Half-year Report

RNS Number : 8123V

Securities Trust of Scotland PLC

05 December 2019

 

Securities Trust of Scotland plc

Legal Entity Identifier: 549300UZ1Y7PPQYJGE19

Half-year financial report

Six months to 30 September 2019

A copy of the half-year financial report ended 30 September 2019 has been submitted to the National Storage Mechanism and will shortly be available for viewing at: http://www.morningstar.co.uk/uk/NSM.

A copy of the half-year report can shortly be downloaded at www.securitiestrust.com.

FINANCIAL HIGHLIGHTS

 

Total return‡^ (including reinvested dividends)	Six months ended 30 September 2019 %	Six months ended 30 September 2018 %
Net asset value per share*	12.3	11.1
Peer group†	8.7	10.7
Share price	17.0	8.9

Income	Six months ended 30 September 2019	Six months ended 30 September 2018
Revenue per share	4.30p	3.91p
Dividend per share	2.90p	2.90p

Ongoing charges^ (as a percentage of shareholders' funds)	Six months ended 30 September 2019 %	Six months ended 30 September 2018 %
Ongoing charges	0.9	0.9

‡ The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or peer group.

* The net asset value ('NAV') per share total return is calculated using cum-income NAV with dividends reinvested.

† Please see below for details on the company's peer group.

^ Please see below for definitions of Alternative Performance Measures.

INTERIM MANAGEMENT REPORT

Chairman's Statement

I am pleased to present the half yearly financial report following my appointment as Chairman of the company at the Annual General Meeting on 17 September 2019. The six-month period under review has seen strong returns from equity markets around the world despite some considerable uncertainty and apparent threats to economic growth. On the global stage the intensification of the trade war between the USA and China has been a major concern for future growth. In Europe the ongoing saga of Brexit and in particular the possibility of a no deal exit and its potential impact on economic growth has been a constant concern.

Set against these threats has been the accommodative stance adopted by central banks, particularly the ECB providing some source of optimism amid the macro uncertainty. 

Performance

I am delighted to report that your company has performed strongly on a number of measures over the period under review. The net asset value (NAV) total return was 12.3% which compares very favourably with the open and closed ended peer group median return of 8.7%.

Your board is particularly encouraged to see that the discount at which the company's shares trade has narrowed in the period under review. As a result the share price total return was 17.0%. I will comment further on the share rating below.

These returns are most satisfactory and the board is particularly encouraged that the longer-term performance of the company is now equally strong. Over three years the NAV total return is 36.9% against the peer group median return of 28.2%.

Revenue return and dividend

As an investment trust with a global equity income mandate, the board and shareholders give equal importance to revenue and dividend growth as they do to capital return. The revenue return per share was 4.30p (six months to 30 September 2018: 3.91p) representing an increase of 10.0%. Revenue returns in the short term can, and are most likely to be, variable. Your investment manager makes use of the options market to generate income, and does so in a risk controlled manner. Generally, higher levels of volatility in equity markets create opportunities for the investment manager to participate in the use of options. In periods of lower volatility shareholders should expect a lower level of contribution to total revenue from options income.

In the six months under review options income was £344,000, 6.3% of total income (2018: 8.6%).

The board is pleased to declare a second interim dividend of 1.45p per share which will be paid on 24 January 2020 to shareholders on the register on 27 December 2019. The ex- dividend date will be 24 December 2019. 

Discount and share buy backs

The share price discount to net asset value narrowed from 7.48% to 3.62% at 30 September 2019 and during the period under review your company's share price has on occasion traded at a premium to NAV. Over the six months 210,625 shares were bought back to be held in treasury at an  average discount of 7.39%. This is a significant reduction in activity. By comparison, over the same period in 2018 4.39 million shares (4.0% of the then shares in issue) were bought back. 

The discount has narrowed further since the period end and it is pleasing to see the shares are now trading around net asset value on a consistent basis.

As shareholders will be aware, and as discussed in last year's Chairman's statement the board has significantly increased marketing activity in conjunction with the investment manager - Martin Currie. Shareholders may well have seen some of the marketing initiatives in the financial press and on line, and there is evidence that the activity is producing good results. Increased demand for your company's shares is one of the reasons for the narrowing of the discount.

Another is the relatively good NAV performance versus the peer group and a third is the value proposition that the shares represent. As at 30 September 2019 and based on the dividend of 6.25p paid in the year to 31 March 2019 the dividend yield of the shares is 3.2%. This yield level compares very favourably with a number of the companies in our peer group.

Your board intends to sustain the marketing initiatives and is particularly encouraged by the reaction in the share price rating.

ESG

Environmental, Social and Corporate Governance (ESG) issues are consistently raised by shareholders at meetings with the directors and also with the investment manager. Your investment managers are A+ A+ A+ rated by the PRI in respect of their ESG scrutiny and capabilities and as Mark Whitehead points out in his review, ESG is a key component of the manager's investment process. It is a topic that is discussed at each board meeting and we believe the intensity of focus and scrutiny on this area is set to increase.

This is not a 'box-ticking' exercise, both your board and investment manager believe that high standards of ESG in the investment process lead to better investments being made and ultimately this may well generate higher long-term returns for shareholders. I shall continue to provide detailed updates in future reports.

Board changes

Rachel Beagles retired as Chairman of Securities Trust of Scotland at the AGM on 17 September after 9 years as a director, the last two of which were as Chairman. The board would like to thank Rachel for her hard work and commitment over her tenure and wish her well with her current commitments.

The board is committed to maintaining the highest standards of corporate governance in terms of its structure and independence and future changes will reflect that commitment.

Outlook

I started this statement by referring to the uncertainty caused by tariff wars and Brexit. There are always causes of uncertainty in equity markets - they just vary in nature from period to period.

Securities Trust of Scotland benefits from a global mandate and therefore the widest possible opportunity set in which to seek value and opportunity. The inherent diversification advantage also helps to reduce exposure to single nation risks, domestic market issues and political surprises.

Your board believes that a high conviction portfolio of 35-55 quality companies, identified following a strict selection process based on fundamental analysis and independent research, offers shareholders the best chance of achieving sustainable returns over the long-term.

Consequently, and despite the widely debated issues ahead of investors, the board feels that your company is well placed to continue to achieve its objectives.

Don't miss our updates

The company's award-winning website at securitiestrust.com is a rich source of information and resources. It includes regular video updates, interactive blogs, articles and comment on market events as well as monthly performance factsheets, announcements and independent research reports. I encourage you to subscribe to our monthly email updates that will keep you abreast of key information.

Please do as always get in touch if you have any questions or feedback on any of the company's activities. I can be contacted by email at [e-mail] or through the Company Secretary at [e-mail].

John Evans

Chairman

5 December 2019

Manager's review

The six months to the end of September 2019 have been strong for the company, with its NAV rising by 12.3% (Total Return) in sterling terms. This return was comfortably ahead of the composite peer group median which includes all open-ended and closed-ended Global Equity Income Funds, which returned 8.7% in sterling terms over the same period.

Underlying the company's strong headline return over the period has been some equity market volatility to contend with, driven by a continued slowdown in global macroeconomic activity and corporate profitability.  This has been exacerbated by the re-intensification of the US and China  trade war which has seen both sides  raise tariffs on imports into their  respective countries. This tit-for-tat display has very serious ramifications for future global growth, business and market sentiment. Although estimates vary, real growth is at risk of falling over the coming quarters pushing many countries into recession territory.  

Trade tensions are a key drag on corporate confidence, capex and trade volumes. Global economic growth as measured by Purchasing Managers' Indexes (PMIs) has been weakening, and is now languishing at a three-year low. Global trade volumes are also weak, now at to their lowest levels since January 2012.

Corporate earnings growth expectations have also fallen and although we are not yet in an earnings recession, the threat of one is rising. Earnings per share (EPS) revisions have been in negative territory for most of the year, but encouragingly they appear to be showing some signs of improvement in the short term. First-half corporate results were better than consensus expectations and better than what the global PMI downtrend has been implying.

Over the six months, in terms of regions, North America made the strongest absolute contribution to the company's performance. Meanwhile Emerging Markets - perhaps the world's biggest potential victims of the trade war - lagged, although were still positive for returns. By sector, technology, utilities and materials fared the best for the company, while energy and - to a lesser extent - consumer discretionary, suffered. It is somewhat unusual to have utilities, a defensive sector by nature, at the top of the leaderboard alongside technology, a growth sector.

Defensive sectors have performed better as lower bond yields have reduced funding costs for debt-laden business models and allowed analysts to find more intrinsic value in them. Investors have also sought shelter in companies that provide less earnings variability. WEC Energy, the US utility was one of the best performing stocks for the company over the period for these very reasons.

Microsoft, the largest portfolio position, was the driver behind the strong showing from technology. The company has a strong positioning in public cloud adoption, combined with large distribution channels and a massive installed customer base that is helping to improve profit margins. Strong second-quarter results took the stock above the US$1 trillion market-cap level on the back of some positive operational trends: Azure, Microsoft's emerging public cloud storage proposition is growing exceptionally strongly; share gains and positive pricing trends in data centers; Office 365 user growth; and the integration of LinkedIn, all helped to drive durable double-digit revenue and dividend growth which we believe will continue over the medium term.

Occidental was the biggest laggard for the company during the period. We held the oil & gas exploration and production company, due to its strong balance sheet and relative dividend certainty. However, the company announced a deal to buy Anadarko in May, which the market took a dim view of. The acquisition necessitates a higher level of balance-sheet leverage to finance it, in our view, just at the wrong time in the cycle. With the deal also comes greater sensitivity to changes in the oil price. A splurge of capital ill-discipline, when it could be argued we are entering a period of macroeconomic contraction and therefore lower demand for oil and gas (resulting in lower commodity prices), heightens shareholder risk in our view. We therefore sold the stock over the period.

We continue to focus our research effort on identifying financially robust and sustainable business models that can generate strong cash flows to support dividend growth, even in a more difficult operating environment. One such example is the purchase of Verizon. The company is a best-in-class wireless operator in a market with a good competitive and regulatory backdrop. We expect the firm to grow revenue faster than inflation and earnings even faster. The 5G broadband market which it is commercially rolling out is an exciting option for growth.

Another recent addition has been Bunzl, which is dominant in the sourcing and supplying of goods-not-for-resale, allowing the company to consistently grow volumes roughly in line with GDP. Furthermore, Bunzl is an active consolidator of a heavily fragmented market and as an advantaged buyer it can complete this roll up while continuing to deliver attractive return metrics. Bunzl has delivered 26 years of increasing dividends and there are currently no reasons to believe this will be discontinued.

We believe threats of disruption leading to sustained margin erosion are overplayed and that consequently we are seeing an attractive entry point into a good long-term story. Bunzl is particularly appealing when compared with its defensive peer set, most of which trade at or near peak valuations.

These purchases were funded from sales where we see less upside potential, such as the aforementioned Occidental.  We also sold Kingfisher which has been battling against the macroeconomic backdrop in both the UK and France.  Its French business, Castorama, has been struggling due to having the wrong pricing dynamic - which is leading to falling volumes. In the UK, B&Q has been through the first half of a restructuring plan, but consumer spending has been  lacklustre and may not turn around any time soon. Screwfix, Kingfisher's 'jewel in the crown', has also not been rolled out to other European countries, which we believed would be a meaningful driver of future growth. An overhaul of Kingfisher's management team has seen the CEO and CFO leave their posts and the restructuring strategy to be all but abandoned, leaving us to question what will drive the share price to outperform. 

Throughout the last year, we have focused a material proportion of our research on governance and sustainability, as part of our bottom-up research process. We find this approach to be an important competitive advantage, given that it further increases our understanding of the companies we invest in, while ensuring we engage with companies on the most important issues that could have a material impact on their future performance. During the last year we have engaged with all the companies in the portfolio and we actively voted against management resolutions at 23% of the voteable meetings. These were on issues such as egregious executive compensation plans, over-boarding and director elections that we disagreed with.

Outlook

With weakening macroeconomic data worldwide, investors continue to concern themselves with the increasing probability that we are slipping into a global recession. Bond markets are certainly offering the investor cause for anxiety as an early signal that a recession is imminent. The yield curve offers a good indicator for the combined impact of central bank policy action and growth. Of late, the US 2year/10year curve has flattened, even though expectations that the Federal Reserve (Fed) will cut interest rates further have risen sharply. This is concerning as a steeper yield curve would indicate that the bond market was becoming more confident that near-term monetary easing will lead to better long-term outcomes. This would give equities a platform to move higher from.

The best signal for a potential recovery in earnings growth would be an indication that global industrial activity has bottomed. An improved trade war outcome would also be supportive. Here, a de-escalation is possible, and equities have responded positively when there have been better news headlines in recent months. It remains to be seen though, how much long-term damage has already been done to globalisation.

If economic data deteriorates from here, we can also expect a more aggressive central bank policy response. In Europe - particularly in Germany, where growth has completely collapsed due to its high reliance on the manufacturing industry - we could expect a fiscal package to help stimulate activity. The Fed is likely to become more aggressive with its easing monetary response too.

However, this may not necessarily stimulate equities to move higher. The last five inter-meeting Fed interest rate cuts all saw equities trade lower over the following six months. So, we need growth to improve rather than stimulus.

One positive is that valuations are looking more supportive. The S&P 500 index is trading back at long-term p/e averages (20-year averages). The S&P 500 dividend yield has moved higher than both the 10-Year Treasury yield and now the 30-Year Treasury Yield. The last time this happened was in March 2009 (the low point of the financial crisis) so, this could be a sign that investors have become far too pessimistic and that equities can find a base to move higher from here.

The UK is now looking very likely to exit the EU at the end of January with a withdrawal deal in place.  However, there is the wrinkle of a general election hurdle first which could still cause some volatility in UK and European stocks.  But, as we edge closer to the end of January and an orderly withdrawal looks the most likely outcome, sterling should strengthen and with it those stocks that have a high correlation to the currency.  Sectors such as autos, insurance and industrials could do well for the portfolio as a result.

All these points lead us to remain cautious; we are happy to be positioned fairly conservatively, with an overweight to more defensive sectors, as opposed to lower-quality cyclicals that currently look optically cheap. Lower interest rates do not bode well for banks, an important component of the equity market offering 'value' - so we would like to see higher long-term bond yields as a signal to add capital to high-quality cyclicals.

Careful assessment of risk-reward in choosing stocks, considered portfolio construction and constant risk monitoring are all integral components of the investment process for the company. We believe that favouring attractively priced, high-quality companies that exhibit financial strength, combined with the ability to pay sustainable dividends through the business cycle, is the best way to position the Securities Trust of Scotland in the current uncertain market environment.

Mark Whitehead

5 December 2019

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 latest annual report. 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 latest annual report. The board maintains a risk register and also carries out a risk workshop annually. The board has identified the following principal risks to the company:

·      Loss of s1158-9 status

·      Long-term investment underperformance

·      Market, financial and interest rate risk

·      Operational Risk

Further details of these risks and how the board manages them can be found in the 2019 annual report and on the company's website www.securitiestrust.com.

Directors' responsibility

In accordance with Chapter 4 of the Disclosure and Transparency Rules, and to the best of their knowledge, each director of the company confirms that the financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018. The directors are satisfied that the financial statements give a true and fair view of the assets, liabilities, financial position and profit of the company. Furthermore, each director certifies that the interim management statement includes an indication of important events that have occurred during the first six months of the financial year, and their impact on the financial statements, together with a description of the principal risks and

uncertainties that the company faces. In addition, each director of the company confirms with the exception of management, secretarial fees, directors' fees and directors' shareholdings, that there have been no related party transactions during the six months to 30 September 2019.

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 and Manager's review.

The financial position of the company as at 30 September 2019 is shown on the unaudited condensed statement of financial position. The unaudited condensed statement of cash flow of the company is below. 

In accordance with the Financial Reporting Council's guidance on Risk Management, Internal Control and Related  Financial and Business Reporting issued in September 2014  and the UK Corporate Governance Code, the directors have  undertaken a rigorous review of the company's ability to  continue as a going concern. The company's assets consist primarily 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 disclosed above and have reviewed revenue forecasts. They believe that the company has adequate financial resources to continue its operational existence for the foreseeable future and for at least one year from the date of signing of these financial statements. Accordingly, the directors continue to adopt the going concern basis in preparing these financial statements. 

By order of the board

John Evans, Chairman

5 December 2019

Portfolio Summary Portfolio distribution as at 30 September 2019
By region (excluding cash)	As at 30 September 2019	As at 31 March 2019
	%	%
North America	43.5	46.7
Developed Europe	42.1	41.5
Developed Asia Pacific ex Japan	14.4	11.8
	100.0	100.0

By sector (excluding cash)	As at 30 September 2019	As at 31 March 2019
	%	%
Consumer goods	21.3	19.9
Industrials	20.9	16.8
Financials	18.0	19.2
Technology	13.1	9.6
Basic materials	8.0	9.0
Telecommunications	6.2	2.7
Healthcare	5.1	8.3
Utilities	2.6	6.4
Oli & gas	2.4	6.6
Consumer services	2.4	1.5
	100.0	100.0

By asset class (including cash and borrowings)	As at 30 September 2019	As at 31 March 2019
	%	%
Equities	109.6	110.4
Cash	2.6	2.6
Less borrowings	(12.2)	(13.0)
	100.0	100.0

Largest 10 holdings	30 September 2019	30 September 2019	31 March 2019	31 March 2019
	Market value	% of total	Market value	% of total
	£000	portfolio	£000	portfolio
Microsoft	13,242	5.7	10,625	5.0
Verizon Communications	8,286	3.6	-	-
Lockheed Martin	8,036	3.4	4,907	2.3
Danone	7,864	3.4	5,333	2.5
Koninklijke DSM	7,561	3.2	6,479	3.1
Crown Castle International	7,495	3.2	6,527	3.1
Airbus	7,344	3.2	5,974	2.8
Taiwan Semiconductor	7,171	3.1	5,979	2.8
Samsung Electronics	6,378	2.7	3,410	1.6
Zurich Insurance Group	6,377	2.4	6,585	3.1

Unaudited Condensed Statement of Comprehensive Income

		(Unaudited) Six months to 30 September 2019			(Unaudited) Six months to 30 September 2018
	Note	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Net gains on investments	5	-	20,336	20,336	-	17,061	17,061
Net currency gains/ (losses)		119	(722)	(603)	55	(719)	(664)
Income	3	5,459	-	5,459	5,214	-	5,214
Investment management fee		(211)	(391)	(602)	(204)	(378)	(582)
Other expenses		(294)	-	(294)	(301)	-	(301)
Net return before finance costs and taxation		5,073	19,223	24,296	4,764	15,964	20,728
Finance costs		(104)	(184)	(288)	(100)	(173)	(273)
Net return on ordinary activities before taxation		4,969	19,039	24,008	4,664	15,791	20,455
Taxation on ordinary activities	4	(485)	-	(485)	(429)	-	(429)
Net returns attributable to ordinary redeemable shareholders		4,484	19,039	23,523	4,235	15,791	20,026
Net returns per ordinary redeemable share (basic and diluted)	2	4.30p	18.25p	22.55p	3.91p	14.58	18.49p

		(Audited)
		Year to 31 March 2019
		Revenue	Capital	Total
	Note	£000	£000	£000
Net gains on investments	5	-	15,195	15,195
Net currency gains/ (losses)		(14)	(565)	(579)
Income	3	8,539	-	8,539
Investment management fee		(397)	(737)	(1,134)
Other expenses		(614)	-	(614)
Net return before finance costs and taxation		7,514	13,893	21,407
Finance costs		(196)	(355)	(551)
Net return on ordinary activities before taxation		7,318	13,538	(20,856)
Taxation on ordinary activities	4	(671)	-	(671)
Net return attributable to ordinary redeemable shareholders		6,647	13,538	20,185
Net returns per ordinary redeemable share (basic and diluted)	2	6.23p	12.70p	18.93p

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 six months.

The notes below form part of these condensed financial statements.

Unaudited Condensed Statement of Financial Position

		(Unaudited) As at 30 September 2019		(Unaudited) As at 30 September 2018		(Audited) year to 31 March 2019
	Note	£000	£000	£000	£000	£000	£000
Fixed assets
Investments and derivatives at fair value through profit or loss*	5		232,901		218,780		212,678
Current assets
Trade and other receivables	6	489		416		880
Cash and cash equivalents		5,486		5,379		5,084
			5,975		5,795		5,964
Current liabilities
Trade payables - amounts falling due within one year	7	(10,424)		(10,841)		(10,521)
Dividend payable		-		-		(1,515)
Total current liabilities		(10,429)		(10,841)		(12,036)
Net current liabilities			(4,454)		(5,046)		(6,072)
Total assets less current liabilities			228,447		213,734		206,606
Trade payables - amounts falling due after more than one year	8		(15,827)		(15,285)		(15,162)
Total net assets			212,620		198,449		191,444
Capital and reserves
Called up ordinary share capital		1,223		1,223		1,223
Capital redemption reserve		78		78		78
Share premium reserve		30,040		30,040		30,040
Special distributable reserve*		82,345		85,307		82,709
Capital reserve*		94,325		77,832		75,286
Revenue reserve*		4,609		3,969		2,108
Total shareholders' funds			212,620		198,449		191,444
Net asset value per ordinary redeemable share	2		203.88p		187.11p		183.21p

* These reserves are distributable.

The company is registered in Scotland no.SC283272.

The notes below form part of these condensed financial statements.

The financial statements were approved by the board of directors on 5 December 2019 signed on its behalf by John Evans, Chairman.

Unaudited Condensed Statement of Changes in Equity

For the period to 30 September 2019 (Unaudited)	Called up ordinary share capital £000	Capital redemption reserve £000	Share premium account £000	Special distributable capital reserve* £000	Capital reserve* £000	Revenue  reserve* £000	Total £000
As at 31 March 2019	1,223	78	30,040	82,709	75,286	2,108	191,444
Net return attributable to shareholders**	-	-	-	-	19,039	4,484	23,523
Ordinary shares bought back during the period	-	-	-	(364)	-	-	(364)
Dividends paid from revenue	-	-	-	-	-	(1,983)	(1,983)
As at 30 September 2019	1,223	78	30,040	82,345	94,325	4,609	212,620

For the period to 30 September 2018 (Unaudited)	Called up ordinary share capital £000	Capital redemption reserve £000	Share premium account £000	Special distributable capital reserve* £000	Capital reserve* £000	Revenue  reserve* £000	Total £000
As at 31 March 2018	1,223	78	30,040	92,772	62,041	1,630	187,784
Net return attributable to shareholders**	-	-	-	-	15,791	4,235	20,026
Ordinary shares bought back during the period	-	-	-	(7,465)	-	-	(7,465)
Dividends paid from revenue	-	-	-	-	-	(1,896)	(1,896)
As at 30 September 2018	1,223	78	30,040	85,307	77,832	3,969	198,449

For the year to 31 March 2019 (Audited)	Called up ordinary share capital	Capital redemption reserve	Share premium account	Special distributable capital reserve*	Capital reserve*	Revenue  reserve*	Total
	£000	£000	£000	£000	£000	£000	£000
As at 31 March 2018	1,223	78	30,040	92,772	62,041	1,630	187,784
Net return attributable to shareholders**	-	-	-	-	13,538	6,647	20,185
Ordinary shares bought back during the year	-	-	-	(10,063)	-	-	(10,063)
Dividends paid from revenue	-	-	-	-	-	(6,169)	(6,169)
Dividends paid from capital	-	-	-	-	(293)	-	(293)
As at 31 March 2019	1,223	78	30,040	82,709	75,286	2,108	191,444

*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 Condensed Statement of Comprehensive Income above, and therefore this is also the 'Total comprehensive income' for the period.

The notes below form part of these condensed financial statements.

Unaudited Condensed Statement of Cash Flow

		(Unaudited) Six months to		(Unaudited) Six months to		(Audited) Year to
		30 September 2019		30 September 2018		31 March 2019
	Note	£000	£000	£000	£000	£000	£000
Cashflows from operating activities
Profit before tax			24,008		20,455		20,856
Adjustments for:
Gains on investments	5	(20,336)		(17,061)		(15,195)
Finance costs		288		273		551
Exchange movement on bank borrowings	9	665		751		628
Purchases of investments*	5	(54,051)		(41,522)		(78,397)
Sales of investments**	5	54,164		46,476		87,587
Dividend income	3	(5,115)		(4,740)		(7,836)
Other income	3	-		(1)		(3)
Stock lending income	3	-		(26)		(31)
Premium income - written options	3	(344)		(447)		(669)
Dividend received		5,601		5,002		7,608
Other income received		-		1		3
Stock lending income received		-		27		33
Premium income received - written options		344		447		669
(Increase)/decrease in receivables		(95)		1,558		1,583
Decreases in payables		(73)		(14)		33
Overseas withholding tax suffered	4	(485)		(429)		(671)
			(19,437)		(9,705)		(4,107)
Net cash flows from operating activities**			4,571		10,750		16,749
Cash flows from financing activities
Repurchase of ordinary share capital		(382)		(7,129)		(10,094)
Equity dividends paid from revenue		(3,498)		(3,498)		(6,256)
Equity dividends paid from capital		-		-		(293)
Interest paid on borrowings		(289)		(273)		(551)
Net cash flows from financing activities**			(4,169)		(10,900)		(17,194)
Net increase/(decrease) in cash and cash equivalents**			402		(150)		(445)
Cash and cash equivalents at the start of the year**			5,084		5,529		5,529
Cash and cash equivalents at the end of the period/year**	9		5,486		5,379		5,084

* 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 interim balance has been restated to include UBS collateral n the cash balance.

Notes to the Condensed Financial Statements

Note 1:  Accounting policies

For the period ending 30 September 2019 (and the year ending 31 March 2019), the company is applying Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102)', which forms part of the Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council ('FRC') in 2015.

These condensed financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS 102 issued by the FRC in September 2015, FRS 104 Interim Financial Reporting issued by the FRC in March 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.

The accounting policies applied for the condensed set of financial statements are set out in the company's annual report for the year to 31 March 2019.

Note 2:  Returns and net asset value

	(Unaudited) Six months to 30 September 2019	(Unaudited) Six months to 30 September 2018	(Audited) Year to 31 March 2019
Revenue return
Revenue return attributable to ordinary redeemable shareholders	£4,484,000	£4,235,000	£6,647,000
Weighted average number of shares in issue during the period*	104,299,302	108,331,647	106,621,950
Revenue return per ordinary redeemable share (basic and diluted)	4.30p	3.91p	6.23p
Capital return
Capital return attributable to ordinary redeemable shareholders	£19,039,000	£15,791,000	£13,538,000
Weighted average number of shares in issue during the period*	104,299,302	108,331,647	106,621,950
Capital return per ordinary redeemable share	18.25p	14.58p	12.70p
Total return
Capital return per ordinary redeemable share (basic and diluted)	22.55p	18.49p	18.93p
Net asset value per share
Net assets attributable to shareholders	£212,620,000	£198,449,000	£191,444,000
Number of shares in issue at period end	104,285,623	106,061,396	104,496,248
Net asset value per share	203.88p	187.11p	183.21p

* Calculated excluding shares held in treasury.

During the six months to 30 September 2019 there were 210,625 shares bought back into treasury at a cost of £364,000. (Six months to 30 September 2018: 4,385,396 shares brought back into treasury at a cost of £7,465,000; twelve months to 31 March 2019: 5,950,544 shares brought back into treasury at a cost of £10,063,000). Between 1 October and 3 December 2019, 196,768 ordinary shares of 1p each were bought back into treasury at a cost of £388,650. There have been no shares issued from treasury during the six months to 30 September 2019. (Six months to 30 September 2018: no shares were issued from treasury; twelve months to 31 March 2019: no shares were issued from treasury.) There have been no shares cancelled from treasury during the six months to 30 September 2019. (Six months to 30 September 2018: no shares were cancelled from treasury; twelve months ended 31 March 2019: no shares were cancelled from treasury). As at 30 September 2019 there were 18,013,525 shares in held in treasury.

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 six months ended 30 September 2019 and 30 September 2018.

2019	Dividend rate	NAV	Share price
31 March 2019	n/a	183.21	169.50
4 July 2019	1.90	199.22	199.50
30 September 2019	n/a	203.88	196.50
Total return		12.30%	17.00%

2018	Dividend rate	NAV	Share price
31 March 2018	n/a	170.02	160.50
5 July 2018	1.75	180.61	168.00
30 September 2018	n/a	187.11	173.00
Total return		11.10%	8.90%

Note 3:  Revenue

	(Unaudited) Six months to 30 September 2019 £000	(Unaudited) Six months to 30 September 2018 £000	(Audited) Year to 31 March 2019 £000
From listed investments
UK - equities	1,008	787	1,716
Overseas - equities	4,107	3,953	6,120
	5,115	4,740	7,836
Other revenue
Premium - written options	344	447	669
Stock lending	-	26	31
Other income	-	1	3
	5,459	5,214	8,539

During the six months to 30 September 2019 the company did not receive any capital dividends. (Six months to 30 September 2018: £nil; year to 31 March 2019: £nil).

During the six months to 30 September 2019 there were special dividends of £99,000 (30 September 2018: £207,000) which were received and treated as income.

Note 4: Taxation on ordinary activities

	(Unaudited) Six months to 30 September 2019 £000			(Unaudited) Six months to 30 September 2018 £000			(Audited) Year to 31 March 2019 £000
Foreign tax			485			429			671

Note 5:  Investments and derivatives at fair value through profit or loss

	(Unaudited) As at 30 September 2019 £000	(Unaudited) As at 30 September 2018 £000	(Audited) As at 31 March 2019 £000
UK listed investments held at fair value through profit or loss	35,108	30,724	32,126
Overseas listed investments held at fair value through profit or loss	197,793	188,138	180,552
Total value of financial asset investments	232,901	218,862	212,678
Derivative financial instruments - value of written option contracts	-	(82)	-
Valuation of investments and derivatives	232,901	218,780	212,678
Opening valuation	212,678	206,673	206,673
Opening unrealised gains	(29,924)	(18,231)	(18,231)
Opening cost	182,754	188,442	188,442
Acquisition at cost	54,051	41,522	78,397
Disposal proceeds	(54,164)	(46,476)	(87,587)
Gains on disposal of investments and derivatives	4,961	4,572	3,502
Disposals at cost	(49,203)	(41,904)	(84,085)
Closing cost	187,602	188,060	182,754
Add: unrealised gains	45,299	30,720	29,924
Closing valuation	232,901	218,780	212,678
Gains on investments and derivatives
Net gains on disposal of investments and derivatives	4,961	4,572	3,502
Movement in unrealised gains	15,375	12,489	11,693
	20,336	17,061	15,195

Transaction costs

During the period, 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:

	(Unaudited) Six months to 30 September 2019 £000	(Unaudited) Six months to 30 September 2018 £000	(Audited) Year to 31 March 2019 £000
Acquisitions	90	65	141
Disposals	27	19	39
	117	84	180

Note 6:  Trade and other receivables

	(Unaudited) As at 30 September 2019 £000	(Unaudited) As at 30 September 2018 £000	(Audited) As at 31 March 2019 £000
Dividends receivable	289	285	775
Cash collateral held at broker for derivatives	1	-	1
Tax recoverable	190	130	69
Prepayments and other debtors	9	-	35
Stock lending income receivable	-	1	-
	489	416	880

None of the company's trade and other receivables are past due or impaired at any period end.

Note 7:  Trade payables - amounts falling due within one year

	(Unaudited) As at 30 September 2019 £000	(Unaudited) As at 30 September 2018 £000	(Audited) As at 31 March 2019 £000
Interest accrued	13	14	14
Sterling bank revolving loan	10,000	10,000	10,000
Amount due for Ordinary shares bought back	-	385	18
Other trade payables	416	442	489
	10,429	10,841	10,521

Note 8:  Trade payables - amounts falling due after one year

	(Unaudited) As at 30 September 2019 £000	(Unaudited) As at 30 September 2018 £000	(Audited) As at 31 March 2019 £000
Bank loan	15,827	15,285	15,162

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 27 September 2019 at a rate of 1.41088% with a maturity date of 27 December 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 30 September 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 £3,981,000 (€4,500,000), Facility C £10,346,000 (US$12,750,000) and Facility D £10,000,000.

Note 9:  Analysis of net debt

	(Audited) As at 31 March 2019 £000	Cash flow £000	Exchange movements £000	(Unaudited) As at 30 September 2019 £000
Cash at bank	5,084	402	-	5,486
Bank borrowings	(25,162)	-	(665)	(25,827)
	(20,078)	402	(665)	(20,341)

Note 10:  Stock lending

During the financial year 31 March 2019 the company terminated the Securities Lending Authorisation Agreement with State Street Bank & Trust Company.

As at 30 September 2019 none of the investments were subject to stock lending agreements (as at 30 September 2018: £15,960,000, as at 31 March 2019: £nil) and no assets were held in collateral (as at 30 September 2018: £16,791,000, as at 31 March 2019: £nil).

The gross earnings and the fees paid for the six months are £nil (six months ended 30 September 2018: £35,000, twelve months ended 31 March 2019: £42,000) and £nil (six months ended 30 September 2018: £9,000, twelve months ended 31 March 2019: £11,000).

Note 11:  Interim financial report

The financial information contained in this half-yearly financial report does not constitute statutory accounts as defined in S434 - 6 of the Companies Act 2006. The financial information for the six months ended 30 September 2019 has not been audited or reviewed.

The information for the year ended 31 March 2019 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under s498 (2),(3) or (4) of the Companies Act 2006.

Note 12:  Fair value hierarchy

Under FRS 102, the company 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:

	As at 30 September 2019 (Unaudited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	232,901	-	-	232,901
Net fair value	232,901	-	-	232,901
	As at 30 September 2018 (Unaudited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	218,780	-	-	218,780
Net fair value	218,780	-	-	218,780
	As at 31 March 2019 (Audited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£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

Note 13:  Post balance sheet events

Between 1 October 2019 and 3 December 2019 a further 196,768 ordinary shares of 1p each have been bought back into treasury at a cost of £388,650.

 

END

 

 

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