Final Results
Fidelity European Values PLC - FINAL RESULTS
Final Results For the year ended 31 December 2014
Chairman's Statement
I have pleasure in presenting the Annual Report of Fidelity European Values PLC
for the year ended 31 December 2014.
PERFORMANCE
I am pleased to report that for the year ended 31 December, the net asset value
("NAV") per share total return of your Company was 5.1%, outperforming its
Benchmark Index, the FTSE World Europe (ex UK) Index, which returned 0.2%. The
share price total return over this period was 8.7%, ahead of the NAV return as
a consequence of the level of discount (ex income) narrowing from 7.9% at the
start of the year to 4.6% at the end of the year. I am also pleased to say that
three and five year performance are ahead of the Benchmark Index (as shown in
the table below). (All figures are in UK sterling terms and are on a total
return basis.)
European equities were flat in sterling terms over the twelve month period
ending 31 December 2014. However, the stock markets of continental Europe
generally gained in local currency terms, boosted by the European Central
Bank's ("ECB") announcement of a series of easing measures. In addition, ECB
President, Mario Draghi, hinted at the possibility of further quantitative
easing in order to boost growth and tackle the threat of deflation, which
supported markets. Sentiment was also supported by the increased confidence in
the US economic recovery and indications that the Federal Reserve will be
"patient" in the timing of interest rate increases. Meanwhile, overall market
gains were limited by many worries, including Greece's possible exit from the
Eurozone. Political uncertainty in Italy and Spain and ongoing problems in
Ukraine also led to periods of volatility. The economic recovery in the
Eurozone remained fragile, though leading economic indicators stabilised.
Overall, larger companies, which lagged during the market rally of the last two
years, performed well this year. High profile mergers and acquisitions
involving larger companies led to a reappraisal of larger company valuations,
which were trading at multi-year lows relative to smaller sized companies.
Against this backdrop, your Portfolio Manager's focus on companies with solid
balance sheets and growing dividends boosted performance with strong stock
selection contributing most to performance. This is covered more fully in the
Portfolio Manager's Review in the Annual Report.
OUTLOOK
The outlook for Europe appears to be mixed. On the one hand, long term
structural challenges remain, real growth is hard to come by and Greece's
attempts to renegotiate its debt burden continue to cloud the future direction
of the Eurozone. On the other hand, there are a number of tailwinds for the
Eurozone recovery in 2015. A weaker euro is likely to give European exporters a
significant boost. At the same time, with the exception of Greece, narrowing
credit spreads for peripheral European government debt indicates improving
investor confidence. Finally the impact of falling energy costs and continuing
absence of wage inflation in real terms should make Europe more competitive
going forward. Recent economic indicators along with survey-based confidence
indicators signal that growth is expected to remain moderate in 2015. There are
downside risks to the economic outlook: a loss in economic momentum may dampen
private investment and heightened geopolitical risks could have a further
negative impact on business and consumer confidence. In this respect, we
continue to focus on investing in strong European companies that offer
fundamental value with the prospect of making positive returns from current
valuation levels. We are, as I said this time last year, fortunate to have a
wide choice of investment opportunities across the region.
OTHER MATTERS
Sub-division of shares
At last year's Annual General Meeting, shareholders approved the sub-division
of the Company's ordinary shares of 25 pence each into ten ordinary shares of
2.5 pence each. Following completion of the sub-division, 41,792,173 ordinary
shares of 25 pence each converted into 417,921,730 new ordinary shares of 2.5
pence each. The new ordinary shares commenced trading on the main market of the
London Stock Exchange on 2 June 2014.
Change in Investment Policy
The Company sought and received shareholder approval at the General Meeting
held on 15 December 2014 to make changes to the Company's investment policy and
a change to the wording of the investment objective in order to permit:
• an increase in the maximum amount of the Company's gross assets which can
be invested in UK stocks from 5% to 20%; and
• an enhancement in the Company's ability to use derivatives.
The Board and the Investment Manager were of the opinion that the 5% limit was
unduly restrictive on the Investment Manager's ability to invest in the UK,
which has close and substantial trading and investment relationships with
continental Europe. The additional flexibility allows Sam Morse, your Portfolio
Manager, to invest in a wider range of stocks which match his investment
criteria and give the opportunity to capitalise on investment themes which span
both continental Europe and the UK. Sam Morse has extensive investment
experience of the UK market.
The Board has also given Fidelity the flexibility to use an additional range of
derivative instruments, when appropriate, to allow it potentially to both
protect and enhance investment returns. The Board has created a framework of
strict policies and exposure limits and sub-limits to manage the expanded use
of derivatives. The limits and their impacts are monitored daily by the Manager
and reported to the Board on a regular basis.
More information and details concerning the types of derivatives which may be
used and indeed limits on their use are set out in the Strategic Report in the
Annual Report, along with the full Investment Policy.
Gearing
The Company continues to gear through the use of long Contracts For Difference
("CFDs"). As at 31 December 2014, the level of gearing was 5.0% (2013: 4.3%)
and the Board has currently set a gearing range of 0-10%. Gearing made a small
positive contribution to performance in the reporting year, as can be seen from
the attribution analysis table in the Annual Report.
Discount Management
The Board continues to adopt an active discount management policy and share
buybacks have been made during the year. Whilst the primary purpose of our
policy is to reduce share price volatility in relation to NAV, buying in shares
at a discount also results in an enhancement to NAV per share.
Your Board has sanctioned share buybacks over the course of 2014 amounting to
1.3% of the issued share capital of the Company as at 31 December 2014, a lower
figure than the 2.2% repurchased in 2013. The great majority of the repurchases
took place in the first half of the reporting year, and I am pleased to say
that we were able to reduce this activity in the latter part of the year with
an improvement in the way in which the Company's shares have traded against the
NAV.
The level of discount has narrowed from 7.9% at the start of the year to 4.6%
at the year end, based on the NAV excluding income. This narrowing in the
discount has given rise to a share price total return of 8.7% for 2014, ahead
of the NAV total return of 5.1%.
Further details of share repurchases may be found in the Directors' Report in
the Annual Report.
Treasury shares
The Board has decided to seek shareholder approval to hold in Treasury ordinary
shares repurchased by the Company, rather than cancelling them altogether. The
Treasury shares would carry no voting rights or rights to receive a dividend
and would have no entitlement in a winding up of the Company. No more than 5%
of the issued ordinary share capital of the Company would be held in Treasury.
Any shares held in Treasury would only be re-issued at a premium to NAV per
share. This would ensure that the net effect of repurchasing and then
re-issuing ordinary shares would enhance NAV per share.
The Board is seeking shareholder approval to implement this recommendation at
the forthcoming Annual General Meeting.
Dividends
The Board intends to continue with its practice of largely paying out earnings
in full. The objective is one of long term capital growth and we will not seek
to influence the Portfolio Manager to determine the level of income of your
Company's portfolio in any particular year.
The Board has decided to recommend a final dividend of 3.10 pence per share and
a special dividend of 0.54 pence per share, a total of 3.64 pence per share for
the year ended 31 December 2014 (2013: final dividend of 2.98 pence (restated
for the ten for one sub-division of shares); special dividend nil). Both the
final and special dividends will be payable on 22 May 2015 to shareholders who
appear on the register as at close of business on 27 March 2015 (ex-dividend
date 26 March 2015).
The increase in the proposed final dividend for 2014 over 2013 is therefore
4.2%. Whilst we emphasise that the increase is a function of stock selection
and cannot be extrapolated into the future, Sam Morse continues to focus on
companies which are able to grow their dividends and this is one of the
underlying factors in his stock selection. A further explanation of the
investment process can be found in the Annual Report.
I am pleased to say that the proposed special dividend is as a result of the
return of £2.3 million of French withholding tax and related late payment
interest which has been successfully recovered from the French authorities. I
would like to commend Fidelity for the work done to reclaim tax refunds due to
the Company and the Board believes it appropriate to pay this out to
shareholders.
I would also like to repeat an observation I made last year which shareholders
should consider when comparing the level of dividend yield between companies.
This is that we take a conservative approach of charging all management
expenses against income and not against capital. Some Investment Trusts,
particularly those with an equity income objective, split management charges
between capital and income, which has the effect of increasing the income
return (and thus dividend paying potential) and reducing the capital return. I
would stress that this does not alter the total return from both capital and
income combined whatsoever. Moreover, there is no 'right' or 'wrong' way and it
is a matter for judgement. However, the basis should be taken into account,
particularly when comparing the dividend yield between different companies.
Fee arrangements
On 30 January 2015, the Board announced that the investment management
performance fee which has been potentially payable to Fidelity, when
performance has exceeded a hurdle rate above the Benchmark Index, has been
removed with effect from 1 January 2015. The last performance fee was paid for
the year ending 31 December 2012. We are pleased to have agreed this change
with Fidelity and the result is a simple and transparent fee arrangement.
The base fee (annual management charge) that the Company pays for investment
management services remains unchanged at 0.85% of net assets, payable by way of
0.2125% per quarter as set out in the Directors' Report in the Annual Report.
Regulatory matters
The Board worked with its advisors in order to achieve compliance with the
European Alternative Investment Fund Managers Directive ("AIFMD") which came
into effect on 22 July 2014. As a result the Board has appointed FIL Investment
Services (UK) Limited (a Fidelity group company) to act as the Company's
Alternative Investment Fund Manager. FIL Investment Services (UK) Limited has
delegated the portfolio management to FIL Investments International who
previously acted as the Company's Manager. FIL Investments International
continues to act as Company Secretary.
An additional requirement of the AIFMD was to appoint a Depositary on behalf of
the Company to oversee the custody and cash arrangements of the Company. The
Company has appointed J.P.Morgan Europe Limited to act as the Company's
Depositary. J.P.Morgan Europe Limited is part of the same group of companies as
JPMorgan Chase Bank which continues to act as the Company's Banker and
Custodian.
The Alternative Investment Fund Manager's Disclosure report is in the Annual
Report.
Board of Directors
In accordance with the UK Corporate Governance Code for Directors of FTSE 350
companies, the entire Board is subject to annual re-election. The Directors'
biographies can be found in the Annual Report. The Directors have a wide range
of appropriate skills and experience to make up a balanced Board for your
Company.
Simon Fraser, due to his previous employment relationship with the Manager, his
length of service and his directorship of another Investment Trust managed by
Fidelity, namely Fidelity Japanese Values PLC, is deemed non-independent by the
UK Corporate Governance Code. The Board is convinced that his experience serves
the Company well; and the Directors support unanimously his continued position
as a Director of the Company. With the exception of Simon Fraser, in the
opinion of the Board, all other Directors are independent.
In line with good corporate governance, the Board carries out an assessment of
its own performance every year and every third year an independent, externally
facilitated evaluation of its performance takes place as required by the UK
Corporate Governance Code for Directors of all FTSE 350 companies. This
independent evaluation took place towards the end of 2014 and the evaluation
reported that the performance and contribution of the Board was effective and
all Directors were committed to their roles.
The Board has considered the proposals for the re-election of all of the
Directors and recommends to shareholders that they vote in favour of the
proposals.
Continuation vote
In accordance with the Articles of Association of the Company, an ordinary
resolution that the Company continue as an investment trust for a further two
years was passed at the 2013 Annual General Meeting. A further continuation
vote will take place at this year's Annual General Meeting.
The Company's performance record has been excellent since launch in November
1991 with a NAV total return of 2,054.6% compared to the Benchmark Index return
of 620.1%. During the year to 31 December 2014, the Company's NAV total return
has outperformed the Benchmark Index by 4.9% and is also ahead over 3, 5 and 10
years, as reflected in the table below.
Your Board recommends that shareholders vote in favour of the continuation
vote. A further continuation vote will take place at the Annual General Meeting
in 2017.
PERFORMANCE OVER ONE YEAR, THREE YEARS, FIVE YEARS AND SINCE LAUNCH TO 31
DECEMBER 2014 (ON A TOTAL RETURN BASIS) (%)
FTSE
World
Europe
(ex
Share UK)
NAV price Index1
One year +5.1 +8.7 +0.2
Three years +57.3 +72.4 +47.7
Five years +49.1 +55.6 +32.4
Since launch (1991) +2,054.6 +1,941.1 +620.1
1 Data prior to the year ended 31 December 2011 is on a net of tax basis
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
Annual General Meeting
The Annual General Meeting of the Company will be held at Fidelity's offices at
25 Cannon Street, London EC4M 5TA (St Paul's or Mansion House tube stations) on
Thursday 14 May 2015 at midday. Full details of the meeting are given in the
Annual Report.
My fellow Directors and I look forward to talking with as many shareholders as
possible on this occasion and it will be our pleasure to hold a presentation by
your Portfolio Manager, Sam Morse.
Humphrey van der Klugt
Chairman
13 March 2015
Portfolio Manager's Review
PERFORMANCE REVIEW
As shown in the Financial Summary in the Annual Report, the NAV per share of
the Company returned 5.1% in the year to 31 December 2014, outperforming the
FTSE World Europe (ex UK) Index which returned 0.2%. (All performance figures
are quoted on a total return basis and in UK sterling.)
MARKET BACKGROUND
Continental markets were able to make at least some of the progress in local
currency that many were anticipating at the start of the year, with the FTSE
World Europe (ex UK) Index posting a return of 7.4% in euro terms. However, the
weakening of the euro against UK sterling meant that the returns experienced by
UK based investors were disappointingly flat. The first three quarters of the
year saw a largely directionless market until October, when market volatility
picked up sharply.
The first quarter saw rising share prices, led by companies listed in the
markets of southern Europe, such as Spain and Italy, as some evidence, and
hope, of an improved domestic European economy led to a re-rating of their
prospects. The share prices of many larger multi-national companies, however,
were pressured by growing concerns about the likely impact of the Federal
Reserve's "tapering" on the economies and currencies of the emerging world.
Continental European markets made no progress in UK sterling terms during the
second quarter as it became clearer that global growth, with the notable
exception of the US, was weak and that this was having a dampening impact on
the earnings growth of European companies. Larger companies, which had lagged
during the market rally of the last two years, outperformed as some high
profile mergers and acquisitions were announced, leading to a reappraisal of
larger company valuations which had become attractive relative to their smaller
brethren. There was an eerie calm at the half year, with unusually low levels
of volatility, which proved to be the "calm before the storm".
Markets were flat in euro terms in the third quarter but the euro depreciated
against UK sterling over the quarter and depreciated by much more against the
US dollar. The main losers in the third quarter were economy-sensitive cyclical
companies (autos, capital goods, industrials) as it became apparent that the
economy was, indeed, more mixed, partly due to ongoing geo-political
uncertainty around Ukraine and the Middle East. In terms of country
performance, the year to date trends continued, with the stock markets of
southern Europe holding up surprisingly well, perhaps anticipating further
monetary easing, while German companies continued to lag continental European
markets, despite the fall in the euro.
There was much for investors to fret about in the final quarter of 2014 and
volatility returned to continental European markets with a vengeance. This made
for a "V" shaped period - bottoming in late October when fears that Ebola would
spread outside Africa caused a moment of panic. The main feature of the
quarter, however, was the dramatic fall in the oil price, from around US $95 to
under US $60, accelerated by the Organisation of the Petroleum Exporting
Countries ("OPEC") decision not to cut production despite supply appearing to
exceed short term demand. The impact on oil-exporting nations, such as Russia,
which was already suffering from economic sanctions, was immediate, with
ensuing currency weakness and predictions of recession.
The year did end on a more optimistic note with markets rising. Investors hoped
that the triple boost of lower commodity prices, a lower euro and monetary
easing, with quantitative easing increasingly likely, would lead to a strong
earnings recovery in continental Europe. The probable success, however, of the
radical left (Syriza) in elections in Greece and the surge in opinion polls for
the populist Podemos party in Spain put a cloud over the markets of southern
Europe which did not rise as far or as fast as others.
PORTFOLIO REVIEW
I am pleased to report that the Company's strategy of investing in attractively
valued companies which can deliver consistent dividend growth has returned to
form in 2014 (after a difficult 2013). The Company's NAV outperformed the
Benchmark Index by almost 5%. Positive stock selection and a more balanced
market environment helped while share repurchases and gearing provided a small
additional boost.
In terms of stock selection, some of the stronger performers of the first half
of the year, for example, Novo-Nordisk, the leading diabetes care company, the
two regulated Spanish utilities, and Iliad, a French telecoms company, all
enjoyed strong outperformance over the year. Iliad subsequently gave up some of
its gains when it announced that it was no longer planning to consolidate a
peer group company in France but was considering, later abandoning, the
acquisition of a wireless communications service provider, T-Mobile, in the US.
In the second half of the year, Symrise, the German flavours and fragrances
business, performed very strongly as investors began to appreciate the benefits
of a recent acquisition and as a potential beneficiary of lower oil prices
which would reduce their cost of goods sold. Finally, and encouragingly, in
light of shareholders' recent approval of the Company's request to have the
flexibility to invest more in UK listed companies, 3i Group, one of the UK's
leading private equity businesses, also continued to perform very strongly as
some of its key investments, such as Action, a Dutch discount retail chain,
delivered stronger than expected earnings growth.
The fall in the oil price led to a weak performance from shareholdings in
companies operating in the oil industry, such as Total and Statoil, both of
which were acquired during the year. Although these purchases were, with
hindsight, poorly timed, I believe that these companies and Royal Dutch Shell,
which is also held in the portfolio, will continue their efforts to improve
cost and capital efficiency, and thereby their returns. The lower oil price
will provide even more incentive to negotiate harder with governments and
unions to improve the fundamental performance of these businesses. All three
companies pay very attractive levels of dividend which are probably sustainable
in the shorter term, given strong balance sheets, but I will continue to keep
an eye on progress and the likelihood that they will be able to grow dividends
on a longer term (three to five year) view.
OUTLOOK
2015 has already been an interesting period. January has seen some major
events; some were anticipated, others not. Three, in particular, come to mind.
The first, the removal of the peg between the Swiss franc and the euro, was
dramatic but will probably prove less significant, in time, than the other two
events.
The second major event was positive for the stockmarkets and economies of
Europe. President of the European Central Bank ("ECB"), Mario Draghi, announced
a massive monetary expansion or quantitative easing, through the purchase of
sovereign bonds of Eurozone countries. This will start in March this year, with
the purchase of euro 60 billion of bonds each month by the ECB, and will
continue, at least, until September 2016 and maybe beyond. The impact of this
initiative is much debated, especially given that the US (and UK) central banks
may be tightening monetary policy at the same time. I believe it is likely to
support asset prices in Europe but I am sceptical of the benefits to the real
economy. In any case, the link between stock price performance and the domestic
economy is, as proved in many academic studies, tenuous. This is because the
direction of share prices is driven by many other factors such as industry
structures, corporate governance and valuation, which in the case of European
companies is already high, at least relative to history.
The third major event was the result of the national election in Greece. The
victory of Syriza has reminded investors that, often, politics trumps
economics. Politics will have a big influence in 2015 with six more general
elections in Europe including the UK. The fragmentation of voting and the rise
of populist parties such as Syriza in Greece and Podemos in Spain will keep
investors on their toes. Geo-political risks, such as ongoing tensions in
Ukraine and the Middle East and elsewhere, may continue to unnerve investors
this year, as they did in 2014.
In theory, 2015 should be a better year for earnings and dividend growth in
continental Europe, given monetary easing, euro weakness and softening
commodity prices. Current equity valuations probably require good news
(earnings and dividend growth) for the market to make further progress.
Likewise, these valuation levels may well prove vulnerable to disappointing
news.
I would like to thank you, as shareholders, for supporting our plan to increase
our ability to invest in companies listed in the UK and an enhancement in the
Company's ability to use derivatives. With more arrows in the quiver, I feel
well equipped to face the risks and opportunities in the year ahead. The basic
objective of the Company, to achieve long term capital growth principally from
the stockmarkets of continental Europe, will, despite these changes, continue
to be respected. I remain focused on attractively-valued companies, with strong
balance sheets and a track record in cash generation, which have the potential
to grow dividends consistently on a three to five year view. With this focus,
and more investment flexibility, your Company should be well-placed to deliver
continued outperformance in what may well be a volatile environment.
Sam Morse
Portfolio Manager
• March 2015
Strategic Report
PRINCIPAL RISKS AND UNCERTAINTIES
The Board confirms that there is an ongoing process for identifying, evaluating
and managing the principal risks faced by the Company. The process is regularly
reviewed by the Board in accordance with the Financial Reporting Council's
"Internal Control: Revised Guidance for Directors".
The Board is responsible for the Company's systems of risk management and of
internal controls and for reviewing its effectiveness. An internal controls
report providing an assessment of risks, together with controls to mitigate
these risks, is prepared by the Manager and considered by the Audit Committee
at each of its meetings.
The Board also determines the nature and extent of any risks it is willing to
take in order to achieve its strategic objectives.
The Alternative Investment Fund Managers Directive ("AIFMD") came into effect
on 22 July 2014. The Board has appointed FIL Investment Services (UK) Limited
(a Fidelity group company) to act as the Company's Alternative Investment Fund
Manager ("AIFM"). In its capacity as AIFM, FIL Investment Services (UK) Limited
has responsibility for risk management for the Company. It works with the Board
to identify and manage the principal risks and to ensure that the Board can
continue to meet its UK corporate governance obligations.
The Board considers the following as the principal risks and uncertainties
faced by the Company:
Market Risk
The Company's assets consist of listed securities and the principal risks are
therefore market related such as market downturn, interest rate movements, and
exchange rate movements. The Portfolio Manager's success or failure to protect
and increase the Company's assets against this background is core to the
Company's continued success.
Risks to which the Company is exposed and which form part of the market risks
category are included in Note 18 to the Financial Statements in the Annual
Report together with summaries of the policies for managing these risks. These
comprise: market price risk (which comprises interest rate risk, foreign
currency risk and other price risk); derivative instruments risk; liquidity
risk; counterparty risk; and credit risk.
Performance Risk
The achievement of the Company's performance objective relative to the market
requires the application of risk. Strategy, asset allocation and stock
selection might lead to underperformance of the Benchmark Index. The Board
reviews risk at each Board meeting, considers the asset allocation of the
portfolio and the risk associated with particular countries and industry
sectors within the parameters of the investment objective. The Portfolio
Manager is responsible for actively monitoring the portfolio selected in
accordance with the asset allocation parameters and seeks to ensure that
individual stocks meet an acceptable risk/reward profile.
Income/Dividend Risk
The Company's revenue may decline which would impact on the Company's ability
to maintain its dividend. The Company's objective is capital growth and, as
explained in the Chairman's Statement above, the Portfolio Manager is not
constrained in any way to determine the level of income. The Board monitors
this risk through the receipt of detailed income reports and forecasts which
are considered at each meeting.
Discount Control Risk
The price of the Company's shares as well as its discount to NAV, are factors
which are not within the Company's total control. Some short term influence
over the discount may be exercised by the use of share repurchases at
acceptable prices. Details of repurchases during the year are given in the
Annual Report. The Company's share price, NAV and discount volatility are
monitored daily by the Manager and considered by the Board at each of its
meetings.
Gearing Risk
The Company has the option to invest up to the total of any loan facilities or
to use Contracts For Difference ("CFDs") to invest in equities. The principal
risk is that gearing magnifies investment returns. Therefore, if the Company is
geared in strongly performing stocks, it will benefit from gearing. If the
Company is geared in poorly performing stocks, the impact would be detrimental.
Other risks are that the cost of gearing may be too high or that the term of
the gearing is inappropriate in relation to market conditions. The Company
currently has no bank loans and geared exposure is being achieved through the
use of long CFDs. This has reduced the cost of gearing and provides greater
flexibility. The Board regularly considers gearing and gearing risk and
sets limits accordingly.
Derivatives Risk
Shareholders approved the Board's proposal to give the Investment Manager the
flexibility to use an additional range of derivative instruments, to enable
both the protection and enhancement of investment returns. There is a risk that
the use of derivatives may lead to a higher volatility in the NAV and the share
price than might otherwise be the case. The Board has received derivatives
training and has put in place policies and limits to control the Company's use
of derivatives and exposures. These are monitored on a daily basis by the
Manager's Compliance team and regular reports are provided to the Board.
Further details on derivative instruments risk is included in Note 18 in the
Annual Report.
Tax and Regulatory Risks
A breach of Section 1158 of the Corporation Tax Act 2010 could lead to a loss
of investment trust status, resulting in the Company being subject to tax on
capital gains. A breach of other legal and regulatory rules may lead to
suspension from listing on the London Stock Exchange or a qualified audit
report. The Board receives regular reports from the Manager confirming
regulatory compliance during the year.
The regulation which was of greatest significance in this reporting year was
the Alternative Investment Fund Managers Directive. Details can be found in the
Chairman's Statement above.
Operational Risks
The Company has no employees and relies on a number of third party service
providers, principally the Manager, Registrar, Custodian and Depositary. The
Company is dependent on the Manager's control systems and those of its
Registrar, Custodian and Depositary both of which are monitored and managed by
the Manager in the context of the Company's assets and interests on behalf of
the Board.
The security of the Company's assets, dealing procedures, accounting records
and the maintenance of regulatory and legal requirements, among other things,
rely on the effective operation of such systems.
The Manager, Registrar, Custodian and Depositary are subject to a risk-based
programme of internal audits by the Manager. In addition, service providers'
own internal controls reports are received by the Board and any concerns
investigated.
While it is believed that the likelihood of poor governance, compliance and
operational administration by third party service providers is low, the Board
recognises the financial consequences, for example, of cyber crime, could be
serious, including the associated reputational damage to the Company. The Board
receives regular updates from the Manager in relation to cyber crime.
Other Risks
A continuation vote takes place every two years. This takes the form of an
ordinary resolution to shareholders and requires a simple majority of votes
cast in favour to ensure that the Company continues in existence for a further
two years until the next continuation vote is put to shareholders. There is a
risk that shareholders do not vote in favour of the continuation vote during
periods when performance is poor. Further details are provided in the
Chairman's Statement above, in relation to the next continuation vote and a
review of the Company's performance.
Directors' Report
RELATED PARTY TRANSACTIONS
No Director has a contract of service with the Company and no contracts existed
during or at the end of the financial period in which any Director was
materially interested and which were significant in relation to the Company's
business. Therefore, there have been no related party transactions requiring
disclosure under Financial Reporting Standard 8.
GOING CONCERN
The Company's business activities, together with the factors likely to affect
its future development, performance and position are set out in the Strategic
Report in the Annual Report. The financial position of the Company, its cash
flows, liquidity position and gearing facilities are described in the Financial
Statements and Notes thereto in the Annual Report.
The Company's objectives, policies and processes for managing its capital,
financial risk objectives, details of financial instruments and its exposures
to credit and liquidity risk are also set out in the Strategic Report and in
the Notes to the Financial Statements in the Annual Report
The Company's assets consist mainly of securities which are readily realisable.
Where outsourcing arrangements are in place, including Registrar, Custodian and
Depositary services, alternative providers are readily available. As a
consequence, the Directors believe that the Company is well placed to manage
its business risks successfully.
The Board receives regular reports from the Manager and the Directors believe
that the Company has adequate resources to continue in operational existence
for the foreseeable future. As such a going concern basis is appropriate in
preparing these Financial Statements.
The Directors anticipate a majority vote in favour of the upcoming continuation
vote and see no reason to present this report other than on a going concern
basis.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations. Company law
requires the Directors to prepare financial statements for each financial
period. Under that law they have elected to prepare the Financial Statements in
accordance with UK Generally Accepted Accounting Practice.
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 for the period.
In preparing these Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the Financial
Statements;
• prepare the Financial Statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business; and
• confirm that the Financial Statements are fair, balanced and
understandable.
The Directors are responsible for ensuring that adequate accounting records are
kept which disclose with reasonable accuracy at any time the financial position
of the Company and to enable them to ensure that its Financial Statements
comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Under applicable law and regulations the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, a Corporate Governance
Statement and a Directors' Remuneration Report that comply with that law and
those regulations.
The Directors have delegated responsibility for the maintenance and integrity
of the corporate and financial information included on the Company's pages of
the Manager's website www.fidelity.co.uk/its. Visitors to the website need to
be aware that legislation in the United Kingdom governing the preparation and
dissemination of the financial statements may differ from legislation in their
own jurisdictions.
We confirm that to the best of our knowledge the Financial Statements, prepared
in accordance with United Kingdom Generally Accepted Accounting Practice, give
a true and fair view of the assets, liabilities, financial position and profit
or loss of the Company; 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 it faces. We confirm that we consider the Annual Report and
Financial Statements, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the Company's
performance, business model and strategy.
Approved by the Board on 13 March 2015 and signed on its behalf.
Humphrey van der Klugt
Chairman
Income Statement for the year ended 31 December 2014
2014 2013
revenue capital total revenue capital total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains on
investments
designated
at fair
value
through
profit or
loss 9 - 17,549 17,549 - 95,243 95,243
Gains on
derivative
instruments
held at
fair value
through
profit or
loss 10 - 1,818 1,818 - 12,044 12,044
Income and
interest
received 2 22,107 - 22,107 21,066 - 21,066
Investment
management
fees 3 (6,011) - (6,011) (5,821) - (5,821)
Other
expenses 4 (921) - (921) (803) - (803)
Exchange
(losses)/
gains on
other net
assets (23) (76) (99) 4 108 112
---------- ---------- ---------- ---------- ---------- ----------
Net return
before
finance
costs and
taxation 15,152 19,291 34,443 14,446 107,395 121,841
Finance
costs 5 (162) - (162) (279) - (279)
---------- ---------- ---------- ---------- ---------- ----------
Net return
on ordinary
activities
before
taxation 14,990 19,291 34,281 14,167 107,395 121,562
Taxation on
return on
ordinary
activities 6 371 - 371 (1,505) - (1,505)
---------- ---------- ---------- ---------- ---------- ----------
Net return
on ordinary
activities
after
taxation
for the
year 15,361 19,291 34,652 12,662 107,395 120,057
========== ========== ========== ========== ========== ==========
Return per
ordinary
share 1 7 3.67p 4.61p 8.28p 2.98p 25.29p 28.27p
========== ========== ========== ========== ========== ==========
The 2013 figures have been adjusted to reflect the ten for one ordinary share
sub-division that took place on 2 June 2014
A Statement of Total Recognised Gains and Losses has not been prepared as there
are no gains and losses other than those reported in this Income Statement.
The total column of the Income Statement is the profit and loss account of the
Company.
All revenue and capital items in the above statement derive from continuing
operations.
No operations were acquired or discontinued in the year.
The Notes form an integral part of these Financial Statements.
Reconciliation of Movements in Shareholders' Funds
for the year ended 31 December 2014
share capital
share premium redemption capital revenue total
capital account reserve reserve reserve equity
Note £'000 £'000 £'000 £'000 £'000 £'000
Opening
shareholders'
funds as at 1
January 2013 10,781 58,615 5,044 523,187 18,647 616,274
Net return on
ordinary
activities
after
taxation for
the year - - - 107,395 12,662 120,057
Repurchase of
ordinary
shares (234) - 234 (13,239) - (13,239)
Dividend paid
to
shareholders 8 - - - - (11,901) (11,901)
---------- ---------- ---------- ---------- ---------- ----------
Closing
shareholders'
funds as at
31 December
2013 10,547 58,615 5,278 617,343 19,408 711,191
Net return on
ordinary
activities
after
taxation for
the year - - - 19,291 15,361 34,652
Repurchase of
ordinary
shares (136) - 136 (8,348) - (8,348)
Dividend paid
to
shareholders 8 - - - - (12,518) (12,518)
---------- ---------- ---------- ---------- ---------- ----------
Closing
shareholders'
funds as at
31 December
2014 10,411 58,615 5,414 628,286 22,251 724,977
========== ========== ========== ========== ========== ==========
The Notes form an integral part of these Financial Statements.
Balance Sheet as at 31 December 2014
Company number 2638812
2014 2013
Notes £'000 £'000
Fixed assets
Investments designated at fair value through
profit or loss 9 716,562 669,216
---------- ----------
Current assets
Derivative instrument assets held at fair
value through profit or loss 10 1,329 19,980
Debtors 11 2,128 2,463
Amounts held in margin accounts 607 -
Fidelity Institutional Liquidity Fund plc 4,038 31
Cash at bank 4,402 21,326
---------- ----------
12,504 43,800
---------- ----------
Creditors
Derivative instrument liabilities held at fair
value through profit or loss 10 (2,293) -
Creditors 12 (1,796) (1,825)
---------- ----------
(4,089) (1,825)
---------- ----------
Net current assets 8,415 41,975
---------- ----------
Total net assets 724,977 711,191
========== ==========
Capital and reserves
Share capital 13 10,411 10,547
Share premium account 14 58,615 58,615
Capital redemption reserve 14 5,414 5,278
Capital reserve 14 628,286 617,343
Revenue reserve 14 22,251 19,408
---------- ----------
Total equity shareholders' funds 724,977 711,191
========== ==========
Net asset value per ordinary share1 15 174.09p 168.58p
========== ==========
The 2013 figure has been adjusted to reflect the ten for one ordinary share
sub-division that took place on 2 June 2014
The Financial Statements were approved by the Board of Directors on 13 March
2015 and were signed on its behalf by:
Humphrey van der Klugt Chairman
The Notes form an integral part of these Financial Statements.
Cash Flow Statement for the year ended 31 December 2014
2014 2013
Notes £'000 £'000
Operating activities
Investment income received 17,366 14,631
Income received on long CFDs 1,287 3,009
Deposit interest received 513 44
Investment management fee paid (6,003) (5,619)
Performance fee paid - (2,243)
Directors' fees paid (131) (104)
Other cash payments (773) (660)
---------- ----------
Net cash inflow from operating activities 16 12,259 9,058
---------- ----------
Finance costs
Interest paid on long CFDs (168) (281)
---------- ----------
Net cash outflow from finance costs (168) (281)
---------- ----------
Overseas taxation recovered 3,243 651
---------- ----------
Financial investments
Purchase of investments (258,483) (156,750)
Disposal of investments 229,027 167,459
---------- ----------
Net cash (outflow)/inflow from financial
investments (29,456) 10,709
---------- ----------
Derivative activities
Proceeds of long CFD positions closed 22,762 5,765
Movement on amounts held in margin accounts (607) -
---------- ----------
Net cash inflow from derivative activities 22,155 5,765
---------- ----------
Dividends paid to shareholders (12,518) (11,901)
---------- ----------
Net cash (outflow)/inflow before use of liquid
resources and financing (4,485) 14,001
---------- ----------
Cash flow from management of liquid resources
Fidelity Institutional Liquidity Fund plc (4,007) (1)
---------- ----------
Net cash outflow from management of liquid
resources (4,007) (1)
---------- ----------
Net cash (outflow)/inflow before financing (8,492) 14,000
---------- ----------
Financing
Repurchase of ordinary shares (8,356) (13,232)
---------- ----------
Net cash outflow from financing (8,356) (13,232)
---------- ----------
(Decrease)/increase in cash 17 (16,848) 768
========== ==========
The Notes form an integral part of these Financial Statements.
Notes to the Financial Statements
1 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with United
Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the
Statement of Recommended Practice: Financial Statements of Investment Trust
Companies and Venture Capital Trusts ("SORP") issued by the Association of
Investment Companies ("AIC"), in January 2009.
a) Basis of accounting - The Financial Statements have been prepared on a going
concern basis and under the historical cost convention, except for the
measurement at fair value of fixed asset investments and derivative assets and
liabilities, and on the assumption that approval as an investment trust
continues to be granted by HM Revenue and Customs.
A resolution proposing the continuation of the Company as an investment trust
will be put to shareholders at the Annual General Meeting on 14 May 2015. The
Directors are recommending that shareholders vote in favour of this resolution.
In light of their recommendation and in accordance with Financial Reporting
Standard ("FRS") 18 'Accounting Policies', the Directors believe that it is
appropriate to prepare the Financial Statements on a going concern basis.
Accordingly the Financial Statements do not include any adjustments that may
arise from a reconstruction or liquidation of the Company. Such adjustments
would include expenses of reconstruction or liquidation along with any costs
associated with realising the portfolio.
b) Income - Income from equity investments is credited to the revenue column of
the Income Statement on the date on which the right to receive the payment is
established. Overseas dividends are stated gross of withholding tax. UK
dividends are stated at the amount actually receivable, which is net of the
attaching tax credit. Interest receivable on short term deposits is credited to
the revenue column of the Income Statement on an accruals basis. Where the
Company has elected to receive a dividend as scrip dividend, that is in the
form of additional shares rather than cash, the amount of the dividend foregone
is credited to the revenue column of the Income Statement. Any excess in the
value of the shares received over the amount of the dividend foregone is
credited to the capital column of the Income Statement. Derivative income from
dividends on long Contracts For Difference ("CFDs") is credited to the revenue
column of the Income Statement on the date on which the right to receive the
payment is established.
c) Special dividends - Special dividends are treated as a revenue receipt or a
capital receipt depending on the facts and circumstances of each particular
case.
d) Expenses - All expenses are accounted for on an accruals basis and are
charged in full to the revenue column of the Income Statement, with the
exception of any performance fee which is charged wholly to the capital column,
as it arises mainly from capital returns on the portfolio.
e) Taxation - Irrecoverable overseas withholding tax suffered is recognised at
the same time as the income to which it relates. Deferred taxation is
recognised in respect of all timing differences, that have originated but not
reversed at the Balance Sheet date, where transactions or events have occurred
that result in an obligation to pay more tax in the future, or a right to pay
less. A deferred taxation asset is recognised when it is more likely than not
that the asset will be recoverable.
f) Foreign currency - The Directors, having regard to the currency of the
Company's share capital and the predominant currency in which its investors
operate, have determined the functional currency to be UK sterling.
Transactions denominated in foreign currencies are translated to UK sterling at
the rate of exchange ruling as at the date of those transactions. Assets and
liabilities denominated in foreign currencies are translated at the rates of
exchange ruling at the Balance Sheet date. All capital gains and losses,
including exchange differences on the translation of foreign currency assets
and liabilities, are dealt with in the capital column of the Income Statement.
g) Valuation of investments - This portfolio of investments is managed and its
performance evaluated on a fair value basis, in accordance with a documented
investment strategy, and information about the portfolio is provided internally
on that basis to the Company's Board of Directors. Accordingly, upon initial
recognition the investments are designated by the Company as "at fair value
through profit or loss". They are included initially at fair value, which is
taken to be their cost, and subsequently the investments are valued at fair
value, which is measured as follows:
• Listed investments are valued at bid prices, or last market prices,
depending on the convention of the exchange on which they are listed, or
otherwise at fair value based on published price quotations; and
• Unlisted investments, where there is not an active market, are valued
using an appropriate valuation technique so as to establish what the
transaction price would have been at the Balance Sheet date.
In accordance with the AIC SORP the Company includes transaction costs,
incidental to the purchase or sale of investments, within gains on investments
and has disclosed them in Note 9 below.
h) Derivative instruments - When appropriate the Company may utilise derivative
instruments, including CFDs. Derivative instruments are held "at fair value
through profit or loss" and are valued at fair value, which is measured as
follows:
• CFDs are valued at the difference between the strike price and the bid or
last price of the underlying shares in the contract.
Gains and losses in the fair value of derivative instruments are recognised in
the capital column of the Income Statement. Income received or paid on
derivative instruments is recognised in the revenue column of the Income
Statement. Interest paid on long CFDs is charged to 'finance costs', in the
revenue column of the Income Statement. Any positions on derivative instruments
open at the year end are reflected in the Balance Sheet at their fair value
either within 'current assets' or 'creditors', as appropriate.
i) Fidelity Institutional Liquidity Fund plc - The Company holds an investment
in the Fidelity Liquidity Fund plc, a short term money market fund investing in
a diversified range of short term instruments. It is a distributing fund and
accordingly the interest earned is credited to the revenue column of the Income
Statement.
j) Capital reserve - The following are accounted for in capital reserve:
• Gains and losses on the disposal of investments and derivative instruments;
• Changes in the fair value of the investments and derivative instruments held
at the year end;
• Foreign exchange gains and losses of a capital nature;
• Performance fees;
• Dividends receivable which are capital in nature; and
• Costs of repurchasing ordinary shares.
As a result of technical guidance by the Institute of Chartered Accountants in
England and Wales in TECH 02/10: Distributable Profits, changes in the fair
value of investments which are readily convertible to cash at the Balance Sheet
date, without accepting adverse terms, can be treated as realised. Capital
reserves realised and unrealised are shown in aggregate as 'capital reserve' in
the Reconciliation of Movements in Shareholders' Funds and the Balance Sheet.
At the Balance Sheet date all investments held by the Company were listed on a
recognised stock exchange and were considered to be readily convertible to
cash.
k) Dividends - In accordance with Financial Reporting Standard 21: Events after
the Balance Sheet Date, dividends declared and approved by the Company after
the Balance Sheet date have not been recognised as a liability of the Company
at the Balance Sheet date.
2014 2013
£'000 £'000
2 INCOME
Income from investments designated at fair value
through profit or loss
Overseas dividends 19,095 16,599
Overseas scrip dividends 338 728
UK dividends 873 686
---------- ----------
20,306 18,013
Income from derivative instruments held at fair
value through profit or loss
Dividends on long CFDs 1,287 3,009
---------- ----------
Income from investments and derivative
instruments 21,593 21,022
---------- ----------
Interest received
Interest received on deposits and money market
funds 33 44
Interest received on tax reclaims 481 -
---------- ----------
514 44
---------- ----------
Total income and interest received 22,107 21,066
========== ==========
2014 2013
£'000 £'000
3 INVESTMENT MANAGEMENT FEES
Investment management fees 6,011 5,821
========== ==========
FIL Investment Services (UK) Limited (a Fidelity group company) is the
Company's Alternative Investment Fund Manager and has delegated the portfolio
management to FIL Investments International, who previously acted as the
Company's Manager. Details of the services provided and fees paid are given in
the Directors' Report in the Annual report.
2014 2013
£'000 £'000
4 OTHER EXPENSES
AIC fees 21 23
Custody fees 123 132
Depositary fees 21 -
Directors' fees1 133 136
Legal and professional fees 182 158
Marketing expenses 165 155
Printing and publication expenses 115 78
Registrars' fees 78 68
Costs associated with the sub-division of the
ordinary shares 38 -
Fees payable to the Company's Independent Auditor
for the audit of the annual financial statements2 23 23
Other expenses 22 30
---------- ----------
921 803
========== ==========
1 Details of the breakdown of Directors' fees are provided in the
Directors' Remuneration Report in the Annual Report
2 The VAT on fees payable to the Company's Independent Auditor
is included in "other expenses"
2014 2013
£'000 £'000
5 FINANCE COSTS
Interest paid on long CFDs 162 279
========== ==========
2014 2013
revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000
TAXATION
ON RETURN
ON
ORDINARY
6 ACTIVITIES
a)
Analysis
of the tax
(credit)/
charge in
the year
Overseas
taxation
suffered 2,603 - 2,603 2,558 - 2,558
Overseas
taxation
recovered1 (2,974) - (2,974) (1,053) - (1,053)
---------- ---------- ---------- ---------- ---------- ----------
Total
current
taxation
(credit)/
charge for
the year
(see Note
6b) (371) - (371) 1,505 - 1,505
========== ========== ========== ========== ========== ==========
1 Includes French tax recovered from prior years, following
European Court of Justice rulings, of £1,781,000 (2013: nil)
b) Factors affecting the taxation (credit)/charge for the year
The taxation assessed for the year is lower than the time apportioned standard
rate of UK corporation tax for an investment trust company of 21.49% (2013:
23.25%).
The differences are explained below.
2014 2013
revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000
Net return on
ordinary
activities
before
taxation 14,990 19,291 34,281 14,167 107,395 121,562
========== ========== ========== ========== ========== ==========
Net return on
ordinary
activities
before
taxation
multiplied by
the time
apportioned
standard rate
of UK
corporation
tax
of 21.49%
(2013:
23.25%) 3,221 4,146 7,367 3,294 24,969 28,263
Effects of:
Gains on
investments
not taxed1 - (4,146) (4,146) - (24,969) (24,969)
Income not
included for
taxation
purposes (3,747) - (3,747) (3,430) - (3,430)
Movement in
excess
expenses for
the year 608 - 608 231 - 231
Overseas
taxation
(recovered)/
suffered (371) - (371) 1,505 - 1,505
Overseas
taxation
relief (82) - (82) (95) - (95)
---------- ---------- ---------- ---------- ---------- ----------
Current
taxation
(credit)/
charge for
the year
(Note 6a) (371) - (371) 1,505 - 1,505
========== ========== ========== ========== ========== ==========
1 Investment trust companies are exempt from UK taxation on
capital gains if they meet the HM Revenue & Customs criteria set out in Section
1159 of the Corporation Tax Act 2010
c) The Company has unrelieved excess expenses of £14,900,000 (2013: £
12,071,000) and unrelieved loan relationship expenses of £5,505,000 (2013:
£5,505,000). It is unlikely that the Company will generate sufficient taxable
profits in the future to utilise these amounts and, therefore, no deferred tax
asset has been recognised.
2014 2013
revenue capital total revenue capital total
RETURN PER
ORDINARY
7 SHARE
Return per
ordinary
share -
pence 3.67 4.61 8.28 2.98 25.29 28.27
======== ======== ======= ======== ======== ========
Net return
on
ordinary
activities
after
taxation
for the
year - £
000s 15,361 19,291 34,652 12,662 107,395 120,057
======== ======== ======= ======== ======== ========
The return per ordinary share is based on 418,048,312 ordinary shares (2013:
424,578,870) being the weighted average number of ordinary shares in issue
during the year. The weighted average number of Existing Ordinary Shares in
issue at 31 December 2013 has been restated to reflect the ten for one ordinary
share sub-division that took place on 2 June 2014, as disclosed in Note 13
below. On the original basis, as stated in the financial statements for the
year ended 31 December 2013, the net returns per ordinary share were, revenue
return 29.82 pence, capital return 252.94 pence and total return 282.76 pence,
based on the weighted average number of Existing Ordinary Shares in issue of
42,457,887.
2014 2013
£'000 £'000
8 DIVIDENDS
Dividend paid
Dividend of 29.75 pence per ordinary share paid
for the year ended 31 December 20131 12,518 -
Dividend of 27.75 pence per ordinary share paid
for the year ended 31 December 20121 - 11,901
---------- ----------
12,518 11,901
========== ==========
Dividends proposed and declared
Final dividend of 3.10 pence per ordinary share
proposed for the year ended 31 December 20142 12,910 -
Special dividend of 0.54 pence per ordinary share
declared for the year ended 31 December 20142 2,249 -
Dividend of 29.75 pence per ordinary share
proposed for the year ended 31 December 20131 - 12,518
---------- ----------
15,159 12,518
========== ==========
1 If the pence per ordinary share dividend rates actually paid and
proposed, as shown above, are restated to reflect the ten for one ordinary
share sub-division that took place on 2 June 2014, as disclosed in Note 13
below, the adjusted dividend rates per share are 2.975 pence, for the year
ended 31 December 2013 and 2.775 pence for the year ended 31 December 2012
2 Based on the number of ordinary shares in issue at the date of this
report
The Directors have, for the year ended 31 December 2014, proposed a final
dividend of 3.10 pence per ordinary share and declared a special dividend of
0.54 pence per ordinary share, both to be paid on 22 May 2015, to shareholders
on the register at 27 March 2015 (ex-dividend date 26 March 2015). All
dividends are paid out of revenue reserve.
2014 2013
£'000 £'000
9 INVESTMENTS
Investments designated at fair value through
profit or loss
Investments listed on a recognised stock exchange 716,562 669,216
========== ==========
Opening fair value of investments
Opening book cost 512,029 492,869
Opening investment holding gains 157,187 91,069
---------- ----------
669,216 583,938
Movements in the year
Purchases at cost 258,782 157,518
Sales - proceeds (228,985) (167,483)
Sales - gains 46,878 29,125
Investment holding (losses)/gains (29,329) 66,118
---------- ----------
Closing fair value of investments 716,562 669,216
========== ==========
Closing book cost 588,704 512,029
Closing investment holding gains 127,858 157,187
---------- ----------
Closing fair value of investments 716,562 669,216
========== ==========
Gains on investments designated at fair value
through profit or loss - for the year
Gains on sales of investments 46,878 29,125
Investment holding (losses)/gains (29,329) 66,118
---------- ----------
17,549 95,243
========== ==========
Gains on investments in the year are shown net of
investment transaction costs incurred
Purchases expenses 418 247
Sales expenses 227 188
---------- ----------
645 435
========== ==========
The portfolio turnover rate for the year was 34.7% (2013: 25.1%). It represents
the average of, the cost of investments purchased and the proceeds of
investments sold during the year, expressed as a percentage of the average
value of the investments held during the year.
2014 2013
fair portfolio fair portfolio
value exposure value exposure
£'000 £'000 £'000 £'000
10 DERIVATIVE INSTRUMENTS
Derivative instruments
held at fair value
through profit or loss
Long CFDs - assets 1,329 21,152 19,980 72,686
Long CFDs -
liabilities (2,293) 23,471 - -
---------- ---------- ---------- ----------
(964) 44,623 19,980 72,686
========== ========== ========== ==========
2014 2013
£'000 £'000
Net gains on derivative instruments held at fair
value through profit or loss - for the year
Gains on long CFD positions closed 22,762 5,765
Holding (losses)/gains on long CFDs (20,944) 6,279
---------- ----------
1,818 12,044
========== ==========
2014 2013
£'000 £'000
11 DEBTORS
Securities sold for future settlement - 42
Taxation recoverable 1,861 2,130
Other debtors 267 291
---------- ----------
2,128 2,463
========== ==========
2014 2013
£'000 £'000
12 CREDITORS
Securities purchased for future settlement 4 43
Amount payable on share repurchases - 8
Finance costs payable 7 13
Amount payable to the Manager 1,576 1,579
Other creditors 209 182
---------- ----------
1,796 1,825
========== ==========
2014 2013
Number Number
of of
shares £'000 shares £'000
13 SHARE CAPITAL
Existing Ordinary
Shares of 25 pence
each - issued,
allotted and fully
paid
Beginning of the
year 42,187,693 10,547 43,127,073 10,781
Repurchase of
Existing Ordinary
Shares (395,520) (99) (939,380) (234)
---------- ---------- ---------- ----------
41,792,173 10,448 42,187,693 10,547
Existing Ordinary
Shares cancelled on
the sub-division (41,792,173) (10,448) - -
---------- ---------- ---------- ----------
End of the year - - 42,187,693 10,547
========== ========== ========== ==========
New Ordinary Shares
of 2.5 pence each -
issued, allotted
and fully paid
Beginning of the
year - - - -
New Ordinary Shares
issued on the
sub-division 417,921,730 10,448 - -
Repurchase of New
Ordinary Shares (1,473,820) (37) - -
---------- ---------- ---------- ----------
End of the year 416,447,910 10,411 - -
========== ========== ========== ==========
On 2 June 2014 the Existing Ordinary Shares of 25 pence each were sub-divided.
Ten New Ordinary Shares of 2.5 pence each were issued for each Existing
Ordinary Share of 25 pence each. The New Ordinary Shares rank pari passu with
each other and are subject to the same rights and restrictions as the shares
they replaced. A holding of New Ordinary Shares following the sub–division
represents the same proportion of the issued share capital of the Company as
the corresponding holding in the Existing Ordinary Shares.
14 RESERVES
The "share premium account" arose on the issue of ordinary shares. It is not
distributable by way of dividend and it cannot be used to fund share
repurchases.
The "capital redemption reserve" maintains the equity share capital of the
Company and represents the nominal value of shares repurchased and cancelled.
It is not distributable by way of dividend and it cannot be used to fund share
repurchases.
The "capital reserve" reflects realised gains or losses on investments and
derivative instruments sold, unrealised increases and decreases in the fair
value of investments and derivative instruments held and other income and costs
recognised in the capital column of the Income Statement. It can be used to
fund share repurchases and it is distributable by way of dividend. The Board
has stated that it has no current intention to pay dividends out of capital.
The "revenue reserve" represents the net revenue surpluses recognised in the
revenue column of the Income Statement that have been retained and have not
been distributed to shareholders as dividend. It is distributable by way of
dividend.
15 NET ASSET VALUE PER ORDINARY SHARE
The net asset value per ordinary share is based on net assets of £724,977,000
(2013: £711,191,000) and on 416,447,910 (2013: 421,876,930) shares, being the
number of ordinary shares in issue at the year end.
The number of ordinary shares in issue at 31 December 2013 is restated to
reflect the ten for one ordinary share sub-division that took place on 2 June
2014, as disclosed in Note 13 below. On the original basis, as stated in the
2013 Financial Statements, the net asset value per ordinary share was 1,685.78
pence, based on 42,187,693 Existing Ordinary Shares in issue at 31 December
2013.
2014 2013
£'000 £'000
16 RECONCILIATION OF NET RETURN BEFORE FINANCE
COSTS AND TAXATION TO NET CASH INFLOW FROM
OPERATING ACTIVITIES
Net return before finance costs and taxation 34,443 121,841
Less: capital return for the year (19,291) (107,395)
---------- ----------
Net revenue return before finance costs and taxation 15,152 14,446
Scrip dividends (338) (728)
Decrease/(increase) in other debtors 24 (97)
Decrease in performance fee creditor - (2,243)
Increase in other creditors 24 238
Overseas taxation suffered (2,603) (2,558)
---------- ----------
Net cash inflow from operating activities 12,259 9,058
========== ==========
2014 2013
£'000 £'000
RECONCILIATION OF NET CASH MOVEMENTS TO MOVEMENT
17 IN NET FUNDS
Net funds at the beginning of the year 21,357 20,480
---------- ----------
Net cash (outflow)/inflow (16,848) 768
Fidelity Institutional Liquidity Fund plc 4,007 1
Foreign exchange movement on other net assets (76) 108
---------- ----------
Change in net funds (12,917) 877
---------- ----------
Net funds at the end of the year 8,440 21,357
========== ==========
foreign
cash exchange
2014 flows movements 2013
£'000 £'000 £'000 £'000
Analysis of net funds
Fidelity Institutional
Liquidity Fund plc 4,038 4,007 - 31
Cash at bank 4,402 (16,848) (76) 21,326
---------- ---------- ---------- ----------
8,440 (12,841) (76) 21,357
========== ========== ========== ==========
18 FINANCIAL INSTRUMENTS
MANAGEMENT OF RISK
The general risk analysis undertaken by the Board and its overall policy
approach to risk management are set out in the Strategic Report in the Annual
Report. This Note is incorporated in accordance with Financial Reporting
Standard 29: Financial Instruments: Disclosures ("FRS 29") and refers to the
identification, measurement and management of risks potentially affecting the
value of financial instruments.
The Company's financial instruments comprise:
• Equity shares held in accordance with the Company's investment objective
and policies;
• Derivative instruments which comprise long CFDs; and
• Cash, liquid resources and short term debtors and creditors that arise
from its operations.
The risks identified by FRS 29 arising from the Company's financial instruments
are market price risk (which comprises interest rate risk, foreign currency
risk and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instrument risk. The Board reviews and agrees policies for managing
each of these risks, which are summarised below. These policies have remained
unchanged since the beginning of the accounting period.
Market price risk
Interest rate risk
The Company finances its operations through share capital raised. In addition,
the Company has a geared exposure to European equities through the use of long
CFDs which incur funding costs and provide collateral. It is, therefore,
exposed to a financial risk as a result of increases in interest rates.
Interest rate risk profile
The values of the Company's financial instruments that are exposed to movements
in interest rates are shown below:
2014 2013
£'000 £'000
Exposure to financial instruments that bear
interest
Gearing effect of exposure through long CFDs 45,587 52,706
---------- ----------
Exposure to financial instruments that earn
interest
Amounts held in margin accounts 607 -
Fidelity Institutional Liquidity Fund plc 4,038 31
Cash at bank 4,402 21,326
---------- ----------
9,047 21,357
---------- ----------
Net exposure to financial instruments that bear
interest 36,540 31,349
========== ==========
Foreign currency risk
The Company's total net assets and its total return on ordinary activities can
be affected by foreign exchange movements because the Company has assets and
income which are denominated in currencies other than the Company's base
currency, which is UK sterling. The Company is also subject to short term
exposure from exchange rate movements, for example, between the date when an
investment is bought or sold and the date when settlement of the transaction
occurs.
Three principal areas have been identified where foreign currency risk could
impact the Company:
• Movements in rates affecting the value of investments and derivative
instruments;
• Movements in rates affecting short term timing differences; and
• Movements in rates affecting income received.
The Company does not currently hedge, by the use of derivative instruments, the
UK sterling value of investments, derivative instruments and other net assets
which are denominated in other currencies.
Currency exposure of financial assets
The company's financial assets comprise equity investments, long CFDs, short
term debtors and cash. The currency profile of these financial assets is shown
below:
2014
investments
designated
at
fair
value
through exposure
profit to short
or long term
loss CFDs debtors1 cash2 total
£'000 £'000 £'000 £'000 £'000
Danish
krone 36,739 - 11 - 36,750
Euro 428,436 44,623 1,375 158 474,592
Norwegian
krone 34,504 - - - 34,504
Swedish
krona 22,285 - - - 22,285
Swiss
franc 156,570 - 475 - 157,045
Turkish
lira 8,745 - - - 8,745
UK
sterling 29,283 - 874 8,282 38,439
---------- ---------- ---------- ---------- ----------
716,562 44,623 2,735 8,440 772,360
========== ========== ========== ========== ==========
2013
investments
designated
at
fair
value
through exposure
profit to short
or long term
loss CFDs debtors cash1 total
£'000 £'000 £'000 £'000 £'000
Czech
koruna 2,713 - 42 - 2,755
Danish
krone 41,170 - 12 - 41,182
Euro 405,919 72,686 1,760 40 480,405
Norwegian
krone 33,090 - - - 33,090
Swedish
krona 23,961 - - - 23,961
Swiss
franc 127,188 - 358 - 127,546
Turkish
lira 7,539 - - - 7,539
UK
sterling 27,636 - 291 21,317 49,244
---------- ---------- ---------- ---------- ----------
669,216 72,686 2,463 21,357 765,722
========== ========== ========== ========== ==========
1 Cash includes amounts held in the Fidelity Institutional
Liquidity Fund plc
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves and it has a geared exposure to European equities through
the use of long CFDs. The Company's financial liabilities comprise the gearing
effect of long CFDs, which have no fixed expiry date, and other short term
creditors, that are repayable within one year. The currency profile of these
financial liabilities is shown below:
2014
gearing
effect
of
exposure
to short
long term
CFDs creditors total
£'000 £'000 £'000
Euro 45,587 7 45,594
UK sterling - 1,789 1,789
---------- ---------- ----------
45,587 1,796 47,383
========== ========== ==========
2013
short
gearing effect of exposure to long term
CFDs creditors total
£'000 £'000 £'000
Euro 52,706 16 52,722
UK
sterling - 1,809 1,809
---------- ---------- ----------
52,706 1,825 54,531
========== ========== ==========
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents the
potential loss the Company might suffer through holding market positions in the
face of price movements. The Board meets quarterly to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors within the parameters of the investment objective. The Investment
Manager is responsible for actively monitoring the existing portfolio selected
in accordance with the overall asset allocation parameters described above and
seeks to ensure that individual stocks also meet an acceptable risk/reward
profile.
DERIVATIVE INSTRUMENTS RISK
The risks and risk management processes which result from the use of derivative
instruments are included within the other risk categories disclosed in this
Note. Derivative instruments are used by the Portfolio Manager to gain
"unfunded" long exposure to equity markets, sectors or single stocks.
"Unfunded" exposure is exposure gained without an initial outflow of capital.
The risk and performance contribution of the derivative instruments to the
Company's portfolio is overseen by a specialist Derivative Instruments Team
which draws on over forty years of experience in derivative risk management.
This team uses portfolio risk assessment tools to advise the Investment Manager
on portfolio construction.
Liquidity risk
The Company's assets mainly comprise readily realisable securities and long
CFDs which, if necessary, can be sold easily to meet funding commitments. Short
term flexibility is achieved by the use of overdraft facilities as required.
Counterparty risk
All securities and derivative instruments are transacted with brokers and carry
the risk that the counterparty to a transaction may not meet its financial
obligations. In accordance with the risk management process which the Manager
employs, the Manager will seek to minimise such risk by only entering into
transactions with counterparties which it believes to have an adequate credit
rating at the time the transaction is entered into, by ensuring that formal
legal agreements covering the terms of the contract are entered into in advance
and through adopting a counterparty risk framework which measures, monitors and
manages counterparty risk through the use of internal and external credit
agency ratings and evaluates derivative instrument credit risk exposure.
For Over The Counter ("OTC") derivative transactions, in accordance with the
terms of International Swap Dealers Association ("ISDA") market standard
derivative contracts, collateral is used to reduce the risk of both parties to
the contract. Collateral is managed on a daily basis for all relevant
transactions. At 31 December 2014, £607,000 (2013: nil) was held in cash in a
segregated collateral account, on behalf of the broker, to reduce the exposure
to counterparty risk of the broker. At 31 December 2013, £19,703,000 was held
in government bonds in a segregated collateral account, on behalf of the
Company, to reduce the exposure to counterparty risk of the Company.
Credit risk
Investments may be adversely affected if any of the institutions with which
money is deposited suffer insolvency or other financial difficulties. All
transactions are carried out with a large number of brokers and are settled on
a delivery versus payment basis. Limits are set on the amount that can be due
from any one broker. All security transactions are through brokers which have
been approved as an acceptable counterparty. This is reviewed on an ongoing
basis. At the year end, the exposure to credit risk includes cash at bank,
outstanding securities transactions and derivative instruments at fair value.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
If interest rates at 31 December 2014, had increased by 0.25%, with all other
variables held constant, total net assets and total return on ordinary
activities would have decreased by £91,000 (2013: £78,000). A decrease in
interest rates by 0.25% would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
If the UK sterling exchange rate at 31 December 2014, had strengthened or
weakened by 10% in relation to the larger currency exposures held by the
Company, with all other variables held constant, total net assets and the total
return on ordinary activities would have (decreased)/increased by the following
amounts.
If the UK sterling exchange rate had strengthened by 10% the impact would have
been:
2014 2013
£'000 £'000
Danish krone (3,341) (3,744)
Euro (39,000) (43,668)
Norwegian krone (3,137) (3,008)
Swedish krona (2,026) (2,178)
Swiss franc (14,277) (11,595)
---------- ----------
(61,781) (64,193)
========== ==========
If the UK sterling exchange rate had weakened by 10% the impact would have
been:
2014 2013
£'000 £'000
Danish krone 4,083 4,576
Euro 47,666 53,372
Norwegian krone 3,834 3,677
Swedish krona 2,476 2,662
Swiss franc 17,449 14,172
---------- ----------
75,508 78,459
========== ==========
Other price risk sensitivity analysis
Changes in market prices, other than those arising from interest rate risk or
foreign currency risk, also affect the value of the Company's net assets and
its total return on ordinary activities. Details of how the Board sets risk
parameters and performance objectives can be found in the Strategic Report in
the Annual Report.
Investments exposure sensitivity analysis
An increase of 10% in the fair value of investments at 31 December 2014 would
have increased total net assets and total return on ordinary activities by £
71,656,000 (2013: £66,922,000). A decrease of 10% would have had an equal but
opposite effect.
Derivative instruments exposure sensitivity analysis
The Company invests in long CFDs to gain exposure to the equity markets. An
increase of 10% in the price of shares underlying the CFDs at 31 December 2014
would have increased total net assets and total return on ordinary activities
by £4,462,000 (2013: £7,269,000). A decrease of 10% would have had an equal but
opposite effect.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
As explained in Notes 1(g) and 1(h) above, investments are stated at fair
value, which is bid or last market price, and long CFDs are stated at fair
value, which is the difference between the settlement price and the value of
the underlying shares in the contract. Other financial assets and liabilities
are stated in the Balance Sheet at values which are not materially different to
their fair values. In the case of cash, book value approximates to fair value
due to the short maturity of the instruments.
FAIR VALUE HIERARCHY
Under FRS 29 financial companies are required to disclose the fair value
hierarchy that classifies financial instruments measured at fair value at one
of three levels according to the relative reliability of the inputs used to
estimate the fair values.
Classification Input
Level 1 Valued using quoted
prices in active markets for identical assets
Level 2 Valued by reference to
valuation techniques using observable inputs other than quoted prices included
within Level 1
Level 3 Valued by reference to
valuation techniques using inputs that are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset.
The valuation techniques used by the Company are explained in Accounting
Policies Notes 1(g) and 1(h) above. All the financial instruments held at fair
value by the Company at 31 December 2014 are considered to fall within Level 1,
with the exception of net derivative instrument liabilities of £964,000 (2013:
derivative instrument assets of £19,980,000) which fall within Level 2.
19 CAPITAL MANAGEMENT
The Company does not have any externally imposed capital requirements. The
capital of the Company comprises its gearing, which is managed via the use of
long CFDs, and its issued share capital and reserves which are disclosed in the
Balance Sheet above. It is managed in accordance with the Company's investment
policy and in pursuit of its investment objective, as disclosed in the
Strategic Report in the Annual Report. The principal risks and their management
are disclosed in the Strategic Report in the Annual Report and above.
20 CONTINGENT LIABILITIES AND CAPITAL COMMITMENTS
There were no contingent liabilities or capital commitments as at 31 December
2014 (2013: none).
21 RELATED PARTY TRANSACTIONS
The Company has identified the Directors as its only related parties. The
Directors have complied with the provisions of Financial Reporting Standard 8
"Related Party Disclosures", which require disclosure of related party
transactions and balances. The Directors' remuneration and their interests in
the shares of the Company are disclosed in the Directors' Remuneration Report
in the Annual Report.
2013 FINANCIAL INFORMATION
The figures and financial information for 2013 are extracted from the published
Annual Report and Accounts for the year ended 31 December 2013 and do not
constitute the statutory accounts for that year. The Annual Report and Accounts
has been delivered to the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a statement
under either section 498(2) or section 498(3) of the Companies Act 2006.
2014 FINANCIAL INFORMATION
The figures and financial information for 2014 are extracted from the published
Annual Report and Accounts for the year ended 31 December 2013 and do not
constitute the statutory accounts for that year. The Annual Report and Accounts
include the Report of the Independent Auditors which is unqualified and does
not contain a statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The Annual Report and Accounts will be delivered to the
Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at www.morningstar.co.uk/uk/NSM.
The Annual Report and Financial Statements were posted to shareholders on/
around 30 March 2015 and will be available on the Company's website at
www.fidelity.co.uk/its
For Enquiries, please contact:
Christopher Pirnie
FIL Investments International
Company Secretary
13 March 2015
+44 (0) 1737 837929
Friday, 10th January 2025
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