage this risk.
Market, financial and interest rate risk - The company's portfolio is invested in listed equities and is therefore exposed to market risk. Adherence to investment process is intended to ensure portfolios are optimally positioned for market turbulence.
The majority of the company's investment portfolio is invested in overseas securities and the balance sheet can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, and currently does, match specific overseas investment with foreign currency borrowings.
As a consequence of investing in overseas securities the statement of comprehensive income is subject to currency fluctuation arising on overseas income.
In order to retain its place in the FTSE All-Share index, the company must satisfy the liquidity test criteria set by the FTSE at each annual review.
The liquidity of the company's shares is monitored by the board, the investment manager and the company's broker with a report being reviewed at every board meeting. The board regularly discusses ways to improve the liquidity position of the company.
The company intends to use its authority to distribute some capital profit by way of dividend if so required. If the company distributes capital profit by way of dividend, the board is aware that it cannot support the payment of dividends partly out of capital on an indefinite basis in certain investment scenarios. The board actively manages this risk with the investment manager by seeking to grow the company's income and capital in real terms over the longer term.
Operational Risk - The company has outsourced its entire operational infrastructure to third party providers. Contracts and service level agreements have been arranged to ensure that the service provided by each third party provider is of a sufficiently professional and technically high standard. The board receives and reviews control reports from all service providers. Periodically, the board requests representatives from third party service providers to attend board meetings to give the board the opportunity to discuss the controls that are in place directly with the third party providers. The board receives and reviews control reports from all service providers. The board carries out an annual evaluation of its service providers and gives regular feedback to the investment manager through the management engagement committee.
Statement of directors' responsibilities
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Under company law the directors must not approve the accounts unless they are satisfied that they 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 are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. 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.
The financial statements are published on the www.securitiestrust.com website, which is maintained by the investment manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie.
The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and profit or loss 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 financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.
Going concern status
The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review, strategic report and the report of the directors.
The financial position of the company as at 31 March 2019 is shown on the statement of financial position.
The cash flows of the company are set out below. Note 15 sets out the company's risk management policies, including those covering market price risk, liquidity risk and credit risk.
The company has a two year revolving credit facility for £10,000,000 which expires in September 2020, and a multicurrency seven year fixed facility, which expires in September 2023, in three tranches of £1,500,000, €4,500,000 and S$12,750,000, all of which were fully drawn down at the year end date. The company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facilities.
In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale.
The directors are mindful of the principal risks and uncertainties disclosed above and have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future, and at least one year from the date of this annual report. Accordingly, the directors continue to adopt the going concern basis in preparing these accounts.
Viability Statement
The company's business model is designed to achieve rising income and long-term capital growth through investment in a balanced portfolio constructed from global equities unconstrained by geography, sector, stock or market capitalisation. The business model is based on having no fixed or limited life provided global equity markets continue to operate normally. The board has assessed its viability over a three year period in accordance with provision C.2.2 of the 2016 UK Corporate Governance Code. The board considers that this reflects the minimum period which should be considered in the context of its long-term objective but one which is limited by the inherent and increasing uncertainties involved in assessment over a longer period.
In making this assessment the directors have considered the following risks to its ongoing viability:
• the principal risks and uncertainties and the mitigating actions set out above;
• the ongoing relevance of the company's investment objective in the current environment;
• the level of income forecast to be generated by the company and the liquidity of the company's portfolio; and
• the level of fixed costs and debt relative to its liquid assets.
The expectation is that the current portfolio could be liquidated to the extent of 97% within 3 trading days.
Based on the results of their analysis and the company's processes for monitoring each of the factors set out above, the directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over at least the next three years.
Rachel Beagles
Chairman
21 June 2019
Statement of Comprehensive Income
|
|
|
Year to 31 March 2019 |
Year to 31 March 2018 |
||||
|
|
Note |
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
Net (losses) / gains on investments |
8 |
- |
15,195 |
15,195 |
- |
(8,277) |
(8,277) |
|
Net currency gains / (losses) |
|
(14) |
(565) |
(579) |
(46) |
906 |
860 |
|
Income |
3 |
8,539 |
- |
8,539 |
8,339 |
- |
8,339 |
|
Investment management fee |
|
(397) |
(737) |
(1,134) |
(428) |
(794) |
(1,222) |
|
Other expenses |
4 |
(614) |
- |
(614) |
(618) |
- |
(618) |
|
Net return before finance costs and taxation |
|
7,514 |
13,893 |
21,407 |
7,247 |
(8,165) |
(918) |
|
Finance costs |
5 |
(196) |
(355) |
(551) |
(187) |
(314) |
(501) |
|
Net return on ordinary activities before taxation |
|
7,318 |
13,538 |
20,856 |
7,060 |
(8,479) |
(1,419) |
|
Taxation on ordinary activities |
7 |
(671) |
- |
(671) |
(693) |
- |
(693) |
|
Net return attributable to ordinary redeemable shareholders |
|
6,647 |
13,538 |
20,185 |
6,367 |
(8,479) |
(2,112) |
|
Net return per ordinary redeemable share (basic and diluted) |
2 |
6.23p |
12.70p |
18.93p |
5.69p |
(7.58p) |
(1.89p) |
The total columns of this statement are the profit and loss accounts of the company.
The revenue and capital items are presented in accordance with the Association of Investment Companies (AIC) Statement of Recommended Practice (SORP 2014).
All revenue and capital items in the above statement derive from continuing operations.
No operations were acquired or discontinued in the year.
The notes below form part of these financial statements.
Statement of Financial Position
|
|
|
As at 31 March 2019 |
As at 31 March 2018 |
||
|
|
Note |
£000 |
£000 |
£000 |
£000 |
|
Fixed assets |
|
|
|
|
|
|
Investments at fair value through profit or loss* |
8 |
|
212,678 |
|
207,148 |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Trade and other receivables** |
9 |
880 |
|
2,237 |
|
|
Cash and cash equivalents** |
|
5,084 |
|
5,529 |
|
|
|
|
5,964 |
|
7,766 |
|
|
Current liabilities |
|
|
|
|
|
|
Derivative financial liabilities held at fair value through profit and loss* |
|
- |
|
(475) |
|
|
Trade payables - amounts falling due within one year |
10 |
(10,521) |
|
(10,519) |
|
|
Dividend payable |
6 |
(1,515) |
|
(1,602) |
|
|
Total current liabilities |
|
(12,036) |
|
(12,596) |
|
|
Net current liabilities |
|
|
(6,072) |
|
(4,830) |
|
Total assets less current liabilities |
|
|
206,606 |
|
202,318 |
|
Trade payables - amounts falling due after more than one year |
11 |
|
(15,162) |
|
(14,534) |
|
Net assets |
|
|
191,444 |
|
187,784 |
|
Capital and reserves |
|
|
|
|
|
|
Called up ordinary share capital |
12 |
|
1,233 |
|
1,233 |
|
Capital redemption reserve |
|
|
78 |
|
78 |
|
Share premium reserve |
|
|
30,040 |
|
30,040 |
|
Special distributable reserve*** |
|
|
82,709 |
|
92,772 |
|
Capital reserve*** |
12 |
|
75,286 |
|
62,041 |
|
Revenue reserve*** |
|
|
2,108 |
|
1,630 |
|
Total shareholders' funds |
|
|
191,444 |
|
187,784 |
|
Net asset value per ordinary redeemable share |
2 |
|
183.21p |
|
170.02p |
* Prior year balance has been restated to show the derivative liabilities as a current liability
**Prior year balances have been restated to include UBS collateral in the cash balances for both years.
***These reserves are distributable.
The company is registered in Scotland no.283272.
The notes form part of these financial statements
The financial statements were approved by the board and signed on its behalf by Rachel Beagles, Chairman
Statement of Changes in Equity
|
For the year ended 31 March 2019 |
Note |
Called up £000 |
Capital reserve £000 |
Share Reserve £000 |
Special reserve* £000 |
reserve* £000 |
reserve* £000 |
|
|
As at 31 March 2018 |
|
1,223 |
78 |
30,040 |
92,772 |
62,041 |
1,630 |
187,784 |
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
13,538 |
6,647 |
20,185 |
|
Ordinary shares bought back during the year |
12 |
- |
- |
- |
(10,063) |
- |
- |
(10,063) |
|
Dividends paid from revenue |
|
- |
- |
- |
- |
- |
(6,169) |
(6,169) |
|
Dividends paid from capital |
6 |
- |
- |
- |
- |
(293) |
- |
(293) |
|
Balance at 31 March 2019 |
|
1,223 |
78 |
30,040 |
82,709 |
75,286 |
2,108 |
191,444 |
|
For the year ended 31 March 2018 |
Note |
Called up £000 |
Capital reserve £000 |
Share Reserve £000 |
Special reserve* £000 |
reserve* £000 |
reserve* £000 |
|
|
As at 31 March 2017 |
|
1,223 |
78 |
30,040 |
95,692 |
70,520 |
1,910 |
199,463 |
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
(8,479) |
6,367 |
(2,112) |
|
Ordinary shares bought back during the year |
12 |
- |
- |
- |
(2,920) |
- |
- |
(2,920) |
|
Dividends paid |
6 |
|
- |
- |
- |
- |
(6,647) |
(6,647) |
|
Balance at 31 March 2018 |
|
1,223 |
78 |
30,040 |
92,772 |
62,041 |
1,630 |
187,784 |
*These reserves are distributable.
**The company does not have any other income or expenses that are not included in the 'Net return attributable to ordinary redeemable shareholders' as disclosed in the Statement of Comprehensive Income above, and therefore this is also the 'Total comprehensive income' for the year.
The notes form part of these financial statements.
|
Statement of Cashflow
|
|
Year to |
Year to |
||
|
|
Note |
£000 |
£000 |
£000 |
£000 |
|
Cash flows from operating activities |
|
|
|
|
|
|
(Losses)/gains before tax |
|
|
20,856 |
|
(1,419) |
|
Adjustments for: |
|
|
|
|
|
|
Losses/(gains) on investments |
8 |
(15,195) |
|
8,277 |
|
|
Capital distribution received* |
|
- |
|
27 |
|
|
Finance costs |
5 |
551 |
|
501 |
|
|
Exchange movement on bank borrowings |
|
628 |
|
(1,011) |
|
|
Purchases of investments** |
8 |
(78,397) |
|
(93,620) |
|
|
Sales of investments** |
8 |
87,587 |
|
98,452 |
|
|
Dividend income |
3 |
(7,836) |
|
(7,418) |
|
|
Other income |
3 |
(3) |
|
- |
|
|
Stock lending income |
3 |
(31) |
|
(35) |
|
|
Premium income - written options |
3 |
(669) |
|
(886) |
|
|
Dividends received |
|
7,608 |
|
7,335 |
|
|
Other income received |
|
3 |
|
- |
|
|
Stock lending income received |
|
33 |
|
100 |
|
|
Premium income received - written options |
3 |
669 |
|
886 |
|
|
Decrease in receivables |
|
1,583 |
|
571 |
|
|
(Decrease)/increase in payables |
|
33 |
|
(30) |
|
|
Overseas withholding tax suffered |
7 |
(671) |
|
(693) |
|
|
|
|
|
(4,107) |
|
12,456 |
|
Net cash flows from operating activities |
|
|
16,749 |
|
11.037 |
|
Cash flows from financing activities |
|
|
|
|
|
|
Repurchase of ordinary share capital |
|
(10,094) |
|
(2,871) |
|
|
Equity dividends paid from revenue |
|
(6,256) |
|
(5,045) |
|
|
Equity dividends paid from capital |
|
(293) |
|
- |
|
|
Interest paid on borrowings |
|
(551) |
|
(503) |
|
|
Net cash flows from financing activities |
|
|
(17,194) |
|
(8,419) |
|
Net increase in cash and cash equivalents |
|
|
(445) |
|
2,618 |
|
Cash and cash equivalents at the start of the year*** |
|
|
(5,529) |
|
2,911 |
|
Cash and cash equivalents at the end of the period/year*** |
|
|
(5,084) |
|
5,529 |
* This relates to the proceeds for the capital dividend from Singapore Communications.
** Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from operating activities because they form part of the fund's dealing operations.
***Prior year balances have been restated to include UBS collateral in the cash balances for both years.
The notes form part of these financial statements.
Notes to the Financial Statements
Note 1. Accounting policies
(a) For the year ended 31 March 2019, the company is applying Financial Reporting Standard 102 ('FRS 102') applicable in the UK and Republic of Ireland, which forms part of the Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council ('FRC') in 2015.
These financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS102 issued by the FRC in September 2015 and the revised Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the AIC in November 2014 and updated in January 2017 and February 2018.
Statement of estimation uncertainty - in the application of the company's accounting policies, the board is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not always readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may vary from these estimates. There have been no significant judgements, estimates or assumptions for the year.
Functional currency - the company is required to nominate a functional currency, being the currency in
which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared. This is also the currency in which all expenses and dividends are paid in.
(b) Income from equity investments is determined on the date on which the investments are quoted ex-dividend, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Income from fixed interest securities is recognised on an effective yield basis.
UK dividends received are accounted for at the amount receivable and are not grossed up for any tax credit. Other income includes any taxes deducted at source. Gains and losses arising from the translation of income denominated in foreign currencies are recognised in the revenue reserve.
Scrip dividends are treated as unfranked investment income; any excess in value of shares received over the amount of the cash dividend is recognised in capital reserve. Income from underwriting commission and traded options are recognised as earned.
(c) Interest receivable and payable and management expenses are treated on an accruals basis.
(d) The management fee and interest costs are allocated 65% to capital and 35% to revenue in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. All other expenses are wholly allocated to revenue.
(e) Gains and losses on the realisation of investments and changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms, together with exchange adjustments to overseas currencies are taken to capital reserve.
(f) Acquisitions in foreign currencies are recorded in the operational currency of the company at the prevailing exchange rate on the date of the transaction and retranslated at the rates of exchange ruling on the date of the statement of financial position. Investments are recognised initially as at the trade date of a transaction. Subsequent to this, the disposal of an investment is accounted for once again as at the trade date of a transaction.
(g) Revenue received and interest paid in foreign currencies are translated at the rates of exchange on the transaction date.
Any exchange differences between the recognition and settlement both for revenue transactions are recognised as revenue in the statement of comprehensive income.
(h) The company's investments are classified as 'financial assets at fair value through profit or loss' and are valued at fair value. For listed investments this is deemed to be bid market prices. Gains and losses arising from changes in fair value are included in the capital return for the year.
(i) All financial assets and liabilities are recognised in the financial statements at fair value, with loans/debt valued at
amortised cost.
(j) Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the statement of financial position date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the statement of financial position date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Timing differences are differences arising between the company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
(k) Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the statement of comprehensive income.
(l) The cost of share buybacks include the amount of consideration paid, including directly attributable costs and are deducted from the special distributable reserve until the shares are cancelled.
(m) The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on dividends received in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. The company does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently re-measured to the fair value at each reporting date. The resulting gain or loss is recognised as revenue or capital in the statement of comprehensive income depending on the nature and motive of each derivative transaction.
During the year ending 31 March 2017 the company commenced the writing of options, continuing through to the year ending 31 March 2019. These derivatives are held at fair value based on the bid/offer prices of the options written to which the company is exposed. The value of the option is subsequently marked-to-market to reflect the fair value of the option based on traded prices. The primary purpose behind the writing of options is to receive the premium, thus any premium received is considered to be revenue in nature and presented under revenue in the statement of comprehensive income. When an option is closed out or exercised, the gain or loss is accounted for as a capital gain or loss.
(n) Stock lending income is received net of associated costs and recognised in revenue as earned.
(o) Nature of distributable reserve accounts
Capital reserve
Gains and losses on realisations of fixed asset investments, and transactions costs, together with appropriate exchange differences, are dealt with in this reserve.
Increases and decreases in the valuation of fixed asset investments are also dealt with in this reserve along with payment of capital dividend. Also taken to this reserve are 65% of the management fees as detailed in note (d).
Revenue reserve
Net revenue profits and losses of the company and the fair value costs of share based payments which are revenue in nature are recorded within this reserve, together with the dividend payment made by the company. The remaining 35% of the management fees are taken to this reserve.
Special distributable reserve
Records transactions of which are capital in nature - shares bought back into treasury and the related stamp duty incurred.
Note 2. Returns and net asset value
|
|
Year to |
Year to |
|
Revenue return |
|
|
|
Revenue return attributable to ordinary redeemable shareholders |
£6,647,000 |
£6,367,000 |
|
Weighted average number of shares in issue during the year |
106,621,950 |
111,910,413 |
|
Revenue return per ordinary redeemable share (basic and diluted) |
6.23p |
5.69p |
|
Capital return |
|
|
|
Capital return attributable to ordinary redeemable shareholders |
£13,538,000 |
(£8,479,000) |
|
Weighted average number of shares in issue during the year |
106,621,950 |
111,910,413 |
|
Capital return per ordinary redeemable share (basic and diluted) |
12.70p |
(7.58p) |
|
Total return |
|
|
|
Total return per ordinary redeemable share (basic and diluted) |
18.93p |
(1.89p) |
|
Net asset value per share |
|
|
|
Net assets attributable to shareholders |
£191,444,000 |
£187,784,000 |
|
Number of shares in issue at year end |
104,496,248 |
110,446,792 |
|
Net asset value per share |
183.21p |
170.02p |
Total return
The total return per share for the company is the combined effect of the rise and fall in the share price or NAV together with the reinvestment of the quarterly dividends paid.
The tables below provide the NAVs and share prices of the company on the dividend reinvestment dates for the year ended 31 March 2019 and 31 March 2018.
|
2019 |
Dividend rate |
NAV |
Share price |
|
31 March 2018 |
n/a |
170.02 |
160.50 |
|
5 July 2018 |
1.75 |
180.61 |
168.00 |
|
4 October 2018 |
1.45 |
183.95 |
170.00 |
|
27 December 2018 |
1.45 |
162.84 |
151.00 |
|
28 March 2018 |
1.45 |
181.37 |
169.00 |
|
31 March 2018 |
n/a |
183.21 |
169.50 |
|
Total return |
|
11.4% |
9.6% |
|
|
|
|
|
|
2018 |
|
|
|
|
31 March 2017 |
n/a |
177.83 |
166.00 |
|
15 June 2017 |
1.60 |
181.72 |
170.13 |
|
24 August 2017 |
1.45 |
181.51 |
169.50 |
|
23 November 2017 |
1.45 |
183.58 |
171.25 |
|
29 March 2018 |
1.45 |
170.22 |
160.50 |
|
31 March 2018 |
n/a |
170.02 |
160.50 |
|
Total return |
|
(1.10%) |
0.20% |
Note 3. Revenue
|
|
Year to £000 |
Year to £000 |
|
From listed investments |
|
|
|
UK - equities |
1,716 |
1,347 |
|
Overseas - equities |
6,120 |
6,071 |
|
|
7,836 |
7,418 |
|
Other revenue |
|
|
|
Premium - written options |
669 |
886 |
|
Stock lending |
31 |
35 |
|
Other income |
3 |
- |
|
|
8,539 |
8,339 |
Capital dividend received
During the year ended 31 March 2018, the company received no special dividends treated as capital (2018: £27,200).
Note 4. Other expenses
|
|
Year to £000 |
Year to £000 |
|
Bank charges and custody fees |
25 |
24 |
|
Depositary fees |
49 |
45 |
|
Directors' fees |
127 |
120 |
|
Employers' national insurance contributions |
12 |
12 |
|
Legal fees |
7 |
8 |
|
Printing and postage |
19 |
13 |
|
Registrar's fees |
58 |
55 |
|
Secretarial fee |
132 |
106 |
|
VAT** |
(27) |
31 |
|
Other |
188 |
184 |
|
Total |
590 |
598 |
|
Auditors' remuneration: |
|
|
|
- audit services |
22 |
18 |
|
- non-audit services |
2 |
2 |
|
|
614 |
618 |
For the year ending 31 March 2019 the accounting methodology for expenses changed and they are now being accounted for on a gross basis. In the prior year expenses were accounted for on a net basis.
*The audit fees for 2019 are payable to Ernst & Young LLP (2018: Deloitte LLP). The non-audit fees fees amounted to £1,500 plus VAT for the year ended 31 March 2019 (2018: paid to Deloitte: £1,500 plus VAT). The non-audit fees payable during the year ended 31 March 2018 related to Deloitte LLP providing tax advise on the treatment of directors expenses. The non-audit services for the year end 31 March 2019 relate to the assessment of 'ready to tag' accounts and design process for iXBRL purposes.
**VAT for the year ending 31 March 2019 is the actual VAT recovered during the year. VAT for the year ending 31 March 2018 is the total VAT charged during the year.
Details of the contract between the company and Martin Currie for the provision of the investment management and secretarial arrangements are set out in the company's annual report.
|
|
Year to 31 March 2017 |
Year to 31 March 2018 |
||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
|
Ongoing charges are calculated with reference to the following figures: |
|
|
|
|
|
|
|
Investment management fee |
(397) |
(737) |
(1,134) |
(428) |
(794) |
(1,222) |
|
Other expenses |
(614) |
- |
(614) |
(618) |
- |
(618) |
|
Total expenses |
(1,011) |
(737) |
(1,748) |
(1,046) |
(794) |
(1,840) |
|
Average net assets over the year |
|
|
190,587 |
|
|
202,270 |
|
Ongoing charges |
|
|
0.90% |
|
|
0.90% |
Note 5. Finance costs
|
|
Year to 31 March 2019 |
Year to 31 March 2018 |
||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
|
Interest on bank loans and overdrafts |
196 |
355 |
551 |
187 |
314 |
501 |
Note 6. Dividends
|
|
Year to £000 |
Year to £000 |
|
Year ended 31 March 2017 - fourth interim dividend of 1.60p |
- |
1,794 |
|
Year ended 31 March 2018 - first interim dividend of 1.45p |
- |
1,626 |
|
Year ended 31 March 2018 - second interim dividend of 1.45p |
- |
1,625 |
|
Year ended 31 March 2018 - third interim dividend of 1.45p |
- |
1,602 |
|
Year ended 31 March 2018 - fourth interim dividend from revenue of 1.48p |
1,603 |
- |
|
Year ended 31 March 2018 - fourth interim dividend from capital of 0.27p |
293 |
- |
|
Year ended 31 March 2019 - first interim dividend of 1.45p |
1,532 |
- |
|
Year ended 31 March 2019 - second interim dividend of 1.45p |
1,519 |
- |
|
Year ended 31 March 2019 - third interim dividend of 1.45p |
1,515 |
- |
|
|
6,462 |
6,647 |
Set out below are the total dividends payable in respect of the period, which forms the basis on which the requirements of sections 1158-1159 of the Corporation Tax Act 2010 are considered.
|
|
Year to £000 |
Year to £000 |
|
First interim dividend of 1.45p for the year ended 31 March 2019 (2018: 1.45p) |
1,532 |
1,626 |
|
Second interim dividend of 1.45p for the year ended 31 March 2019 (2018: 1.45p) |
1,519 |
1,625 |
|
Third interim dividend of 1.45p for the year ended 31 March 2019 (2018: 1.45p) |
1,515 |
1,602 |
|
Proposed fourth interim dividend of 1.90p for the year ended 31 March 2019 (2018: 1.75p) |
1,985 |
1,933 |
|
|
1,985 |
6,786 |
During the year the directors received dividends of 6.10p (2018: 5.95p) per share. Directors' shareholdings are disclosed in the company's annual report. The revenue reserves as at 31 March 2019 are £2,108,000, of this £1,985,000 will be used to fund the fourth interim dividend. At the AGM held on 16 May 2012, the board received shareholder approval to amend the articles of association of the company to enable dividends to be paid out of capital.
Note 7. Taxation on ordinary activities
|
|
Year to £000 |
Year to £000 |
|
Foreign tax |
671 |
693 |
The corporation tax rate was 19.0% (2018: 19.0%). The tax charge for the year differs from the charge resulting from applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below:
|
|
Year to £000 |
Year to £000 |
|
Net return on ordinary activities before taxation |
20,856 |
(1,419) |
|
Corporation tax at standard rate of 19% (2018: 19%) |
3,963 |
(270) |
|
Effects of: |
|
|
|
Losses/(gains) on investments not taxable |
(2,887) |
1,573 |
|
Non taxable UK dividend income |
(292) |
(256) |
|
Overseas dividends not taxable |
(1,030) |
(1,040) |
|
Overseas tax suffered |
671 |
693 |
|
Losses on investments not taxable |
107 |
(172) |
|
Increase in excess management and loan expenses |
150 |
174 |
|
Impact of expensed foreign tax |
(11) |
(9) |
|
Total tax charge |
671 |
693 |
As at 31 March 2019, the company had unutilised management expenses of £16,186,000 (2018: £15,394,000) carried forward. Due to the company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
Note 8. Investments at fair value through profit or loss
|
|
Year to £000 |
Year to £000 |
|
UK listed investments held at fair value through profit or loss |
32,126 |
31,614 |
|
Overseas listed investments held at fair value through profit or loss |
180,552 |
175,534 |
|
Total value of financial asset investments |
212,678 |
207,148 |
|
Derivative financial instruments - written option contracts |
- |
(475) |
|
Valuation of investments and derivatives |
212,678 |
206,673 |
|
Opening valuation |
206,673 |
219,809 |
|
Opening unrealised gains |
(18,231) |
(47,059) |
|
Opening cost |
188,442 |
172,750 |
|
Acquisitions at cost |
78,397 |
93,620 |
|
Disposal proceeds |
(87,587) |
(98,452) |
|
Gains on disposal of investments and derivatives |
3,502 |
20,524 |
|
Disposals at cost |
(84,085) |
(77,928) |
|
Closing cost |
182,754 |
188,442 |
|
Add: unrealised gains |
29,924 |
18,231 |
|
Closing valuation |
212,678 |
206,673 |
There were no fixed interest securities as at 31 March 2019 (2018: nil).
An analysis of the investment portfolio by sector, and a list of all the investments and their market value, is detailed above.
|
Gains/(losses) on investments and derivatives |
Year to |
Year to |
|
Net gains on disposal of investments and derivatives |
3,502 |
20,524 |
|
Movement in unrealised (losses)/gains |
11,693 |
(28,828) |
|
Capital distributions |
- |
27 |
|
|
15,195 |
(8,277) |
Transaction costs
During the year, expenses were incurred in acquiring or disposing of investments classified as fair value though profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the statement of comprehensive income. The total costs were as follows:
|
|
Year to |
Year to |
|
Acquisitions |
141 |
168 |
|
Disposals |
39 |
146 |
|
|
180 |
314 |
Note 9. Trade and other receivables
|
|
As at |
As at |
|
Dividends receivable |
775 |
547 |
|
Cash collateral held at broker for derivatives* |
1 |
1,563 |
|
Tax recoverable |
69 |
125 |
|
Prepayments and other debtors |
35 |
- |
|
Stock lending income receivable |
- |
2 |
|
|
880 |
2,237 |
*Prior year balance has been restated to include UBS collateral.
None of the company's trade receivables are past due or impaired.
Note 10. Trade payables - amounts falling due within one year
|
|
As at |
As at |
|
Interest accrued |
14 |
14 |
|
Sterling bank revolving loan |
10,000 |
10,000 |
|
Amount due for ordinary shares bought back |
18 |
49 |
|
Other trade payables |
489 |
456 |
|
|
10,521 |
10,519 |
Note 11. Trade payables - amounts falling due after more than one year
|
|
As at |
As at |
|
Bank loan |
15,162 |
14,534 |
On 19 September 2016 the company entered into a new agreement with the Royal Bank of Scotland Plc for £1,500,000 (Facility A), €4,500,000 (Facility B) and US$12,750,000 (Facility C) term loans and £10,000,000 (Facility D) multi-currency revolving credit facility agreement.
The term loans carry an annual fixed rate interest of 2.1408%, 1.4175% and 3.1925% for Facility A, Facility B and Facility C respectively. The rate of interest for the revolving credit facility is set at each roll-over date and is made up of a fixed margin of 0.5% plus LIBOR rate. Under this agreement £10,000,000 was drawn at 28 March 2019 at a rate of 1.48325% with a maturity date of 28 June 2019.
The repayment date of the term loans is the same as their termination date which is the 19 September 2023. The repayment date of the revolving facility is the last day of its interest period and the termination date is the 30 September 2020.
Under the loan agreements the company is to ensure that, at each month end, the aggregate principal amount outstanding in respect of monies borrowed does not exceed an amount equal to 25% of its net tangible assets and, unless otherwise agreed with the lender, net tangible assets are not less than £100,000,000. Also the company shall not enter into any obligations except with the prior consent of the Lender and not enter into any option writing programme which the value of its transactions, at any time, exceed 15% of its net tangible assets.
As at 31 March 2019 the company had drawn down the full amount of the loan and the balances as at that date were for Facility A £1,500,000, Facility B£3,877,000 (€4,500,000), Facility C £9,785,000 (US$12,750,000) and Facility D £10,000,000.
Note 12. Called up share capital
|
|
Number of shares |
As at |
Number of shares |
As at |
|
Ordinary shares of 1p |
|
|
|
|
|
Ordinary shares in issue at the beginning of the year |
110,446,792 |
1,105 |
112,162,368 |
1,122 |
|
Ordinary shares bought back to Treasury during the year |
(5,950,544) |
(60) |
(1,715,576) |
(17) |
|
Ordinary shares in issue at the end of the year |
104,496,248 |
1,045 |
110,446,792 |
1,105 |
|
Treasury shares (ordinary shares 1p) |
|
|
|
|
|
Treasury shares in issue at the beginning of the year |
11,852,356 |
118 |
10,136,780 |
101 |
|
Ordinary shares bought back to Treasury during the year |
5,950,544 |
60 |
1,715,576 |
17 |
|
Treasury shares in issue at the end of the year |
17,802,900 |
178 |
11,852,356 |
118 |
|
Total ordinary shares in issue and in Treasury at the end of the year |
122,299,148 |
1,223 |
122,299,148 |
1,223 |
There were 5,950,544 shares bought back during the year to 31 March 2019 at a cost of £10,063,000 (2018: 1,715,576 at a cost of £2,920,000). During the year, the company issued no shares (2018: nil). The share premium represents the surplus amount over the nominal value of the issued share capital excluding costs, with any related issuance cost allocated to the special distributable capital reserve.
The analysis of the capital reserve is as follows:
|
|
Realised capital reserve £000 |
Investment holding gains £000 |
Total capital £000 |
|
As at 31 March 2018 |
43,810 |
18,231 |
62,041 |
|
Gains on realisation of investments at fair value |
3,502 |
- |
3,502 |
|
Realised currency losses during the year |
(565) |
- |
(565) |
|
Movement in unrealised gains |
- |
11,693 |
11,693 |
|
Capitalised expenses |
(1,092) |
- |
(1,092) |
|
Capital distributions |
(293) |
- |
(293) |
|
As at 31 March 2019 |
45,362 |
29,924 |
75,286 |
The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts', 2014.
Note 13. Analysis of debt
|
|
As at £000 |
Cash flows £000 |
Exchange movements £000 |
As at £000 |
|
Cash at bank* |
5,529 |
(445) |
- |
5,084 |
|
Bank borrowings |
(24,534) |
- |
(628) |
(25,162) |
|
Net debt |
(19,005) |
(445) |
(628) |
(20,078) |
*Prior year balances have been restated to exclude UBS collateral which was moved to trade and other receivables.
Note 14. Related party transactions
With the exception of the management fees and secretarial fees, directors' fees and directors' shareholdings (as disclosed within the company's annual report and accounts), there have been no related party transactions during the year, or in the prior year.
Note 15. Derivatives and other financial instruments
The company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, for the purpose of managing currency and market risks arising from the company's activities.
The main risks the company faces from its financial instruments are (a) market price risk (comprising of (i) interest rate risk, (ii) currency risk and (iii) other price risk), (b) liquidity risk and (c) credit risk.
The board regularly reviews and agrees policies for managing each of these risks. The manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term receivables and creditors, other than for currency disclosures.
(a) Market price risk
The fair value or future cash flows of a financial instrument held by the company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, foreign currency risk and other price risk.
(i) Market risk arising from interest rate risk
Interest rate movements may affect:
· the fair value of the investments in fixed interest rate securities;
· the level of income receivable on cash deposits; and
· the level of interest payable on borrowings.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
The board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The company has a revolving loan with the Royal Bank of Scotland Plc which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 20 per cent of the net tangible assets of the company. Details of borrowings at 31 March 2019 are shown in note 10 and 11 above.
Interest risk profile
The interest rate risk profile of the portfolio of financial assets (comprising cash balances only) at the year end was as follows:
|
As at 31 March 2019 |
Interest rate % |
Local currency 000 |
Foreign exchange rate |
GBP sterling equivalent £000 |
|
Assets: |
|
|
|
|
|
Sterling |
0.07 |
4,391 |
1.000 |
4,391 |
|
Euro |
(0.60) |
523 |
1.160 |
450 |
|
US dollar |
0.50 |
87 |
1.303 |
67 |
|
Swedish krona |
(1.50) |
307 |
12.086 |
25 |
|
Swiss Franc |
(1.75) |
196 |
1.298 |
151 |
|
Total |
|
|
|
5,084 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling term loan |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling revolving loan |
1.48 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.160 |
3,877 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.303 |
9,785 |
|
Total |
|
|
|
25,162 |
|
As at 31 March 2018 |
Interest rate % |
Local currency 000 |
Foreign exchange rate
|
GBP sterling equivalent £000 |
|
Assets: |
|
|
|
|
|
Sterling* |
0.01 |
5,337 |
1.000 |
5,337 |
|
Euro* |
(0.60) |
191 |
1.141 |
167 |
|
US dollar |
0.09 |
(2) |
1.403 |
(1) |
|
Swedish Krona |
(1.50) |
307 |
11.748 |
26 |
|
Total |
|
|
|
5,529 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling term loan |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling revolving loan |
1.15 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.141 |
3,945 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.403 |
9,089 |
|
Total |
|
|
|
24,534 |
*Prior year balances have been restated to exclude UBS collateral which was moved to trade and other receivables.
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates at the statement of financial position date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
The following table illustrates the sensitivity of the return after taxation to an increase or decrease of 75 (2018: 50) basis points in interest rates.
This is mainly attributable to the company's exposure to the interest rate on its bank loan.
|
|
Year to 31 March 2019 |
Year to 31 March 2018 |
||
|
|
Increase in rate |
Decrease in rate |
Increase in rate |
Decrease in rate |
|
Effect on revenue return |
(13) |
13 |
(10) |
10 |
|
Effect on capital return |
(25) |
25 |
(18) |
18 |
|
Effect on total return and on net assets |
(38) |
38 |
(28) |
28 |
In the opinion of the directors, the above sensitivity analysis may not be representative of the year as a whole, since exposure may change as investments are made, borrowings are drawn down and may be repaid throughout the year.
(ii) Market risk arising from foreign currency risk
A significant proportion of the company's investment portfolio is invested in overseas securities and the statement of financial position can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, from time to time, match specific overseas investment with foreign currency borrowings.
The revenue account is subject to currency fluctuation arising on overseas income.
Foreign currency risk profile
Foreign currency risk exposure by currency of denomination:
|
|
As at 31 March 2018 |
As at 31 March 2017 |
||||
|
|
Investment exposure £000 |
Net monetary exposure £000 |
Total currency exposure £000 |
Investment exposure £000 |
Net monetary exposure £000 |
Total currency exposure £000 |
|
US dollar |
95,369 |
(9,506) |
85,863 |
88,829 |
(9,866) |
78,963 |
|
Euro |
41,841 |
(3,103) |
38,738 |
45,064 |
(7,774) |
37,290 |
|
Swiss franc |
10,481 |
169 |
10,650 |
3,977 |
80 |
4,057 |
|
Canadian dollar |
9,649 |
61 |
9,710 |
17,054 |
40 |
17,094 |
|
Australian dollar |
5,662 |
- |
5,662 |
8,428 |
53 |
8,481 |
|
Swedish krona |
4,052 |
26 |
4,078 |
3,872 |
- |
3,872 |
|
Hong Kong dollar |
7,588 |
- |
7,588 |
2,329 |
- |
2,329 |
|
Singapore dollar |
2,500 |
- |
2,500 |
3,694 |
- |
3,694 |
|
Korean won |
3,410 |
17 |
3,427 |
2,160 |
29 |
2,189 |
|
Total overseas investments |
180,552 |
(12,336) |
168,216 |
175,407 |
(17,438) |
157,969 |
|
Pound sterling |
32,126 |
(8,898) |
23,228 |
31,266 |
(1,451) |
29,815 |
|
Total |
212,678 |
(21,234) |
191,444 |
206,673 |
(18,889) |
187,784 |
The asset allocation between specific markets can vary from time to time based on the manager's opinion of the attractiveness of the individual markets.
Foreign currency sensitivity
At 31 March 2019, if sterling had strengthened by 10% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 10% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.
|
|
As at 31 March 2019 £000 |
As at 31 March 2018 £000 |
|
US dollar |
8,586 |
7,897 |
|
Euro |
3,874 |
3,729 |
|
Swiss franc |
1,065 |
406 |
|
Canadian dollar |
971 |
1,709 |
|
Australian dollar |
566 |
848 |
|
Swedish krona |
408 |
387 |
|
Hong Kong dollar |
759 |
233 |
|
Singapore dollar |
250 |
369 |
|
Korean won |
343 |
219 |
(iii) Market risk arising from other price risk
Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
It is the board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, as set out above, both act to reduce market risk. The manager actively monitors market prices throughout the year and reports to the board, which meets regularly in order to review investment strategy. All investments held by the company are listed on stock exchanges worldwide.
Other price risk sensitivity
The following table illustrates the sensitivity of the return after taxation and the net asset value to an increase or decrease of 15% in the fair value of the company's equities. The calculations are based on the portfolio valuations, as at the respective statement of financial position date, and are not representative of the year as a whole.
|
|
Year to 31 March 2019 |
Year to 31 March 2018 |
||
|
|
Increase in fair value £000 |
Decrease in fair value |
Increase in fair rate |
Decrease in fair rate |
|
Effect on revenue return |
(67) |
67 |
(65) |
65 |
|
Effect on capital return |
31,777 |
(31,777) |
30,880 |
(30,880) |
|
Effect on total return and on net assets |
301,710 |
(31,710) |
30,815 |
(30,815) |
(b) Liquidity risk
This is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk is not considered to be significant as the company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (see notes 10 and 11 for more details).
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:
|
|
As at 31 March 2019 |
As at 31 March 2018 |
||||
|
|
Three months or less £000 |
More than three months £000 |
Total £000 |
Three months or less £000 |
More than three months £000 |
Total £000 |
|
Trade payables: |
|
|
|
|
|
|
|
Interest accrued |
14 |
|
14 |
14 |
- |
14 |
|
Bank loans |
10,138 |
16,872 |
27,010 |
10,122 |
16,535 |
26,657 |
|
Amount due for ordinary shares bought back |
18 |
- |
18 |
49 |
- |
49 |
|
Other trade payables |
489 |
- |
489 |
456 |
- |
456 |
|
|
10,659 |
16,872 |
27,531 |
10,641 |
16,535 |
27,176 |
* Prior year figures have been restated to show the undiscounted contractual interest on the loans to their maturity. The changes were as follows: bank loans three months or less figure changed by £122 from £10,000. Bank loans more than three months figure changed by £2,001 from £14,534. The total change being £2,123 from £24,534.
(c) Credit risk
This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the company suffering a loss.
The risk is not considered to be significant by the board, and is managed as follows:
· investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amounts that may be due from any one broker; and
· cash is held only with reputable banks with high quality external credit ratings.
The maximum credit risk exposure as at 31 March 2019 was £5,964,000 (2018: £7,766,000). This was due to trade receivables and cash as per notes 9 and 13 above.
Fair value of financial assets and financial liabilities
All financial assets and liabilities of the company are included in the statement of financial position at fair value or the statement of financial position amount is a reasonable approximation of fair value.
(d) Counterparty risk
The table below shows the counterpart risk as at the Balance Sheet date:
|
As at 31 March 2019 |
Derivative exposure £000 |
Collateral posted £000 |
Collateral received £000 |
Collateral asset class £000 |
|
Counterparty |
|
|
|
|
|
UBS |
- |
1 |
- |
Cash |
|
Total |
- |
1 |
- |
|
|
As at 31 March 2018 |
Derivative exposure £000 |
Collateral posted £000 |
Collateral received £000 |
Collateral asset class £000 |
|
Counterparty |
|
|
|
|
|
UBS |
(475) |
1,563 |
- |
Cash |
|
Total |
(475) |
1,563 |
- |
|
Note 16. Capital management policies and procedures
The company's capital management objectives are:
· to ensure that the company will be able to continue as a going concern; and
· to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt.
The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.
The board monitors and reviews the broad structure of the company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.
Note 17. Fair value hierarchy
Under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
· Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
· Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc); or
· Level 3: significant unobservable input (including the company's own assumptions in determining the fair value of investments).
The financial assets measured at fair value through profit and loss are grouped into the fair value hierarchy as follows:
|
At 31 March 2019 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities and derivatives |
212,678 |
- |
- |
212,678 |
|
Net fair value |
212,678 |
- |
- |
212,678 |
|
At 31 March 2018 |
|
|
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities and derivatives |
207,148 |
- |
- |
207,148 |
|
Financial liabilities at fair value through profit or loss |
|
|
|
|
|
Derivative instruments |
(475) |
- |
- |
(475) |
|
Net fair value |
206,673 |
- |
- |
206,673 |
Note 18. Stock lending
During the year the company terminated the Securities Lending Authorisation Agreement with State Street Bank & Trust Company.
As at 31 March 2019 none of the investments were subject to stock lending agreements and no assets were held in collateral (2018: £13,226,000 of investments subject to stock lending, £13,836,000 held as collateral).
The gross earnings and the fees paid for the year are £42,000 (2018: £47,000) and £11,000 (2018: £12,000).
Note 19. Post year end events
On 21 June 2019 the board declared a fourth interim dividend of 1.90p per share. As at 20 June 2019, the company had bought back a further 201,378 ordinary shares at a total cost of £345,000 resulting in a further reduction of £345,000 to the special distributable reserve.
Note 20. AIFMD disclosures
In accordance with the AIFM Directive, information in relation to the company's leverage and the remuneration of the company's AIFM, Martin Currie Fund Management ('MCFM'), is required to be made available to investors. In accordance with the Directive, the AIFM's remuneration policy is available from MCFM on request (see contact details on the back cover). The numerical remuneration disclosures in relation to the AIFM's year ended 31 March 2018 are available from the company secretary on request.
The company's maximum and actual leverage levels at 31 March 2019 are shown below:
|
Leverage Exposure |
Gross Method |
Commitment Method |
|
Maximum permitted limit |
300% |
200% |
|
Actual |
107% |
109% |
The leverage limits are set by the AIFM and approved by the board and are in line with the maximum leverage levels permitted in the company's articles of association. The AIFM is also required to comply with the gearing parameters set by the board in relation to borrowings.
Website
Securities Trust of Scotland Trust has its own dedicated website at www.securitiestrust.com.
This offers shareholders, prospective investors and their advisers a wealth of information about the company. Updated daily, it includes the following: latest prices, manager videos, performance data, portfolio information, latest monthly update, research, press releases and articles, annual and half yearly reports.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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