Annual Financial Report
SHIRES INCOME PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2015
STRATEGIC REPORT - COMPANY SUMMARY AND FINANCIAL HIGHLIGHTS
The Company
The Company is an investment trust and its Ordinary shares are listed on the premium segment of the Official List of the UK Listing Authority and traded on the London Stock Exchange. An investment trust enables savers to make a single investment in a diversified portfolio.
Investment Objective
The Company aims to provide shareholders with a high level of income, together with growth of both income and capital from a portfolio substantially invested in UK equities.
Company Benchmark
FTSE All-Share Index (Total Return).
Investment Manager
Aberdeen Asset Managers Limited ("Investment Manager" or "AAM").
Authorised and regulated by the Financial Conduct Authority
Alternative Investment Fund Manager
Aberdeen Fund Managers Limited ("Manager", "AFML" or "the AIFM").
Authorised and regulated by the Financial Conduct Authority
Management Arrangements Provided by Aberdeen Group
To comply with the Alternative Investment Fund Managers Directive ("AIFMD"), the Company has appointed Aberdeen Fund Managers Limited ("AFML"), a wholly owned subsidiary of Aberdeen Asset Management PLC, as its alternative investment fund manager ("Manager" or "AIFM"). The management agreement with AFML complies with the new AIFMD regulatory regime and under this arrangement, AFML has been appointed to provide investment management, risk management, administration and company secretarial services as well as promotional activities. The Company's portfolio will be managed by Aberdeen Asset Managers Ltd ("Investment Manager" or "AAM") by way of a group delegation agreement in place between AFML and AAM. In addition, AFML has sub-delegated promotional activities to AAM and administrative and secretarial services to Aberdeen Asset Management PLC.
Website
Up-to-date information can be found on the Company's website - www.shiresincome.co.uk
Pre-investment Disclosure Document (PIDD)
The Alternative Investment Fund Managers Directive requires AFML, as the alternative investment fund manager of Shires Income PLC, to make available to investors certain information prior to such investors' investment in the Company. The Company's PIDD is available for viewing on the Company's website.
FINANCIAL HIGHLIGHTS
|
|
2015 |
2014 |
|
Net asset value total return |
+9.7% |
+11.5% |
|
Share price total return |
+4.9% |
+14.0% |
|
Benchmark total return |
+6.6% |
+8.8% |
|
Earnings per share (revenue) |
12.92p |
12.63p |
|
Dividend per share |
12.25p |
12.0p |
|
Dividend yield |
4.9% |
4.8% |
|
Total return assumes the re-investment of net dividends paid during the year. |
||
STRATEGIC REPORT - OVERVIEW OF STRATEGY
Introduction
The purpose of this report is to provide shareholders with details of the Company's strategy and business model as well as the principal risks and challenges it faces.
The business of the Company is that of an investment trust and the Directors do not envisage any change in this activity in the foreseeable future.
Objective
To provide for shareholders a high level of income, together with growth of both income and capital from a portfolio substantially invested in UK equities.
Business Model
Investment Policy
In pursuit of its objective, the Company's policy is to invest principally in the ordinary shares of UK quoted companies, and in convertible and preference shares with above average yields.
The Directors are responsible for determining the gearing strategy of the Company. Gearing is used with the intention of enhancing long-term returns. Gearing is subject to a maximum equity gearing level of 35% of net assets at the time of draw down. Any borrowing, except for short-term liquidity purposes, is used for investment purposes.
The Company generates income primarily from ordinary shares, convertibles and preference shares. It also achieves income by writing call and put options on shares owned, or shares the Investment Manager would like to own. By doing so, the Company generates premium income.
Investment Process
The Investment Manager follows a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is intended as the major source of added value. No stock is bought without the Investment Manager having first met management. The Investment Manager estimates a company's worth in two stages, quality then price. Quality is defined by reference to management, business focus, the balance sheet and corporate governance. Price is calculated by reference to key financial ratios, the market, the peer group and business prospects. Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.
The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold and top-slicing/topping up. This approach usually results in low turnover within portfolios.
Portfolios are managed by the Investment Manager on a team basis, with individual investment managers carrying out their own research and analysis. All ideas are shared via formal committees and common databases, with desk heads ensuring consistency.
Principal Risks and Uncertainties
The principal risks facing the Company relate to the Company's investment activities and gearing and include market risk and credit risk. An explanation of these risks and how they are managed is contained in note 16 to the financial statements. The Board has adopted a matrix of the key risks that affect its business.
Performance risk: A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds. The net asset value ("NAV") performance relative to the FTSE All-Share Index ("the Index") and the underlying stock weightings in the portfolio against the Index weightings are monitored closely by the Board.
Investment risk: Investment risk within the portfolio is managed in three ways:
· Adherence to the investment process in order to minimise investments in poor quality companies and/or overpaying.
· Diversification of investment - seeking to invest in a wide variety of companies with strong balance sheets and the earnings power to pay increasing dividends. In addition, investments are diversified by sector in order to reduce the risk of a single large exposure. The Company invests mainly in equities, preference shares and convertibles.
· The Board has laid down absolute limits on maximum holdings and exposures in the portfolio at the time of acquisition. These can only be over-ridden with Board approval. These include the following:
- Maximum 7.5% of assets invested in the securities of one company (excluding Aberdeen Smaller Companies High Income Trust PLC);
- Maximum 5% of quoted investee company's ordinary shares (excluding Aberdeen Smaller Companies High Income Trust PLC).
The Company also invests in preference shares, primarily to enhance the income generation of the Company. The majority of these investments is in large financial institutions. Issue sizes are normally relatively small and associated low volumes of trading could give rise to a lack of liquidity. The maximum holding in preference shares is managed by the first guideline referred to above. In addition, the Company cannot hold more than 10% of any investee company's preference shares.
The Company enters into traded option contracts, also primarily to enhance the income generation of the Company. The risks associated with these option contracts are managed through the principal guidelines below, which operated in the year under review:
- Call options written to be covered by stock;
- Put options written to be covered by net current assets/borrowing facilities;
- Call options not to be written on more than 100% of a holding of stock;
- Call options not to be written on more than 30% of the UK equity portfolio;
- Put options not to be written on more than 30% of the UK equity portfolio.
Gearing risk: In the long-term, to help income generation and capital growth, the Company has borrowed to invest in the assets. This is undertaken in the belief that the assets will produce a greater total return than the cost of the borrowing over time. However, if asset values decline, that fall is exacerbated by gearing. During the year under review, the Company's borrowing was exclusively bank borrowing, utilising a revolving credit and term loan facility. The bank borrowings have certain associated covenants which are monitored by the Manager and Board. The gearing risk of the Company is actively managed and monitored with the Manager able to increase or decrease the short-term borrowings in line with their view of the stock market. As stated earlier, the maximum equity gearing limit, set by the Board, is 35% which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio.
The Board and the Manager keep under review options available to protect a portion of the portfolio from a sudden decline in markets.
Operational risk: In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of the Aberdeen Group, BNP Paribas Securities Services (the Depositary), Equiniti Limited (the registrar) and BNP Paribas, who maintain the Company's accounting records. The security of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. The effectiveness of the controls and systems is monitored by the Board on a regular basis.
The management of the Company has been delegated to the Aberdeen Group under a management agreement. The performance of the Aberdeen Group, in particular the Investment Manager, is regularly reviewed by the Board. Its compliance with the management agreement is also formally reviewed on an annual basis.
Income/dividend risk: The level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio. Any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls) may reduce the level of dividends received by shareholders. The Board monitors these risks through the receipt of detailed income forecasts and considers the level of income at each meeting. However, the Company may draw upon dividend reserves if required.
Investment in smaller companies: Rather than the Company holding a number of smaller companies shares, Shires Income invests indirectly in this part of the equity market through one holding in Aberdeen Smaller Companies High Income Trust PLC, which is also managed by the Investment Manager.
The Directors regularly review this holding (currently 6.6% of the Company's portfolio). All of the directors of Aberdeen Smaller Companies High Income Trust PLC are independent of Shires Income PLC. The Investment Manager does not charge any management fee in respect of the amount of Shires Income's assets attributable to this holding.
Share price discount to NAV risk: The Company's shares may trade at a discount to the underlying NAV per share. The discount (or premium) at which the Company's shares may trade is influenced by the supply of shares and the number of buyers and sellers of the Company's shares in the market. The Board regularly reviews the Company's discount/premium.
Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as Section 1158 of the Corporation Tax Act 2010, the UK Listing Rules, the Disclosure and Transparency Rules, the Companies Act 2006 and Alternative Investment Fund Managers Directive, could lead to a number of detrimental outcomes and reputational damage including additional tax obligations. The Board and Manager monitor changes in government policy and legislation which may have an impact on the Company and the Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager.
Performance and Outlook
The strategic direction and development of the Company is regularly discussed as part of Board meeting agendas. At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives. The Board also considers the future direction of the Company at an annual strategy meeting where a wide discussion takes place on development and strategic direction. The Company's brokers, JP Morgan Cazenove, present to the Board during the course of the year and cover the topics of sector development, perception of the Company and relevant strategic issues. The Board also considers the efficacy of the promotional activities of the Company, including communications with shareholders.
A review of the Company's activities and performance during the year ended 31 March 2015 and future developments is detailed in the Chairman's Statement and the Investment Manager's Review. This covers market background, investment activity, portfolio strategy, dividend and gearing policy and investment outlook.
Key Performance Indicators (KPIs)
The main KPIs against which the Board assesses the Company's performance include:
- Net Asset Value
- Revenue Return per Ordinary Share
- Share Price
- Dividend per Share
- Discount
- Performance relative to FTSE All-Share Index
- Ongoing Charges
|
|
Board Diversity
The Board recognises the importance of having a range of skilled, experienced individuals with relevant knowledge in order to allow it to fulfill its obligations. At 31 March 2015, there were three male Directors and one female Director. The Company has no employees.
Employee and Socially Responsible Policies
As the Company has delegated the management of the portfolio, it has no employees and therefore has no requirement for disclosures in this area. The Company's socially responsible investment policy is set out in the Statement of Corporate Governance.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.
The Aberdeen Group's corporate socially responsible investment policy including environmental policy can be found on http://www.aberdeen-asset.com/aam.nsf/groupCsr/home
Anthony B. Davidson
Chairman
29 May 2015
STRATEGIC REPORT - CHAIRMAN'S REVIEW
Results Review
The outcome for the year to the end of March 2015 was an increase in the Company's net asset value per share of 9.7% on a total return basis. This compares to a rise in our benchmark, the FTSE All-Share Index, of 6.6%. The total return from the share price was 4.9%.
The preference share portfolio has performed well, delivering a return of 17.9%, some way ahead of that produced by the benchmark. The gearing is notionally deployed into this element of the portfolio; the rationale being that these investments should deliver a solid revenue stream but with a lower level of volatility than would be expected from equities.
The Board is proposing a full year dividend of 12.25p per share. This is 1.06 times covered by the revenue generated by the portfolio. If approved at the Annual General Meeting a final dividend of 3.25p per share will be paid on 31 July 2015 to shareholders on the register as at 3 July 2015.
Historically, the three interim and final dividends have been equal amounts. It should not be assumed that this will be the case in the future. Subject to unforeseen circumstances it is proposed to continue to pay quarterly interim dividends of 3.00p each and the Board will decide on next year's final dividend having reviewed the full year results.
The year has seen a continued recovery in the economies of the UK and US. Indeed in the US the recovery has been sufficiently strong that the authorities have been able to terminate their asset purchase programme. Europe has performed less well. Although growth is now expected to accelerate over this year and next, the European Central Bank has found itself having to reduce interest rates to their lowest ever level and commence its own version of quantitative easing.
The Investment Manager's Review details the investment activity during the year.
Performance
Pearson delivered pleasing performance over the year as the repositioning of the business began to bear fruit. The portfolio is overweight Life Insurance and this was beneficial as the holdings in Prudential and Chesnara both performed well. In line with previous years there was an underweight position relative to the mining sector and this was again beneficial as these businesses struggled in the face of the decline in commodity prices. Although Pfizer's bid for AstraZeneca ultimately failed, it did demonstrate the inherent value in the business and the Company benefitted from this. Other investments that performed well include Schroders, Provident Financial and Close Brothers. Whilst they are all financial companies they have very different fundamental drivers.
Aberdeen Smaller Companies High Income Trust has been the Company's most successful investment over the last five years. However, this year it has been less so despite the actual performance of the trust being ahead of its benchmark. The decline in its share price was caused by a move in the discount that the shares trade at relative to its net asset value.
Earnings and Dividends
I noted last year that, special dividends aside, it seemed reasonable to expect dividend growth to slow over the year. That turned out to be the case with underlying growth of 1.4% in the UK market during 2014. Pleasingly the equity portfolio did better than this, delivering growth of over 5%. There were eight investments that increased their dividends by 10% or more over the year. Tesco and Centrica both announced dividend cuts, though the majority of the impact on the Company's earnings will be felt during the current financial year. Expectations are for a pick-up in the rate of dividend growth, excluding the impact of special distributions, in the UK this year. In part this is caused by the weakening of sterling relative to the dollar.
Portfolio Profile and Gearing
On 19 December 2014, the Company renewed its £20 million loan facility with Scotiabank Europe. £8.5 million was rolled over under the revolving facility and £10 million was drawn down under the term loan facility, the latter at a fixed interest rate of 2.103% for three years.
The Company's gearing increased slightly during the year from 18.9% to 19.4%. The Board continually monitors the level of gearing in the Company. Although the absolute level of gearing looks high, I remind shareholders that it is being deployed notionally in fixed interest securities which bring an element of diversification to the Company's total revenue stream.
Alternative Investment Fund Managers Directive
The Company reported the changes made to its arrangements with Aberdeen in July last year as a result of the implementation of the AIFMD in the UK. This resulted in the appointments of a new alternative investment fund manager (AIFM), Aberdeen Fund Managers Limited (AFML), and a depositary, BNP Paribas Securities Services. These regulatory changes have also placed additional periodic disclosure requirements on the Company's AIFM, AFML. As a result, your Annual Report for 2015 contains an additional un-audited disclosure page.
Corporate Governance
During the year the Nomination Committee, with the assistance of an external facilitator, evaluated the operations of the Board, individual Directors and the Chairman. The Management Engagement Committee undertook a formal review of the Manager, covering the investment management, company secretarial, administrative and promotional services provided to the Company. The review took into account the Investment Manager's investment performance record, management processes, investment style, resources and risk control mechanisms. I am pleased to report that the Board agreed with the Committee's recommendation that the continued appointment of the Manager is very much in the interests of shareholders as a whole.
The Board
The Directors have discussed succession planning for the Board and, following a process which used an external search consultant, we welcome Robert Talbut, who joined the Board on 1 April 2015. Robert has over 30 years of financial services experience. He will stand for appointment at the Annual General Meeting in July.
At the same time, David Kidd, who has served on this Board for eleven years, is retiring from the Board and is therefore not offering himself for re-appointment at the Annual General Meeting. I would like to take this opportunity to thank David for his considerable and wide-ranging contributions over the years.
Annual General Meeting
The Company's Annual General Meeting takes place in London, on 8 July 2015, and I look forward to seeing as many of you there as possible. The Investment Manager will make a presentation covering the past year and give their outlook for the current year. Shareholders are invited to join the Board and the Investment Manager for lunch following the Annual General Meeting, when there will be opportunities for informal questions.
If at any other time you wish to contact the Chairman or any other member of the Board, please write c/o the Company Secretary at 40 Princes Street, 7th Floor, Edinburgh, EH2 2BY. I can assure you that all correspondence is forwarded accordingly.
Outlook
Recovery is continuing in both the domestic economy and the United States. Unemployment is falling in both countries, disposable incomes are increasing and growth is approaching trend levels. Europe is also showing signs of improvement, though it should be remembered that some extraordinary policy measures, including negative deposit rates and a stimulus programme equating to €60bn per month, have been required to get to this position.
The decline in the oil price should act as an additional form of stimulus for most economies. If however the reduced price does not drive additional demand then it may instead prove to be deflationary. That would hinder continuing recovery.
Despite some sector specific exceptions, companies are generally trading reasonably well, though those that are exposed to the decline in commodity prices will need time to adjust to their new environment. Equities appear to be good value relative to fixed interest. This probably says more about the relative expensiveness of some fixed interest rather than the cheapness of equities. Having previously traded at a discount to their international peers, UK equities are now valued more in line with their overseas counterparts, though the yield in the domestic market remains above that available elsewhere. An additional positive is that following a prolonged period of downgrades to earnings expectations investors now seem to be pricing in a more achievable level of profits growth and hence disappointments may diminish. That will be important because European quantitative easing has pushed markets upwards and valuation multiples, especially of higher quality companies, are at levels that will require growth in earnings.
As I have commented previously, the portfolio contains a broad spread of businesses with attractive medium and longer term prospects across many different industries. The investment strategy remains the same with a focus on ownership of businesses with sustainable competitive advantages and reliable management teams. These factors give us the confidence to be cautiously optimistic.
Anthony B. Davidson
Chairman
29 May 2015
STRATEGIC REPORT - MANAGER'S REVIEW
Highlights
- Performance - Net asset value total return of 9.7%, outperforms the benchmark.
- Good growth in earnings per share.
- Volatility creates opportunities for a range of new introductions.
- Portfolio well positioned for the longer term, shorter term risks from geopolitical events especially given relatively full valuations of many businesses.
Portfolio Strategy
We take a long term approach to investing, believing that whilst there might be volatility in the short and even medium term, share prices will ultimately reflect the fundamental value of a company. Consequently there has been no change to our approach to the construction of the portfolio. We seek to identify the best quality companies we can and buy them at attractive valuations. Investment decisions are based on detailed internal due diligence and we endeavour to insulate ourselves from the noise that constantly permeates markets. Such a strategy is likely, by definition, to lead to low levels of turnover in the portfolio and we have experienced that again this year.
Gearing has risen slightly from 18.9% to 19.4%, as the growth in shareholders' funds has been offset by a slight increase in net debt. The gearing is notionally invested in the preference share portfolio. This part of the portfolio provides a core level of high income and would in normal conditions, be expected to be more resilient than equities in the event of a fall in the market.
The Company's assets are invested in equities, preference shares and convertible shares. At the year end, 69.2% of the portfolio's assets were invested in equities, 25.8% in preference shares and the remainder in convertible shares and cash.
Revenue Account
Earnings per share increased by 2.3% over the year to 12.92p. The equity portfolio delivered earnings growth of almost 5.5%. There were a number of factors that impacted the earnings during the year. The significant return of capital by Vodafone in February the prior year reduced the size of our holding. Vodafone is one of the higher yielding companies in the FTSE 100 and we were unable to redeploy the proceeds at such a high yield. Tesco was the sole holding to cut the dividend that it paid during the financial year. The timing of the distributions relative to the Company's year end will result in a further reduction in 2016. Currencies had an impact with sterling's strength against the dollar reducing the dividends received from businesses like HSBC, Shell and BP in the early part of the year, though this gradually reversed over the period. Conversely the euro consistently weakened against the pound and consequently the dividends received from Unilever declined slightly. Lastly there was the impact of special dividends. Compass declared a special distribution and this more than offset the impact of the non-recurrence of a special dividend from Sage.
The following table details the Company's main sources of income over the last five years.
|
2015 |
2014 |
2013 |
2012 |
2011 |
|
|
|
% |
% |
% |
% |
% |
|
Ordinary dividends |
54.6 |
52.5 |
49.8 |
48.5 |
44.1 |
|
Preference dividends |
35.0 |
36.1 |
38.2 |
39.6 |
44.4 |
|
Aberdeen Smaller Companies |
4.3 |
4.9 |
5.7 |
5.5 |
6.9 |
|
Fixed interest and bank interest |
0.2 |
0.2 |
0.3 |
0.3 |
0.6 |
|
Traded option premiums |
5.9 |
6.3 |
6.0 |
6.1 |
4.0 |
|
|
________ |
________ |
________ |
________ |
________ |
|
|
100.0 |
100.0 |
100.0 |
100.0 |
100.0 |
|
|
________ |
________ |
________ |
________ |
________ |
|
Total income (£'000s) |
4,665 |
4,534 |
4,275 |
4,352 |
4,153 |
|
|
________ |
________ |
________ |
________ |
________ |
There were some pleasing dividend increases from our investments over the year, with eight raising their payouts by 10% or more. Wood Group demonstrated their confidence in the future with a 25% uplift and an indication that they expect to be able to produce at least a double digit increase this year. That comes on the back of a 25% raise in 2013. Schroders and Prudential were both acknowledged in this section of our report in 2014 and they feature again this year having produced a 34% and 10% increase in their respective dividends. Other investments that delivered significant uplifts included: Compass Group who also declared a sizeable special dividend, Provident Financial and one of our new holdings, automotive distribution business Inchcape. It is also worth remembering that just over one third of the Company's revenues comes from fixed interest instruments, which deliver no growth in dividends.
Equities
As we entered the Company's financial year, two themes that were apparent were the continuation of the US and UK economic recoveries.
The UK recovery continued apace in 2014 with a first quarter GDP reading of 3.1%, whilst unemployment reached its lowest level for five years. Despite this, Mark Carney, the Governor of the Bank of England was keen to dampen expectations of an imminent increase in domestic interest rates. The US economy actually registered a contraction though that was related to the harsh weather, timing and a run down of inventories and the markets shrugged it off. Indeed the Federal Reserve felt sufficiently comfortable about the economy's future prospects to announce a further $10 billion of tapering. Markets were in a bullish mood and by mid May the FTSE All-Share had registered a new all-time high in total return terms.
Prospects were less rosy in Europe. Recovery was anaemic and in many instances the peripheral nations were now outperforming the core. Consequently the ECB felt it necessary to reduce interest rates to their lowest ever level and to introduce negative deposit rates. The authorities also made it clear for the first time that they were prepared to countenance some form of quantitative easing in order to stimulate lending.
There was a significant amount of corporate news flow, particularly from the pharmaceuticals sector and the Company was a beneficiary of much of this. AstraZeneca announced that they had received an approach from Pfizer. Meanwhile, GlaxoSmithKline bought Novartis's vaccines business and simultaneously injected their over the counter business into a joint venture with Novartis that should allow both companies to benefit from the strengths of the other. Whilst merger and acquisition activity was a prominent feature, it was noticeable how disappointing the performance of many IPOs was.
The clearest theme to emerge from the first half reporting season was that sterling was strengthening against both the dollar and euro. In many instances this had a beneficial impact in that it was helping to reduce inflationary pressure on costs. However, in aggregate this was being more than offset by the negative impact on the translation of profits and in some cases on overseas demand. This weighed on earnings expectations and hence downgrades to analysts' profit forecasts continued to outnumber upgrades by a factor of almost 2.5:1.
By the summer, geopolitical events had moved to the fore. Tensions were rising between Russia and Ukraine and ISIS was a growing force in Iraq. Investors were unperturbed, remaining focussed on the improving economic fundamentals. They were rewarded with data that showed US second quarter GDP ahead of expectations at 4% and the UK economy surpassing its previous peak level of output. This may have been the slowest recovery for 100 years but it was a recovery.
Europe was still showing no signs of improvement and by August the German economy was contracting, France was not growing and deflation was increasingly seen as a risk. As Mario Draghi sought to provide reassurance that the ECB would act to provide additional stimulus, bond markets reacted with a further contraction in yields. Yields on German 10 year bunds fell through 1% for the first time ever. The same trend was evident in UK and US government issues. Equity markets followed suit as investors focussed on the benefits of additional stimulus rather than on the conditions that were making such activity necessary.
As autumn began markets started to decline. Macroeconomic newsflow remained mixed with the US and UK still performing well. Indeed the US was able to announce the termination of its asset purchase programme. However, China acknowledged for the first time that they might fail to achieve their targeted level of growth. The ECB made deposit rates even more negative and launched its Third Long Term Refinancing Operation, designed to support SMEs. Take up was surprisingly low suggesting that it would be some time before lending accelerated. The threat of deflation in the region was an increasing concern and many investors were frustrated that there was so little clarity on the likely scale of any stimulus package.
The stand-out event was the collapse in oil prices. Supply now exceeded demand and with Saudi Arabia making it clear that they would prefer to protect their market share rather than cut production the price fell dramatically. Share prices of oil service and small independent oil exploration and production companies were hit hard. The oil majors held up rather better, though there were questions raised about their ability to sustain their dividends.
The year finished with investors trying to determine the likely second and third order impacts of the falling oil price. Would the US economy really be a net beneficiary? Would the impact in the UK boost corporate profitability but with accompanying deflation? Would that mean a delay to interest rate increases in both economies? If it was deflationary in Europe would that serve to increase the likelihood of quantitative easing? And most pressing of all, how big would any European stimulus programme be?
Markets started 2015 strongly, indeed February was the best month for equities in a year and the FTSE 100 index achieved an all-time high surpassing the 6930 level last seen in 1999. There were two particularly important events. The ECB announced that it would commence quantitative easing amounting to €60bn per month for at least 18 months. The scale was a positive surprise for investors. The second event was the success of the anti-austerity party Syriza in the Greek elections. This served to reignite fears about sovereign indebtedness and the possibility of a Greek exit from the euro.
The Spring corporate reporting season saw results broadly in line with expectations, albeit ones that had been downgraded quite markedly over the course of 2014.
Our long term approach to investing means that the core features of the portfolio tend to be in place for a number of years and change tends to be evolutionary.
Consequently many of the aspects that we have discussed in previous reports have remained in place over the course of the year. The portfolio is constructed in a bottom up manner based on the fundamental analysis of the companies in question. Sectoral overweight and underweight positions are therefore an output of the portfolio construction process rather than a determinant of which businesses we invest in. With that in mind it is important to note the somewhat imbalanced nature of the index in the UK with a small number of companies having very large weights. If we are to have, what is to our mind a sensibly diversified portfolio, we are likely therefore to be structurally underweight to these businesses and sectors.
Over the course of the year our underweight position relative to the Oil & Gas sector has declined as the collapse in the oil price has reduced these companies' importance in the benchmark. Our underweight to Basic Materials has also declined quite markedly. Two factors have been at play here; firstly the miners have been impacted by declining commodity prices and hence they now represent less of the index. Secondly the introductions of Croda and Elementis have given the portfolio exposure to Chemicals where previously there was none. Similarly, there is a larger overweight in Technology, due to the introduction of Aveva. We have moved from a slight overweight to a slight underweight position with respect to Healthcare. It is interesting that our weight in the portfolio remains identical to that at the end of the previous year but the weightings in the index have changed. In Telecommunications we now have a small overweight position arising as we have built our holding in Inmarsat. As in previous years there is a sizeable though reduced overweight in Financials. The majority of this results from the investment in Aberdeen Smaller Companies High Income Trust. The widening of the discount on the trust lies behind the reduced relative position. We remain underweight the UK domestic banks where we still have concerns about the potential impact of government ownership. We are overweight Life Assurance and Financial Services, two sectors that have provided the Company with some attractive dividend increases.
Five new holdings were added to the portfolio. Ultra Electronics is an aerospace and defence business. They have particular strengths in the areas of cyber security and battle space IT. Both of these markets are expected to exhibit long term structural growth despite pressures in more conventional defence expenditure. The company has a broad portfolio of products and end market exposures which, allied with a strong balance sheet has allowed them to be relatively resilient during a period of significant reductions in US and UK defence expenditure. Inchcape distributes premium vehicles for automotive manufacturers into a range of international markets. The exclusivity and long term nature of the agreements provide significant barriers to entry. Indeed they have never lost such a contract. Their presence in a number of emerging markets will allow them to benefit from the structural growth that is occurring in these territories. We introduced two speciality chemicals companies during the year. Croda produce niche naturally derived products that are sold into the personal care, life sciences and crop care markets. The high value nature of these products allows the company to deliver margins materially ahead of those normally seen in the industry. Some temporary weakness in demand created an opportunity for us to initiate a position. Elementis is a global leader in rheological additives for the coatings and other speciality markets. The company has opportunities to grow as they widen both their product portfolio and geographical presence. Their products are critical to the performance of the end product which serves to give the business pricing power. Barriers to entry are significant especially for their hectorite derived products where they own the world's only commercial mine. Finally, Aveva produce three-dimensional design software for large and complex infrastructure in the shipping, nuclear and energy markets. Their business benefits from a high level of recurring revenues, often with very long term contracts, high technical barriers to entry, pricing power and a net cash balance sheet. They do however have exposure to the oil and gas end markets and as such their share price has been adversely affected. This has provided us with an opportunity to buy an initial position in a company that we have followed for many years. Each of Inchcape, Elementis and Aveva have increased their dividends by more than 10% per year over the last three years. Indeed in the case of Elementis, if we include their policy of paying out half their net cash each year in addition to an ordinary dividend their distribution has risen by more than 30% per year in recent times.
Morrisons was the only holding from which we exited. The industry's travails are well documented with the growing presence of the hard discounters, falling real estate values and a wary consumer combining to result in a requirement for a structural resetting of margins and returns. In addition this company had fallen behind the competition in the areas of convenience stores and online sales - two areas of the market that are growing. We commented in last year's review that we had sold half our position in recognition of these facts. During the autumn we decided to exit the remainder of the holding and to concentrate our focus on the potential rewards available if our other holding in this arena, Tesco, can be successfully turned round.
In more general portfolio activity we topped up holdings that came under pressure due to weakening commodity prices, these include Wood Group, Weir Group and BHP Billiton. We also topped up Rolls Royce following their profits warning. We supported Cobham when they had a small placing to help fund their acquisition of Aeroflex. The shares subsequently performed well and we top sliced the holding later in the year. We bought a little more Vodafone following the return of the Verizon cash and associated share consolidation which had had the effect of reducing our holding. We also bought some more Schroders which continues to trade strongly. We top sliced the holdings in Associated British Foods, Prudential and Pearson all of which had performed well over the year.
Lastly we exchanged the holding of Royal Dutch Shell A shares for B shares. The company's decision to cease payment of a scrip dividend on the A shares meant that the Company would face Dutch withholding tax on the dividends that it received. The move into the B shares mitigates some of the impact.
In many cases the transactions were enacted via the assignment or exercise of put and call options.
Investment Performance Analysis
In the year to the end of March 2015, the total return on net assets was 9.7% compared to our benchmark, the FTSE All-Share Index which returned 6.6%.
Having been a detractor from performance in 2013, Pearson was the most significant positive contributor this year with the share price registering a gain of 43%. Prudential and Schroders were again important contributors with Prudential delivering growth in its Asian operations and Schroders benefiting from rising markets and the acquisition of the Cazenove private wealth business. Both companies declared significant dividend increases. The Company has a sizeable investment in AstraZeneca and that was helpful when the company was bid for by Pfizer. Although the bid subsequently failed, the approach served to illustrate some of the value in the company's pipeline and the shares finished the year with a gain of 24%. At the sector level the Company remained underweight Mining companies and this aided performance as share prices fell on the back of declining demand for commodities from China in particular. Not owning Rio Tinto and Anglo American in particular helped. Other notable successes included Inmarsat, whose Global Express programme is rolling out successfully whilst the potential for gains from their US spectrum has increased in likelihood, as well as Compass, whose steady compounding returns profile has found favour with investors, and Land Securities, that has benefited from a strong London office market in keeping with other similar businesses.
Unsurprisingly there are holdings in the portfolio that have had a less good year.
Having been a strong positive contributor over recent years, Aberdeen Smaller Companies High Income Trust had the most significant negative impact last year. It is worth noting that the company actually outperformed its benchmark over the year and that the negative impact was caused by the widening of the discount that its shares trade at relative to its net asset value. This effect was witnessed across the small company investment trust universe.
Standard Chartered announced a pick up in impairment charges as some clients were impacted by weakening commodity prices. We believe that their problems are resolvable. They have already announced sweeping management changes and a $400 million cost saving plan. As we wait for these to take effect we note that it retains its unique positioning as an emerging markets focussed lender, benefiting from significant barriers. It is also now trading below book value.
Tesco's travails are well known. The new CEO, Dave Lewis, has outlined a credible recovery plan, though this won't happen rapidly. The company was one of two investments to announce dividend cuts during the year.
Declining commodity prices, especially oil, negatively impacted Weir Group, Wood Group and BHP Billiton. We believe that these remain high quality companies that have some flexibility to adapt to the current environment and that commodity prices are unlikely to remain at current depressed levels into the long term.
Lastly, Centrica had a tough year as they faced falling oil and electricity prices, political interference, warm weather and the higher costs of the US polar vortex. This culminated in the decision by the new CEO, Ian Conn to reduce the dividend. The impact from this will not be felt until the Company's 2016 financial year.
The portfolio is constructed to deliver growth in both capital and earnings over time. The success of this strategy can be seen in the performance which at the year-end had exceeded that delivered by its benchmark over each of one, three and five years. Capital and earnings growth are unlikely to progress either smoothly or in line with each other. We are however very aware of the desirability of growth in the portfolio's earnings.
Prospects
Equity markets appear good value when compared to fixed interest. However, it is increasingly accepted that fixed income markets are being driven to uncomfortably high levels by the actions of central banks around the world. Without wishing to suggest when this might reverse it seems fair to observe that the yields on hopefully risk free assets no longer provide a sound touchstone for the determination of fundamental equity valuations. It is notable though that although they were a solid contributor to performance last year, the preference shares have not moved to the same level of valuations as the rest of the fixed interest market. Although they will likely be affected by a rising interest rate environment, their more equity like characteristics mean that the impact is likely to be less than that experienced by conventional fixed interest instruments.
We are in an environment where creditors have to pay to lend money to the Swiss Government and the Mexican authorities can issue 100 year euro denominated debt. In effect investors who want any semblance of yield or the possibility of capital appreciation are forced to buy equities. This has driven the valuations, especially of high quality companies, to levels that are increasingly difficult to justify unless the current environment is indeed the "new normal".
After four years of low or no aggregate earnings growth across Europe it would be easy to be pessimistic about the outlook for corporate profitability. In fact there are some reasons for optimism. The US and UK are still recovering. Growth in both these economies is forecast to accelerate this year. Unemployment is falling and wages are beginning to rise which should be good for demand. Dollar strength will aid companies exporting to the US. The lower cost of energy should feed through to demand and profit growth. There are signs that the European economy is picking up, boosted by quantitative easing, but improving all the same. GDP is now expected to rise over the next two years. Credit conditions are easing as both demand and availability increase. Eurozone earnings momentum has turned positive for the first time in four years as analysts' forecasts have not been subject to the downgrades that have been so familiar over recent times.
Corporate balance sheets are strong; this gives management teams options. Therefore it would not be surprising to see merger and acquisition activity continue. Shell's proposed acquisition of BG and Heinz's merger with Kraft are examples. If such deals are done for the right reasons they can deliver value.
Less positively, with the Eurozone already experiencing deflation there are increasing concerns that the fall in the oil price may not be accompanied by an increase in demand. In such a scenario the benefit of cheaper energy may be outweighed by the impact of deflation. However, the market is currently pricing in an increase in inflation across the region. Falling commodity prices and currencies have prompted interest rate cuts in a range of countries from Australia and Canada to Denmark. Expectations for interest rate increases in the UK have been pushed out to 2016 and whilst the US is still likely to increase rates sometime this year it will be difficult for them to do so at a time when most other regions are reducing rates. This points to the second significant risk, namely that the benefits of European quantitative easing are diluted as countries around the world seek to counter the threat of deflation by devaluing their currencies.
China's growth is slowing, its economy is having to transition. Chinese demand for commodities is reducing and that can be seen in commodity prices that have been falling for some time. This decline in demand may serve to push deflation across the emerging markets, and this would surely impact the developed markets as well.
Clearly a Greek exit from the euro has the potential to cause uncertainty. There will be pinch points as the staged repayments and renegotiations progress. It seems more likely than not that all parties involved will ultimately come to a sensible agreement. However, the process of reaching a settlement has the potential to cause significant volatility in markets.
The risk from geopolitical events seems to be rising. This could create additional volatility during the year.
However, investors should take care to look at individual company valuations rather than relying on aggregate valuations. There is a very broad spread of valuations across different market sectors accompanied by wide ranging variances in expectations for earnings growth, and in some cases contraction. Although we recognise that the valuations of many quality companies are full rather than cheap, we remain positive about the long term prospects for the businesses that we have invested in.
Aberdeen Asset Managers Limited
29 May 2015
STRATEGIC REPORT - RESULTS
Financial Summary
|
|
31 March 2015 |
31 March 2014 |
% change |
|
Total investments |
£92,181,000 |
£87,835,000 |
+4.9 |
|
Shareholders' funds |
£77,832,000 |
£74,502,000 |
+4.5 |
|
Market capitalisation |
£75,594,000 |
£75,669,000 |
-0.1 |
|
Net asset value per share |
259.46p |
248.36p |
+4.5 |
|
Share price (mid-market) |
252.00p |
252.25p |
-0.1 |
|
(Discount)/premium to NAV |
(2.9%) |
1.6% |
|
|
|
|
|
|
|
Gearing |
|
|
|
|
Net gearing |
19.4% |
18.9% |
|
|
Equity gearing |
18.4% |
17.9% |
|
|
|
|
|
|
|
Dividend and earnings |
|
|
|
|
Revenue return per share A |
12.92p |
12.63p |
+2.3 |
|
Dividend per share B |
12.25p |
12.00p |
|
|
Dividend cover |
1.06 |
1.05 |
|
|
Revenue reserves C |
£6,313,000 |
£6,031,000 |
|
|
|
|
|
|
|
Operating costs |
|
|
|
|
Ongoing charges ratio D |
1.01% |
1.00% |
|
|
A Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income). |
|||
|
B The figures for dividend per share reflect the years in which they were earned (see note 8). |
|||
|
C The revenue reserve figure does not take account of the third interim or final dividend amounting to £1,874,849 (2014 - £1,799,855) combined. |
|||
|
D Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the management fee and administrative expenses divided by the average cum income net asset value throughout the year. |
|||
Performance (total return)
|
|
1 year |
3 year |
5 year |
|
|
% return |
% return |
% return |
|
Net asset value |
+9.7 |
+57.9 |
+85.3 |
|
Share price (based on mid-market) |
+4.9 |
+52.1 |
+83.1 |
|
FTSE All-Share Index |
+6.6 |
+35.4 |
+49.3 |
|
All figures are for total return and assume re-investment of net dividends excluding transaction costs. |
|||
Dividends
|
|
Rate per share |
xd date |
Record date |
Payment date |
|
First interim dividend |
3.00p |
1 October 2014 |
3 October 2014 |
31 October 2014 |
|
Second interim dividend |
3.00p |
2 January 2015 |
5 January 2015 |
30 January 2015 |
|
Third interim dividend |
3.00p |
2 April 2015 |
7 April 2015 |
30 April 2015 |
|
Proposed final dividend |
3.25p |
2 July 2015 |
3 July 2015 |
31 July 2015 |
|
2014/15 |
12.25p |
|
|
|
|
|
|
|
|
|
|
First interim dividend |
3.00p |
2 October 2013 |
4 October 2013 |
31 October 2013 |
|
Second interim dividend |
3.00p |
31 December 2013 |
3 January 2014 |
31 January 2014 |
|
Third interim dividend |
3.00p |
2 April 2014 |
4 April 2014 |
30 April 2014 |
|
Final dividend |
3.00p |
2 July 2014 |
4 July 2014 |
31 July 2014 |
|
2013/14 |
12.00p |
|
|
|
Ten Year Financial Record
|
Year to 31 March |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
|
Revenue available for ordinary dividends (£'000) |
5,792 |
5,987 |
6,026 |
5,536 |
3,512 |
3,292 |
3,615 |
3,556 |
3,789 |
3,877 |
|
Per share (p) |
|
|
|
|
|
|
|
|
|
|
|
Net revenue return |
18.9 |
19.3 |
22.2 |
18.8 |
11.8 |
11.1 |
12.2 |
11.9 |
12.6 |
12.9 |
|
Net dividends paid/proposed |
19.25 |
19.25 |
19.75 |
19.75 |
12.00 |
12.00 |
12.00 |
12.00 |
12.00 |
12.25 |
|
Total return |
74.2 |
25.9 |
(63.4) |
(112.9) |
85.3 |
22.6 |
7.4 |
53.5 |
26.0 |
23.1 |
|
Net asset value |
327.1 |
334.0 |
251.1 |
118.5 |
186.8 |
197.5 |
192.9 |
234.4 |
248.4 |
259.5 |
|
Share price (mid-market) |
313.50 |
310.75 |
220.00 |
109.00 |
184.00 |
190.00 |
194.50 |
233.00 |
252.25 |
252.00 |
|
|
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
|
Shareholders' funds (£m) |
97.1 |
99.1 |
74.6 |
35.2 |
55.5 |
58.6 |
57.3 |
70.3 |
78.7 |
77.8 |
|
|
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
|
|
|
|
|
|
|
|||||
|
The figures for 2011 to 2015 are for the Company only, following the dissolution of the subsidiaries in May 2011. |
||||||||||
Cumulative Performance
Rebased to 100 at 31 March 2004
|
As at 31 March |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
|
NAV |
100.0 |
120.3 |
123.1 |
92.2 |
43.5 |
68.5 |
72.4 |
70.7 |
85.9 |
91.0 |
95.1 |
|
NAV total return A |
100.0 |
128.9 |
140.3 |
111.7 |
58.3 |
103.2 |
116.3 |
121.1 |
156.3 |
174.3 |
191.2 |
|
Share price performance |
100.0 |
117.9 |
116.8 |
82.7 |
41.0 |
69.2 |
71.4 |
73.1 |
87.6 |
94.8 |
94.7 |
|
Share price total return A |
100.0 |
126.2 |
133.0 |
100.5 |
55.6 |
106.0 |
116.8 |
127.6 |
162.3 |
185.1 |
194.1 |
|
Benchmark performance |
100.0 |
124.0 |
133.6 |
119.1 |
80.7 |
118.4 |
124.8 |
122.2 |
137.6 |
144.7 |
149.1 |
|
Benchmark total return A |
100.0 |
128.0 |
142.3 |
131.3 |
92.8 |
141.3 |
153.6 |
155.7 |
181.9 |
197.9 |
210.9 |
|
|
|
|
|
||||||||
|
NAV figures are based on Company only values following the dissolution of the subsidiaries in May 2011. |
|||||||||||
|
A Total return figures are based on reinvestment of net income. |
|||||||||||
INVESTMENT PORTFOLIO - ORDINARY SHARES
AS AT 31 MARCH 2014
|
|
Valuation |
Total |
Valuation |
|
|
2015 |
portfolio |
2014 |
|
Company |
£'000 |
% |
£'000 |
|
Aberdeen Smaller Companies High Income Trust |
6,124 |
6.6 |
6,865 |
|
Royal Dutch Shell |
3,063 |
3.3 |
3,380 |
|
AstraZeneca |
3,030 |
3.3 |
2,810 |
|
British American Tobacco |
2,896 |
3.1 |
2,935 |
|
GlaxoSmithKline |
2,721 |
3.0 |
2,801 |
|
Unilever |
2,702 |
2.9 |
2,612 |
|
Prudential |
2,625 |
2.8 |
2,550 |
|
HSBC Holdings |
2,589 |
2.8 |
2,690 |
|
Centrica |
2,452 |
2.7 |
3,024 |
|
Pearson |
2,351 |
2.6 |
2,179 |
|
Ten largest investments |
30,553 |
33.1 |
|
|
BHP Billiton |
2,328 |
2.5 |
2,582 |
|
Chesnara |
2,238 |
2.4 |
2,002 |
|
Vodafone |
2,163 |
2.4 |
2,038 |
|
Schroders |
2,150 |
2.3 |
1,365 |
|
Standard Chartered |
2,095 |
2.3 |
1,993 |
|
Close Brothers |
2,011 |
2.2 |
2,400 |
|
National Grid |
1,928 |
2.1 |
2,080 |
|
BP |
1,895 |
2.1 |
2,083 |
|
Cobham |
1,883 |
2.0 |
1,564 |
|
Sage Group |
1,675 |
1.8 |
1,651 |
|
Twenty largest investments |
50,919 |
55.2 |
|
|
Compass |
1,467 |
1.6 |
1,373 |
|
Tesco |
1,451 |
1.6 |
1,772 |
|
Inmarsat |
1,268 |
1.4 |
995 |
|
Land Securities |
1,267 |
1.4 |
1,176 |
|
Provident Financial |
1,118 |
1.2 |
823 |
|
GKN |
1,112 |
1.2 |
1,211 |
|
Rolls Royce |
1,058 |
1.1 |
1,031 |
|
Weir Group |
987 |
1.1 |
938 |
|
Croda International |
986 |
1.1 |
- |
|
Wood Group (John) |
972 |
1.0 |
690 |
|
Thirty largest investments |
62,605 |
67.9 |
|
|
Experian |
726 |
0.8 |
703 |
|
Associated British Foods |
676 |
0.7 |
1,085 |
|
BG Group |
605 |
0.7 |
570 |
|
Aveva |
548 |
0.6 |
- |
|
Inchcape |
413 |
0.4 |
- |
|
Ultra Electronic Holdings |
405 |
0.4 |
- |
|
Elementis |
155 |
0.2 |
- |
|
Total Ordinary shares |
66,133 |
71.7 |
|
INVESTMENT PORTFOLIO - OTHER INVESTMENTS
AS AT 31 MARCH 2014
|
|
Valuation |
Total |
Valuation |
|
|
2015 |
portfolio |
2014 |
|
Company |
£'000 |
% |
£'000 |
|
Convertibles |
|
|
|
|
Premier Farnell 89.2p Cum Conv |
774 |
0.9 |
769 |
|
Balfour Beatty Cum Conv 10.75% |
572 |
0.6 |
585 |
|
Total Convertibles |
1,346 |
1.5 |
|
|
Preference shares |
|
|
|
|
Ecclesiastical Insurance Office 8 5/8% |
5,851 |
6.3 |
5,130 |
|
Royal & Sun Alliance 7 3/8% |
5,340 |
5.8 |
4,720 |
|
General Accident 7.875% |
4,683 |
5.1 |
4,063 |
|
Santander 10.375% |
4,039 |
4.4 |
3,680 |
|
Standard Chartered 8.25% |
3,583 |
3.9 |
3,391 |
|
R.E.A. Holdings 9% |
1,206 |
1.3 |
1,136 |
|
Total Preference shares |
24,702 |
26.8 |
|
|
Total other investments |
26,048 |
28.3 |
|
|
Total investments |
92,181 |
100.0 |
|
|
|
|||
|
Purchases and/or sales effected during the year result in 2014 and 2015 values not being directly comparable. |
|||
Distribution of Assets and Liabilities
|
|
|
Movement during the year |
|
|||||
|
|
Valuation at |
|
|
|
Gains/ |
Valuation at |
||
|
|
31 March 2014 |
Purchases |
Sales |
Other |
(losses) |
31 March 2015 |
||
|
|
£'000 |
% |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
% |
|
Listed investments |
|
|
|
|
|
|
|
|
|
Ordinary shares |
64,361 |
86.4 |
8,587 |
(7,630) |
- |
815 |
66,133 |
85.0 |
|
Convertibles |
1,354 |
1.8 |
- |
- |
(10) |
2 |
1,346 |
1.7 |
|
Preference shares |
22,120 |
29.7 |
- |
- |
(83) |
2,665 |
24,702 |
31.7 |
|
|
_______ |
______ |
_______ |
______ |
_____ |
_______ |
_______ |
_____ |
|
Total investments |
87,835 |
117.9 |
8,587 |
(7,630) |
(93) |
3,482 |
92,181 |
118.4 |
|
Current assets |
5,380 |
7.2 |
|
|
|
|
4,418 |
5.7 |
|
Current liabilities |
(18,713) |
(25.1) |
|
|
|
|
(8,767) |
(11.3) |
|
Non current liabilities |
- |
- |
|
|
|
|
(10,000) |
(12.8) |
|
|
_______ |
______ |
|
|
|
|
_______ |
_____ |
|
Net assets |
74,502 |
100.0 |
|
|
|
|
77,832 |
100.0 |
|
|
_______ |
______ |
|
|
|
|
_______ |
_____ |
|
Net asset value per Ordinary share |
248.4p |
|
|
|
|
|
259.5p |
|
|
|
_______ |
|
|
|
|
|
_______ |
|
DIRECTORS' REPORT
Introduction
The Board of Directors, Mr A.B. Davidson (Chairman), Ms M. Glen, Mr D.P. Kidd and Mr A.S. Robson held office throughout the whole year under review. Mr R. Talbut was appointed to the Board effective 1 April 2015. The Directors present their report and audited financial statements for the year ended 31 March 2015.
The Company and its Objective
The Company is an investment trust and its Ordinary shares are listed on the premium segment of the Official List of the UK Listing Authority and traded on the London Stock Exchange. The Company's objective is to provide for shareholders a high level of income, together with growth of both income and capital from a portfolio substantially invested in UK equities. In pursuit of the Company's objective, the Company invests principally in the ordinary shares of UK quoted companies, and in convertible and preference shares with above average yields. A review of the Company's activities is given in the Strategic Report. This includes the overall strategy of the business of the Company and its principal activities, main risks faced by the Company, likely future developments of the business and the recommended dividend.
Status
The Company, which was incorporated in 1929, is an investment company, within the terms of Section 833 of the Companies Act 2006 ("2006 Act") and carries on business as an investment trust. The Company is registered as a public limited company in England and Wales. The Company's registration number is 00386561. The Company has no employees and makes no political donations.
The Company has been accepted by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 April 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 March 2015 so as to enable it to comply with the ongoing requirements for investment trust status.
The affairs of the Company were conducted in such a way as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner in the future.
Results and Dividends
Dividends on the Ordinary shares are payable quarterly at the end of January, April, July and October. Dividends paid and proposed for the year amounted to 12.25p.
A third interim dividend of 3.0p per Ordinary share was declared on 20 March 2015 and paid on 30 April 2015. A final dividend of 3.25p per Ordinary share is proposed, payable on 31 July 2015 to shareholders on the register on 3 July 2015. The ex-dividend date is 2 July 2015. Under International Financial Reporting Standards (IFRS) both these dividends will be accounted for in the financial year ended 31 March 2016.
Management Agreement
To comply with the Alternative Investment Fund Managers Directive, the Company's investment management arrangements with the Aberdeen Group have been reorganised. The Company has appointed Aberdeen Fund Managers Limited, a wholly owned subsidiary of Aberdeen Asset Management PLC, as its alternative investment fund manager with effect from 17 July 2014. In order to facilitate this appointment, the Company terminated its existing investment management agreement with Aberdeen Asset Managers Limited and entered into a new management agreement with AFML. The new management agreement with AFML is on the same commercial terms as the previous agreement with AAM and complies with the new AIFMD regulatory regime. Under the new arrangements, AFML has been appointed to provide investment management, risk management, administration and company secretarial services to the Company as well as carry out promotional activities on the Company's behalf. The Company's portfolio will continue to be managed by AAM by way of a group delegation agreement in place between AFML and AAM. In addition, AFML has sub-delegated promotional activities to AAM and administrative and secretarial services to Aberdeen Asset Management PLC. Fees payable are shown in note 4 to the financial statements.
The management fee, details of which are shown in note 3 to the financial statements is 0.45% for funds up to £100 million and 0.40% for funds over £100 million, excluding commonly managed funds. The management agreement is terminable on not less than six months' notice. The terms and conditions of the AIFM's appointment and its performance are reviewed by the Management Engagement Committee on an annual basis. The Committee's conclusions regarding the continued appointment of the AIFM are dealt with in detail in the Chairman's Statement.
Going Concern
The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £20 million are committed to the Company until 19 December 2017. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and, for the above reasons, they continue to adopt the going concern basis in preparing the financial statements.
Accountability and Audit
Each Director confirms that, so far as he or she (hereinafter referred to as "he") is aware, there is no relevant audit information of which the Company's auditor is unaware, and he has taken all the steps that he could reasonably be expected to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company's auditor is aware of that information. Additionally there are no important events affecting the Company since the year end.
By order of the Board
Aberdeen Asset Management PLC
Secretary, 29 May 2015
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 they are required to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law.
The financial statements are required by law to 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 estimates that are reasonable and prudent;
· state whether they have been prepared in accordance with IFRSs as adopted by the EU subject to any material departures disclosed and explained in the notes to 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 proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
· that in the opinion of the Directors, the annual report and accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and
· the Strategic Report and Directors' Report include 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 the Company faces.
For and on behalf of Shires Income PLC
Anthony B. Davidson
Chairman
29 May 2015
STATEMENT OF COMPREHENSIVE INCOME
|
|
|
Year ended |
Year ended |
||||
|
|
|
31 March 2015 |
31 March 2014 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gains on investments at fair value |
10 |
- |
3,470 |
3,470 |
- |
4,387 |
4,387 |
|
|
|
|
|
|
|
|
|
|
Investment income |
|
|
|
|
|
|
|
|
Dividend income |
|
3,737 |
- |
3,737 |
3,399 |
- |
3,399 |
|
Interest income/(expense) |
|
578 |
(93) |
485 |
579 |
(93) |
486 |
|
Stock dividends |
|
65 |
- |
65 |
260 |
- |
260 |
|
Traded option premiums |
|
275 |
- |
275 |
286 |
- |
286 |
|
Money market interest |
|
10 |
- |
10 |
10 |
- |
10 |
|
Exchange gains |
|
- |
- |
- |
- |
2 |
2 |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
|
2 |
4,665 |
3,377 |
8,042 |
4,534 |
4,296 |
8,830 |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Management fee |
3 |
(198) |
(198) |
(396) |
(186) |
(186) |
(372) |
|
Other administrative expenses |
4 |
(384) |
- |
(384) |
(347) |
- |
(347) |
|
Finance costs of borrowings |
6 |
(164) |
(163) |
(327) |
(160) |
(160) |
(320) |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
|
|
(746) |
(361) |
(1,107) |
(693) |
(346) |
(1,039) |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
Profit before taxation |
|
3,919 |
3,016 |
6,935 |
3,841 |
3,950 |
7,791 |
|
|
|
|
|
|
|
|
|
|
Taxation |
7 |
(42) |
32 |
(10) |
(52) |
52 |
- |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
Profit attributable to equity holders of the Company |
|
3,877 |
3,048 |
6,925 |
3,789 |
4,002 |
7,791 |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
Earnings per Ordinary share (pence) |
9 |
12.92 |
10.16 |
23.08 |
12.63 |
13.34 |
25.97 |
|
|
|
_______ |
_______ |
______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit for the year" is also the "Total comprehensive income for the year", as defined in IAS 1 (revised). |
|||||||
|
The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with IFRS. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. |
|||||||
|
All items in the above statement derive from continuing operations. |
|||||||
|
The accompanying notes are an integral part of these financial statements. |
|||||||
|
|
|||||||
|
The following table shows the revenue for each year under IFRS less the ordinary dividends declared in respect of the financial year to which they relate. This table is for information purposes only and does not form part of the above Statement of Comprehensive Income. |
|||||||
|
|
|
|
|||||
|
|
Year to |
Year to |
|||||
|
|
31 March |
31 March |
|||||
|
|
2015 A |
2014 B |
|||||
|
|
£'000 |
£'000 |
|||||
|
Revenue |
3,877 |
3,789 |
|||||
|
Dividends declared |
(3,675) |
(3,600) |
|||||
|
|
________ |
________ |
|||||
|
|
202 |
189 |
|||||
|
|
________ |
________ |
|||||
|
|
|||||||
|
A Dividends declared relates to first three interim dividends (each 3.00p) and the proposed final dividend (3.25p) declared in respect of financial year 2014/15. |
|||||||
|
B Dividends declared relates to first three interim dividends (each 3.0p) and the final dividend (3.0p) declared in respect of financial year 2013/14. |
|||||||
BALANCE SHEET
|
|
|
As at |
As at |
|
|
|
31 March 2015 |
31 March 2014 |
|
|
Notes |
£'000 |
£'000 |
|
Non-current assets |
|
|
|
|
Ordinary shares |
|
66,133 |
64,361 |
|
Convertibles |
|
1,346 |
1,354 |
|
Other fixed interest |
|
24,702 |
22,120 |
|
|
|
__________ |
__________ |
|
Securities at fair value |
10 |
92,181 |
87,835 |
|
|
|
__________ |
__________ |
|
|
|
|
|
|
Current assets |
|
|
|
|
Trade and other receivables |
|
11 |
19 |
|
Accrued income and prepayments |
|
1,005 |
956 |
|
Cash and cash equivalents |
|
3,402 |
4,405 |
|
|
|
__________ |
__________ |
|
|
11 |
4,418 |
5,380 |
|
|
|
__________ |
__________ |
|
Total assets |
|
96,599 |
93,215 |
|
Creditors: amounts falling due within one year |
|
|
|
|
Trade and other payables |
|
(267) |
(213) |
|
Short-term borrowings |
|
(8,500) |
(18,500) |
|
|
|
__________ |
__________ |
|
|
12 |
(8,767) |
(18,713) |
|
|
|
__________ |
__________ |
|
Net current assets |
|
(4,349) |
(13,333) |
|
|
|
__________ |
__________ |
|
Total assets less current liabilities |
|
87,832 |
74,502 |
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
Long-term borrowings |
12 |
(10,000) |
- |
|
|
|
__________ |
__________ |
|
Net assets |
|
77,832 |
74,502 |
|
|
|
__________ |
__________ |
|
|
|
|
|
|
Issued capital and reserves attributable to equity holders |
|
|
|
|
Called-up share capital |
13 |
15,049 |
15,049 |
|
Share premium account |
14 |
19,308 |
19,308 |
|
Capital reserve |
15 |
37,162 |
34,114 |
|
Revenue reserve |
15 |
6,313 |
6,031 |
|
|
|
__________ |
__________ |
|
Equity shareholders' funds |
|
77,832 |
74,502 |
|
|
|
__________ |
__________ |
|
Net asset value per Ordinary share (pence) |
9 |
259.46 |
248.36 |
|
|
|
__________ |
__________ |
STATEMENT OF CHANGES IN EQUITY
|
Year ended 31 March 2015 |
|
|
|
|
|
|
|
|
Share |
|
Retained |
|
|
|
Share |
premium |
Capital |
revenue |
|
|
|
capital |
account |
reserve |
reserve |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 March 2014 |
15,049 |
19,308 |
34,114 |
6,031 |
74,502 |
|
Revenue profit for the year |
- |
- |
- |
3,877 |
3,877 |
|
Capital profit for the year |
- |
- |
3,048 |
- |
3,048 |
|
Equity dividends (see note 8) |
- |
- |
- |
(3,595) |
(3,595) |
|
|
_________ |
__________ |
_________ |
________ |
_________ |
|
As at 31 March 2015 |
15,049 |
19,308 |
37,162 |
6,313 |
77,832 |
|
|
_________ |
__________ |
_________ |
________ |
_________ |
|
|
|
|
|
|
|
|
Year ended 31 March 2014 |
|
|
|
|
|
|
|
|
Share |
|
Retained |
|
|
|
Share |
premium |
Capital |
revenue |
|
|
|
capital |
account |
reserve |
reserve |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 March 2013 |
15,049 |
19,308 |
30,112 |
5,837 |
70,306 |
|
Revenue profit for the year |
- |
- |
- |
3,789 |
3,789 |
|
Capital profit for the year |
- |
- |
4,002 |
- |
4,002 |
|
Equity dividends (see note 8) |
- |
- |
- |
(3,595) |
(3,595) |
|
|
_________ |
__________ |
_________ |
________ |
_________ |
|
As at 31 March 2014 |
15,049 |
19,308 |
34,114 |
6,031 |
74,502 |
|
|
_________ |
__________ |
_________ |
________ |
_________ |
|
|
|
|
|
|
|
|
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend. |
|||||
|
The accompanying notes are an integral part of these financial statements. |
|||||
CASH FLOW STATEMENT
|
|
Year ended |
Year ended |
||
|
|
31 March 2015 |
31 March 2014 |
||
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
|
|
Investment income received |
|
4,266 |
|
3,956 |
|
Money market interest received |
|
11 |
|
10 |
|
Management fee paid |
|
(391) |
|
(365) |
|
Other cash expenses |
|
(399) |
|
(358) |
|
|
|
________ |
|
________ |
|
Cash generated from operations |
|
3,487 |
|
3,243 |
|
|
|
|
|
|
|
Interest paid |
|
(318) |
|
(320) |
|
Overseas tax recoverable |
|
(5) |
|
- |
|
|
|
________ |
|
________ |
|
Net cash inflows from operating activities |
|
3,164 |
|
2,923 |
|
|
|
________ |
|
________ |
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
Purchases of investments |
(8,461) |
|
(6,240) |
|
|
Sales of investments |
7,889 |
|
8,841 |
|
|
|
________ |
|
________ |
|
|
Net cash (outflow)/inflow from investing activities |
|
(572) |
|
2,601 |
|
|
|
________ |
|
________ |
|
Cash flows from financing activities |
|
|
|
|
|
Equity dividends paid |
(3,595) |
|
(3,595) |
|
|
|
________ |
|
________ |
|
|
Net cash outflow from financing activities |
|
(3,595) |
|
(3,595) |
|
|
|
________ |
|
________ |
|
Net (decrease)/increase in cash and cash equivalents |
|
(1,003) |
|
1,929 |
|
|
|
________ |
|
________ |
|
|
|
|
|
|
|
Reconciliation of net cash flow to movements in cash and cash equivalents |
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents as above |
|
(1,003) |
|
1,929 |
|
Net cash and cash equivalents at start of year |
|
(14,095) |
|
(16,026) |
|
Exchange movements |
|
- |
|
2 |
|
|
|
________ |
|
________ |
|
Net cash and cash equivalents at end of year |
|
(15,098) |
|
(14,095) |
|
|
|
________ |
|
________ |
|
|
|
|
|
|
|
Net cash and cash equivalents comprise: |
|
|
|
|
|
Cash and cash equivalents |
|
3,402 |
|
4,405 |
|
Short-term borrowings |
|
(8,500) |
|
(18,500) |
|
Long-term borrowings |
|
(10,000) |
|
- |
|
|
|
________ |
|
________ |
|
|
|
(15,098) |
|
(14,095) |
|
|
|
________ |
|
________ |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 March 2014
|
1. |
Accounting policies |
|
|
|
(a) |
Basis of accounting |
|
|
|
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union. |
|
|
|
|
|
|
|
The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in line with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. The Directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP except as referred to in paragraph (c) below. The financial statements have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. The Directors believe this is appropriate for the reasons outlined in the Directors' Report. |
|
|
|
|
|
|
|
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Sections 1158-1159 of the Corporation Tax Act 2010. |
|
|
|
|
|
|
|
At the date of authorisation of these financial statements, various Standards, amendments to Standards and Interpretations which have not been applied to these financial statements, were in issue but were not yet effective (and in some cases, had not yet been adopted by the EU). These have not been applied to these financial statements. |
|
|
|
|
|
|
|
At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: |
|
|
|
IFRS 9 Financial Instruments (effective 1 January 2018); |
|
|
|
Investment Entities - Amendments to IFRS 10, IFRS 12 & IAS 28 - (effective 1 January 2016). |
|
|
|
|
|
|
(b) |
Investments |
|
|
|
All investments have been designated upon initial recognition at fair value through profit or loss. This is because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis. Investments are recognised or derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned. Proceeds are measured at fair value which is regarded as the proceeds of sales less any transaction costs. |
|
|
|
|
|
|
|
The fair value of the financial instruments is based on their quoted bid price at the Balance Sheet date, without deduction for any estimated future selling costs. |
|
|
|
|
|
|
|
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as "Gains/(losses) on investments". Also included within this caption are transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment and its bid price at the date of purchase. |
|
|
|
|
|
|
(c) |
Income |
|
|
|
Dividend income from equity investments which includes all ordinary shares and also preference shares classified as equity instruments is accounted for when the shareholders' rights to receive payment have been established, normally the ex-dividend date. |
|
|
|
|
|
|
|
Interest from debt securities, which include preference shares classified as debt instruments, is accounted for on an effective interest rate basis. Any write-off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write-off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently buys and sells debt securities, and believe any premium or discount included in the price of such an investment is a capital item. |
|
|
|
|
|
|
|
Traded option contracts are restricted to writing out-of-the-money options with a view to generating income. Premiums received on traded option contracts are recognised as income evenly over the period from the date they are written to the date when they expire or are exercised or assigned. Gains and losses on the underlying shares acquired or disposed of as a result of options exercised are included in the capital account. Unexpired traded option contracts at the year end are accounted for at their fair value. |
|
|
|
|
|
|
|
Interest from deposits is dealt with on an effective interest basis. |
|
|
|
|
|
|
|
Underwriting commission is recognised when the underwriting services are provided and is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment. |
|
|
|
|
|
|
(d) |
Expenses |
|
|
|
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company. |
|
|
|
|
|
|
(e) |
Borrowings |
|
|
|
Short-term borrowings, which comprise interest bearing bank loans and overdrafts, are initially recognised at cost, being the fair value of the consideration received, net of any issue expenses. The finance costs, being the difference between the net proceeds of borrowings and the total amount of payments that require to be made in respect of those borrowings, accrue evenly over the life of the borrowings. |
|
|
|
Long-term borrowings of the Company are stated at the amount of the net proceeds immediately after issue plus cumulative finance costs less cumulative payments made in respect of the debt. The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method |
|
|
|
The finance costs borrowings are accounted for on an accruals basis and are charged 50% to revenue and 50% to capital in the Income Statement to reflect the Company's investment policy and prospective income and capital growth. |
|
|
|
|
|
|
(f) |
Taxation |
|
|
|
The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company has no liability for current tax. |
|
|
|
|
|
|
|
Deferred tax is provided in full on temporary differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. |
|
|
|
|
|
|
(g) |
Foreign currencies |
|
|
|
Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate. |
|
|
|
2015 |
2014 |
|
2. |
Income |
£'000 |
£'000 |
|
|
Income from listed investments |
|
|
|
|
Dividend income |
3,737 |
3,399 |
|
|
Interest income from investments |
577 |
579 |
|
|
Money market interest |
10 |
10 |
|
|
Stock dividend |
65 |
260 |
|
|
|
________ |
________ |
|
|
|
4,389 |
4,248 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
Other income from investment activity |
|
|
|
|
Deposit interest |
1 |
- |
|
|
Traded option premiums |
275 |
286 |
|
|
|
________ |
________ |
|
|
Total income |
4,665 |
4,534 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
|
2015 |
2014 |
|
|
Total income comprises: |
£'000 |
£'000 |
|
|
Dividends and interest from investments |
4,389 |
4,248 |
|
|
Deposit interest |
1 |
- |
|
|
Other income from investment activity |
275 |
286 |
|
|
|
________ |
________ |
|
|
Total income |
4,665 |
4,534 |
|
|
|
________ |
________ |
|
|
|
||
|
|
All dividend income was received from UK companies. The amount of £(93,000) (2014 - £(93,000)) included in the capital column of Investment Income represents the write off of the premium or discount on acquisition of debt securities referred to in note 1(c). |
||
|
|
|
2015 |
2014 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
3. |
Management fees |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Management fees |
198 |
198 |
396 |
186 |
186 |
372 |
|
|
|
______ |
______ |
______ |
______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 March 2015 management and secretarial services were provided by Aberdeen Asset Managers Limited ("AAM") until 13 July 2014 and thereafter by Aberdeen Fund Managers Limited ("AFML"). There were no changes to the commercial arrangements. Under the terms of an agreement effective from 14 July 2014 (which replaced the existing arrangements with AAM), the Company has appointed AFML to provide management, accounting, administrative and secretarial duties. |
||||||
|
|
|
||||||
|
|
The management fee is based on 0.45% for funds up to £100 million and 0.40% for funds over £100 million, calculated monthly and paid quarterly. The fee is allocated 50% to revenue and 50% to capital. The agreement is terminable on six month's notice. The total of the fees paid and payable during the year to 31 March 2015 was £396,000 (2014 - £372,000) and the balance due to AFML at the year end was £101,000 (2014 - £96,000). The Company held an interest in commonly managed fund Aberdeen Smaller Companies High Income Trust PLC in the portfolio during the year to 31 March 2015 (2014 - same). The value attributable to this holding is excluded from the calculation of management fee payable by the Company. |
||||||
|
|
|
2015 |
2014 |
|
4. |
Administrative expenses |
£'000 |
£'000 |
|
|
Directors' remuneration |
93 |
97 |
|
|
Audit fees (net of VAT) |
18 |
18 |
|
|
Promotional activities |
84 |
73 |
|
|
Professional fees |
53 |
17 |
|
|
Directors & Officers' liability insurance |
10 |
10 |
|
|
Trade subscriptions |
25 |
27 |
|
|
Share Plan costs |
16 |
18 |
|
|
Registrars fees |
32 |
29 |
|
|
Printing, postage and stationery |
26 |
23 |
|
|
Other administrative expenses |
27 |
35 |
|
|
|
________ |
________ |
|
|
|
384 |
347 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
The management agreement with AFML also provides for the provision of promotional activities, which AFML has delegated to AAM. The total fees paid and payable under the management agreement in relation to promotional activities were £84,000 (2014 - £73,000). The Company's management agreement with AFML also provides for the provision of company secretarial and administration services to the Company; no separate fee is charged to the Company in respect of this agreement. |
||
|
5. |
Directors' remuneration |
|
|
The Company had no employees during the year (2014 - nil). No pension contributions were paid for Directors (2014 - £nil). |
|
|
|
2015 |
2014 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
6. |
Finance costs and borrowings |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Bank loans and overdrafts repayable within five years |
164 |
163 |
327 |
160 |
160 |
320 |
|
|
|
______ |
______ |
______ |
______ |
______ |
______ |
|
|
|
2015 |
2014 |
||||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
||
|
7. |
Taxation |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
||
|
|
(a) |
Analysis of the charge for the year |
|
|
|
|
|
|
|
|
|
|
UK corporation tax |
32 |
(32) |
- |
52 |
(52) |
- |
|
|
|
|
Overseas tax |
10 |
- |
10 |
- |
- |
- |
|
|
|
|
|
______ |
______ |
______ |
______ |
______ |
______ |
|
|
|
|
Total current tax |
42 |
(32) |
10 |
52 |
(52) |
- |
|
|
|
|
|
______ |
______ |
_______ |
______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
Factors affecting the tax charge for the year |
|||||||
|
|
|
The tax assessed for the year is lower than the effective rate of corporation tax in the UK. The differences are explained in the reconciliation below: |
|||||||
|
|
|
|
|||||||
|
|
|
|
2015 |
2014 |
|||||
|
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
|
Profit before taxation |
3,919 |
3,016 |
6,935 |
3,841 |
3,950 |
7,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation tax at an effective rate of 21% (2014 - 23%) |
823 |
633 |
1,456 |
883 |
908 |
1,791 |
|
|
|
|
Effects of: |
|
|
|
|
|
|
|
|
|
|
UK dividend income not liable to further tax |
(755) |
- |
(755) |
(768) |
- |
(768) |
|
|
|
|
Non-taxable stock dividends |
(13) |
- |
(13) |
(60) |
- |
(60) |
|
|
|
|
Expenses not utilised |
- |
43 |
43 |
- |
28 |
28 |
|
|
|
|
Overseas withholding tax |
10 |
- |
10 |
- |
- |
- |
|
|
|
|
Non-taxable overseas dividends |
(23) |
- |
(23) |
(3) |
- |
(3) |
|
|
|
|
Gains on investments not taxable |
- |
(729) |
(729) |
- |
(1,009) |
(1,009) |
|
|
|
|
Disallowed expenses |
- |
21 |
21 |
- |
21 |
21 |
|
|
|
|
|
______ |
______ |
______ |
______ |
______ |
______ |
|
|
|
|
|
42 |
(32) |
10 |
52 |
(52) |
- |
|
|
|
|
|
______ |
______ |
______ |
______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 March 2015 the Company had surplus management expenses and loan relationship debits with a tax value of £4,652,000 (2014 - £4,618,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses. |
|||||||
|
|
|
2015 |
2014 |
|
8. |
Dividends |
£'000 |
£'000 |
|
|
Amounts recognised as distributions to equity holders in the period: |
|
|
|
|
Third interim dividend for the year ended 31 March 2014 of 3.0p (2013 - 3.0p) per share |
900 |
900 |
|
|
Final dividend for the year ended 31 March 2014 of 3.0p (2013 - 3.0p) per share |
900 |
900 |
|
|
First two interim dividends for the year ended 31 March 2015 totalling 6.0p (2014 - 6.0p) per share |
1,800 |
1,800 |
|
|
Refund of unclaimed dividends from previous periods |
(7) |
(7) |
|
|
|
________ |
________ |
|
|
|
3,593 |
3,593 |
|
|
|
________ |
________ |
|
|
3.5% Cumulative Preference shares |
2 |
2 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
The third interim dividend of 3.0p for the year to 31 March 2015 paid on 30 April 2015 and the proposed final dividend for the year to 31 March 2015 payable on 31 July 2015 have not been included as liabilities in these financial statements. |
||
|
|
|
||
|
|
We also set out below the total ordinary dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered: |
||
|
|
|
|
|
|
|
|
2015 |
2014 |
|
|
|
£'000 |
£'000 |
|
|
Three interim dividends for the year ended 31 March 2015 totalling 9.0p (2014 - 9.0p) per share |
2,700 |
2,700 |
|
|
Proposed final dividend for the year ended 31 March 2015 of 3.25p (2014 - 3.00p) per share |
975 |
900 |
|
|
|
________ |
________ |
|
|
|
3,675 |
3,600 |
|
|
|
________ |
________ |
|
9. |
Return and net asset value per share |
|
|
|
|
The gains per share are based on the following figures: |
|
|
|
|
|
2015 |
2014 |
|
|
|
£'000 |
£'000 |
|
|
Revenue return |
3,877 |
3,789 |
|
|
Capital return |
3,048 |
4,002 |
|
|
|
________ |
________ |
|
|
Net return |
6,925 |
7,791 |
|
|
|
________ |
________ |
|
|
Weighted average number of Ordinary shares |
29,997,580 |
29,997,580 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
Net asset value per Ordinary share is based on net assets attributable to Ordinary shareholders of £77,832,000 (2014 - £74,502,000) and on the 29,997,580 (2014 - 29,997,580) Ordinary shares in issue at 31 March 2015. |
||
|
|
|
2015 |
2014 |
||||||||
|
10. |
Non-current assets - Securities at fair value |
£'000 |
£'000 |
||||||||
|
|
Listed on recognised stock exchanges: |
|
|
||||||||
|
|
United Kingdom |
92,181 |
87,835 |
||||||||
|
|
|
________ |
________ |
||||||||
|
|
|
|
|
||||||||
|
|
|
2015 |
2014 |
||||||||
|
|
|
Listed |
Restricted |
|
Listed |
Restricted |
|
||||
|
|
|
investments |
investments |
Total |
investments |
investments |
Total |
||||
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
||||
|
|
Cost at 31 March 2014 |
71,547 |
139 |
71,686 |
71,417 |
139 |
71,556 |
||||
|
|
Investment holdings gains/(losses) at 31 March 2014 |
16,288 |
(139) |
16,149 |
14,207 |
(139) |
14,068 |
||||
|
|
|
________ |
________ |
_______ |
________ |
________ |
_______ |
||||
|
|
Fair value at 31 March 2014 |
87,835 |
- |
87,835 |
85,624 |
- |
85,624 |
||||
|
|
Purchases |
8,587 |
- |
8,587 |
6,500 |
- |
6,500 |
||||
|
|
Sales - proceeds |
(7,630) |
- |
(7,630) |
(8,569) |
- |
(8,569) |
||||
|
|
Sales - net realised gains |
1,683 |
(139) |
1,544 |
2,292 |
- |
2,292 |
||||
|
|
Amortised cost adjustments to debt securities A |
(93) |
- |
(93) |
(93) |
- |
(93) |
||||
|
|
Fair value movement in the year |
1,799 |
139 |
1,938 |
2,081 |
- |
2,081 |
||||
|
|
|
________ |
________ |
_______ |
________ |
________ |
_______ |
||||
|
|
Fair value at 31 March 2015 |
92,181 |
- |
92,181 |
87,835 |
- |
87,835 |
||||
|
|
A Charged to capital. |
________ |
________ |
_______ |
________ |
________ |
_______ |
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
2015 |
2014 |
||||||||
|
|
|
Listed |
Restricted |
|
Listed |
Restricted |
|
||||
|
|
|
investments |
investments |
Total |
investments |
investments |
Total |
||||
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
||||
|
|
Cost at 31 March 2015 |
74,094 |
- |
74,094 |
71,547 |
139 |
71,686 |
||||
|
|
Investment holdings gains/(losses) at 31 March 2015 |
18,087 |
- |
18,087 |
16,288 |
(139) |
16,149 |
||||
|
|
|
________ |
________ |
________ |
________ |
________ |
_______ |
||||
|
|
Fair value at 31 March 2015 |
92,181 |
- |
92,181 |
87,835 |
- |
87,835 |
||||
|
|
|
________ |
________ |
_______ |
________ |
________ |
_______ |
||||
|
|
|
|
|
|
|
|
|
||||
|
|
|
2015 |
2014 |
||||||||
|
|
Gains on investments |
£'000 |
£'000 |
||||||||
|
|
Net realised gains on sales of investments |
1,685 |
2,492 |
||||||||
|
|
Call options exercised |
(141) |
(200) |
||||||||
|
|
|
________ |
_______ |
||||||||
|
|
Net realised gains on sales |
1,544 |
2,292 |
||||||||
|
|
Movement in fair value of investments |
2,043 |
2,203 |
||||||||
|
|
Put options assigned |
(105) |
(122) |
||||||||
|
|
Movement in appreciation of traded options held |
(12) |
14 |
||||||||
|
|
|
________ |
_______ |
||||||||
|
|
|
3,470 |
4,387 |
||||||||
|
|
|
________ |
_______ |
||||||||
|
|
|
|
|
||||||||
|
|
The cost of the exercising of call options and the assigning of put options is the difference between the market price of the underlying shares and the strike price of the options. The premiums earned on options expired, exercised or assigned of £275,000 (2014 - £286,000) have been dealt with in the revenue account. |
||||||||||
|
|
|
||||||||||
|
|
The movement in the fair value of traded option contracts has been calculated in accordance with the accounting policy stated in note 1(c) and has been charged to the capital reserve. |
||||||||||
|
|
|
||||||||||
|
|
As at 31 March 2015, the Company had pledged collateral equal to nil% (2014 - nil%) of the market value of the traded options in accordance with standard commercial practice. The carrying amount of financial assets pledged equated to £nil (2014 - £nil) all in the form of securities. The collateral position is monitored on a daily basis. |
||||||||||
|
|
|
||||||||||
|
|
During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Statement of Comprehensive Income. The total costs on the purchases and sales of investments in the year was £53,000 (2014 - £44,000). |
||||||||||
|
|
|
||||||||||
|
|
All investments are categorised as held at fair value through profit and loss and were designated as such upon initial recognition. |
||||||||||
|
|
|
||||||||||
|
|
At 31 March 2015 the Company held the following investments comprising more than 3% of the class of share capital held: |
||||||||||
|
|
|
|
|
|
Class |
||||||
|
|
|
Country of |
Number of |
Class of |
held |
||||||
|
|
Company |
incorporation |
shares held |
shares held |
% |
||||||
|
|
Aberdeen Smaller Companies High Income Trust PLC |
Scotland |
3,120,476 |
ordinary |
14.1 |
||||||
|
|
Ecclesiastical Insurance Office |
England |
4,240,000 |
8 5/8% cum pref |
4.0 |
||||||
|
|
Royal & Sun Alliance |
England |
4,350,000 |
7 3/8% cum pref |
3.5 |
||||||
|
|
General Accident |
Scotland |
3,548,000 |
7.875% cum pref |
3.2 |
||||||
|
|
|
2015 |
2014 |
|
11. |
Current assets |
£'000 |
£'000 |
|
|
Accrued income and prepayments |
1,005 |
956 |
|
|
Other debtors |
11 |
19 |
|
|
Cash and cash equivalents |
3,402 |
4,405 |
|
|
|
________ |
_______ |
|
|
|
4,418 |
5,380 |
|
|
|
________ |
_______ |
|
|
None of the above amounts is overdue. |
|
|
|
|
|
2015 |
2014 |
|
12. |
Current liabilities |
£'000 |
£'000 |
|
|
Short-term bank loan |
8,500 |
18,500 |
|
|
Option contracts |
11 |
22 |
|
|
Other creditors |
256 |
191 |
|
|
|
________ |
_______ |
|
|
|
8,767 |
18,713 |
|
|
|
________ |
_______ |
|
|
|
|
|
|
|
Included above are the following amounts owed to Aberdeen, the Manager and Secretary, for management and secretarial services and for the promotion of the Company. |
||
|
|
|
|
|
|
|
|
2015 |
2014 |
|
|
|
£'000 |
£'000 |
|
|
Other creditors |
224 |
115 |
|
|
|
________ |
_______ |
|
|
|
|
|
|
|
|
2015 |
2014 |
|
|
Non-current liabilities |
£'000 |
£'000 |
|
|
Long-term bank loan |
10,000 |
- |
|
|
|
________ |
_______ |
|
|
|
|
|
|
|
The Company currently has an agreement with Scotiabank Europe PLC to provide a loan facility to 19 December 2017 for up to £20,000,000. At the year end £8,500,000 had been drawn down at an all-in interest rate of 1.41405%, maturing on 20 April 2015. At the date of signing this report the amount drawn down was unchanged at £8,500,000 with an all-in interest rate of 1.4128%, maturing on 22 June 2015. A £10,000,000 fixed rate loan facility was drawn down on 19 December 2014 at a rate of 2.103000%. This rate is fixed until 19 December 2017. |
||
|
|
|
||
|
|
The terms of the Scotiabank Europe facility contain a covenant that gross borrowings may not exceed one-third of adjusted net assets. The Company has met this covenant since inception of the agreement until the date of this Report. |
||
|
|
|
2015 |
2014 |
||
|
13. |
Called up share capital |
Number |
£'000 |
Number |
£'000 |
|
|
Allotted, called up and fully paid |
|
|
|
|
|
|
Ordinary shares of 50 pence each |
29,997,580 |
14,999 |
29,997,580 |
14,999 |
|
|
3.5% Cumulative Preference shares of £1 each |
50,000 |
50 |
50,000 |
50 |
|
|
|
|
_______ |
|
_______ |
|
|
|
|
15,049 |
|
15,049 |
|
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
|
|
During the year nil (2014 - nil) Ordinary shares were issued by the Company at a total consideration received, including transaction costs of £nil (2014 - £nil). |
||||
|
|
|
2015 |
2014 |
|
14. |
Share premium account |
£'000 |
£'000 |
|
|
At 31 March 2015 and 2014 |
19,308 |
19,308 |
|
|
|
________ |
_______ |
|
|
|
2015 |
2014 |
|
15. |
Retained earnings |
£'000 |
£'000 |
|
|
Capital reserve |
|
|
|
|
At 31 March 2014 |
34,114 |
30,112 |
|
|
Net gains on sales of investments during year |
1,544 |
2,292 |
|
|
Movement in fair value gains on investments |
1,938 |
2,081 |
|
|
Amortised cost adjustment charged to capital |
(93) |
(93) |
|
|
Management fees |
(198) |
(186) |
|
|
Interest on bank loans and overdrafts repayable within five years |
(163) |
(160) |
|
|
Tax relief obtained by expenses capitalised |
32 |
52 |
|
|
Foreign exchange movement |
- |
2 |
|
|
Traded options |
(12) |
14 |
|
|
|
________ |
_______ |
|
|
At 31 March 2015 |
37,162 |
34,114 |
|
|
|
________ |
_______ |
|
|
|
|
|
|
|
|
2015 |
2014 |
|
|
Revenue reserve |
£'000 |
£'000 |
|
|
At 31 March 2014 |
6,031 |
5,837 |
|
|
Revenue |
3,877 |
3,789 |
|
|
Dividends paid |
(3,595) |
(3,595) |
|
|
|
________ |
_______ |
|
|
At 31 March 2015 |
6,313 |
6,031 |
|
|
|
________ |
_______ |
|
16. |
Financial instruments |
|||||||||
|
|
Risk management |
|||||||||
|
|
The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. 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 may from time to time use FTSE options for protection of the loss of value to the portfolio at modest cost. |
|||||||||
|
|
|
|||||||||
|
|
Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 2, the premium received and fair value changes in respect of options written in the year were £275,000. Positions closed during the year realised a loss of £246,000. The largest position in derivative contracts held during the year at any given time was £108,000 (2014 - £97,000). The Company had open positions in derivative contracts at 31 March 2015 valued at a liability of £11,000 as discussed in note 12. |
|||||||||
|
|
|
|||||||||
|
|
The Board has delegated the risk management function to AFML under the terms of its management agreement with AFML (further details of which are included under note 3). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the Manager's approach to the management of each type of risk, are summarised below. Such approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors. |
|||||||||
|
|
|
|||||||||
|
|
Risk management framework |
|||||||||
|
|
The directors of Aberdeen Fund Managers Limited collectively assume responsibility for AFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year. |
|||||||||
|
|
|
|||||||||
|
|
AFML is a fully integrated member of the Aberdeen Group, which provides a variety of services and support to AFML in the conduct of its business activities, including in the oversight of the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to Aberdeen Asset Managers Limited, which is responsible for ensuring that the Company is managed within the terms of its investment guidelines and the limits set out in its pre-investment disclosures to investors (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the Company. |
|||||||||
|
|
|
|||||||||
|
|
The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group CEO and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment. |
|||||||||
|
|
|
|||||||||
|
|
The Manager conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Chief Executive Officer of the Group. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SWORD"). |
|||||||||
|
|
|
|||||||||
|
|
The Group's corporate governance structure is supported by several committees to assist the board of directors of Aberdeen, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference. |
|||||||||
|
|
|
|||||||||
|
|
Risk management |
|||||||||
|
|
The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and price risk), (ii) liquidity risk and (iii) credit risk. The Company has minimal exposure to foreign currency risk as it holds only a small amount of foreign currency assets and has no exposure to any foreign currency liabilities. |
|||||||||
|
|
|
|||||||||
|
|
(i) |
Market 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, currency risk and other price risk. |
||||||||
|
|
|
|
||||||||
|
|
|
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 |
||||||||
|
|
|
interest payable on the Company's variable rate borrowings. |
||||||||
|
|
|
|
||||||||
|
|
|
Management of the risk |
||||||||
|
|
|
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. Borrowings comprise fixed rate, revolving, and uncommitted facilities. The fixed rate facilities are used to finance opportunities at low rates and, the revolving and uncommitted facilities to provide flexibility in the short-term. Current bank covenant guidelines state that the gross borrowings will not exceed one-third of adjusted net assets. |
||||||||
|
|
|
|
||||||||
|
|
|
The Board reviews on a regular basis the values of the fixed interest rate securities. |
||||||||
|
|
|
|
||||||||
|
|
|
Interest rate profile |
||||||||
|
|
|
The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows: |
||||||||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
Weighted |
|
|
|
|
|||
|
|
|
|
average |
|
|
|
|
|||
|
|
|
|
period |
Weighted |
|
|
|
|||
|
|
|
|
for which |
average |
|
|
Non- |
|||
|
|
|
|
rate is |
interest |
Fixed |
Floating |
interest |
|||
|
|
|
|
fixed |
rate |
rate |
rate |
bearing |
|||
|
|
|
As at 31 March 2015 |
Years |
% |
£'000 |
£'000 |
£'000 |
|||
|
|
|
Assets |
|
|
|
|
|
|||
|
|
|
UK irredeemable preference shares |
- |
8.46 |
24,702 |
- |
- |
|||
|
|
|
Cash and cash equivalents |
- |
0.25 |
- |
3,402 |
- |
|||
|
|
|
|
________ |
_______ |
________ |
_______ |
________ |
|||
|
|
|
Total assets |
- |
- |
24,702 |
3,402 |
- |
|||
|
|
|
|
________ |
_______ |
______ |
_______ |
________ |
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
Liabilities |
|
|
|
|
|
|||
|
|
|
Short-term bank loan |
0.08 |
1.41 |
(8,500) |
- |
- |
|||
|
|
|
Long-term bank loan |
3.00 |
2.10 |
(10,000) |
|
|
|||
|
|
|
|
________ |
_______ |
________ |
_______ |
________ |
|||
|
|
|
Total liabilities |
- |
- |
(18,500) |
- |
- |
|||
|
|
|
|
________ |
_______ |
_______ |
_______ |
________ |
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
Weighted |
|
|
|
|
|||
|
|
|
|
average |
|
|
|
|
|||
|
|
|
|
period |
Weighted |
|
|
|
|||
|
|
|
|
for which |
average |
|
|
Non- |
|||
|
|
|
|
rate is |
interest |
Fixed |
Floating |
interest |
|||
|
|
|
|
fixed |
rate |
rate |
rate |
bearing |
|||
|
|
|
As at 31 March 2014 |
Years |
% |
£'000 |
£'000 |
£'000 |
|||
|
|
|
Assets |
|
|
|
|
|
|||
|
|
|
UK irredeemable preference shares |
- |
8.47 |
22,120 |
- |
- |
|||
|
|
|
Cash and cash equivalents |
- |
0.28 |
- |
4,405 |
- |
|||
|
|
|
|
________ |
_______ |
________ |
_______ |
________ |
|||
|
|
|
Total assets |
- |
- |
22,120 |
4,405 |
- |
|||
|
|
|
|
________ |
_______ |
_______ |
_______ |
________ |
|||
|
|
|
|
|
|
|
|
|
|||
|
|
|
Liabilities |
|
|
|
|
|
|||
|
|
|
Short-term bank loan |
0.08 |
1.64 |
(18,500) |
- |
- |
|||
|
|
|
|
________ |
_______ |
_______ |
_______ |
________ |
|||
|
|
|
Total liabilities |
- |
- |
(18,500) |
- |
- |
|||
|
|
|
|
________ |
_______ |
_______ |
_______ |
________ |
|||
|
|
|
|
||||||||
|
|
|
The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. |
||||||||
|
|
|
The cash assets consist of cash deposits on call earning interest at prevailing market rates. |
||||||||
|
|
|
The UK irredeemable preference shares assets have no maturity date. |
||||||||
|
|
|
Short-term debtors and creditors (with the exception of bank loans) have been excluded from the above tables.
|
||||||||
|
|
|
|
||||||||
|
|
|
Maturity profile |
||||||||
|
|
|
The maturity profile of the Company's financial assets and financial liabilities (excluding convertibles) at the Balance Sheet date was as follows: |
||||||||
|
|
|
|
|
|
|
|||||
|
|
|
|
Within |
Within |
More than |
|||||
|
|
|
|
1 year |
1-5 years |
5 years |
|||||
|
|
|
At 31 March 2015 |
£'000 |
£'000 |
£'000 |
|||||
|
|
|
Fixed rate |
|
|
|
|||||
|
|
|
UK irredeemable preference shares |
- |
- |
24,702 |
|||||
|
|
|
Short-term bank loan |
(8,500) |
- |
- |
|||||
|
|
|
Long-term bank loan |
- |
(10,000) |
- |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
|
(8,500) |
(10,000) |
24,702 |
|||||
|
|
|
|
|
|
|
|||||
|
|
|
Floating rate |
|
|
|
|||||
|
|
|
Cash and cash equivalents |
3,402 |
- |
- |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
Total |
(5,098) |
(10,000) |
24,702 |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
|
|
|
|
|||||
|
|
|
|
Within |
Within |
More than |
|||||
|
|
|
|
1 year |
1-5 years |
5 years |
|||||
|
|
|
At 31 March 2014 |
£'000 |
£'000 |
£'000 |
|||||
|
|
|
|
|
|
|
|||||
|
|
|
UK irredeemable preference shares |
- |
- |
22,120 |
|||||
|
|
|
Short-term bank loan |
- |
(18,500) |
- |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
|
- |
(18,500) |
22,120 |
|||||
|
|
|
|
|
|
|
|||||
|
|
|
Floating rate |
|
|
|
|||||
|
|
|
Cash and cash equivalents |
4,405 |
- |
- |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
Total |
4,405 |
(18,500) |
22,120 |
|||||
|
|
|
|
________ |
_______ |
________ |
|||||
|
|
|
|
|
|
|
|||||
|
|
|
Interest rate sensitivity |
||||||||
|
|
|
The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet 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. |
||||||||
|
|
|
|
||||||||
|
|
|
If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's: |
||||||||
|
|
|
profit before tax for the year ended 31 March 2015 would increase/decrease by £34,000 (2014 - £44,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end. |
||||||||
|
|
|
profit before tax for the year ended 31 March 2015 would increase/decrease by £469,000 (2014 - increase/decrease by £869,000). This is mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level. |
||||||||
|
|
|
|
||||||||
|
|
|
In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception. |
||||||||
|
|
|
|
||||||||
|
|
|
Price risk |
||||||||
|
|
|
Price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. |
||||||||
|
|
|
|
||||||||
|
|
|
Management of the risk |
||||||||
|
|
|
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 to specific sectors and the stock selection process 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. The investments held by the Company are listed on the London Stock Exchange. |
||||||||
|
|
|
|
||||||||
|
|
|
Price sensitivity |
||||||||
|
|
|
If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the profit before tax attributable to Ordinary shareholders for the year ended 31 March 2015 would have increased/decreased by £6,613,000 (2014 - increase/decrease of £6,436,000). This is based on the Company's equity portfolio held at each year end. |
||||||||
|
|
|
|
||||||||
|
|
(ii) |
Liquidity risk |
||||||||
|
|
|
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. |
||||||||
|
|
|
|
||||||||
|
|
|
Management of the risk |
||||||||
|
|
|
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 facilities, details of which can be found in note 12. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis. |
||||||||
|
|
|
|
||||||||
|
|
|
The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise a revolving loan facility and a fixed term loan facility. The Board has imposed a maximum equity gearing of 35% which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio. Details of borrowings at 31 March 2015 are shown in note 12. |
||||||||
|
|
|
|
||||||||
|
|
|
Liquidity risk exposure |
||||||||
|
|
|
At each of 31 March 2015 and 31 March 2014 the Company's bank loans amounted to £18,500,000. |
||||||||
|
|
|
|
||||||||
|
|
(iii) |
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. |
||||||||
|
|
|
|
||||||||
|
|
|
Management of the risk |
||||||||
|
|
|
- where the Investment Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; |
||||||||
|
|
|
- investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk; |
||||||||
|
|
|
- transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default; |
||||||||
|
|
|
- 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 amount that may be due from any one broker; |
||||||||
|
|
|
- the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to Custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Aberdeen Group's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Aberdeen Group's Risk Management Committee and to the Board of the Company. This review will also include checks on the maintenance and security of investments held; |
||||||||
|
|
|
- transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Investment Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and |
||||||||
|
|
|
- cash is held only with reputable banks with high quality external credit enhancements. |
||||||||
|
|
|
|
||||||||
|
|
|
It is the Investment Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties. |
||||||||
|
|
|
|
||||||||
|
|
|
None of the Company's financial assets is secured by collateral or other credit enhancements. |
||||||||
|
|
|
|
||||||||
|
|
|
Credit risk exposure |
||||||||
|
|
|
In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 March 2015 was as follows: |
||||||||
|
|
|
|
||||||||
|
|
|
|
2015 |
2014 |
||||||
|
|
|
|
Balance |
Maximum |
Balance |
Maximum |
||||
|
|
|
|
Sheet |
exposure |
Sheet |
exposure |
||||
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
||||
|
|
|
Non-current assets |
|
|
|
|
||||
|
|
|
Securities at fair value through profit or loss |
92,181 |
92,181 |
87,835 |
87,835 |
||||
|
|
|
Current assets |
|
|
|
|
||||
|
|
|
Trade and other receivables |
11 |
11 |
19 |
19 |
||||
|
|
|
Accrued income |
1,005 |
1,005 |
956 |
956 |
||||
|
|
|
Cash and cash equivalents |
3,402 |
3,402 |
4,405 |
4,405 |
||||
|
|
|
|
________ |
_______ |
________ |
_______ |
||||
|
|
|
|
96,599 |
96,599 |
93,215 |
93,215 |
||||
|
|
|
|
________ |
_______ |
________ |
_______ |
||||
|
|
|
|
|
|
|
|
||||
|
|
|
None of the Company's financial assets is past due or impaired. |
||||||||
|
|
|
|
||||||||
|
|
|
Fair value of financial assets and liabilities |
||||||||
|
|
|
The book value of cash at bank and bank loans and overdrafts included in these financial statements approximates to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. Traded options contracts are valued at fair value which have been determined with reference to quoted market values of the contracts. The contracts are tradeable on a recognised exchange. For all other short-term debtors and creditors, their book values approximates to fair values because of their short-term maturity. |
||||||||
|
17. |
Fair value hierarchy |
||||||
|
|
IFRS 7 'Financial Instruments: Disclosures' require an entity 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 has the following levels: |
||||||
|
|
|
||||||
|
|
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
||||||
|
|
Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and |
||||||
|
|
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
||||||
|
|
|
||||||
|
|
The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 March 2015 as follows: |
||||||
|
|
|
||||||
|
|
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
Quoted investments |
a) |
92,181 |
- |
- |
92,181 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value through profit or loss |
|
|
|
|
|
|
|
|
Derivatives |
b) |
(9) |
(2) |
- |
(11) |
|
|
|
|
|
_______ |
______ |
_______ |
______ |
|
|
|
Net fair value |
|
92,172 |
(2) |
- |
92,170 |
|
|
|
|
|
_______ |
______ |
_______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
As at 31 March 2014 |
Note |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
Quoted investments |
a) |
87,835 |
- |
- |
87,835 |
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities at fair value through profit or loss |
|
|
|
|
|
|
|
|
Derivatives |
b) |
(21) |
(1) |
- |
(22) |
|
|
|
|
|
_______ |
______ |
_______ |
______ |
|
|
|
Net fair value |
|
87,814 |
(1) |
- |
87,813 |
|
|
|
|
|
_______ |
______ |
_______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
a) |
Quoted investments |
|
|
|
|
|
|
|
|
The fair value of the Company's quoted investments has been determined by reference to their quoted bid prices at the reporting date. Quoted investments included in Fair Value Level 1 are actively traded on recognised stock exchanges. |
|||||
|
|
|
|
|||||
|
|
b) |
Derivatives |
|||||
|
|
|
The fair value of the Company's investments in Exchange Traded Options has been determined using observable market inputs on an exchange traded basis and therefore has been classed as Level 1. |
|||||
|
|
|
|
|||||
|
|
|
The fair value of the Company's investments in Over the Counter Options has been determined using observable market inputs other than quoted prices included within Level 1. |
|||||
|
18. |
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 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. This review includes the nature and planned level of gearing, which takes account of the Investment 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. The Company is not subject to any externally imposed capital requirements. |
|
19. |
Related party transactions and transactions with the Manager |
|
|
Fees payable during the year to the Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report in the Annual Report. |
|
|
|
|
|
The Company has an agreement with Aberdeen Fund Managers Limited for the provision of management, secretarial, accounting and administration services and for the carrying out of promotional activities in relation to the Company. Details of transactions during the year and balances outstanding at the year end disclosed in notes 3 and 4. |
20. The Directors recommend that a final dividend of 3.25p per Ordinary share be paid, making a total of 12.25p for the year ended 31 March 2015 (2014 - 3.00p). The final dividend will be paid on 31 July 2015 to Shareholders on the register at 3 July 2015. The ex-dividend date is 2 July 2015.
21. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2015 or 2014. The financial information for 2014 is derived from the statutory accounts for 2014 which have been delivered to the Registrar of Companies. The statutory accounts for 2015 will be delivered following the Company's Annual General Meeting. The auditor has reported on hose accounts and their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation. The Company's Annual General Meeting will be held at Bow Bells House, 1 Bread Street, London EC4M 9HH on 8 July 2015 at 12 noon.
22. The Annual Report and Accounts will be posted to shareholders in June 2015 and copies will be available from the registered office of the Manager. The accounts will be available on the Company's website, wwwshiresincome.co.uk
Please note that past performance is not necessarily a guide to the future and the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
For Shires Income PLC
Aberdeen Asset Management PLC, Secretary
29 May 2015
This information is provided by RNS
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