Final Results

FIDELITY SPECIAL VALUES PLC - Final Results

PR Newswire

London, 6 November 2015

The information below has been extracted from the Annual Report and Accounts for the year ended 31 August 2015 and is included solely for the purpose of complying with DTR 6.3.5 and the requirements it imposes on issuers as to how to make public annual financial reports.
 

Chairman’s Statement

RESULTS FOR THE YEAR ENDED 31 AUGUST 2015

NAV PER SHARE:              +7.3%
SHARE PRICE:                 +12.4%
BENCHMARK:                    -2.3%
DIVIDENDS:                        3.35p

I have pleasure in presenting the Annual Report of Fidelity Special Values PLC for the year ended 31 August 2015.

PERFORMANCE

This financial year marked the third year of Alex Wright’s tenure as Portfolio Manager and for the third successive year, the NAV of the Company increased in excess of the Benchmark Index. For the three years, performance on a total return basis of the NAV was +72.1%, the share price was +100.2% against the Benchmark Index of +28.1%.

This financial year saw a positive return while the Index posted a negative return. This is due principally to a commendable selection of stocks for the portfolio, in addition to Alex Wright’s ability to avoid some of the more troubled areas. Despite the ongoing uncertainty created by a variety of macroeconomic influences, bottom-up stock selection continued to be the driving force behind the portfolio’s Index-beating return, demonstrating the value of fundamental research and a contrarian approach.

The contrarian nature of the Company’s investment selection means that the Board does not expect a consistent outperformance of the Index every single year, though we do believe that the portfolio has the potential to outperform significantly over the longer term. As ever, the Board encourages Shareholders to take a similarly long term view of their investment in the Company’s shares.

OUTLOOK

The year under review saw some significant volatility in asset prices, particularly towards the end of the reporting period. Earlier challenges came in the shape of the Scottish Independence referendum, the UK general election and continued Eurozone instability. However, it took a deterioration of leading indicators in China to really dent the market’s confidence. Valuations at the market level are now closer to their longer term averages, though of course as ever there will be a range of company-specific valuations. The role of the Portfolio Manager is essentially to sift through cheapest and most unloved shares, and identify opportunities for positive and profitable change.

OTHER MATTERS

Sub-Division of shares

The Board was conscious that the Company’s share price had increased substantially from its launch price of £1 per share in 1994 to a price of £9.25 per share as at close of business on 22 April 2015. This meant that smaller investors, or investors who participate in monthly saving plans or dividend reinvestment schemes, had sometimes experienced difficulty fulfilling their order because of the high price at which the shares were trading, resulting in a cash surplus that could not be invested until sufficient funds had accumulated in their accounts to buy the next share.

As a result the Board sought and received Shareholders approval at the General Meeting of the Company held on 20 May 2015 to sub-divide the Company’s ordinary shares of 25 pence each into five ordinary shares of 5 pence each.

Following completion of the sub-division, 54,128,896 existing ordinary shares in issue were converted into 270,644,480 new ordinary shares. This included 879,000 existing shares held in Treasury at the time which converted into 4,395,000 new ordinary shares. The new ordinary shares commenced trading on the main market of the London Stock Exchange on 29 June 2015.

Investment Objective, Investment Policy and the Use of Derivatives

At the General Meeting held on 20 May 2015, Shareholders also approved the following changes to the Company’s investment objective and policy:

•    Broadening the wording of the investment objective to make it clear that investments into companies can be made directly through stocks as well as via derivatives;

•    Clarifying the use of derivatives within the Company’s investment policy. Derivatives are used principally in the followings ways:

i.   As an alternative form of gearing to bank loans or bonds. The Company will purchase long Contracts For Difference (“CFDs”) that achieve an equivalent effect to bank gearing but currently at lower financing costs;

ii.  To hedge equity market risks where the Portfolio Manager considers that suitable protection can be positioned to limit the downside of a falling market at a reasonable cost; and

iii. To enhance the investment returns by taking short exposures on stocks that the Portfolio Manager considers to be over-valued; and

•    Changing the gross gearing limit from 130% to 140%, thus allowing the Portfolio Manager the flexibility to manage the net gearing of the portfolio within a typical range of 100% to 120% while running short positions of up to 10%.

CFDs are sterling denominated and have the added benefit of mitigating an element of exchange rate risk when buying overseas-listed companies.

The agreed parameters for the use of derivatives are carefully monitored at all times.

Further details on the revised investment policy can be found in the Strategic Report in the Annual Report.

Discount, Share Repurchases and Issues

During the reporting year, the Board reviewed its discount management policy. Previously the Board had no rigid premium management or discount control policy but undertook to issue or repurchase ordinary shares if deemed to be in the best interests of Shareholders at the time. Under the new policy the Board seeks to maintain the discount in single digits in normal market conditions and will, subject to market conditions, consider repurchasing ordinary shares with the objective of stabilising the share price discount based on the cum income NAV within a single digit range.

The level of discount has narrowed from 6.3% at the start of the reporting year to 2.0% at the end of the reporting year. (During the year, the Company’s shares traded within a range of 10.6% discount to 2.3% premium). This narrowing of discount has given rise to a share price total return of 12.4% for the year, ahead of the NAV total return of 7.3%. The Board will continue to monitor this closely and will consider taking further action where we feel it to be effective.

Details of ordinary share repurchases carried out during the reporting year can be found in Note 13 in the Annual Report.

I am pleased to report that the Company’s ordinary shares have traded at a premium on certain days in the last quarter of the reporting period, and the Company has therefore issued 350,000 shares from Treasury at an average premium to NAV of 1.6%.

Since the end of the reporting period and as at the date of this report, the Company has not issued or repurchased any shares.

Gearing

The Board has agreed with the Portfolio Manager that if he is able to find attractive opportunities in the market, then the Company’s gearing should be allowed to rise, and stay geared, as long as the opportunities remain. Net market exposure (see Glossary of Terms) averaged below 110% over the reporting period. However it had risen back towards 110% by the end of the period, a reflection of the increased number of valuation opportunities made available by falling prices. I am confident that combined with Alex Wright’s contrarian and value-focused investment philosophy, this should continue to add value for Shareholders over the long term.

Overall, the Board is pleased not only with the financial performance of the Company over the last year, but also that it is making good use of its structural advantages over its open–ended counterparts. Over the long term, this extra flexibility should continue to translate into enhanced returns for our Shareholders.

Dividend

The Company’s previous dividend policy was to pay a dividend annually at the time of the Annual General Meeting. This policy was reviewed by the Board in the first half of the reporting year and it concluded that in order to smooth the dividend payment, it would be appropriate to pay dividends twice yearly. As a result an interim dividend payment of 1.00 pence* was paid on 20 May 2015.

The Board has decided to recommend a final dividend of 2.35 pence per share for the year ended 31 August 2015. The interim and final dividends represent a total increase of 1.5% over the 3.30 pence* paid for the year ended 31 August 2014. This dividend will be payable on 21 December 2015 to Shareholders on the register at close of business on 20 November 2015 (ex-dividend date 19 November 2015).

*     Restated for the five for one sub-division of shares

Board of Directors

In common with our practice since 2004, all Directors are subject to annual re-election and their biographical details are included in the Annual Report to assist Shareholders when considering their votes.

After 8 and 21 years respectively, Ben Thomson and Douglas Kinloch Anderson have decided to step down from the Board at the conclusion of the Annual General Meeting on 15 December 2015. I would like to take this opportunity to thank them both on behalf of the Board and the Shareholders for their invaluable contribution. We will miss them. I am delighted to welcome Nigel Foster and Dean Buckley to the Board as their replacements. Nigel was appointed on 1 September 2015 and has over 30 years of financial services experience, and in particular of derivatives. Dean was appointed to the Board on 3 November 2015 and has nearly 30 years of investment management experience having held senior positions in a number of asset management companies. Both appointments are subject to election by the Shareholders at the forthcoming Annual General Meeting.

It is my view that the new Board will continue to have the relevant skills and experience to serve the Company into the future, just as the old Board did.

Annual General Meeting: Tuesday 15 December 2015 at 11.30 am

The Annual General Meeting will be held at 11.30 am on Tuesday 15 December 2015 at Fidelity’s offices at 25 Cannon Street, London EC4M 5TA (St Paul’s or Mansion House tube stations).

It is the most important meeting that we, the Directors of your Company, have with our Shareholders each year. Alex Wright, the Portfolio Manager, will be making a presentation to Shareholders, highlighting the achievements and challenges of the year past and the prospects for the year to come. We hope as many of you as possible are able to come and join us for this occasion

Lynn Ruddick
Chairman
6 November 2015

Year to  31 August  NAV and Index total  return %	2015	2014	2013	2012	2011	5  years	Since  launch
NAV per share	+7.3	+10.7	+44.8	+15.0	-4.1	+89.8	+1,270.9
FTSE All-Share Index	-2.3	+10.3	+18.9	+10.2	+7.3	+51.4	+330.3
Difference	+9.6	+0.4	+25.9	+4.8	-11.4	+38.4	+940.6
Share price	+12.4	+9.2	+63.1	+9.2	-5.0	+107.7	+1,281.6

Portfolio Manager’s Review

UK MARKET REVIEW

The UK stock market recorded slightly negative returns over the Company’s financial year, with a particularly sharp fall over the summer months erasing earlier gains. Above average valuations proved unsustainable in the face of increasing concerns about GDP growth prospects in China and other emerging markets. Commodity stocks suffered particularly poor returns, with an uncertain demand outlook causing prices of oil and industrial metals to fall significantly.

Throughout the year, market commentators expressed concerns around the UK general election, Greek membership of the Eurozone, and continuing instability in the Middle East, though ultimately these issues had limited influence on the overall market or the portfolio. However, some of the sectors that looked vulnerable to political intervention from the Labour party rallied following the surprisingly conclusive general election victory by the Conservative party.

PORTFOLIO REVIEW

The Company’s NAV and share price returns were positive despite the market’s negative return. This was achieved by a combination of holding shares in companies entering a period of positive change, and in most cases managing to avoid shares in companies whose outlook significantly worsened over the period. As a reminder, I invest Shareholders’ funds with an ‘unconstrained’ approach, which means I am not obliged to hold companies simply because they are large and significant for the Benchmark Index. Having been concerned about the outlook for many commodity-related stocks over the period, the Company had very limited holdings in the area. This enabled us to weather the worst of the stock market falls.

The Company’s financial year was another when the average smaller company outperformed its larger counterpart. The Company has continued to invest in companies of all sizes, but with a preference for smaller and medium sized companies, where a lack of research resources at other investment institutions means we have a better chance of identifying change that others have not yet noticed.

Positive performance contributions came from a number of our medium sized holdings. After being the top contributor to fund performance in 2013/2014, fuel distributor DCC again made significant gains over the year. The company’s strategy of buying up delivery assets and integrating them into their existing networks has been progressing nicely, with attractive opportunities on the continent available as integrated oil majors exit these markets, where they have struggled to make a return. DCC has been a long-standing position for the portfolio, though the shares have performed very strongly and will now act as a source of funds for new ideas as the company’s positive fundamentals are increasingly reflected in a higher valuation.

Regus is an owner of office space in towns and cities worldwide, and is benefitting from the transition to more flexible working arrangements. The company is the global leader in its market and has a huge platform for growth and expansion across the world. This type of company would usually be a prime candidate for holding in growth-orientated funds, but the market has struggled to value the company due to both the effect that opening new offices has on current earnings and its unique business model. This has resulted in the company’s shares being significantly undervalued compared to its potential long term earnings growth. The shares have performed well due to the economic sensitivity of the company, although they currently remain undervalued. I will keep a close watch on both the valuation and balance sheet here.

The top performer over the year was Electronic Arts, a US games company. The success of this investment is an example of how Shareholders can be rewarded when they invest in unloved companies with prospects for both internal and external change. It also demonstrates the value of allowing some overseas positions in the fund. When I bought Electronic Arts for Special Values in 2012, the shares met all the criteria I look for in a potential investment and the company has turned in a generous performance for Shareholders since it was bought. Again, considering the higher valuation that the company enjoys now, the portfolio’s capital deployed here will gradually be re-allocated to shares at an earlier stage of recovery.

OUTLOOK

The recent volatility in the stock market has led to a sense of caution among investors, and falling prices and valuations in the stock market. This uncertainty has created some attractive contrarian opportunities in various sectors and market capitalisation categories. I have been taking the opportunity to buy shares in companies whose prices have fallen despite attractive prospects for positive change over the medium term.

Key sectors for the Company continue to include financials (and banks in particular), and a recent increase in the holdings in oil and gas, where the excessive negative sentiment seems to have obscured a reduction in supply that should improve industry dynamics in the medium term.

As ever, my focus is on identifying out-of-favour stocks with potential for positive change and limited downside risk. This bottom-up strategy is my preferred approach to meeting the Company’s investment objective of providing long term capital growth for investors.

Alex Wright
Portfolio Manager
6 November 2015
 

Strategic Report

PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT

The Board has an ongoing process for identifying, evaluating and managing the principal risks faced by the Company. The Board, with the assistance of the Manager, has developed a risk matrix which, as part of the risk management and internal control process, identifies the key risks that the Company faces. The matrix has identified strategic, marketing, investment management, company secretarial and other support function risks. The Board reviews and agrees policies for managing these risks. Risks are identified, placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of risks, is updated and reviewed regularly in the form of comprehensive internal controls reports considered by the Audit Committee. The Board also determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives. The Board’s approach to risks is embedded in the Company’s investment objective and investment policy in the Annual report.

EXTERNAL RISKS

Market Risk

The Company’s assets consist mainly of listed securities and the principal risks are therefore market related such as market downturns, interest rate movements, deflation/inflation, terrorism and protectionism.

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 are: market price risk (which comprises interest rate risk, foreign currency risk and other price risk); liquidity risk; counterparty risk; credit risk; and derivative instruments risk.

Long CFDs are currently used for gearing purposes. In addition, a day-to-day overdraft facility can be used if required.

The Company relies on a number of main service providers, principally the Manager, Registrar, Custodian and Depositary, who are subject to regular audits by Fidelity’s internal audit team. The counterparties’ own internal controls reports are also received by the Board and any concerns investigated.

Share Price Risk

Share prices are volatile and for the short term Shareholder, likely to want to sell in the near future, volatility is a risk. The Board does not believe that volatility should be a significant risk for the long term Shareholder.

Discount Control Risk

The Board cannot fully control the discount at which the Company’s share price trades in relation to net asset value. However, it can influence this through its share repurchase policy and through creating demand for shares through good performance and an active investor relations programme.

The Company’s share price, NAV and discount volatility are monitored daily by the Manager and considered by the Board regularly.

INTERNAL RISKS

Investment Management Risk

The Board relies on the Portfolio Manager’s skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company’s Benchmark Index and competitors and also considers the outlook for the market with the Portfolio Manager at each Board meeting. The emphasis is on long term investment performance and the Board accepts that by targeting long term results the Company risks volatility in the shorter term.

Governance, Operational, Financial, Compliance, Administration etc Risks

Whilst it is believed that the likelihood of poor governance, compliance and operational administration by other third party service providers is low, the financial consequences could be serious, including the associated reputational damage to the Company. Your Board is responsible for the Company’s systems of risk management and of internal controls and for reviewing its effectiveness. Details of this process are provided in the Corporate Governance Statement in the Annual 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 Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt the going concern basis in preparing these Financial Statements.

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, to the extent possible, 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 the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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 which 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 at www.fidelity.co.uk/its. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their jurisdictions.

We confirm that to the best of our knowledge the Financial Statements, prepared in accordance with the applicable set of accounting standards, 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 6 November 2015 and signed on its behalf.

Lynn Ruddick
Chairman

Income Statement for the year ended 31 August 2015

					2015				2014
			revenue		capital		total		revenue		capital		total
Notes			£’000		£’000		£’000		£’000		£’000		£’000
9		Gains on investments	–		18,355		18,355		–		32,699		32,699
10		Gains on long CFDs	–		21,843		21,843		–		14,597		14,597
10		Losses on short CFDs, futures and warrants	–		(13,239)		(13,239)		–		(4,624)		(4,624)
2		Net income	16,044		–		16,044		15,305		–		15,305
2		Other interest	155		–		155		93		–		93
3		Investment management fee	(5,128)		–		(5,128)		(5,087)		–		(5,087)
4		Other expenses	(788)		–		(788)		(633)		–		(633)
		Exchange losses on other net assets	(5)		(490)		(495)		(3)		(389)		(392)
		Net return on ordinary activities before finance costs and taxation	10,278		26,469		36,747		9,675		42,283		51,958
5		Finance costs	(1,063)		–		(1,063)		(1,281)		–		(1,281)
		Net return on ordinary activities before taxation	9,215		26,469		35,684		8,394		42,283		50,677
6		Taxation on return on ordinary activities	(149)		–		(149)		2		–		2
		Net return on ordinary activities after taxation for the year	9,066		26,469		35,535		8,396		42,283		50,679
7		Return per ordinary share1	3.39p		9.90p		13.29p		3.10p		15.63p		18.73p

1. The 2014 figures have been restated to reflect the five for one ordinary share sub-division that took place on 29 June 2015.   

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 in the Annual Report form an integral part of these financial statements.
 

Balance Sheet as at 31 August 2015

Company number 2972628

			2015		2014
Notes			£’000		£’000
		Fixed assets
9		Investments	510,256		458,879
		Current assets
10		Derivative assets	28,496		26,742
11		Debtors	3,172		7,582
		Amounts held at futures clearing houses and brokers	47		3,421
		Fidelity Institutional Liquidity Fund	500		27,584
		Cash at bank	4,682		2,743
			36,897		68,072
		Creditors
10		Derivative liabilities	(8,204)		(5,803)
12		Creditors	(1,613)		(1,929)
			(9,817)		(7,732)
		Net current assets	27,080		60,340
		Total net assets	537,336		519,219
		Capital and reserves
13		Share capital	13,532		13,532
14		Share premium account	95,896		95,767
14		Capital redemption reserve	3,256		3,256
14		Other non-distributable reserve	5,152		5,152
14		Capital reserve	411,356		390,883
14		Revenue reserve	8,144		10,629
		Total equity Shareholders’ funds	537,336		519,219
15		Net asset value per ordinary share1	201.61p		192.29p

1. The 2014 column has been restated to reflect the five for one ordinary share sub-division that took place on 29 June 2015.

The financial statements were approved by the Board of Directors on 6 November 2014 and were signed on its behalf by:

Lynn Ruddick
Chairman

The Notes in the Annual Report form an integral part of these financial statements.
 

Reconciliation of Movements in Shareholders’ Funds

for the year ended 31 August 2015

Notes				share capital £’000		share premium account £’000		capital redemption reserve £’000		other non- distributable reserve £’000		capital reserve £’000		revenue reserve £’000		total equity £’000
		Opening Shareholders’ funds at 1 September 2014		13,532		95,767		3,256		5,152		390,883		10,629		519,219
		Issue of ordinary shares		–		129		–		–		603		–		732
		Repurchase of ordinary shares		–		–		–		–		(6,599)		–		(6,599)
		Net return on ordinary activities after taxation for the year		–		–		–		–		26,469		9,066		35,535
8		Dividend paid to Shareholders		–		–		–		–		–		(11,551)		(11,551)
		Closing Shareholders’ funds at 31 August 2015		13,532		95,896		3,256		5,152		411,356		8,144		537,336
		Opening Shareholders’ funds at 1 September 2013		13,532		95,767		3,256		5,152		349,724		11,029		478,460
		Repurchase of ordinary shares		–		–		–		–		(1,124)		–		(1,124)
		Net return on ordinary activities after taxation for the year		–		–		–		–		42,283		8,396		50,679
8		Dividend paid to Shareholders		–		–		–		–		–		(8,796)		(8,796)
		Closing Shareholders’ funds at 31 August 2014		13,532		95,767		3,256		5,152		390,883		10,629		519,219

The Notes in the Annual Report form an integral part of these financial statements.
 

Cash Flow Statement for the year ended 31 August 2015

			year ended  2015		Year  ended  2014
Notes			£’000		£’000
		Operating activities
		Investment income received	12,056		8,907
		Net derivative income	3,204		3,726
		Interest received	79		20
		Investment management fee paid	(5,088)		(5,040)
		Directors’ fees paid	(147)		(139)
		Other cash payments	(107)		(901)
16		Net cash inflow from operating activities	9,997		6,573
		Servicing of finance
		Cash outflow from CFD interest paid	(1,024)		(1,305)
		Cash outflow from servicing of finance	(1,024)		(1,305)
		Taxation
		Overseas taxation recovered	–		14
		Taxation recovered	–		14
		Financial investments
		Purchase of investments	(243,238)		(291,210)
		Disposal of investments	214,351		285,767
		Net cash outflow from financial investments	(28,887)		(5,443)
		Derivative activities
		Receipts on long CFDs	22,578		22,564
		Payments on short CFDs, futures and warrants	(13,275)		(4,061)
		Movement on amounts held at futures clearing houses and brokers	3,374		(3,421)
		Net cash inflow from derivative activities	12,677		15,082
8		Dividend paid to Shareholders	(11,551)		(8,796)
		Net cash (outflow)/inflow before use of liquid resources and financing	(18,788)		6,125
		Cash flow from management of liquid resources
		Fidelity Institutional Liquidity Fund	27,084		(27,584)
		Net cash inflow/(outflow) from management of liquid resources	27,084		(27,584)
		Net cash inflow/(outflow) before financing	8,296		(21,459)
		Financing
		Issue of ordinary shares	732		–
		Repurchase of ordinary shares	(6,599)		(1,124)
		Net cash outflow from financing	(5,867)		(1,124)
17		Increase/(decrease) in cash	2,429		(22,583)

The Notes in the Annual Report 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 & Customs.

b) Income – Income from equity investments is credited to the Income Statement on the date on which the right to receive the payment is established. UK dividends are accounted for net of any tax credit. Unfranked investment income includes tax deducted at source. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) and derivative expenses paid as dividends on short CFDs are included in ‘Net income’ in the revenue column of the Income Statement.

Interest received on short CFDs, deposits and money market funds is included in “Other interest” in the revenue column of the Income Statement.

c) Special dividends – Special dividends are treated as a capital receipt or a revenue receipt depending on the facts and circumstances of each particular case.

d) Expenses – Expenses, including investment management fees, are accounted for on an accruals basis and are charged to the revenue column of the Income Statement.

e) Finance costs – Finance costs represent interest paid on long CFDs and are accounted for on an accruals basis using the effective interest method. They are charged to ‘finance costs’ in the revenue column of the Income Statement.

f) Taxation – 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, or a right to pay less, tax in the future . A deferred tax asset is recognised when it is more likely than not that the asset will be recoverable.

g) 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 reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are reported at the rate 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.

h) Valuation of investments – The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. 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 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 and AIM quoted 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 charges transaction costs incidental to the purchase or sale of investments, to ‘Gains on investments’ in the capital column of the Income Statement and has disclosed these costs in Note 9 in the Annual Report.

i) Derivative instruments – When appropriate, permitted transactions involving derivative instruments are used. The Company may enter into futures, equity forwards, long and short CFDs, options and warrants. Derivative instruments are held at fair value through profit or loss and are valued at “fair value”, which is measured as follows:

•    Futures and options - the quoted trade price for the contract; and

•    CFDs and equity forwards - the difference between the strike price and the bid or last price of the underlying shares in the contract.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in “Net income” in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included; for long CFDs, as Gains/(losses) on long CFDs, and for short CFDs, futures, options and warrants as Gains/(losses) on short CFDs, futures, options and warrants in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within “Current assets” and “Creditors”.

j) Capital reserve – The following are accounted for in capital reserve:

•    Gains and losses on the disposal of investments and derivative instruments, if in accordance with Notes 1(h) and 1(i) above;

•    Changes in the fair value of investments and derivative instruments held at the year end, if in accordance with Notes 1(h) and 1(i) above;

•    Foreign exchange gains and losses of a capital nature;

•    Dividends receivable of a capital in nature; and

•    Costs of repurchasing ordinary shares.

As a result of technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/10 “Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006”, changes in fair value of investments which are readily convertible to cash, without accepting adverse terms at the balance sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as “capital reserve” in the Balance Sheet and the Reconciliation of Movements in Shareholders’ Funds. 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, with the exception of unquoted investments with a fair value of £1,706,000 (2014: £303,000).

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.

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
2	INCOME
	Income from investments
	UK dividends			9,146		7,565
	UK scrip dividends			716		848
	Overseas dividends			3,331		787
	Overseas scrip dividends			281		1,320
	Bond interest			133		–
				13,607		10,520
	Income/(expenses) from derivative instruments
	Dividends received on long CFDs			3,366		5,945
	Dividends paid on short CFDs			(929)		(1,160)
				2,437		4,785
	Net income			16,044		15,305
	Other interest
	Interest received on short CFDs			98		75
	Interest received on deposits and money market funds			57		18
				155		93
	Total net income and other interest			16,199		15,398

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
3	INVESTMENT MANAGEMENT FEE
	Investment management fee			5,128		5,087

A summary of the terms of the Management Agreement is given in the Directors’ Report in the Annual Report.

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
4	OTHER EXPENSES
	AIC fees			21		24
	Custody fees			16		18
	Depositary fees1			45		6
	Directors’ expenses			11		16
	Directors’ fees2			146		142
	Legal and professional fees			85		73
	Marketing expenses			132		180
	Printing and publication expenses			93		68
	Registrars’ fees			67		66
	Fees payable to the Independent Auditor for the audit of the annual financial statements3			24		24
	Costs in relation to the ordinary share sub-division			127		–
	Sundry other expenses			21		16
				788		633

1     A Depositary was appointed on 17 July 2014 as required under the AIFMD

2     Details of the breakdown of Directors’ fees are provided in the Annual Report within the Directors’ Remuneration Report

3     The VAT on fees payable to the Company’s Auditor is included in other expenses

				Year ended 31.08.15 £’000		Year ended 31.08.14  Â£â€™000
5	FINANCE COSTS
	Interest paid on long CFDs			1,063		1,281

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
6	TAXATION ON RETURN ON ORDINARY ACTIVITIES
	a) Analysis of the taxation (credit)/charge for the year
	Overseas taxation recovered			(62)		(14)
	Overseas taxation suffered			211		12
	Total current taxation charge/(credit) for the year (see Note 6b)			149		(2)

b) Factors affecting the taxation charge/(credit) for the year

The taxation charge/(credit) for the year is lower than the standard rate of UK corporation tax of 20.58% (2014: 22.16%). A reconciliation of the taxation charge based on the standard rate of UK corporation tax to the actual taxation charge is shown below:

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
	Net return on ordinary activities before taxation			35,684		50,677
	Net return on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 20.58% (2014: 22.16%)			7,344		11,230
	Effects of:
	Gains on investments not taxable			(5,447)		(9,370)
	Income not taxable			(2,766)		(2,331)
	Excess management expenses not utilised in the year			869		471
	Overseas taxation recovered			(62)		(14)
	Overseas taxation suffered			211		12
	Current taxation charge/(credit) (Note 6a)			149		(2)

Investment trust companies are exempt from UK corporation tax on capital gains if they meet the HM Revenue & Customs criteria set out in s1159 of the Corporation Taxes Act 2010.

c) Deferred taxation

A deferred tax asset of £10,914,000 (2014: £10,573,000), in respect of excess expenses of £54,569,000 (2014: £50,346,000), has not been recognised as It is unlikely that there will be sufficient future taxable profits to utilise these expenses.

Year ended  31 August 2015

Year ended 31 August 2014

revenue

capital

total

revenue

capital (as restated)1

total

RETURN PER ORDINARY SHARE

Return per Ordinary Share – basic and diluted

3.39p

9.90p

13.29p

3.10p

15.63p

18.73p

1     The weighted average number of Existing Ordinary Shares of 25 pence held outside Treasury in issue for the year ended 31 August 2014 has been restated to reflect the five for one ordinary share sub-division that took place on 29 June 2015, as disclosed in Note 13 below. On the original basis, as stated in the financial statements for the year ended 31 August 2014, the net returns per ordinary share were, revenue return 15.52 pence, capital return 78.15 pence and total return 93.67 pence, based on the weighted average number of Existing Ordinary Shares of 25 pence each held outside Treasury in issue of 54,107,586

Returns per Ordinary Share are based on the revenue net return on ordinary activities after taxation for the year of £9,066,000 (2014: £8,396,000), the capital net return on ordinary activities after taxation for the year of £26,469,000 (2014: £42,283,000) and the total net return on ordinary activities after taxation for the year of £35,535,000 (2014: £50,679,000) and on 267,389,412 (2014: 270,537,930) New Ordinary Shares being the weighted average number of New Ordinary Shares of 5 pence each held outside Treasury in issue during the year. Basic and diluted returns per share are the same as the Company has no dilutive financial instruments.

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
8	DIVIDENDS
	Dividend paid Interim dividend of 1.00 pence per New Ordinary Share paid for the year ended 31 August 20151			2,665		–
	Dividend of 3.30 pence per New Ordinary Share paid for the year ended 31 August 20141			8,886		–
	Dividend of 3.25 pence per New Ordinary Share paid for the year ended 31 August 20131			–		8,796
				11,551		8,796

	Dividend proposed Final dividend of 2.35 pence per New Ordinary Share for the year ended 31 August 2015			6,263		–
	Dividend of 3.30 pence per New Ordinary Share for the year ended 31 August 20141			–		8,886
				6,263		8,886

1     These dividend rates have been restated to reflect the five for one ordinary share sub-division that took place on 29 June 2015, as disclosed in Note 13 below. The actual dividend rates paid per Existing Ordinary Share were interim dividend for the year ended 31 August 2015: 5.00 pence; dividend for the year ended 31 August 2014: 16.50 pence; and dividend for the year ended 31 August 2013: 16.25 pence

The Directors have proposed a final dividend of 2.35 pence per New Ordinary Share which is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The dividend will be paid on 21 December 2015 to shareholders on the register at 20 November 2015 (ex dividend date 19 November 2015).

									2015 £’000				2014 £’000
9	INVESTMENTS
	Investments
	Listed investments								422,310				404,796
	AIM quoted investments								79,920				51,130
	Specialist Fund Market investments								6,320				2,650
	Unlisted investments								1,706				303
	Total investments – fair value and portfolio exposure								510,256				458,879
						2015
				Listed investments		other investments						Total investments
				£’000		£’000						£’000
	Opening book cost			346,006		55,140						401,146
	Opening investment holding gains/(losses)			58,969		(1,236)						57,733
	Opening fair value and gross asset exposure of investments			404,975		53,904						458,879
	Movements in the year
	Purchases at cost			191,875		51,858						243,733
	Sales – proceeds			(198,670)		(12,041)						(210,711)
	Sales – realised gains/(losses) on sales			40,125		(1,237)						38,888
	Losses on investments held			(15,995)		(4,538)						(20,533)
	Closing fair value and gross asset exposure of investments			422,310		87,946						510,256
	Closing book cost			379,336		93,720						473,056
	Closing investment holding gains/(losses)			42,974		(5,774)						37,200
	Closing fair value and gross asset exposure of investments			422,310		87,946						510,256

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
	Gains on investments
	Gains on sales of investments in the year			38,888		58,850
	Investment holding losses in the year			(20,533)		(26,151)
				18,355		32,699

	Costs of investment transactions
	Transaction costs incurred on the acquisition and disposal of investments, which are included within gains on investments above, were as follows:
	Purchase transaction costs			720		1,209
	Sales transaction costs			144		212
				864		1,421
	The portfolio turnover rate for the year ended 31 August 2015 was 46.2% (2014: 62.6%)

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
10	DERIVATIVE INSTRUMENTS
	Gains on long CFDs
	Realised gains on long CFD positions closed			22,578		22,564
	Unrealised losses on long CFDs held			(735)		(7,967)
				21,843		14,597
	Losses on short CFDs, futures and warrants
	Realised losses on short CFD positions closed			(5,648)		(2,307)
	Unrealised (losses)/gains on short CFDs held			(2,883)		369
	Realised losses on futures closed			(7,679)		(1,754)
	Unrealised gains/(losses) on futures held			2,984		(945)
	Realised losses on warrants closed			(13)		–
	Unrealised gains on warrants held			–		13
				(13,239)		(4,624)

				2015 fair value £’000		2014 fair value £’000
	Derivative assets/(liabilities) as recognised on the Balance Sheet
	Derivative assets			28,496		26,742
	Derivative liabilities			(8,204)		(5,803)
				20,292		20,939

				2015				2014
						gross asset				gross asset
				fair value		exposure		fair value		exposure
				£’000		£’000		£’000		£’000
	At the year end the Company held the following derivative instruments
	Long CFDs			21,574		158,331		22,309		184,134
	Short CFDs			(3,321)		38,455		(438)		37,978
	Futures (hedges)			2,039		(41,933)		(945)		(52,536)
	Warrants			–		–		13		13
				20,292		154,853		20,939		169,589

				2015 £’000		2014 £’000
11	DEBTORS
	Securities sold for future settlement			1,223		4,862
	Accrued income			1,851		2,204
	Taxation recoverable			76		14
	Other debtors			22		502
				3,172		7,582

				2015 £’000		2014 £’000
12	CREDITORS
	Securities purchased for future settlement			360		862
	Other creditors			1,253		1,067
				1,613		1,929

				2015				2014
				number of  shares		£’000		number of  shares		£’000
13	SHARE CAPITAL
	Issued, allotted and fully paid:
	Existing Ordinary Shares of 25 pence each – held outside of Treasury
	Beginning of the year			54,004,896		13,501		54,128,896		13,532
	Existing Ordinary Shares repurchased into Treasury			(755,000)		(189)		(124,000)		(31)
	Existing Ordinary Shares cancelled on the sub-division			(53,249,896)		(13,312)		–		–
	End of the year			–		–		54,004,896		13,501

	Existing Ordinary Shares of 25 pence each held in Treasury
	Beginning of the year			124,000		31		–		–
	Existing Ordinary Shares repurchased into Treasury			755,000		189		124,000		31
	Existing Ordinary Shares cancelled on the sub-division			(879,000)		(220)		–		–
	End of the year			–		–		124,000		31
	Total share capital					–				13,532

				2015				2014
				number of shares		£’000		number of shares		£’000
	New Ordinary Shares of 5 pence each held outside Treasury
	Beginning of the year			–		–		–		–
	New Ordinary Shares issued on the sub-division			266,249,480		13,312		–		–
	New Ordinary Shares Issued from Treasury			350,000		18		–		–
	New Ordinary Shares repurchased into Treasury			(75,000)		(4)		–		–
	End of the year			266,524,480		13,326		–		–

	New Ordinary Shares of 5 pence each held in Treasury
	Beginning of the year			–		–		–		–
	New Ordinary Shares issued on the sub-division			4,395,000		220		–		–
	New Ordinary Shares Issued from Treasury			(350,000)		(18)		–		–
	New Ordinary Shares repurchased into Treasury			75,000		4		–		–
	End of the year			4,120,000		206		–		–
	Total share capital					13,532				–

On 29 June 2015 the Existing Ordinary Shares of 25 pence each were sub-divided. Five New Ordinary Shares of 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.

Shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

14  RESERVES

The share premium account represents the amount by which the proceeds from the issue of ordinary shares has exceeded the cost of those ordinary shares. It is not distributable by way of dividend. 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. It cannot be used to fund share repurchases.

The other non-distributable reserve represents an amount transferred in prior years from the warrant reserve. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital reserve represents realised gains or losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives 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 have stated that it has no current intention to pay dividends out of capital.

The revenue reserve represents retained revenue surpluses recognised through the revenue column of the Income Statement. 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 £537,336,000 (2014: £519,219,000) and on 266,524,480 (2014: 270,024,480) ordinary shares, being the number of New Ordinary Shares of 5 pence each held outside Treasury in issue at the year end . It is the Company’s policy that shares held in Treasury will only be reissued at a premium to net asset value per share and, therefore, shares held in Treasury have no dilutive effect.

The number of ordinary shares in issue at 31 August 2014 is restated to reflect the five for one ordinary share sub-division that took place on 29 June 2015, as disclosed in Note 13 above. On the original basis, as stated in the 2014 financial statements, the net asset value per ordinary share was 961.43 pence, based on 54,004,896 Existing Ordinary Shares of 25 pence each held outside Treasury in issue at 31 August 2014.

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
16	RECONCILIATION OF NET RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES
	Net total return before finance costs and taxation			36,747		51,958
	Less: net capital before finance costs and taxation			(26,469)		(42,283)
	Net revenue return before finance costs and taxation			10,278		9,675
	Scrip dividends			(997)		(2,168)
	Decrease/(increase) in debtors			833		(1,003)
	Increase in other creditors			94		81
	Overseas taxation suffered			(211)		(12)
	Net cash inflow from operating activities			9,997		6,573

				Year ended 31.08.15 £’000		Year ended 31.08.14 £’000
17	RECONCILIATION OF NET CASH MOVEMENTS TO MOVEMENT IN NET FUNDS
	Net funds at the beginning of the year			30,327		25,715
	Net cash inflow/(outflow)			2,429		(22,583)
	Fidelity Institutional Liquidity Fund			(27,084)		27,584
	Foreign exchange movement on other net assets			(490)		(389)
	Change in net funds			(25,145)		4,612
	Net funds at the end of the year			5,182		30,327

				2015 £’000		cash flows £’000		exchange movements £’000		2014 £’000
	Analysis of net funds
	Fidelity Institutional Liquidity Fund plc			500		(27,084)		–		27,584
	Cash at bank			4,682		2,429		(490)		2,743
				5,182		(24,655)		(490)		30,327

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 CFDs, futures, options and warrants on listed stocks and equity indices; 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 derivatives instruments 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 gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposure

The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

				31.08.15		31.08.14
				£’000		£’000
	Exposure to financial instruments that bear interest
	Long CFD exposure less fair value			136,757		161,825
	Exposure to financial instruments that earn interest
	Short CFD exposure			38,455		37,978
	Amounts held at futures clearing houses and brokers			47		3,421
	Fidelity Institutional Liquidity Fund			500		27,584
	Cash at bank			4,682		2,743
				43,684		71,726
	Net exposure to financial instruments that bear interest			93,073		90,099

Foreign currency risk

The Company does not carry out currency speculation. The Company’s net return on ordinary activities after taxation for the year and total net assets can be affected by foreign exchange movements because the Company has income and assets which are denominated in currencies other than the Company’s base currency which is UK sterling. The Company can also be 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 impact the Company:

•    Movements in exchange rates affecting the value of investments and derivative instruments;

•    Movements in exchange rates affecting short term timing differences; and

      •    Movements in exchange rates affecting the income received.

Currency exposure of financial assets

The currency exposure profile of the Company’s financial assets is shown below.

								2015
	currency			fair value of investments		exposure to long derivative instruments1		short term debtors2		cash and cash equivalents3		total currency exposure
				£’000		£’000		£’000		£’000		£’000
	Euro			20,938		59,170		114		–		80,222
	UK sterling			436,302		56,398		2,995		5,085		500,780
	US dollar			41,229		830		110		74		42,243
	Other currencies			11,787		–		–		23		11,801
				510,256		116,398		3,219		5,182		635,055

1   The exposure to the market of long CFDs after the netting of hedges

2   Short-term debtors comprise debtors and amounts held at futures clearing houses and brokers

3   Cash and cash equivalents comprise the Fidelity Institutional Liquidity Fund and cash at bank

								2014
	currency			fair value of investments		exposure to long derivative instruments1		short term debtors2		cash and cash equivalents3		total currency exposure
				£’000		£’000		£’000		£’000		£’000
	Euro			9,402		55,085		414		11		64,912
	UK sterling			412,343		66,829		10,418		30,253		519,843
	US dollar			34,671		6,338		83		10		41,102
	Other currencies			2,463		3,359		88		53		5,963
				458,879		131,611		11,003		30,327		631,820

1     The exposure to the market of long CFDs after the netting of hedges

2     Short-term debtors comprise debtors and amounts held at futures clearing houses and brokers

3                      Cash and cash equivalents comprise the Fidelity Institutional Liquidity Fund and cash at bank

Currency exposure of financial liabilities

The currency exposure profile of the Company’s financial liabilities is shown below.

						2015
				exposure to short derivative instruments1		short term creditors		total
				£’000		£’000		£’000
	Euro			3,014		1		3,015
	UK sterling			26,260		1,612		27,872
	US dollar			4,896		–		4,896
	Other currencies			4,285		–		4,285
				38,455		1,613		40,068
	1     The exposure to the market of long CFDs after the netting of hedges

						2014
				exposure to short derivative instruments1		short term creditors		total
				£’000		£’000		£’000
	Euro			14,969		4		14,973
	Norwegian Krone			10,102		–		10,102
	UK sterling			6,639		1,925		8,564
	US Dollar			4,487		–		4,487
	Other currencies			1,781		–		1,781
				37,978		1,929		39,907
	1     The exposure to the market of short CFDs

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 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. Other price risks arising from derivative positions, mainly due to the underlying exposures, are estimated using Value at Risk and Stress Tests as set out in the Company’s Derivative Risk Measurement and Management Document.

LIQUIDITY RISK

The Company’s assets comprise readily realisable securities, which can be sold easily to meet funding commitments if necessary. Short term flexibility is achieved by the use of bank overdraft facilities as required.

COUNTERPARTY RISK

Certain of the derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps Dealers Association’s (“ISDA”) market standard derivative legal documentation. As a result the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. 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, by the use of internal and external credit agency ratings, and evaluates derivative instrument credit risk exposure.

For Over The Counter (“OTC”) derivative transactions, 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 August 2015, £19,171,000 (2014: £23,857,000) was held by the broker, in government bonds in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company and £47,000 (2014: £3,421,000), was held by the Company in cash, shown as ‘Amounts held at futures clearing houses and brokers’ in the Balance Sheet, in a segregated collateral account on behalf of the broker, to reduce the credit risk exposure of the broker.

CREDIT RISK

Financial instruments 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 brokers that have been approved by the Managers and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on outstanding securities transactions, derivative instruments and cash at bank.

DERIVATIVE INSTRUMENTS RISK

The risks and risk management processes which result from the use of derivative instruments, are set out in a documented “Derivative Risk Measurement and Management Document”. Derivative instruments are used by the Manager for the following purposes:

•    To gain unfunded long exposure to equity markets, sectors or single stocks. “Unfunded” exposure is exposure gained without an initial flow of capital;

•    To hedge equity market risk using derivatives with the intention of at least partially mitigating losses in the exposures of the Company’s portfolio as a result of falls in the equity market;

•    To enhance portfolio total return by writing short call options (“covered call writing”) and the selected use of other option strategies; and

      •    To position “short” exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Manager believes to be over valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

The risk and performance contribution of these instruments to the Company’s portfolio is overseen by a specialist derivatives team. This team uses sophisticated portfolio risk assessment tools to advise the Portfolio Manager on portfolio construction. Derivative positions are subject to daily monitoring.

RISK SENSITIVITY ANALYSIS

Interest rate risk sensitivity analysis

If interest rates had increased by 0.25% and the Company’s net exposure to financial instruments that bear interest at 31 August 2015 had been held throughout the year, with all other variables remaining constant, net return on ordinary activities after taxation for the year and total net assets would have decreased by £233,000 (2014: £225,000). A decrease in interest rates of 0.25% would have had an equal and opposite effect.

Foreign currency risk sensitivity analysis

If UK sterling had strengthened by 10% against the foreign currency exposures held at 31 August 2015, with all other variables held constant, the Company’s net return on ordinary activities after taxation for the year and total net assets would have decreased by £11,098,000 (2014: £7,330,000). If UK sterling has weakened by 10% against the foreign currency exposures, with all other variables held constant, the Company’s net return on ordinary activities after taxation for the year and total net assets would have increased by £13,564,000 (2014: £8,959,000).

Other price risk sensitivity analysis

Changes in market prices, other than those arising from interest rate risk or foreign currency risk, may also affect the Company’s net return on ordinary activities after taxation for the year and total net assets. Details of how the Board sets risk parameters and performance objectives can be found in the Strategic Report in the Annual Report.

Investment exposure sensitivity analysis

If the market prices of the investments held at 31 August 2015 had increased by 10%, with all other variables held constant, the Company’s net return on ordinary activities after taxation for the year and total net assets would have increased by £51,026,000 (2014: £45,888,000). A decrease of 10% in the market prices of investments, with all other variables held constant, would have had an equal and opposite effect.

Derivative instrument exposure sensitivity analysis

If the market prices of the securities underlying the derivative instruments held at 31 August 2015 had increased by 10%, with all other variables held constant, the Company’s net return on ordinary activities after taxation for the year and total net assets would have increased by £7,794,000 (2014: £9,363,000). A decrease of 10% in the market prices of the securities underlying the derivative instruments, with all other variables held constant, would have had an equal and opposite effect. Details of the Company’s exposure to derivative instruments are shown in Note 10 above.

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

As explained in Notes 1(h) and 1(i) above; investments are valued at fair value which is bid or last market price, futures and options at quoted trade prices for the contract and CFDs and equity forwards at the difference between the strike price and the bid or last price of the shares in the security that underlies the contract. 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 Notes 1 (h) and (i) above. The table below sets out the fair value hierarchy of the Company’s financial instruments:

				level 1 £’000		level 2 £’000		level 3 £’000		2015 total £’000
	Financial instruments at fair value through profit or loss
	Investments – shares and fixed-interest securities			508,550		–		1,706		510,256
	Derivative instruments			–		20,292		–		20,292
				508,550		20,292		1,706		530,548
				level 1 £’000		level 2 £’000		level 3 £’000		2014 total £’000
	Financial instruments at fair value through profit or loss
	Investments – shares			458,576		–		303		458,879
	Derivative instruments			–		20,939		–		20,939
				458,576		20,939		303		479,818

The table below sets out the movements in level 3 financial instruments during the year:

				2015 level 3		2014 level 3
				£’000		£’000
	Beginning of the year			303		865
	Purchases at cost			–		1,459
	Sales – proceeds			–		(2,580)
	Sales – realised gains			–		1,225
	Investments suspended transferred from level 1 to level 3 at fair value			1,463		–
	Movement in investment holding losses in the year			(60)		(666)
	Level 3 financial instruments at the end of the year			1,706		303

19  CAPITAL RESOURCES AND GEARING

The Company does not have any externally imposed capital requirements. The capital of the Company comprises its gearing, which is managed by the use of derivative instruments, and its issued share capital and reserves as disclosed in the Balance Sheet above. It is managed in accordance with the Company’s investment policy in pursuit of its investment objective, both of which are detailed 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 in Note 18 above.

The Company’s gross gearing and net gearing at the end of the year end are shown below:

				2015
				Gross Gearing				Net Gearing
				£’000		%1		£’000		%1
	Total long exposures before hedges			668,587		124.4		668,587		124.4
	Less: hedging exposures2			(41,933)		(7.8)		(41,933)		(7.8)
	Total long exposures after the netting of hedges			626,654		116.6		626,654		116.6
	Total short exposures			38,455		7.2		(38,455)		(7.2)
	Total Gross Asset Exposure after the netting of hedges			665,109		123.8		588,199		109.4
	Shareholders’ Funds			537,336				537,336
	Gearing					23.8%				9.4%

				2014
				Gross Gearing				Net Gearing
				£’000		%1		£’000		%1
	Total long exposures before hedges			643,026		123.8		643,026		123.8
	Less: hedging exposures2			(52,536)		(10.1)		(52,536)		(10.1)
	Total long exposures after the netting of hedges			590,490		113.7		590,490		113.7
	Total short exposures			37,978		7.3		(37,978)		(7.3)
	Total Gross Asset Exposure after the netting of hedges			628,468		121.0		552,512		106.4
	Shareholders’ Funds			519,219				519,219
	Gearing					21.0%				6.4%
	1     Gross Asset Exposure expressed as a percentage of Shareholders’ Funds 2     Hedging positions reduce market exposure and gearing

20  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. Key management compensation paid was £170,000 (2014: £166,000) This included fees and travel expenses paid to the Directors, as disclosed in the Directors’ Remuneration Report in the Annual Report and £15,000 (2014: £14,000) of Employer’s National Insurance contributions.

STATUS OF RESULTS ANNOUNCEMENT

2014 FINANCIAL INFORMATION

The figures and financial information for 2014 are extracted from the published Annual Report and Accounts for the year ended 31 August 2014 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.

2015 FINANCIAL INFORMATION

The figures and financial information for 2015 are extracted from the published Annual Report and Accounts for the year ended 31 August 2015 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 and Circular will be submitted to the National Storage Mechanism in due course and will be available for inspection at www.morningstar.co.uk/uk/NSM.

The Annual Report and Financial Statements will be posted to shareholders on/around 13 November 2015 and will be available on the Company's website at www.fidelity.co.uk/its  in due course.

For Enquiries, please contact:

Bonita Guntrip

01737 837320