Final Results

RNS Number : 1589S

Schroder Income Growth Fund PLC

12 November 2021

 

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its annual report for the year ended 31 August 2021 as required by the Financial Conduct Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's annual report and accounts for the year ended 31 August 2021 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpages  www.schroders.co.uk/incomegrowth .  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/1589S_1-2021-11-11.pdf

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism, and it will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

Enquiries:

Matthew Riley

Schroder Investment Management Limited 

Tel: [phone]

Chairman's Statement

The year which ended 31 August 2021 was one of two distinctly different environments namely pre and post vaccine. The early months included national lockdowns, and the period from December 2020 onwards was one of accelerating optimism over growth prospects. Despite the many challenges presented by Covid-19 and the emergence of global supply chain constraints, the UK equity market was boosted by the success of the vaccine rollout and the reopening of the economy.

Revenue and dividend

I am pleased to report that the Company was able to deliver an increased dividend for the 26th year running. 12.80 pence per share was paid to shareholders over the year, a rise of 1.6% over the previous year. The Company has continued to fulfil its primary objective of 'real growth of income' above the levels of inflation over the medium and long-term.

The income earned by the Company recovered in the post vaccine period as companies gradually began to increase dividends. Earnings per share increased by 3.3% to 12.08 pence per share, and are now approximately in line with the year ending 31 August 2018 but still have some way to go before surpassing the 2019 high of 14.19 pence per share.

The recovery in revenue resulted in 94% of the year's dividend being covered by income received during the period. A modest transfer was therefore made from the Company's revenue reserves which remain healthy at £7.4 million, which equates to approximately 84% of the dividend amount paid this year.

Capital performance

In this challenging environment, I am pleased to report that the Company's net asset value total return was 34.4%, with the share price total return up by 37.0%. Returns were significantly in excess of its reference index, the FTSE All-Share Index, which returned 26.9%.

More details of the drivers of both income and capital returns during the period can be found in the Manager's review.

Share price discount and issuance

It is pleasing that in a year of continued uncertainty, the Company's share price discount to NAV has remained stable, averaging 1% and ending the period at 0.0%. The Company was able to grow during the period with share issues made at a premium to NAV in November 2020 and May 2021, totalling 425,000 shares.

Gearing

During the year, gearing decreased from 9.5% to 7.9%, predominantly due to NAV growth. Average gearing during the year was 8.8%, boosting performance by around 3.8% over the year. The £20 million revolving credit facility with Sumitomo Mitsui Banking Corporation Europe plc expired on 22 August 2021 and was replaced by a £32.5 million facility with the same lender, which will mature on 23 August 2022. The level of gearing has recently been increased and is currently 12.6%¹.

¹   As at 9 November 2021

Continuation vote

During the year, at the AGM held on Thursday, 17 December 2020, shareholders voted that the Company should continue as an investment trust for a further five years. This is a testament to the consistent performance delivered by the Manager and your board remains committed to continue to engage with shareholders on an ongoing basis to ensure that the Company continues to perform in line with shareholder expectations.

Management fees

As reported in the Interim Report a change to the management fee was negotiated during the period. The new management fee, effective from 1 March 2021, is a flat 0.45% of the value of the Company's assets under management, net of current liabilities other than short-term borrowings, less any cash up to the level of borrowings ("chargeable assets"). A fixed £150,000 fee will also be paid to the Manager to cover administration and company secretarial services. This resulted in a saving for shareholders of £269,000, on an annualised basis, compared to previous arrangements. This represents the second reduction in fees in 3 years and reflects the commitment shared by your Board and Manager to competitive cost ratios in your Company.

Annual general meeting and results webinar

The AGM will be held at 12.00 pm on Thursday, 16 December 2021. We encourage shareholders to either cast their votes by proxy, or to attend in person. The AGM will provide an opportunity for shareholders to ask questions of the board and the Manager although, as per previous years the Manager's presentation will be presented as a separate webinar in order to make it accessible a wider number of shareholders many of whom who find coming to London difficult.

The Manager's webinar will be broadcast on Tuesday, 30 November 2021 at 10.00 am, and all shareholders are encouraged to sign up, to hear the fund manager's view, and to ask questions of the fund manager. To sign up please visit   https://us02web.zoom.us/webinar/register/WN_IglSzqyqSQ2fXsupwo_opw .

In addition, the board would like to invite shareholders to get in touch via the Company Secretary with any questions or comments, so that the board can answer them in advance of the AGM. To email, please use: [e-mail] or write to us at the Company's registered office address (Company Secretary, Schroder Income Growth Fund plc, 1 London Wall Place, London EC2Y 5AU).

Outlook

In a year which began with the UK in the deepest recession on record it is encouraging to see the economy reopening and recovering. Most of our portfolio companies see revenues recovering and dividends being increased or reinstated. Your Manager is continuing to identify companies that have pricing power, unique assets and which in many cases are exposed to the structural tail winds that have resulted from the disruption caused by the lock downs.

While there are clear policy challenges for the Government, Bank of England and consumers, as the economy returns to growth and costs of living soar, I am pleased with the position the Company finds itself in. Following an extremely challenging 2020 it is encouraging to see such a strong recovery in capital values this year as well as a much improved income position.

Our Manager was more active than ever during the year in repositioning the portfolio to weather the new environment in which we find ourselves. The Manager will continue to manage the portfolio with a keen eye on the Company's investment objective: delivering both rising real levels of income to investors, and attractive capital returns. Given improved dividend receipts and healthy reserves, the board is confident that the Company will continue to deliver dividend growth in excess of inflation over the medium to long term.

Bridget Guerin

Chairman

11 November 2021

Manager's Review

The net asset value total return in the 12 months to 31 August 2021 was 34.4%. This compares to 26.9% from the FTSE All Share Total Return Index. The share price total return was 37.0% (source: Morningstar/Schroders).

Investment income for the Company rose 2.2%, which was better than predicted this time last year. For context, the UK equity market paid out a total of £78.3bn in dividends over the 12 months to end August 2021, which was 6.7% lower than the £83.9bn distributed in the prior 12 months.

The most significant impact on portfolio income over the period were the large payments made by mining holdings Rio Tinto and Anglo American. Both companies dramatically increased their ordinary dividend payments, as well as paying substantial special dividends, as a result of rising commodity prices (iron ore, copper, platinum group metals). This positive more than offset the impact of cuts to dividends from other holdings, as well as the continued non-payment of dividends from companies which have been particularly hard hit by the pandemic and associated restrictions. Holdings which reduced dividends materially, included oil producer Royal Dutch Shell, whose dividend payment was down 45%, and interdealer broker TP ICAP, who cut their dividend 55%, partly in order to finance its investment program in technology but also to assist the funding of an acquisition. Meanwhile, insurance company Prudential rebased its pay out 53% downwards, as it demerged its asset management arm M&G and US annuities business Jackson Financial to focus on growth opportunities in Asia.

A large number of holdings increased dividends modestly over the 12-month period. Stable growth and defensive names, such as business services company RELX, GP patient practice property group Assura, and household and consumer goods company Unilever, saw pay outs grow between 3% and 4%. Meanwhile, other financials holdings, such as Legal & General, Direct Line and M&G, as well as defence contractor BAE Systems, managed increases of up to 2%. Larger increases were received from alternatives asset manager Intermediate Capital Group (dividend up 10%) and speciality retailer and vet services business Pets at Home (raised its payments by 6%). Pharmaceutical holdings Astra Zeneca and GlaxoSmithKline, together with food retailer Tesco, maintained their dividend payments. Companies that were hard hit or were fearful of what the Covid-19 pandemic would bring initially, adjusted dividend payments downwards in the prior period but have seen some recovery and thus managed to increase dividends significantly from last year's levels. In the case of luxury goods company Burberry, this was above 2019 levels. Others, however, are still some way below their 2019 payouts despite significant annual increases. These included speciality chemical business Johnson Matthey, housebuilder Taylor Wimpey and student accommodation provider Unite.

We continued to maintain holdings in four companies which have paused payments of dividends due to the impact of the pandemic on their businesses. These are Empiric Student Property, leisure companies Hollywood Bowl and Whitbread, and travel business National Express. We believe these companies are strong winners in their sectors and we retain confidence in their ability to restart dividend payments, and return to attractive dividend levels, once economies are fully open again. We also maintained our position in global security services company G4S despite it not paying a dividend. The company received competing offers and we exited when it was bought by US peer, Allied Universal, in early 2021. We reinvested proceeds of this sale, as well as others, into a number of new holdings, some of which have paid a dividend in the period (such as Avast, Drax, Paypoint, QinetiQ, SThree and Workspace) and some which have not (such as 888, Bridgepoint, Convatec and Travis Perkins). We believe all of these companies have attractive prospects for both future capital growth and growth of income.

Market background

UK equities performed very well over the 12 month period. For most of the period, global markets were driven by a recovery in cyclical sectors. The outperformance of sectors such as miners, industrials, retail, real estate, energy, and financials reflected the powerful reflation and reopening trends set in train in November 2020 following news of highly effective Covid-19 vaccines. More defensive and staple areas, consumer staples and healthcare, lagged the rise in the market. While there is no doubt Covid-19 impacted the full 12 month period, later lockdowns and restrictions had a lesser impact on economic activity compared to those earlier in the pandemic as firms and individuals learnt to adapt their behaviours.

Merger and acquisition activity picked up strongly, with new bids across a variety of sectors. The cyclical recovery began to falter, however, towards the end of the period, partly due to a greater focus on inflation and any resulting central bank policy response.

Portfolio performance

The NAV total return outperformed the FTSE All-Share Index, with stock selection a notable driver and the portfolio's gearing proving a tailwind in a rising market. There was a smaller positive contribution from sector allocation.

	Impact
	(%)
FTSE All Share Index	26.9
Stock selection	3.7
Sector allocation	0.7
Gearing	3.8
Costs	-0.9
Residual	0.2
NAV total return	34.4

Source: Schroders, 12 months to 31 August 2021, Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Performance notably benefited from the pickup in merger and acquisition (M&A) activity seen over the period, with bids for significant portfolio positions accounting for around 10% of the portfolio in aggregate. Increased corporate activity has been a global phenomenon due to the abundance of private equity dry powder and the availability of cheap finance. In the UK, activity has been particularly strong due to the joint valuation attractions of the equity market and the currency to overseas and private buyers. Holdings in global security provider G4S, gambling companies William Hill and Gamesys, infrastructure company John Laing and global cyber security provider Avast were all bid for in the period. Other standout contributors to the portfolio's outperformance included Pets at Home, a speciality retailer and provider of vet and animal services, which was both a lockdown beneficiary (deemed an essential retailer) as well as a structural winner, due to the considerable growth in the pet care market. Meanwhile, alternative asset management company Intermediate Capital Group continued to grow strongly and performed well. As did leisure operator Hollywood Bowl, which benefited from the positive vaccine news and reduced Covid-19 restrictions allowing operations to restart.

From a sector perspective, the portfolio's higher-than-index exposure to the basic materials industry, which included holdings in mining companies Anglo American, Rio Tinto and BHP Billiton, was a positive, despite not holding Glencore. Anglo American, for example, is a well-diversified mining group exposed to both the macroeconomic recovery as well as the ingredients (copper and platinum group metals) required for a more sustainable world with a high growth pipeline. Having less exposure than the index to the more defensive consumer staples sector (in particular not owning Reckitt Benckiser, the maker of over the counter medicines and products) was positive as these more defensive growth companies lagged the rise in the market, having performed well in the early phase of the pandemic.

Top five stock contributors

		Weight
	Portfolio	relative to	Relative perfor-
	weight	index	mance	Impact
	(%)1	(%)1	(%)2	(%)3
G4S	2.1	2.0	43.5	2.6
Pets At Home	3.7	3.6	46.2	1.7
William Hill	0.5	0.4	30.1	1.6
Reckitt Benckiser	-	-1.9	-51.0	1.2
Anglo American	3.8	2.3	55.0	0.9

Source: Schroders, FactSet, for Schroder Income Growth Fund plc investment portfolio, 12 months to end August 2021.

¹ Average over period.

² Total return of the stock relative to FTSE All Share Total Return Index over the period.

³ Impact is the contribution to performance relative to the FTSE All Share Total Return Index. The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Detractors to portfolio performance included certain defensive and stable companies which had performed well for the portfolio in the prior year, such as GP patient practice property group Assura, defence contractor BAE Systems and pharmaceutical and consumer healthcare company GlaxoSmithKline. Our zero banks sector position detracted from performance as provisions made in the depth of the crisis proved overly cautious given the swifter bounce back in the economy and the success of the furlough scheme in containing unemployment. Whilst selection in investment banking and broking services was positive (see Intermediate Capital above), our holding in inter-dealer broker TP ICAP disappointed. Operating performance was lacklustre in large part due to central banks' polices, whilst the market reacted negatively to a rights issue to fund an acquisition to reposition the group towards more growth markets in financial data but which necessitated a cut in the dividend. We have retained our position for the time being as the shares are heavily out of favour and the operating environment may improve with a pick-up in inflationary pressures.

Bottom five stock contributors

		Weight	Relative
	Portfolio	relative to	perfor-
	weight	index	mance	Impact
	(%)1	(%)1	(%)2	(%)3
TP ICAP	1.5	1.4	-49.4	-0.9
Assura	2.3	2.2	-25.7	-0.8
GlaxoSmithKline	5.5	2.4	-21.7	-0.8
Glencore	-	-1.3	69.4	-0.6
BAE Systems	3.5	2.8	-12.0	-0.6

Source: Schroders, FactSet, for Schroder Income Growth Fund plc investment portfolio, 12 months to end August 2021.

¹ Average over period.

² Total return of the stock relative to FTSE All Share Total Return Index over the period.

³ Impact is the contribution to performance relative to the FTSE All Share Total Return Index. The securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

Portfolio activity

We were more active over this past year than we have been in recent history. There were two reasons for this. Firstly, there has been significant bid activity for certain large positions in the portfolio, which has necessitated the reinvestment of proceeds. Of the seven stock positions that we exited during the period, four were the result of bids (G4S, Gamesys, John Laing and William Hill). Secondly, we sought opportunities to reposition areas of the portfolio towards reopening and recovery plays at attractive long-term valuations and funded these purchases with a corresponding sale from the portfolio of British American Tobacco, a consumer staple company which had served the portfolio well in the early phase of the pandemic from a capital and income perspective. In the longer-term, we struggle to envisage a re-rating of the shares against a backdrop of greater focus on environmental, social and governance factors by investors, or a take-private solution given the size of the company and its level of indebtedness. We also sold out of oil and gas companies BP and Galp, reinvesting the proceeds into Royal Dutch Shell, which we believe is well-placed to transition to renewable energy whilst having a stronger balance sheet and asset mix (downstream and integrated gas assets). Additionally, the dividend has been reset to a sustainable level and the commodity price recovery suggests potential for capital returns to shareholders.

There were 16 new holdings in the fund over the period, of which 11 were mid caps. This broadly replaced the mid cap exposure which exited the portfolio due to bids. The remaining 5 were large cap stocks. Among our new positions, we have identified some stocks with unique assets, trading at attractive valuations and income prospects, such as power company Drax, which is set to play a key role in the UK's decarbonisation efforts over the coming decades. After the bid and our subsequent sale of scaled, differentiated online gaming company Gamesys, we reinvested the proceeds into 888, another gaming firm which is well-invested in technology to deliver an engaging online customer experience. We also added utility group SSE to the portfolio, which is well-placed to contribute to the energy transition through ongoing investment in electricity transmission/distribution and renewables. Additionally, we initiated a holding in Avast, a global consumer cyber security company, which has a strong franchise and robust medium-term growth outlook. More recently, the company has received an approach to merge with US peer NortonLifeLock.

We have also looked to gain further exposure to some of the most compelling structural growth trends. One example is our new holding in SThree, an international recruitment company predominantly operating in the science, technology engineering and mathematics (STEM) sectors. The company is exposed to long-term tailwinds associated with digital transformations across a broad set of industries. We have also invested in Workspace, an owner and operator of flexible office and workspaces, which we believe offers many attractions for companies and their employees in the future work environment. Meanwhile, our holding in construction and infrastructure company Balfour Beatty is exposed to governmental fiscal project spend in transport and renewable energy in the US. Additionally, Johnson Matthey, a speciality chemicals business supplying catalysts to the automotive and industrial process industries, is progressing with developments of new markets in key materials for electric vehicle batteries and hydrogen.

As economies reopened and began their recoveries from the pandemic, we sought exposure through investments in Travis Perkins, a beneficiary of buoyant housing, repair and maintenance activity; National Express, a bus and coach operator in UK and international markets, and 3i, an investment company with an attractive main asset - 'Action' - a discount retailer growing rapidly across Europe.

Lastly, we remain attracted by certain restructuring and turnaround situations that are stock specific and less dependent on the macro economic environment, such as Convatec, Paypoint and BT. Med-tech company Convatec has operationally underperformed its peers but looks set to benefit from its new management, who are executing a recovery plan, while also sitting in an attractive industry from a growth and returns perspective. Paypoint is a provider of in-store payment solutions for the growing convenience retail sector. Meanwhile, we believe there is an attractive opportunity in the fibreoptic business broadband rollout for BT and we are encouraged by the pricing power demonstrated in the consumer business.

Outlook

The Covid-19 pandemic has proved to be the ultimate exogenous shock - an unpredictable, global event that has brought economies to a standstill, one that has and continues to impact supply and demand, companies and consumers, in a multitude of ways.

Thanks to a successful vaccine rollout, we could have been forgiven for thinking that things would quickly improve. However, much like the car you leave in the garage over winter, getting started again when the climate improves is never going to be without issues. Whether it's a lack of semiconductors affecting car production or increased shipping costs more generally, numerous industries and companies are being adversely impacted by the bottlenecks and supply chain issues we are witnessing.

Labour inflation has compounded the issue with shortages of skilled workers in particular sectors. In the UK and Europe, the lack of heavy goods vehicle drivers has been notable. Looking forward, these wider supply issues could last until 2022 and cause more lasting inflationary pressures than central banks and governments would like. Among a host of important questions will be how governments assess the security of supply against cost-efficient global supply chains. As investors are increasingly contemplating a global shift for interest rates away from emergency settings, more interesting still is the question of how tightening policy (interest rates and taxation) would be timed and implemented. Tighten too soon and you risk curtailing the economic recovery from the pandemic. Tighten too late and you could see stagflation taking hold, where inflation persists but dampens demand and depresses growth. Governments and central banks will hopefully be looking back at lessons learned from the Global Financial Crisis.

Meanwhile, commodity prices, including those related to oil, gas, metals, sugar and coffee, have risen. Higher raw material costs can feed into steeper prices for producers and consumers, fuelling inflation. Gas prices in the UK, Europe and Asia have soared, compounded by low levels of inventory following last year's cold winter, increased demand worldwide and the switch to renewable energy. This last point highlights one of the few silver linings of the pandemic: the acceleration of disruptive forces that already existed in the realms of technology, energy transition and sustainability. We have already seen disruption to certain industries as individuals reassess priorities, work-life balances and their skillsets, leading to lower labour participation and high levels of vacancies and specific skills shortages. While some shortages and vacancies may be more temporary than others, the lasting "new-normal" behavioural changes will shape industries and provide investment opportunities. As discussed in the activity section above, we have positioned the portfolio to take advantage of a number of these emerging structural tailwinds.

After such a strong rise in markets from the lows of Spring 2020, we would expect markets' progress to become a bit trickier as they navigate the receding liquidity, rates risks, and a peaking of economic growth and earnings momentum. While uncertainties undoubtedly remain and we do not own a crystal ball, we continue to stick by our investment process, which has served our investment team well for over 20 years, and look to identify companies that we believe are well-placed to navigate many of these future challenges by possessing pricing power, unique assets and which are exposed to structural tailwinds.

Policy

Regardless of external conditions, our aims and our investment approach remain constant: to construct a diversified portfolio of mispriced opportunities capable of delivering both real growth of income and attractive capital returns. We remain bottom-up stock pickers looking for idiosyncratic investment opportunities in individual companies.

We continue to see a very attractive opportunity set of mispriced assets in the UK equity market, as the market as a whole, has been and continues to be out of favour with international investors.

Schroder Investment Management Limited

11 November 2021

Strategic Review

Principal risks and uncertainties

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the audit and risk committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust assessment at least annually. The last assessment took place in November 2021.

Although the board believes that it has a robust framework of internal control in place this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

Actions taken by the board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Emerging risks and uncertainties

During the year, the board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were political risk and climate change risk. The board has determined that these risks are worthy of close monitoring, although they do not meet the threshold for inclusion as principal risks at this time. The board receives updates from the Manager, Company Secretary and other service providers on other potential risks that could affect the Company.

Political risk includes the fallout from Brexit, trade wars and regional tensions. The board continues to monitor developments for the UK's departure from the European Union and to assess the potential consequences for the Company's future activities. The board is also mindful that changes to public policy in the UK could impact the Company in the future.

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The board notes the Manager has integrated ESG considerations, including climate change, into the investment process. The board will continue to monitor this.

*The "Change" column on the right highlights at a glance the board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased or decreased, and dashes show risks as stable.

Risk	Mitigation and management	Change (post mitigation and management)*
Strategic The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	The appropriateness of the Company's investment remit is periodically reviewed and success of the Company in meeting its stated objectives is monitored. Share price relative to NAV per share is monitored and the use of buy back authorities is considered on a regular basis. The marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.	-
The Company's cost base could become uncompetitive, particularly in light of open-ended alternatives.	The ongoing competitiveness of all service provider fees is subject to periodic benchmarking against its competitors. Annual consideration of management fee levels.	-
Investment management The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of the Manager's compliance with the agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets. The Manager also reported on the impact of COVID-19 on the Company's portfolio, and the market generally. Annual review of the ongoing suitability of the Manager, including resources and key personnel risk.	-
Market The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.	The risk profile of the portfolio is considered and appropriate strategies to mitigate any negative impact of substantial changes in markets are discussed with the Manager.	-
Currency Currency risk is the risk that changes in foreign currency exchange rates impact negatively the value or level of dividend of the Company's investments.	The Manager monitors the impact of foreign currency movements on the portfolio and is able to rebalance the portfolio towards stocks which are less impacted by changes in foreign currency exchange rates if required.	-
Custody Safe custody of the Company's assets may be compromised through control failures by the depositary.	The depositary reports on the safe custody of the Company's assets, including cash and portfolio holdings, which are independently reconciled with the Manager's records. The review of audited internal controls reports covering custodial arrangements is undertaken. An annual report from the depositary on its activities, including matters arising from custody operations is reviewed.	-
Gearing and leverage The Company utilises a credit facility. This arrangement increases the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings are imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of shareholders' funds.	-
Accounting, legal and regulatory In order to continue to qualify as an investment trust, the Company must comply with the requirements of section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	The confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published annual report are subject to stringent review processes. Procedures have been established to safeguard against disclosure of inside information.	-
Service provider The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, depositary and registrar. Failure of controls and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers are appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reports are provided by key service providers and the quality of services provided are monitored. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements.	-
Cyber The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information or disrupt operations.	Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack. In addition, the board received presentations from the Manager, the registrar and the safekeeping agent and custodian on cyber risk.	-

Risk assessment and internal controls review by the board

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the audit and risk committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

No significant control failings or weaknesses were identified from the audit and risk committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The board is satisfied that it has undertaken a detailed review of the risks facing the Company.

A full analysis of the financial risks facing the Company is set out in note 19 to the accounts on pages 51 to 55 of the annual report and accounts.

Viability statement

The directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 August 2021 and the potential impacts of the principal risks and uncertainties it faces for the review period. The directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively, following the implementation of their business continuity plans.

A period of five years has been chosen as the board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 18 and 19 of the annual report and accounts and in particular the impact of a significant fall in UK equity markets on the value of the Company's investment portfolio. The directors have considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary and on that basis consider that five years is an appropriate time period. The Directors also considered the beneficial tax treatment the Company is eligible for as an investment trust. If changes to these taxation arrangements were to be made it would affect the viability of the Company to act as an effective investment vehicle.

The directors also considered a stress test in which the Company's NAV dropped by 50% and noted that, based on the assumptions in the test, the Company would continue to be viable over a five year period. Based on the Company's processes for monitoring operating costs, the board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

Going concern

The Directors have assessed the principal risks, the impact of the emerging risks and uncertainties and the matters referred to in the viability statement. Based on the work the Directors have performed, they have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the period assessed by the Directors, being the period to 30 November 2022 which is at least 12 months from the date the financial statements were authorised for issue.

By order of the board

Schroder Investment Management Limited

Company Secretary

11 November 2021

Statement of Directors' Responsibilities in respect of the Annual Report and Accounts

The directors are responsible for preparing the annual report, and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the return or loss of the Company for that period. In preparing these financial statements, the directors are required to:

-  select suitable accounting policies and then apply them consistently;

-  state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;

-  make judgements and accounting estimates that are reasonable and prudent; and

-  prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The manager is responsible for the maintenance and integrity of the Company's webpages. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the annual report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Each of the directors, whose names and functions are listed on pages 21 and 22 of the annual report and accounts, confirm that to the best of their knowledge:

-  the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law), give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

-  the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the board

Bridget Guerin
Chairman

11 November 2021

Income Statement 

for the year ended 31 August 2021

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	47,565	47,565	-	(33,534)	(33,534)
Net foreign currency gains	-	5	5	-	6	6
Income from investments	9,432	1,832	11,264	9,225	-	9,225
Other interest receivable and similar income	-	-	-	10	-	10
Gross return/(loss)	9,432	49,402	58,834	9,235	(33,528)	(24,293)
Investment management fee	(592)	(592)	(1,184)	(660)	(660)	(1,320)
Administrative expenses	(382)	-	(382)	(321)	-	(321)
Net return/(loss) before finance costs and taxation	8,458	48,810	57,268	8,254	(34,188)	(25,934)
Finance costs	(88)	(88)	(176)	(157)	(157)	(314)
Net return/(loss) before taxation	8,370	48,722	57,092	8,097	(34,345)	(26,248)
Taxation	-	-	-	(55)	-	(55)
Net return/(loss) after taxation	8,370	48,722	57,092	8,042	(34,345)	(26,303)
Return/(loss) per share	12.08p	70.33p	82.41p	11.69p	(49.94)p	(38.25)p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no other items of other comprehensive income, and therefore the net return after taxation is also the total comprehensive income for the year.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.

Statement of Changes in Equity 

for the year ended 31 August 2021

	Called-up		Capital	Warrant	Share
	share	Share	redemption	exercise	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2019	6,869	7,404	2,011	1,596	34,936	139,482	12,160	204,458
Issue of new shares	35	866	-	-	-	-	-	901
Net (loss)/return on ordinary activities	-	-	-	-	-	(34,345)	8,042	(26,303)
Dividends paid in the year	-	-	-	-	-	-	(8,732)	(8,732)
At 31 August 2020	6,904	8,270	2,011	1,596	34,936	105,137	11,470	170,324
Issue of new shares	42	1,179	-	-	-	-	-	1,221
Net return on ordinary activities	-	-	-	-	-	48,722	8,370	57,092
Dividends paid in the year	-	-	-	-	-	-	(8,722)	(8,722)
At 31 August 2021	6,946	9,449	2,011	1,596	34,936	153,859	11,118	219,915

Statement of Financial Position

at 31 August 2021

	2021	2020
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	234,811	185,331
Current assets
Debtors	2,796	1,594
Cash at bank and in hand	7,718	3,877
	10,514	5,471
Current liabilities
Creditors: amounts falling due within one year	(25,410)	(20,478)
Net current liabilities	(14,896)	(15,007)
Total assets less current liabilities	219,915	170,324
Net assets	219,915	170,324
Capital and reserves
Called-up share capital	6,946	6,904
Share premium	9,449	8,270
Capital redemption reserve	2,011	2,011
Warrant exercise reserve	1,596	1,596
Share purchase reserve	34,936	34,936
Capital reserves	153,859	105,137
Revenue reserve	11,118	11,470
Total equity shareholders' funds	219,915	170,324
Net asset value per share	316.59p	246.71p

These accounts were approved and authorised for issue by the board of directors on 11 November 2021 and signed on its behalf by:

Bridget Guerin
Chairman

Registered in England and Wales as a public company limited by shares

Company registration number: 03008494

Notes to the accounts

for the year ended 31 August 2021

1.  Accounting Policies

(a)  Basis of accounting

Schroder Income Growth Fund plc ("the Company") is registered in England and Wales as a public company limited by shares. The Company's registered office is 1 London Wall Place, London EC2Y 5AU.

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in October 2019. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating for at least 12 months from the date of approval of these accounts. In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's low level of debt and other payables; the low level of operating expenses, comprising largely variable costs which would reduce pro rata in the event of a market downturn; and that the Company's assets comprise cash and readily realisable securities quoted in active markets.

The Company has not presented a statement of cash flows, as it is not required for an investment trust which meets certain conditions.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 August 2020.

No significant judgements, estimates or assumptions have been required in the preparation of the accounts for the current or preceding financial year.

2.  Taxation

	2021	2020
	£'000	£'000
(a) Analysis of charge in the year:
Irrecoverable overseas tax	-	55
Tax charge for the year	-	55

(b)  Factors affecting tax charge for the year

The tax assessed for the year is lower (2020: higher) than the Company's applicable rate of corporation tax for the year of 19.0% (2019: 19.0%)

The factors affecting the current tax charge for the year are as follows:

	2021			2020
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return/(loss) on ordinary activities before taxation	8,370	48,722	57,092	8,097	(34,345)	(26,248)
Net return/(loss) on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2020: 19.0%)	1,590	9,257	10,847	1,539	(6,526)	(4,987)
Effects of:
Capital return/loss on investments	-	(9,038)	(9,038)	-	6,371	6,371
Tax relief on overseas tax suffered	(4)	-	(4)	(6)	-	(6)
Income not chargeable to corporation tax	(1,726)	(348)	(2,074)	(1,674)	-	(1,674)
Unrelieved expenses	140	129	269	141	155	296
Irrecoverable overseas tax	-	-	-	55	-	55
Tax charge for the year	-	-	-	55	-	55

(c)  Deferred taxation

The Company has an unrecognised deferred tax asset of £8,229,000 (2020: £5,985,000) based on a main rate of corporation tax of 25% (2020: 19%). In its 2021 budget, the government announced that the main rate of corporation tax (for all profits except ring-fence profits) for the fiscal year beginning on 1 April 2023 would increase to 25%.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company's status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

3.  Dividends

(a)  Dividends paid and declared

	2021	2020
	£'000	£'000
2020 fourth interim dividend of 5.1p (2019: 5.2p)	3,521	3,572
First interim dividend of 2.5p (2020: 2.5p)	1,732	1,717
Second interim dividend of 2.5p (2020: 2.5p)	1,732	1,717
Third interim dividend of 2.5p (2020: 2.5p)	1,737	1,726
Total dividends paid in the year	8,722	8,732

	2021	2020
	£'000	£'000
Fourth interim dividend declared of 5.3p (2020: 5.1p)	3,682	3,521

All dividends paid and declared to date have been paid, or will be paid, out of revenue profits.

(b)  Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("Section 1158")

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £8,370,000 (2020: £8,042,000).

	2021	2020
	£'000	£'000
First interim dividend of 2.5p (2020: 2.5p)	1,732	1,717
Second interim dividend of 2.5p (2020: 2.5p)	1,732	1,717
Third interim dividend of 2.5p (2020: 2.5p)	1,737	1,726
Fourth interim dividend of 5.3p (2020: 5.1p)	3,682	3,521
Total dividends of 12.8p (2020: 12.6p) per share	8,883	8,681

4.  Return/(loss) per share

	2021	2020
	£'000	£'000
Revenue return	8,370	8,042
Capital return/(loss)	48,722	(34,345)
Total return/(loss)	57,092	(26,303)
Weighted average number of ordinary shares in issue during the year	69,279,644	68,771,540
Revenue return per share	12.08p	11.69p
Capital return/(loss) per share	70.33p	(49.94)p
Total return/(loss) per share	82.41p	(38.25)p

5.  Called-up share capital

	2021	2020
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
Ordinary shares of 10p each
Opening balance of 69,038,343 (2020: 68,688,343) shares	6,904	6,869
Issue of 425,000 (2020: 350,000) new shares	42	35
Total of 69,463,343 (2020: 69,038,343) shares	6,946	6,904

During the year, 425,000 new shares, nominal value £42,500, were issued to the market at a premium to NAV per share to satisfy demand. These shares were issued at an average price of 287.40p per share, for a total consideration of £1,221,000.

6.  Net asset value per share

	2021	2020
Net assets attributable to shareholders (£'000)	219,915	170,324
Shares in issue at the year end	69,463,343	69,038,343
Net asset value per share	316.59p	246.71p

7.  Related party transactions

Details of the remuneration payable to directors are given in the Directors' Remuneration Report on page 32 of the annual report and accounts and details of directors' shareholdings are given in in the Directors' Remuneration Report on page 33 of the annual report and accounts. Details of transactions with the Manager are given in note 16 of the annual report and accounts. There have been no other transactions with related parties during the year (2020: nil).

8.  Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the Company's valuation policy are given in note 1(b) on page 44 of the annual report and accounts.

At 31 August 2021, all investments in the Company's portfolio are categorised as Level 1 (2020: same).

9. Status of announcement

2021 Financial Information

The figures and financial information for 2021 are extracted from the Report and Accounts for the year ended 31 August 2021 and do not constitute the statutory accounts for the year. The 2021 Report and Accounts include the Report of the Independent Auditors which is unqualified.

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

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