Annual Financial Report

RNS Number : 2938F

Schroder Oriental Income Fund Ltd

04 November 2022

 

ANNUAL REPORT AND ACCOUNTS

Schroder Oriental Income Fund Limited (the "Company") hereby submits its Annual Report and Accounts for the year ended 31 August 2022, 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 2022 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/orientalincome .  Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/2938F_1-2022-11-3.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]

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Chairman's Statement

Dear Shareholder

The Company's financial year, to 31st August 2022, saw us witness two very different environments in the global economy and financial markets. The autumn period through to the end of 2021 saw continued strong economic growth, growing inflationary pressures, bond market stability and equity market euphoria. 2022 started with a sharp reversal of market sentiment, exacerbated in February by the invasion of Ukraine. As global energy prices and inflation rose ever higher, so did bond yields and equities fell sharply.

Against this backdrop, the Company produced an encouraging, albeit modest, positive net asset value ("NAV") total return of 2.5%. In 2021, Asia had not experienced the same euphoria in equity markets as elsewhere, as the shadow of China's policy choices lay across the region. Similarly, the falls in 2022 have been more muted than in the US and Europe but, nonetheless, the MSCI AC Pacific ex Japan Index (in sterling terms) still fell by 7.7% over the financial year to 31st August.

As I have mentioned before, this index is an interesting yardstick but it is little more than that. It is not the key driver of how our portfolio is invested. Instead, Richard Sennitt and Abbas Barkhordar seek to build a diversified portfolio of quality, income generating companies based on fundamental stock analysis. They do not slavishly follow macro themes. However, the reasons for the material outperformance during the year are noteworthy and are well explained in the Manager's Review on page 6 of the 2022 Annual Report. What I do want to highlight is the growing dividend stream received by the Company which has underpinned another increase in our own dividend to shareholders to 11.40 pence per share. During 2020 and 2021, we dipped modestly into our revenue reserves until the COVID storm abated. We believed that, with generally low payout ratios and good fundamentals, our portfolio companies would recommence dividend growth when confidence or, in certain cases, regulation permitted. So it has proven and the Company's dividend for this financial year is back, once again, to being well covered, allowing us to replenish our revenue reserve as well as increase the total dividend to you. This year's increase represents an 8.6% rise in the dividend since last year and is the 16th consecutive dividend increase since the Company's launch in 2005.

That said, a modest health warning is warranted. The Company's revenue is accounted for in sterling and our dividend to you is paid in sterling. Our underlying revenue from our portfolio has grown well in local currency terms this year, which is heartening, but the significant weakness of sterling during the year (and subsequently) has flattered both our NAV performance and our revenue when translated into sterling terms. We don't seek to predict or to hedge the vagaries of sterling but the performance of the currency can have a material impact on shareholder total returns and our revenue. For many years it has been a wind at our back. Any reversal of recent sterling weakness would, conversely, act as a headwind in the future.

So far, I have focused on our NAV performance. Our share price has tracked this fairly closely during the financial year and generated a total return (dividends reinvested) of 1.2%. However, the discount that arose in 2020 has persisted, ending the period at 4.8%. This follows many years when the Company's share price traded at a modest premium and the Company issued shares at a premium. Emerging or widening discounts are not unique to the Company: the average discount across the investment trust sector is now wider than during the global pandemic. However, as I noted in this year's Interim Report, the Board does not believe that our discount is justified given our strong performance, attractive yield and relevance within client portfolios. So we have been willing to continue to repurchase shares when there has been a mismatch of supply and demand in the market. During the financial year, a total of 6,265,000 shares were repurchased at an average discount of 5.1%. Since the financial year end, markets have fallen again and volatility has risen. Discounts of investment trusts have widened further, sometimes markedly. Our discount has crept out to around 5-7%. We have redoubled our efforts accordingly and will continue to repurchase shares when we believe that it is in the best interests of shareholders.

In addition to financial performance, investors are increasingly focused on how results are achieved, to ensure that their funds are being invested in responsible companies and that returns are sustainable. You will be pleased to hear that this is also a focus of the Board and the Manager, and details of how Environmental, Social and Governance ("ESG") considerations are factored into investment decisions is covered on pages 14 to 17 of the 2022 Annual Report.

Aside from this, there are two other items that I would like to highlight. Firstly, as announced in the Interim Report published in May, Schroders has agreed to reduce the performance fee payable by the Company. This has had no impact on the year just past because the total return was below the hurdle rate to trigger any performance fee. But, the benefit of the increase in that hurdle from 7% to 8% and the reduction of the cap to 0.65% (from 0.75% previously) will be felt in future years. It represents a notable financial improvement to shareholders and the Board would like to thank Schroders for this.

Secondly, we have been delighted to welcome Isabel Liu to the Board. Isabel joined in November 2021 and is already making a notable contribution to our discussions. Her extensive knowledge of China and the region is generating lively and relevant debate around the board table. Our succession planning over the last five years has enabled us to build a genuinely diverse board with different experience, backgrounds and perspectives. We were supportive of the FCA's initiative to enshrine diversity into the Listing Rules and are pleased to be able to adopt these changes early. Our report on diversity can be found on page 19 of the 2022 Annual Report. This year also saw us conduct a board review, externally facilitated by Stogdale St James. I am pleased to be able to report that this found that your board achieves the high standards we outline in our Purpose, Values and Culture on page 18 of the 2022 Annual Report.

Looking forward, it is easy to despair. Without doubt, the economic environment will get worse before it gets better. A global recession seems likely, even if it may prove shallow. But, financial markets are forward looking and have already discounted much bad news. Looking more specifically at Asia, caution seems warranted in relation to investment in China. Politics, zero-COVID and economic vulnerability, especially to a highly leveraged property market, suggest a bumpy ride ahead for Chinese investments. But aside from China, the region represents something of a haven and, whilst China is important, it is not all of Asia. Many economies outside of China are thriving and represent increasingly attractive alternatives for production, investment and growth. Equity valuations in the region are not demanding and offer interesting opportunities. Our portfolio is well diversified, tilted away from China and focused on companies with strong and reliable fundamentals. Of course, in the short term, equities could fall further. Yet, we see no reason why our portfolio should not prosper in the medium term and generate growing dividends and attractive total returns. Recent events in the UK place into even sharper focus the importance of a globally diversified portfolio for all types of investors, including income investors. Schroder Oriental Income seems to me to have a well deserved place amongst that diversification.

The Company's Annual General Meeting will be held at 4.30pm on Monday 5th December 2022 at Schroder's offices, 1, London Wall Place. Our investment managers, Richard Sennitt and Abbas Barkhordar will be giving presentations at an investor webinar on Tuesday 29th November 2022 at 10.30 am (which can be signed up to via the Company's website, http://www.schroders.co.uk/orientalincome), and at the Company's Annual General Meeting and I would encourage you to come and listen to them. We hope to welcome many of you to the AGM in person and to hear your thoughts and questions.

Paul Meader

Chairman

3 November 2022

Manager's Review

The net asset value per share of the company recorded a total return of +2.5% over the twelve months to end August 2022. Four interim dividends have been declared totalling 11.40p (10.50p last year).

The past year has been a tumultuous period for markets with a number of headwinds globally and regionally weighing on sentiment. Geopolitical tensions worsened with the shock Russian invasion of Ukraine as well as ongoing tensions between the US and China and increasing concerns surrounding Taiwan. Inflation, in part driven by the war in Ukraine and in part by shortages of both goods and labour, rose materially and saw aggressive responses from Central Banks which in turn focussed attention back on to the state of the slowing global economy and its knock-on to earnings. In Asia, the period was dominated by concerns over the health of the Chinese economy with its 'zero-COVID' policy exacerbating ongoing worries over an already weak property market. Increased levels of regulation in China (particularly amongst the internet names) also weighed on sentiment. Later in the period, some easing measures announced by the Chinese government, together with an apparent shift in focus towards 'stability', looked to underpin sentiment.

With the rise in and potential for a more sustained higher level of inflation globally, there was renewed concern over higher interest rates. This saw some of the more highly-rated growth stocks come under pressure, especially the less profitable names, with value stocks outperforming growth stocks over the period. This favoured income stocks. Towards the end of the period there were some hopes that inflation was nearing a peak and this would elicit a pivot from the US Federal Reserve to a more dovish stance. However, this proved to be relatively short-lived.

The divergence of returns across the regional markets continued to be high, with China lagging for the reasons mentioned above. Korea, often a market correlated with global growth expectations, was also weak with the memory sector names falling on concerns over falling demand as well as some of the more highly rated internet names under pressure. Of the larger markets Taiwan, Australia and Singapore all outperformed. Australia and Singapore were aided by a strong recovery in the financials and materials sectors. IT stocks in Taiwan underperformed as concerns over the impact of a slowing consumer would have on end demand, with rising prices eating into real incomes. The other ASEAN markets performed better, helped initially by the potential for post-pandemic re-opening, as well as value stocks outperforming, in which they tend to have higher weightings. Indonesia, in particular, stood out as a beneficiary of higher commodity prices.

Sector returns across the region also saw a large spread. Beneficiaries of rising commodity prices did well, especially energy names, and higher interest rates meant financials also outperformed. Sectors with a high growth component sold off, including the healthcare names dragged down by the high-multiple biotechnology stocks, as did a number of the e-commerce and internet related names largely found in the consumer discretionary and communication services sectors. Information technology sold off towards the end of the period as there was increasing concern over a slowdown in consumer demand at a time when some of the bottlenecks around supply were clearing.

The recovery in earnings over the past year has, in part, started to be reflected in higher dividend payments. Areas of improvement included Australian resource names buoyed by higher commodity prices, as well as some of the real estate companies and financials in Hong Kong and Korea. Australian and Singaporean banks also announced increased dividends in part due to regulators becoming more comfortable with the macro backdrop and in part due to the earnings headwinds starting to abate. Concerns over renewed outbreaks of COVID, supply chain disruption and a volatile geopolitical backdrop understandably did see caution from some companies in areas which were more dependent on the opening up of economies or whose earnings were more impacted by shortages.

Positioning and Performance

The Company's positive NAV total return of +2.5% over the year compared favourably with that of the reference benchmark which fell -7.7% over the year. Although growth expectations have started coming down, the initial recovery in global growth, seen as pandemic restrictions started to be lifted in many economies, combined with interest rates starting to move up was a relatively positive backdrop for the fund as it favoured some of the more economically sensitive sectors, such as financials and materials, at the expense of the more expensive growth names. Our overweight to, and stock selection in, financials and materials added value. In financials this was driven by the positions in banks which in general benefitted from a firming of interest rate expectations combined with their low valuations. The Australian resources exposure was also positive thanks to higher commodity prices driven by the global recovery. This saw the stocks generate substantial levels of free cash flow which in turn led to record dividend payments. A lack of exposure to the higher growth names was also positive with rising rates weighing on valuations. In particular, internet and healthcare names, which tend to pay little or no dividend and where the fund has no exposure, lagged in the period.

Our overweight to information technology was a headwind as the sector saw negative earnings revisions, but our positions added value thanks to strong stock selection in some of the Taiwanese names, which more than offset the negative from being overweight the sector. The fund's real estate holdings also added value thanks to being overweight as well as from positive stock selection. A lack of Chinese private developers and exposure to some of the Singaporean names that, in part, benefitted from 'opening up' helped here.

From a regional perspective, positioning in Singapore and China were the major contributors to relative performance. In China, both the significant underweight to, and stock selection in, the market added value, as the ongoing issues highlighted above impacted stocks. Here, the internet names were among those that bore the brunt of the sell down. In Singapore, stock selection was very strong owing to our positioning in banks, telcos and property. Those areas also saw the Hong Kong overweight add value. Our small overweight to Australia, being the best performing of the larger markets, helped but again it was stock selection in materials and financials that had the bigger impact. Whilst stock selection was also strong in Korea and Taiwan, our underweight to some of the other ASEAN markets, in particular Malaysia and the Philippines detracted.

The geographic exposure in the Company's portfolio continues to be mainly spread between Taiwan, Australia, Singapore, Hong Kong, Korea and China. China remains a substantial underweight but is, in part, offset by the overweight to Hong Kong. Over the period we did reduce our exposure to Hong Kong by reducing exposure to some of the property names that had performed relatively well and by selling our Macau gaming stock early on in the period. Here, concerns over regulation together with ongoing uncertainty as to when travel restrictions would be relaxed due to further COVID outbreaks were the driver. Elsewhere, we added to Singapore, where we are overweight, and also to a limited extent to Korea.

As throughout much of 2021, portfolio moves tended to take advantage of the valuation spread that we saw across industries, reducing those stocks that had performed particularly strongly and now looked more fully valued in favour of those names that had lagged and looked more attractive from a valuation perspective. We continued in aggregate to add to financials where we are overweight with valuations still looking relatively attractive given higher interest rates and subdued credit costs. Here we added to Korean, Australian and Indonesian names, albeit these were partly funded from names elsewhere including in Taiwan. Real estate continues to be an important sector in the fund but we did reduce the size of that overweight, taking profits in Hong Kong and China names that had performed relatively well despite concerns over the Chinese property sector. We own one Chinese name which has performed strongly but do not own any of the private residential developers where the problems have been centred. We have also taken money out of some of the Singapore REITs that are sensitive to rising rates and have been experiencing large increases in costs.

The other area where we have reduced exposure is in the materials sector where sales have been focussed in the Australian names. The sector has performed strongly over the last year, in part helped by the surge in commodity prices. Information technology is the biggest sectoral exposure in the fund after financials. Although near term earnings have been seeing downward revisions we continue to see some strong long-term drivers for growth around digitisation and the roll out of 5G and the 'Internet of Things' and our focus remains on the Taiwanese and Korean companies.

Investment Outlook

Slowing global and weak Chinese growth, elevated geopolitical tensions around Ukraine and Taiwan and rising interest rates, combined with ongoing downward revisions to earnings, mean that headwinds for markets are likely to continue. However, some areas of the markets are starting to look more attractive from a longer term perspective having derated markedly.

Globally, consumption is under pressure as rising prices eat into real incomes. This, allied with the shift away from consumption of goods to consumption of services as the majority of economies open up post-pandemic, has seen the demand for goods falter. This in turn has started to see inventories accumulate across supply chains globally, leading to a fear that we will see a painful period of inventory adjustment on top of an already slowing global economy. From an Asian perspective, this is likely to have an impact on exports and from our portfolio's perspective is most likely to evidence itself in the technology hardware sector. To an extent, markets have already started to discount this with technology names in both Korea and Taiwan already underperforming despite earnings holding up relatively well for now. In our view, valuations are now starting to factor in a slowdown but not yet a "hard landing" which, although not our base case, is a possibility. In general, the stocks we own in this sector are leaders in their area with high market shares and strong balance sheets on attractive valuations, so in our view should prove to be relatively resilient. Although we did take some money out of the sector earlier in the year, we remain overweight.

The other trend that the pandemic and Ukraine crisis have reinforced has been the need for increased self sufficiency. The need for diversified supply chains was something that the COVID crisis had highlighted, given the disruption the pandemic caused. With security of supply already a focus in areas such as semiconductor production thanks to ongoing US-China tensions and the concentration of advanced manufacturing in Taiwan, the Ukraine conflict has also highlighted the vulnerability of nations to energy supply dependency. The recently concluded Party Congress in China saw President Xi mention 'security' 91 times in his opening speech (according to Bloomberg) compared with 55 mentions five years ago, reinforcing a view that China will continue to intensify efforts around 'self sufficiency' in core technologies and strategic industries. All this will likely lead to further localisation of supply chains and an era of reduced globalisation.

Geopolitics will continue to remain a risk, including surrounding Taiwan as highlighted by the recent visit by Nancy Pelosi to the island, which has resulted in increased tensions between the US and China. Other actions such as the recent moves by the US to restrict China's ability to purchase and manufacture high-end semiconductors combined with the upcoming mid-term elections in the US mean it is unlikely we will see any meaningful relaxation in tensions near term and this is likely to continue to weigh on sentiment.

From an Asian perspective the biggest impact on growth is coming from the 'zero-COVID' policy in China, where the lockdowns have had a severe impact on growth as well as exacerbating the weakness in the property sector. It is not clear how long this policy will remain in place but for now there is unlikely, in our view, to be any major volte-face. The recent Party Congress gave no indication when the policy might be eased and whilst vaccination rates in China are high and comparable to most developed nations, a large tranche of the elderly still remain unvaccinated making it difficult for them to open up until this is rectified. Although a wholesale opening up is unlikely near term, it is possible that some more incremental easing measures occur but in our view China's consumption and growth will continue to remain lacklustre as regular mass testing and sporadic targeted lockdowns weigh on sentiment.

Given this, we have started to see a number of actions to loosen policy including rate cuts, easing of property purchase restrictions and increases in infrastructure spending and fiscal incentives. In our view, it is likely that we will see further easing measures but whilst the 'zero-COVID' policy remains their impact for the large part is likely to resemble pushing on a string. Nevertheless, given how poorly the market has performed, together with the move to an easing bias there (whilst most of the rest of the world are tightening), as well as a tentative easing of the severity of lockdowns, there is potential for the market to experience better periods of performance. From our positioning perspective we have been very underweight China for some time and although we continue to look for new opportunities given the falls, we remain so and believe that the challenges that were there for the market remain.

Longer term, although Xi's confirmation at the Congress as the Party's General Secretary for his third five year term was not a surprise, the make-up of the Politburo Standing Committee ("PSC") (and Politburo) was decidedly one-sided being dominated by Xi loyalists, further cementing his power within the Party. The lack of countervailing voices within the new PSC potentially heightens policy risk and likely means that many of the challenges brought about by increased regulation will persist, with the narrative around areas such as 'common prosperity' continuing to weigh on the potential returns of parts of the private sector. All this means one shouldn't necessarily use a mean reversion argument alone when it comes to valuation.

Sector-wise, aside from information technology, financials remain an important overweight. Here banks, in our view, still remain attractive in aggregate on the back of benefits from rising rates and low valuations. However, given the backdrop of rising rates in most markets combined with slowing growth there is a risk that if rates move up faster than expected it could start to impact asset quality, offsetting the benefit of expanding margins, so we remain selective. Underweights are largely found in some of the more 'defensive' areas such as utilities, consumer staples and healthcare where valuations are generally, in our view, quite full.

While recent events described above don't paint a particularly optimistic picture, this has in part been reflected in market action with valuations today looking much less frothy than they did a year ago. Nevertheless, the US Federal Reserve being more aggressive on rates near term is clearly a headwind, given its near term impact on growth and earnings. However, this in turn should start to cap long-term inflationary expectations which will pave the way for lower rates at some point in the future. Until then, it is likely that we see further downward revisions to earnings and a period of inventory adjustment amongst companies to reflect the slower growth and hopefully put them in a position to start to grow earnings once more. Given overall aggregate valuations for the region are now trading at or below long-term averages, this does set up a more constructive backdrop for Asian markets next year, barring a global hard landing or a more extreme geopolitical risk event.

As we have discussed previously, it is our belief that Asia remains an attractive source of equity income, potentially providing diversification for some UK investors seeking income as we saw through the initial wave of COVID. For many companies across the region, dividend payments have recovered along with the recovery in earnings seen over the last year. In the medium- and long-term, dividends tend to follow earnings and earnings have recovered materially from the COVID lows. As described above, earnings growth this year will likely face some downward pressures which may impact dividends, particularly in some of the more cyclical areas including resources and information technology. However, it should not be forgotten that overall payout ratios in Asia do not look extended versus some other markets and corporates in Asia remain relatively lowly geared. From an overall fund distribution perspective, the other dynamic to be cognisant of is sterling, whose direction will obviously impact the size of translated dividends, with a stronger Sterling acting as a headwind. Finally, it is worth highlighting that whilst inflation is rising faster than expected is not great for equities in the short term, longer-term real asset income sources should look attractive versus fixed income alternatives.

To conclude, it is worth remembering that as investors we buy companies not countries. We are mindful of the impact political and macroeconomic factors can have on equities and returns, but we are bottom-up stock-pickers first and foremost, focusing on the company's return prospects and valuation. We do not try to pick companies which will do well based purely on a particular macro environment which we have forecast; rather we try to pick well-managed companies with attractive and potentially growing distributions, which have structural advantages allowing them to survive (and hopefully thrive!) in as wide a range of external conditions as possible. Therefore, a focus on attractive bottom-up ideas, in our view, remains essential.

Schroder Investment Management Limited

3 November 2022

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 review at least annually. The last assessment took place in October 2022.

Although the Board believes that it has a robust framework of internal controls 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. The arrows in the Change column indicate if the Board thinks the risk has increased, decreased or stayed the same during the year.

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. The most significant was climate change risk. The Board has determined that this risk is worthy of close monitoring.

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 as an emerging risk.

*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)*
Geo-Political Risks
Political developments globally might materially affect the ability of the Company to achieve its investment objective.	In addition to the Ukraine war, the Board monitored key political developments in the Asia Pacific region including US/China tension, the political situation in Hong Kong, Taiwan and political developments in mainland China. The Board and the portfolio manager periodically meet with the Manager's economists to gauge the likelihood and impact of certain political changes.	é Political developments, including in China.
Market Risks
The Company is exposed to the effect of market  fluctuations due to the nature of its business. A significant fall in underlying corporate earnings and/or 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. The Manager seeks to invest in companies with strong balance sheets and sustainable business models.	é The extreme market volatility seen recently.
Currency
The Company is exposed to the effect of currency fluctuations due to the nature of its business. The Company invests predominantly in assets which are denominated in a range of currencies. Its exposure to changes in the exchange rate between sterling and other currencies has the potential to have significant impact on returns and the sterling value of dividend income from underlying investments.	The risk profile of the portfolio is considered and appropriate strategies to mitigate negative impact of substantial changes in currency are discussed with the Manager. The Company has no formal policy of hedging currency risk but may use foreign currency borrowings or forward foreign currency contracts to limit exposure. The Company does not hedge against sterling.	é
Investment Performance
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 mandate and the long-term investment strategy is periodically reviewed and the success of the Company in meeting its stated objectives is monitored. Share price relative to NAV per share is monitored by the Board as a key performance indicator and is reviewed against the Company's peers on a regular basis. The use of buy back authorities is considered on a regular basis. The Manager and Corporate Broker monitor market feedback and the Board considers this at each quarterly meeting. Marketing and distribution activity is actively reviewed. Proactive engagement with shareholders.	-
The Manager's investment strategy and levels of resourcing, 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 agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are 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.	-
Competitiveness
The Company's fees could become uncompetitive against its peer group and against open-ended alternatives	The Management Engagement Committee reviews fees paid to the Manager at least annually. Ongoing monitoring of fees charged by other service providers takes place alongside an annual review of the Company's Ongoing Charges figure. The Board approves significant non-routine expenses.	-
Gearing and leverage
The Company utilises credit facilities. These arrangements increase 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 the Company's net assets.	-
Environmental, social and governance
Underestimating the increasing impact of ESG factors on investment performance, and potentially demand for the Company's shares.	The Manager has implemented a comprehensive ESG policy which is outlined in detail on pages 14 to 17 of the 2022 Annual Report . The Manager reports on its ESG engagement at regular board meetings. The Board ensures that ESG factors are incorporated into reports to shareholders.	é Scrutiny of ESG issues has increased, together with the potential for these to affect the value of invested companies.
Service provider performance
The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls, including as a result of fraud, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers 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 their services is monitored, including an annual presentation to the Audit and Risk Committee chair and other directors from key risk and internal controls personnel at the Company's main service providers. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, is undertaken. Service providers' internal controls reports continue to be robust, as businesses gradually return to physical workplaces.	-
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, unauthorised payments or inability to carry out operations in a timely manner.	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 receives 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 20 to the accounts on pages 61 to 66 of the 2022 Annual Report.

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 2022 and 3 November 2022 and the potential impact 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. This time period also reflects the average hold period of an investment.

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 22 to 24 of the 2022 Annual Report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio. The directors have also 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.

The directors have also considered a stress test which represents a severe but plausible scenario along with movement in foreign exchange rates. This scenario assumes a severe stock market collapse and/or exchange rate movements at the beginning of the five year period, resulting in a 50% fall in the value of the Company's investments and investment income and no subsequent recovery in either prices or income in the following five years. It is assumed that the Company continues to pay an annual dividend in line with current levels and that the borrowing facility remains available and remains drawn, subject to the gearing limit.

The Company's investments comprise highly liquid, large, listed companies and so its assets are readily realisable securities and could be sold to meet funding requirements or the repayment of the gearing facility should the need arise. There is no expectation that the nature of the investments held within the portfolio will be materially different in the future.

The operating costs of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position. Furthermore, the Company has no employees and consequently no redundancy or other employment related liabilities.

The Board reviews the performance of the Company's service providers regularly, including the Manager, along with internal controls reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. The Board also considers the business continuity arrangements of the Company's key service providers.

The Board monitors the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls at its quarterly meetings.

Although there continue to be regulatory changes which could increase costs or impact revenue, the directors do not believe that this would be sufficient to affect its viability.

The Board has assumed that the business model of a closed ended investment company, as well as the Company's investment objective, will continue to be attractive to investors. 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.

Based on the above 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 3 November 2023 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

3 November 2022

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

The directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.

Guernsey company law requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors should:

-  select suitable accounting policies, and apply them consistently;

-  present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

-  provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards ("IFRS") is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance;

-  state that the Company has complied with IFRS, 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

-  make judgements and estimates that are reasonable and prudent.

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008 (as amended). 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.

Each of the directors, whose names and functions are listed on pages 26 and 27 of the 2022 Annual Report, confirms that, to the best of their knowledge:

-  the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union and with The Companies (Guernsey) Law, 2008 (as amended) and in accordance with the requirements set out above, and give a true and fair view of the assets, liabilities, financial position and the net return of the Company;

-  the Strategic Review 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; and

-  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.

So far as each of the directors are aware, there is no relevant audit information of which the Company's auditors are unaware, and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditors is aware of that information.

On behalf of the Board

Paul Meader

Chairman

3 November 2022

Statement of Comprehensive Income

for the year ended 31 August 2022

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments at fair value through profit or loss	-	(7,810)	(7,810)	-	121,017	121,017
Net foreign currency (losses)/gains	-	(6,572)	(6,572)	-	395	395
Income from investments	39,047	1,448	40,495	32,394	219	32,613
Other income	24	-	24	1	-	1
Total income/(loss)	39,071	(12,934)	26,137	32,395	121,631	154,026
Management fee	(1,545)	(3,604)	(5,149)	(1,584)	(3,697)	(5,281)
Performance fee	-	-	-	-	(5,636)	(5,636)
Other administrative expenses	(1,114)	(4)	(1,118)	(1,033)	(5)	(1,038)
Profit/(loss) before finance costs and taxation	36,412	(16,542)	19,870	29,778	112,293	142,071
Finance costs	(161)	(376)	(537)	(94)	(220)	(314)
Profit/(loss) before taxation	36,251	(16,918)	19,333	29,684	112,073	141,757
Taxation	(2,146)	-	(2,146)	(2,002)	-	(2,002)
Net profit/(loss) and total comprehensive income	34,105	(16,918)	17,187	27,682	112,073	139,755
Earnings/(loss) per share	12.94p	(6.42)p	6.52p	10.30p	41.70p	52.00p

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The " Revenue and Capital" columns represent supplementary information prepared under guidance set out in the statement of recommended practice for investment trust companies (the "SORP") issued by the Association of Investment Companies in July 2022.

The Company does not have any income or expense that is not included in net profit for the year. Accordingly the "Net profit" for the year 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.

The notes on pages 52 to 66 of the 2022 Annual Report form an integral part of these financial statements.

Statement of Changes in Equity

for the year ended 31 August 2022

		Treasury	Capital
	Share	share	redemption	Special	Capital	Revenue
	capital	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2020	234,347	(2,155)	39	150,374	233,856	30,238	646,699
Repurchase of ordinary shares into treasury	-	(7,345)	-	-	-	-	(7,345)
Net profit and total comprehensive income	-	-	-	-	112,073	27,682	139,755
Dividends paid in the year	-	-	-	-	-	(27,690)	(27,690)
At 31 August 2021	234,347	(9,500)	39	150,374	345,929	30,230	751,419
Repurchase of ordinary shares into treasury	-	(16,491)	-	-	-	-	(16,491)
Net (loss)/profit and total comprehensive income	-	-	-	-	(16,918)	34,105	17,187
Dividends paid in the year	-	-	-	-	-	(27,968)	(27,968)
At 31 August 2022	234,347	(25,991)	39	150,374	329,011	36,367	724,147

The notes on pages 52 to 66 of the 2022 Annual Report form an integral part of these financial statements.

Balance Sheet

at 31 August 2022

	2022	2021
	£'000	£'000
Non current assets
Investments at fair value through profit or loss	750,372	774,425
Current assets
Receivables	4,355	6,881
Cash and cash equivalents	14,155	16,147
	18,510	23,028
Total assets	768,882	797,453
Current liabilities
Payables	(44,735)	(46,034)
Net assets	724,147	751,419
Equity attributable to equity holders
Share capital	234,347	234,347
Treasury share reserve	(25,991)	(9,500)
Capital redemption reserve	39	39
Special reserve	150,374	150,374
Capital reserves	329,011	345,929
Revenue reserve	36,367	30,230
Total equity shareholders' funds	724,147	751,419
Net asset value per share	277.24p	280.94p

The financial statements were approved by the Board of Directors on 3 November 2022 and signed on its behalf by:

Director

The notes on pages 52 to 66 of the 2022 Annual Report form an integral part of these financial statements.

Registered in Guernsey as a public company limited by shares

Company registration number: 43298

Cash Flow Statement

for the year ended 31 August 2022

	2022	2021
	£'000	£'000
Operating activities
Profit before finance costs and taxation	19,870	142,071
Add back net foreign currency losses/(gains)	6,572	(395)
Losses/(gains) on investments at fair value through profit or loss	7,810	(121,017)
Net sales of investments at fair value through profit or loss	16,211	16,858
Decrease/(increase) in receivables	1,032	(1,719)
(Decrease)/increase in payables	(5,676)	5,753
Overseas taxation paid	(2,229)	(2,131)
Net cash inflow from operating activities before interest	43,590	39,420
Interest paid	(509)	(310)
Net cash inflow from operating activities	43,081	39,110
Financing activities
Bank loans repaid	-	(5,304)
Repurchase of ordinary shares into treasury	(17,172)	(6,402)
Dividends paid	(27,968)	(27,690)
Net cash outflow from financing activities	(45,140)	(39,396)
Decrease in cash and cash equivalents	(2,059)	(286)
Cash and cash equivalents at the start of the year	16,147	17,028
Effect of foreign exchange rates on cash and cash equivalents	67	(595)
Cash and cash equivalents at the end of the year	14,155	16,147

Dividends received during the year amounted to £41,682,000 (2021: £30,823,000) and bond and deposit interest receipts amounted to £15,000 (2021: £1,000).

The notes on pages 52 to 66 of the 2022 Annual Report form an integral part of these financial statements.

Notes to the Accounts

1.   Accounting Policies

(a)   Basis of accounting

The financial statements have been prepared in accordance with the Companies Guernsey Law 2008 and International Financial Reporting Standards ("IFRS"), which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC"), that remain in effect and to the extent that they have been adopted by the European Union.

Where consistent with the requirements of IFRS, the directors have sought to prepare the accounts on a basis compliant with presentational guidance set out in the statement of recommended practice for investment trust companies (the "SORP") issued by the Association of Investment Companies in July 2022.

The policies applied in these financial statements are consistent with those applied in the preceding year.

The Company's share capital is denominated in sterling and this is the currency in which its shareholders operate and expenses are generally paid. The Board has therefore determined that sterling is the functional currency and the currency in which the accounts are presented. Amounts have been rounded to the nearest thousand.

The financial statements have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss. The directors believe that the Company has adequate resources to continue operating to 31 December 2023, which is at least 12 months from the date of approval of these financial statements. In forming this opinion, the directors have taken into consideration: the controls and monitoring processes in place; the Company's 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. In forming this opinion, the directors have also considered any potential impact of the COVID-19 pandemic, climate change, inflation, high interest rates and the energy crisis on the viability of the Company. Further details of directors' considerations regarding this are given in the Chairman's Statement, Portfolio Managers' Review, Going Concern Statement, Viability Statement and under the Emerging Risks and uncertainties heading on page 22 of the 2022 Annual Report.

The principal accounting polices adopted are set out below.

2.  Taxation

(a)  Analysis of tax charge for the year

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Irrecoverable overseas tax	2,146	-	2,146	2,002	-	2,002
Taxation for the year	2,146	-	2,146	2,002	-	2,002

The Company became resident in the United Kingdom for taxation purposes, with effect from 1 September 2020. The Company has no corporation tax liability for the year ended 31 August 2022 (2021: nil).

(b)  Factors affecting tax charge for the year

The tax assessed for the year ended 31 August 2022 is lower (2021: lower) than the Company's applicable rate of corporation tax for that year of 19.0% (2021:19%). The factors affecting the tax charge for the year are as follows:

	2022			2021
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return/(loss) before taxation	36,251	(16,918)	19,333	29,684	112,073	141,757
Net return/(loss) before taxation multiplied by the Company's applicable rate of corporation tax for the year of 19.0% (2021:19%)	6,888	(3,215)	3,673	5,640	21,294	26,934
Effects of:
Capital losses/(returns) on investments	-	2,732	2,732	-	(23,068)	(23,068)
Revenue not chargeable to corporation tax	(6,406)	(275)	(6,681)	(5,568)	(42)	(5,610)
Expenses disallowed	-	1	1	-	1	1
Unrelieved expenses	-	316	316	-	1,772	1,772
Marginal Tax Relief	(267)	267	-	-	-	-
Double Tax Relief	(215)	174	(41)	(72)	43	(29)
Irrecoverable overseas tax	2,146	-	2,146	2,002	-	2,002
Taxation for the year	2,146	-	2,146	2,002	-	2,002

(c)  Deferred taxation

The Company has an unrecognised deferred tax asset of £2,745,000 (2021: £2,332,000) based on a main rate of corporation tax of 25%. In its 2020 budget, the UK government announced that the main rate of corporation tax would increase to 25% for the fiscal year beginning on 1 April 2023.

The deferred tax asset has arisen due to the 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 financial statements.

The Company was granted status as an investment trust company by HMRC effective from 1 September 2020, and intends to continue to meet the conditions required to retain that status. Therefore, no provision has been made for deferred UK capital gains tax on any capital gains or losses arising on the revaluation or disposal of investments.

3.  Dividends

(a)  Dividends paid and declared

	2022	2021
	£'000	£'000
2021 fourth interim dividend of 4.80p (2020: 4.60p)	12,727	12,404
First interim dividend of 1.90p (2021: 1.90p)	5,013	5,100
Second interim dividend of 1.90p (2021: 1.90p)	4,997	5,097
Third interim dividend of 2.00p (2021: 1.90p)	5,231	5,089
Total dividends paid in the year	27,968	27,690
	2022	2021
	£'000	£'000
Fourth interim dividend declared of 5.60p (2021: 4.80p)	14,627	12,838

Under the Companies (Guernsey) Law 2008, the Company may pay dividends out of both capital and revenue reserves, subject to passing a solvency test. However all dividends paid and declared to date have been paid, or will be paid, out of revenue profits. The Company has passed the solvency test for all dividends paid to date.

The fourth interim dividend declared in respect of the year ended 31 August 2021 differs from the amount actually paid due to shares repurchased and cancelled after the balance sheet date but prior to the share register record date.

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

The Company was granted status as an investment trust company by HMRC effective from 1 September 2020, and intends to continue to meet the minimum distribution requirements of Section 1158, in order to retain that status. Those requirements 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 £34,105,000 (2021: £27,682,000).

	2022	2021
	£'000	£'000
First interim dividend of 1.90p (2021: 1.90p)	5,013	5,100
Second interim dividend of 1.90p (2021: 1.90p)	4,997	5,097
Third interim dividend of 2.00p (2021: 1.90p)	5,231	5,089
Fourth interim dividend of 5.60p (2021: 4.80p)	14,627	12,838
Total dividends of 11.40p (2021: 10.50p)	29,868	28,124

4.  Earnings/(loss) per share

	2022	2021
	£'000	£'000
Revenue profit	34,105	27,682
Capital (loss)/profit	(16,918)	112,073
Total profit	17,187	139,755
Weighted average number of Ordinary shares in issue during the year	263,653,736	268,751,860
Revenue earnings per share	12.94p	10.30p
Capital (loss)/earnings per share	(6.42)p	41.70p
Total earnings per share	6.52p	52.00p

5.  Share capital

	2022	2021
	£'000	£'000
Ordinary shares of 1p each, allotted, called-up and fully paid:
Opening balance of 267,468,024 (2021: 270,268,024) shares, excluding shares held in treasury	224,847	232,192
Repurchase of 6,265,000 (2021: 2,800,000) shares into treasury	(16,491)	(7,345)
Subtotal of 261,203,024 (2021: 267,468,024) shares, excluding shares held in treasury	208,356	224,847
10,030,000 (2021: 3,765,000) shares held in treasury	25,991	9,500
Closing balance of 271,233,024 (2021: 271,233,024) shares	234,347	234,347

The ordinary shares rank pari passu, and each share carries one vote in the event of a poll at a general meeting. The Company has authority to issue an unlimited number of ordinary shares.

During the year, the Company purchased 6,265,000 of its own shares, nominal value £62,650 to hold in treasury for a total consideration of £16,491,000 representing 2.3% of the shares outstanding at the beginning of the year. The reason for these share purchases was to seek to manage the volatility of the share price discount to net asset value per share.

6.  Net asset value per share

	2022	2021
Net assets attributable to shareholders (£'000)	724,147	751,419
Shares in issue at the year end	261,203,024	267,468,024
Net asset value per share	277.24p	280.94p

7.   Disclosures regarding financial instruments measured at fair value

The Company's portfolio of investments, which may comprise investments in equities, equity linked securities, government bonds and derivatives, are carried in the balance sheet at fair value. Other financial instruments held by the Company may comprise amounts due to or from brokers, dividends and interest receivable, accruals, cash at bank and drawings on the credit facility.

For these instruments, the balance sheet amount is a reasonable approximation of fair value.

The investments are categorised into a hierarchy comprising the following three levels:

Level 1 - valued using quoted prices in active markets.

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted market 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.

Details of the valuation techniques used by the Company are given in note 1(c) on page 52 of the 2022 Annual Report.

At 31 August 2022, the Company's investment portfolio was categorised as follows:

	2022
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Investments in equities and equity linked securities	730,624	19,748	-	750,372
Total	730,624	19,748	-	750,372

Level 2 investments comprise one holding in Midea Group warrants 21/06/2023. There were no transfers between Levels 1, 2 or 3 during the year ended 31 August 2022.

	2021
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Investments in equities and equity-linked securities	769,397	-	5,028	774,425
Total	769,397	-	5,028	774,425

Level 3 investments comprise one holding in global depositary receipts which delisted during the year. There were no other transfers between Levels 1, 2 or 3 during the year ended 31 August 2021.

Status of announcement

2022 Financial Information

The figures and financial information for 2022 are extracted from the Annual Report and Accounts for the year ended 31 August 2022 and do not constitute the statutory accounts for the year. The 2022 Annual 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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