Annual Financial Report
Securities Trust of Scotland plc (the "company")
Legal Entity Identifier: 549300UZ1Y7PPQYJGE19
Annual Financial Results
Year to 31 March 2020
The financial information set out below does not constitute the company's statutory accounts for the financial year ended 31 March 2020 or financial year ended 31 March 2019 but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered following the company's annual general meeting.
The auditor's have reported on those accounts; their report was unqualified. The auditor drew attention to a material uncertainty in relation to a material uncertainty in relation to going concern, without qualifying their report, and did not contain statements under s498(2) or (3) Companies Act 2006.
A copy of the annual report and accounts has also been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The annual general meeting of the company will be held at 12.30pm on 24 September 2020, at Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. The full notice of the meeting can be found on the company's website ( www.securitiestrust.com ).
The unedited full text of those parts of the annual report and accounts for the year ended 31 March 2020, which are required to be published are set out on the following pages.
Financial Highlights
|
Total returns‡ˆ (including reinvested dividends) |
|
|
|
|
Year ended 31 March 2020 % |
Year ended 31 March 2019 % |
|
Net asset value per share* |
(8.3) |
11.4 |
|
Peer group† |
(9.5) |
8.5 |
|
Share price |
2.7 |
9.6 |
|
Key data |
|
|
|
|
As at 31 March 2020 |
As at 31 March 2019 |
|
Net asset value per share (cum income)ˆ |
162.72p |
183.21p |
|
Net asset value per share (ex income)ˆ |
160.62p |
181.22p |
|
Share price |
168.50p |
169.50p |
|
Premium/(discount)ˆ |
3.55% |
(7.48%) |
|
Average premium/(discount) for the 12 week period to 31 March** |
1.81% |
(4.94%) |
|
Net assets |
£170,465,000 |
£191,444,000 |
|
Income |
|
|
|
|
Year ended 31 March 2020 |
Year ended 31 March 2019 |
|
Revenue return per share |
6.46p |
6.23p |
|
Dividend per share |
6.41p |
6.25p |
|
Ongoing chargesˆ# |
|
|
|
|
Year ended 31 March 2020 |
Year ended 31 March 2019 |
|
Ongoing charges |
0.9% |
0.9% |
‡The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or peer group. ˆPlease see annual report for definitions of Alternative performance measures.
*The net asset value (NAV) per share total return is calculated using cum-income NAV with dividends reinvested.
†Please see annual report for details on the company's peer group.
**Based on ex income net asset value. This is an Alternative performance measure, please see annual report for definition.
#Ongoing charges (as a percentage of shareholders' funds) are calculated using average net assets over the period. The ongoing
charges figure has been calculated in line with the AIC's recommended methodology.
Five-year record
Annual total returns with dividends reinvested over 12 month periods to 31 March
|
|
2020 |
2019 |
2018 |
2017 |
2016 |
|
Net assetvalueper share |
(8.3%) |
11.4% |
(1.1%) |
26.7% |
0.0% |
|
SharePrice |
2.7% |
9.6% |
0.2% |
27.7% |
(2.2%) |
Source: Martin Currie Investment Management Limited.
CHAIRMAN'S STATEMENT
Given the current circumstances that are enforcing significant change to all aspects of economic and social activity it is appropriate to deal with the issues that will be of most concern to shareholders before reviewing the returns for the year to 31 March 2020.
First, your board wishes to reassure shareholders that the business continuity arrangements of your investment manager, Martin Currie, have proven to be robust and reliable. The asset management process has continued seamlessly and your portfolio management team is working well from their remote locations and continues actively and effectively to manage the portfolio during these volatile markets.
Second, the board is satisfied that the continuity arrangements of key suppliers to the company, including the registrar, depositary, custodian, auditors and stockbroker are working well.
The outlook for company dividends has never been more uncertain. Companies in receipt of State loans to underwrite furloughed employees have delayed or cancelled their scheduled dividend payments. Many other companies have chosen not to pay dividends in order to conserve cash. Others are being encouraged by regulators to withhold dividend payments. Companies have also chosen to cancel previously announced dividends and your company has not been immune to this trend.
These are testing times to manage for an investment trust with an objective of achieving rising income and long-term capital growth. The board would like to emphasise to shareholders first its policy and second of the benefits conferred by the investment trust structure.
It is the intention of the board and manager to seek, as far as possible, to at least maintain in the future the dividend payment to shareholders at the 6.41p level just announced in respect of the financial year to 31 March 2020.
We have confidence in the ability to deliver on that statement for a number of reasons. The portfolio is actively managed and your manager has already demonstrated that the portfolio has "outperformed" the dividend environment to date and is well capable of continuing to do so. The global remit of the company confers a significant benefit over single country income funds. Your manager has a wide range of countries, sectors and companies to select from and the breadth of opportunity allows significant diversification to be achieved.
The investment trust structure creates flexibility in the pursuit of long-term growth of dividends. Your company has in the past, and may in the future, used its revenue reserves to help smooth payments over time. In 2012 the company amended its articles of association to allow the payment of dividends from capital and in 2015 the board indicated that, if necessary, this could be used to smooth dividend payments over time. A small proportion of the dividend in 2019 was paid from capital reserves and shareholders should be reassured that distributable capital reserves per share are currently 43.9p and if required these may be accessed.
These are very difficult times for income investors. Other sources of income are proving less reliable - many asset classes have found it harder to sustain revenue and dividend payments than equity orientated investment trusts. Bond yields are exceptionally low and central banks have reduced interest rates to almost nominal levels.
The board and portfolio manager are fully aware of the importance of the dividend payment in these trying times and will work to the best of their abilities to deliver on shareholder requirements.
Post year end event
On 2 June 2020 the board was informed that the company's named investment manager, Mark Whitehead, and two other members of the global income team had submitted their resignations to Martin Currie. The board has been assured by Martin Currie that the individuals will work for the duration of their notice period of six months and will continue to provide a professional service to Securities Trust of Scotland. The board is comfortable with this commitment and satisfied as to the management arrangements in the short term.
The departure of the majority of the global equity income management team is a significant development and the board has seriously to consider the company's management arrangements.
Consequently, a process has been initiated to seek and consider the range of options for the future management of the company. The Board is being advised by JP Morgan Cazenove in this process. Whatever option the Board adopts will maintain full value of the assets of the Trust and, if appropriate, approval will be sought from shareholders for the recommended outcome.
In order to maintain the best commercial interests of shareholders the Board concluded that initiating a notice period on the incumbent manager was the most appropriate action. The notice period is 6 months and commenced on 3 June 2020.
This is an unwelcome development but Shareholders should be reassured that your Board is committed to finding the best value outcome by conducting a thorough and professional review of all potential options for the company
Review of the year to 31 March 2020
As you will be aware the return was determined by the sharp falls in stock markets across the world in the last six weeks of the financial year. This is in addition to the events of a year that included the threats and reality of a US/Chinese trade & tariff war; an oil price and production standoff between Russia and Saudi Arabia, Brexit and a UK general election. While relevant and important at the time these factors have paled in significance in the shadow of COVID-19.
The net asset value (NAV) total return for the year was -8.3% which in itself is disappointing but compares favourably with the equivalent return from the peer group which was -9.5%
It is most encouraging that the share price total return for the year was +2.7% as the share rating moved from a discount of 7.48% at the start of the year to a premium of 3.55% at the end. This rerating is a reflection of consistent relative outperformance and an increased and well delivered marketing spend which has attracted greater demand for the company's shares.
It is particularly pleasing that while 435,613 shares were bought back into Treasury in the first nine months of the company's year (at an average discount of 3.57%), 700,000 were issued from Treasury in the final quarter at an average premium of 1.58%. The earnings per share for the year were 6.46p, an increase of 3.7% on those in the previous year.
Revenue benefited from the weakness of sterling over the period, a factor that increases the sterling value of overseas dividend income. Options income was £890,000 for the year, 33.0% higher than in the previous year. The increase in volatility in markets created more opportunities to participate in option writing and your manager took advantage of the opportunities available employing the low risk strategy that has been in place since his appointment.
It is particularly pleasing to see an increase in earnings during a year in which the manager was able to continue the policy of seeking to invest in higher quality companies with lower, but more sustainable, dividend yields. This is an ongoing objective and improves the long-term dividend growth potential of the portfolio. There is a short-term cost however, being a lower level of income as higher yielding companies are sold and replaced with lower yield investments.
Dividend
The board is pleased to declare a fourth quarterly interim dividend of 2.06p which will be paid on 31 July 2020 to shareholders on the register on 10 July 2020. The exdividend date will be 9 July 2020. The total dividend for the year is therefore 6.41p per Ordinary Share, an increase of 2.6% on the 6.25p paid in respect of the previous year.
Your board is delighted to be in a position to increase the dividend in the current environment and have it fully covered by earnings for the year.
Environmental, Social & Governance (ESG)
Your board believes that ESG considerations are increasingly important and relevant. Positive behaviour by companies in these respects adds to shareholder value over the longer term. This is an aspect of the investment process that your manager has long championed and in which it is recognized as having market leading credentials on a global basis. Martin Currie is Triple A+ rated by the UN supported Principles of Responsible Investment (PRI). The manager has actively engaged with many companies in the portfolio during the past year and the board receives regular reports on the manager's activities in this area. It is important to emphasise that well applied ESG policies are likely to be additive to long term shareholder returns and it is pleasing to report that your manager is well regarded and highly competent in this important field.
Board
I became chairman on 17 September 2019, succeeding Rachel Beagles who stepped down from the board having served for 9 years, the last two of which as chairman. The board would like to thank Rachel for her work and commitment over her tenure. The board is committed to maintaining the highest standards of corporate governance, and I would encourage you to read the corporate governance report for details of the changes implemented during the year.
Annual General Meeting (AGM)
The Annual General Meeting is scheduled to take place on 24 September 2020 at the offices of Martin Currie in Edinburgh. In view of the current restrictions regarding social distancing it is highly unlikely that the AGM will be held in its usual format. The board encourages all shareholders to lodge their votes by proxy and will abide with advice on attendance at the AGM when we have more clarity on the correct protocol.
Outlook
The immediate outlook is highly uncertain as the economic implications of the restrictions imposed to control the COVID-19 pandemic work through to the real economy. Your board is encouraged that the investment approach adopted by your manager has always focused on balance sheet strength, credit risk analysis, cash flow and the dividend sustainability of existing and potential investments. Never has such analysis been more pertinent. The global remit of your company is also a source of comfort as the portfolio has the ability to diversify away from those countries demonstrating greatest pressure on corporate dividends. Finally the investment trust structure gives the board flexibility in achieving its objective of maintaining its own dividend payment to shareholders.
Don't miss our updates
The company's award winning website at securitiestrust.com is a comprehensive source of information and includes regular portfolio manager updates and outlook videos, monthly performance factsheets, interactive market analyses and independent research reports. I recommend that you subscribe for regular email updates that will keep you abreast of key information and thank you, on behalf of the board, for your continued support.
I conclude by wishing shareholders and their families all the very best of health in these trying circumstances.
John Evans
1 July 2020
MANAGERS REVIEW
Market review
Looking back, it has certainly been one of the most eventful periods in a generation. Throughout, political uncertainty abounded, in the forms of Brexit negotiations, a UK General Election and a trade war between China and the US. All of these adversely affected the global economy, causing activity and sentiment to fall as we progressed through 2019. This also caused corporate earnings growth to slow markedly. Despite all of these headwinds, equity markets had largely performed exceptionally well. That is, until 20 February this year, when over a three-week period, developed equity markets posted the most aggressive falls in modern history as governments 'locked down' their citizens to control the transmission of the COVID-19 pandemic.
As the company entered the new fiscal year in April 2019, global equity markets had just chalked up a very strong period. This was somewhat at odds with the economic backdrop. At that time, some feared that the US economy was vulnerable to a significant slowdown, due to overheating in 2018 from the fiscal stimulus injected. Labour cost pressures for corporates, excessive inventories and a splurge in capital expenditures in 2018 were beginning to normalize, leading to below-trend spending and production.
In response, the US Federal Reserve unexpectedly flipped from its hawkish monetary policy stance to begin a new interest rate cutting cycle. Falling bond yields and dovish monetary policy then created easier financial conditions stoking bullish sentiment for risk assets. In May, President Trump raised tariffs on US$200 billion of Chinese goods from 10% to 25% as he felt China had reneged upon the terms of already agreed deals. China of course, retaliated, slapping tariffs on US$60 billion of US goods in early June. These actions were poor for market sentiment and we saw some volatile days in equity markets in May as a result. In June, we saw a rebound in sentiment as markets became optimistic of a further monetary loosening response from the Fed to tackle the mid-cycle slow down.
At the end of June, during the Osaka summit, Presidents Trump and Xi Jinping announced a truce after extensive talks, with prior tariffs remaining in force but agreement reached to halt the implementation of any new tariffs. This also involved a slight climb down from the US on its position on Huawei (the US officially classified Huawei as a national security threat during 2019), but still restricted the company doing business with US companies due to violations of US sanctions against Iran.
However, the optimism was short-lived, as in early August President Trump announced another round of 10% tariffs on the remaining US$300 billion of Chinese imported goods. China once again responded, this time with its central bank allowing the renminbi to fall to its lowest point since 2008, which it hoped would boost demand for Chinese products across the globe.
In the UK, Theresa May announced she would step down as UK Prime Minister, sparking a leadership race fought throughout June and early July, culminating in Boris Johnson taking over No. 10 on 24 July. Speculation at the time centred on Boris Johnson pursuing a hard Brexit. It was feared that this might invoke parliamentary intervention to vote against a no-deal outcome, with a real prospect of a snap general election and perhaps even a new Brexit referendum vote for later in the year. This uncertainty weighed heavily on business and consumer sentiment causing a slowdown in economic growth in the UK.
The paralysis in the UK Parliament continued unabated throughout the summer and autumn, as Boris Johnson looked to put together an improved withdrawal deal with the EU, this time with better terms on the Irish backstop which was ultimately the undoing of Theresa May's original draft. This failed to be passed in parliament and Boris Johnson then called a General Election for 12 December in a bid to unlock the constitutional stalemate.
In the autumn, trade tensions and monetary policy were easing significantly which, underpinned the equity markets. But the macro economic data continued to sour. Germany fell into technical recession and the rest of Europe struggled to produce any meaningful growth. As we entered 2020, economists and investors were optimistic for a rebound in global macro activity with some green shoots emerging. Economic data such as the Purchasing Manager's Index (PMI), a survey which provides information about current and future business conditions in the manufacturing and services industries, seemed to be bottoming out. However, noise concerning COVID-19 began to escalate in the news wires early in the year as it took hold in China. Chinese equity markets began to extend loses and the poor sentiment filtered out into other North Asian and emerging markets.
Although China quickly managed to control the spread of the virus, causing its equity market to rally hard as it had done following previous outbreaks, its economy will not be spared this year. Chinese companies' enviable position in global value chains may well be its Achilles' heel, as its customers in the West are now shut down and otherwise unable to operate normally, hence driving negative year-on-year sales growth for the next few quarters.
At first, developed equity markets took a sanguine view of COVID-19 and continued to perform well. As we progressed through February, however, it became clear that COVID-19 was spreading in other countries at a terrifying speed. On 20 February, investors gave up hope that the virus outbreak would be confined mostly to China, and thereby only causing a ripple in global economic and corporate activity. By 16 March, markets had fallen from their peak by over 32% in sterling terms. With the realisation dawning that Europe and North America were not going to escape the tidal wave of economic calamity, investor sentiment collapsed. Fear reached an all-time high as measured by the VIX index and panic was indiscriminate.
Performance for the portfolio since the market peak on 20 February has been mixed. Our mid-capitalisation stocks and those with a value style, particularly those that are more sensitive to the real economy, have been particularly weak, as were those companies whose dividend is likely to be cut due to their end markets collapsing thus severing revenues. By contrast consumer staples, telecoms, real estate and healthcare stocks all performed better relative to those more cyclically exposed. At the beginning of March, Russia and Saudi Arabia also announced their failure to agree oil production cuts which sent the oil price into freefall. We have held only one oil stock, Chevron which was weak as a result of the oil price collapse. However, we do believe this stock is able to continue to pay a dividend as it carries less financial gearing than others in the sector.
At the end of the fiscal year, the chronic impact of the pandemic's supply and demand shock is still paralysing global economies. Economic activity is spiralling lower, unemployment soaring past the levels seen in the Global Financial Crisis and human society and its welfare is at a point of extreme pressure. But this has been met so far, with a massive fiscal and monetary response from governments. Altogether, the various support and stimulus packages announced across the world, are approaching 5% of global GDP. This injection of liquidity has been undertaken to keep citizens at home to protect them and their healthcare systems from the virus. But, perhaps of equal importance, it's also to ensure their respective economies can continue to function, thereby reducing the probability of a protracted recession or even an economic depression.
Portfolio Review
The NAV of the company produced a total return of -8.3% in sterling terms for the fiscal year. This put the company in the second quartile of the composite peer group over the same period which, includes over a hundred comparable global equity income products using an open- or closed-ended structure. The median of this peer group returned -9.5%. The share price of your company fared better, producing a positive total return of 2.7% for the same period under review. The fall in the company's NAV was unfortunately experienced due to the sharp drop in equity markets which commenced at the end of February and extended into the first three weeks of March. The underlying portfolio of investments performed defensively, but the gearing we had in place worked against us in falling markets reducing the overall NAV total by -1.2% for the year.
From a regional perspective, North America provided the most positive performance. The portfolio's average weighting to the region throughout the period was 47%, with technology name Microsoft, WEC Energy Group, and mobile telephony towers business Crown Castle all performing strongly in absolute terms. The worst region was Europe, which on average composed 46% of the portfolio over the period.
Stocks that led the most negative absolute returns included: Continental, a producer of tyres and technologies for the electrification of cars and light trucks; Airbus, the French manufacturer of commercial aircraft; and advertising agency Publicis. The leading sectors in terms of absolute performance were information technology, utilities and real estate. The sectors that produced negative returns included financials, industrials, materials and consumer discretionary. The latter group being more cyclically-facing sectors that investors have de-rated in anticipation of earnings coming under severe pressure as we move into a recession.
The best-performing stock in the portfolio over the past year has been Microsoft - the largest holding in the portfolio. We did trim the position during the period, reducing its weighting down from 6.5% to 5.9%. Microsoft is well positioned for ramping-up public cloud adoption, with large distribution channels and installed customer base, combined with improving margin support. Revenue drivers included its cloud computing service Azure (through which Microsoft is emerging as a leader in public cloud storage), its data centre offering (primarily through share gains and positive pricing trends), its Office 365 software (base user growth and peruser pricing lift) as well as the integration of LinkedIn. All of which should help enable durable double- digit revenue and dividend growth over the next three years.
There is no doubt that this crisis has had an unprecedented effect on companies in many sectors. Liquidity and balance sheet strength have now become highly prized. Companies with any doubt surrounding how long they are be able to generate revenues for have been quick to announce the cancelations of their dividends. We have also seen businesses with significant debt levels cut dividends quickly, as they look to conserve cash to meet their liabilities. That's why we spend so much time trying to make sure that our holdings have the financial strength to weather a typical downturn and continue to pay the dividend.
Recent measures have seen governments and regulators advising companies to cease dividend payments if they are furloughing staff. While we understand the logic behind asking banks with systemic risk to cease dividend payments, we are concerned this action may be somewhat heavy handed in other contexts. Politically, the government seems to be siding with the view that shareholders are faceless capitalists, large city institutions, bankers, hedge fund managers and generally financial services employees and therefore enforcing dividend holidays is the equivalent of the 'victimless crime'. This ignores the fact that many shareholders are the beneficiaries of pension funds along with charities. We are concerned that society, in its time of need, will turn to charities that will no longer be able to provide the vulnerable with the support they desperately need.
Looking at the UK, some commentators are predicting a 40% cut to the FTSE All Share 2020 dividends. The UK and European dividend futures have also all fallen substantially. We have long been extoling the virtues of a global approach to dividend investing due to the concentration of the UK market, with the top 10 companies producing around 50% of the total index dividend stream. But more importantly, this concentration is very sensitive to the economy, the bulk being delivered from miners, banks and energy companies.
The banks have just been asked to stop paying dividends and the oil companies in the UK carry far too much debt and will surely have to cut dividends if the oil price remains below US$50 barrel for the foreseeable future. As one would expect, defensives such as utilities, consumer staples and healthcare have been a relative safe haven. We have recently had limited healthcare exposure. We were concerned coming into a US election year that there would be bipartisan agreement to push for reform of the healthcare system and unilateral pressure on reducing drugs prices, causing the sector to underperform this year. Fear surrounding the virus has simply overwhelmed this view. But Merck and Sanofi have performed well for the portfolio throughout this crisis.
Activity
Earlier in the year we bought a position PepsiCo. Should the company be able to defend its North American Beverage (NAB) business (33% of the total) and grow the rest then it can continue delivering organic revenue growth of ~4%. Combined with net productivity gains, this could mean consistent cash flow supporting strong dividend-per-share growth. This is a high-quality business model operating a strong balance sheet, though the costs of growth are rising at least in the short-term requiring capital investment. Catalysts we are looking for include organic revenue growth and we need to keep a keen eye on Quaker Foods and NAB remaining flat to positive. Finally, we need to see margin improvement at NAB and international. Risks include a challenging backdrop with some jurisdictions seeing volatility (currency fluctuations in particular), new or increased regulations and taxes, as well as difficulties in navigating disruption of the retail and consumer landscape.
More recently, this has proved a defensive business and performed well through the COVID crisis. We also started a position in Verizon, the best-in-class wireless operator in the US market. As a base case, we expect the company to grow revenue in line with US GDP and its earnings before interest and taxes (EBIT) to grow faster than this. The 5G broadband market which it is rolling out is a growth opportunity. At the time of purchase, a solid dividend yield of 4.3% was, in our view, not fully reflected in an attractive valuation. Risks include a change in the regulatory backdrop, a change in market competitive intensity or poor capital allocation. Overall, this a defensive business model that has performed strongly relative to the market recently.
In late summer 2019, we sold our residual position in Occidental Petroleum, after the company announced a deal to buy Anadarko in May 2019. We owned Occidental due to its strong balance sheet and lower breakeven oil price, but this deal increased leverage just at the wrong time in the cycle in our view. The market has treated this acquisition with a dim view and the stock has performed poorly since due to the increased financial leverage and increased sensitivity to changes in the oil price. On 8 March 2020, Saudi Arabia initiated a price war with Russia causing a 65% decline in the oil price. Occidental was then forced to cut its dividend by 86% to conserve cash with the stock price falling heavily. This serves to remind us that our work on balance sheets using credit analysis can help us avoid just this kind of outcome.
In January, we sold our position in VF Corp, a standout business model in the global apparel space. This is an industry which continues to be disrupted due to the high levels of innovation and consumer connectivity required against a backdrop of fast-changing tastes and trends. VF has managed this by evolving its portfolio, for example the recent spin-off of its slower-growth jeans business. It has also placed significant investments to accelerate growth in its largest brands VANS, The North Face and Timberland. The key question from our dividend analysis was not management's ability to maintain the dividend, but their willingness to. With little valuation upside we felt the risk reward was skewed to the downside.
We have not been immune to the intensity of dividend cuts sweeping through the European markets of late, but the portfolio is proving to be resilient thus far. The North American markets have not, as yet, followed suit in banning banks and other sub sectors from paying dividends. We have been quick to cut stocks where we felt the long-term structure of the industry is called into question or where we believe the business model will have to adapt immeasurably. Airbus cut its dividend to zero and Continental may well be forced to cut dividend payments in the coming months, and we have sold these companies in March, to guard against not only income reduction but capital loss that may well ensue. Many of Airbus's main clients are likely to take state aid and will be expected to put new purchases of aircraft on hold. The auto industry will also take a long time to come back to pre-crisis levels and the industry may be forced to accelerate production of electric vehicles at the expense of profitability.
Outlook
We are confronted with rapidly changing data related to the social, political and increasingly financial impact of the response to the Covid-19 virus. The onset of significant travel restrictions and other social distancing measures, first in China and now replicated across over eighty percent of the world's population, in response to managing the public health fallout from the disease, will have serious consequences for economic and financial conditions. This has been reflected in asset prices, but further volatility in equity markets, as the severity of the economic and earnings downturn becomes evident, lie ahead for the next few quarters of the new fiscal year for the company, particularly if secondary waves of the virus force further lockdowns until a vaccine becomes widely available.
In terms of policy response, we have seen significant fiscal and monetary stimulus across many geographies in the form of interest rate reductions and a ramp-up of fiscal stimulus, with a focus on both mitigation of short-term challenges for business and a boost to long-term infrastructure investment with the promise of more intervention if needed to further stimulate activity. Given the lagged effect of stimulus, we would expect these measures to be impactful towards recovery as we exit 2020, rather than effective in mitigating the pullback in economic activity and corporate earnings over the coming quarters. We believe, however, that these measures should be factored in as we assess the medium term earnings potential of the companies we invest in.
During a period of such uncertainty, we are focused on two key areas. Firstly, the implications of the complex economic and policy picture on the capacity of our holdings to continue to generate free cash flow to support their dividends and business investment; here we believe that our focus in due diligence on dividend sustainability and stress testing will be significant. Secondly, we continue to look for opportunities to add to high-quality businesses that have the capacity to emerge through this period of significant uncertainty with stronger market positions and long-term business prospects, at attractive valuations.
Indeed, with 10-year government bond yields for all major developed markets at, or around, zero - which is the risk free rate against which investors have to make an overall return - investing in companies that have the ability to pay dividends and even grow them, could give investors substantial returns from these highly prized assets looking out twelve to eighteen months.
Some key themes for us include digitalisation, where the surge in cloud computing and data storage growth is structural and will of no doubt be a priority area for spending and capital expenditure going forward. Our holding in Microsoft should continue to benefit as a result. We are also seeing massive growth in first-time gamers, a major new consumer base, with Tencent set to profit here. Climate change will most likely be top of government agendas, as the lockdowns have highlighted how much less pollution is being generated across the globe. Our holdings in Greencoat UK Wind and SSE should do well as a result. We will also continue to engage with all our portfolio companies to insist that they improve their disclosure and carbon footprints going forward.
To summarise, although the coming months will no doubt bring more uncertainty, we will continue to invest in high quality businesses that have an exciting future when the current downturn begins to ease. This, combined with the unprecedented levels of monetary and fiscal support, gives us optimism that your company will produce an attractive level of income distribution and total returns during the new fiscal year.
Environmental, social and governance analysis
With society increasingly focusing on ESG, it is important to spend some time fleshing out how we carry our ESG analysis within Martin Currie, for the benefit of the company. We have built strong expertise in the ESG field over more than a decade, as testified by the various accolades Martin Currie has received. Our ESG analysis is fully integrated within our fundamental research. To further harness our extensive ESG knowledge, we have put in place a structured framework to assess the ESG risks related to any stock that we review.
Below, we describe the details of that approach and our proprietary framework, from which the Trust benefits. Ultimately, a detailed ESG analysis helps us find the right investment opportunities as long-term investors, which should benefit our ability to continue to generate strong outperformance. For us, ESG is part of our focus on Stewardship, which goes hand in hand with sustainable investing. ESG risks can ultimately detrimentally impact the fair value of a stock. Assessing these risks is an essential part of ensuring that we capture and understand all risks to an investment case.
Fundamental research
Analysis of ESG factors are captured through:
Early stage analysis - the 'Long-Term Unconstrained checklist'
The purpose of our first stage of fundamental research is to examine the sustainability and quality of the business in broad terms before launching into deeper investigation. ESG is one of the eight key factors we assess, here we look at the company's ESG profile, its governance and remuneration structures.
Integration into our research templates
When researching a company, we systematically score its risks against four factors, one of which is governance and sustainability. Feeding into this overall governance and sustainability risk score, our research template has a qualitative summary and our proprietary ESG scoring system (covered below). The qualitative ESG analysis is a written assessment of the company's specific approach to, and potential impacts from ESG factors. It is a key part of how we build the investment case for the stock, identifies where we need to engage with management and allows for effective peer review by the investment team.
Proprietary ESG risk assessment
We built our proprietary risk scoring system to capture the complexity of the ESG risks facing a company's long-term outlook and sustainability. It assesses the company through two lenses - governance and sustainability. We assess 6 key fields on the governance side, and 5 key fields on the sustainability side, with over 50 underlying sub-categories that reflect what the investment manager believes are the most universal ESG factors. Each sub-category is scored from 1-5, reflecting the level of risk we estimate from each factor, 1 is the lowest risk and 5 the highest. By scoring each factor, the team can then identify what material risks a company is potentially vulnerable to and what areas require more work. A higher risk score in a specific category would not necessarily rule out investing in the firm.
Rather it is an acknowledgement of an area where we have identified a potential risk. We then engage with management in order to understand this risk further, or indeed with a view to guiding the company to improve in that specific field.
Active ownership
We believe monitoring and engagement are an essential part of being a long-term shareholder in a company. It allows us to improve our understanding of investee companies and their governance structures, so that our voting decisions may be better informed. In addition, it enables us to understand to what extent companies have identified material ESG risks and how they are managing these. The materiality and immediacy of a given issue will generally determine the level of our engagement.
Our ambition is to engage with companies on important ESG matters, to identify and share best practise, ultimately guiding them on areas of improvement towards being best in class to make the business more sustainable in the long-term.
Portfolio analytics
We go beyond integration into fundamental research, employing our ESG analysis within the portfolio construction process. Our ESG research feeds through into our portfolio analytics with the output shown in an ESG dashboard. This complements our analysis of thematics, company classifications and geographic revenues and profits.
From this perspective, the real value comes from being able to drill down and examine our overall exposures and identify any areas of potential risk. It provides feedback on the effectiveness of our ESG integration and that can be reflected back into research and portfolio positioning. Overall, this allows us to build a robust, diversified portfolio capable of delivering on our clients' long-term objectives.
A focus on continual improvement
We are always looking at continual improvement within our investment processes. Going forward, we will be placing further emphasis on measuring and reporting on the outcome and impact of our engagement. We want to assess how driving a change agenda to improve ESG at target firms has improved performance.
Mark Whitehead
1 July 2020
Portfolio Summary
|
Portfolio distribution as at 31 March 2020 |
|
|
|
|
By region (excluding cash) |
|
|
|
|
|
31 March 2020 |
|
31 March 2019 |
|
|
% |
|
% |
|
North America |
42.6 |
|
46.7 |
|
Developed Europe |
40.7 |
|
41.5 |
|
Developed Asia Pacific ex Japan |
16.7 |
|
11.8 |
|
|
100.0 |
|
100.0 |
|
By sector (excluding cash) |
|
|
|
|
|
31 March 2020 |
|
31 March 2019 |
|
|
% |
|
% |
|
Financials |
22.7 |
|
19.2 |
|
Technology |
18.5 |
|
9.6 |
|
Industrials |
16.6 |
|
16.8 |
|
Consumer goods |
15.0 |
|
19.9 |
|
Basic materials |
8.2 |
|
9.0 |
|
Telecommunications |
6.6 |
|
2.7 |
|
Healthcare |
4.4 |
|
8.3 |
|
Utilities |
3.3 |
|
6.4 |
|
Consumer services |
2.9 |
|
1.5 |
|
Oil & gas |
1.8 |
|
6.6 |
|
|
100.0 |
|
100.0 |
|
By asset class (including cash and borrowings) |
|
|
|
|
|
31 March 2020 |
|
31 March 2019 |
|
|
% |
|
% |
|
Equities |
106.0 |
|
110.4 |
|
Cash |
2.8 |
|
2.6 |
|
Less borrowings |
(8.8) |
|
(13.0) |
|
|
100.0 |
|
100.0 |
|
Largest 10 holdings |
|
|
|
|
31 March 2020 |
31 March 2020 |
31 March 2019 |
31 March 2019 |
|
Market value |
% of total |
Market value |
% of total |
|
£000 |
portfolio |
£000 |
portfolio |
|
Microsoft 11,212 |
5.9 |
10,625 |
5.0 |
|
ZurichInsuranceGroup 8,083 |
4.3 |
6,585 |
3.1 |
|
CrownCastleInternational 7,728 |
4.1 |
6,527 |
3.1 |
|
Verizon Communications 7,333 |
3.9 |
- |
- |
|
Taiwan Semiconductor 7,331 |
3.9 |
5,979 |
2.8 |
|
SamsungElectronics 7,215 |
3.8 |
3,410 |
1.6 |
|
KoninklijkeDSM 7,093 |
3.7 |
6,479 |
3.1 |
|
LockheedMartin 6,945 |
3.7 |
4,907 |
2.3 |
|
SSE 6,279 |
3.3 |
5,713 |
2.7 |
|
Danone 5,713 |
3.0 |
5,333 |
2.5 |
|
|
|
Sector |
Country |
Marketvalue £000 |
% of total portfolio |
|
|
|
North America |
|
|
80,724 |
42.6 |
|
|
|
Microsoft |
Technology |
United States |
11,212 |
5.9 |
|
|
|
Crown Castle International |
Financials |
United States |
7,728 |
4.1 |
|
|
|
Verizon Communications |
Telecommunications |
United States |
7,333 |
3.9 |
|
|
|
Lockheed Martin |
Industrials |
United States |
6,945 |
3.7 |
|
|
|
PepsiCo |
Consumer goods |
United States |
5,539 |
2.9 |
|
|
|
Merck & Co. |
Healthcare |
United States |
5,130 |
2.7 |
|
|
|
BCE |
Telecommunications |
Canada |
5,115 |
2.7 |
|
|
|
Eaton |
Industrials |
United States |
4,995 |
2.6 |
|
|
|
Air Products + Chemicals |
Basic materials |
United States |
4,918 |
2.6 |
|
|
|
Cisco Systems |
Technology |
United States |
3,675 |
1.9 |
|
|
|
Bank OZK |
Financials |
United States |
3,581 |
1.9 |
|
|
|
Chevron |
Oil & gas |
United States |
3,410 |
1.8 |
|
|
|
Procter & Gamble |
Consumer goods |
United States |
3,397 |
1.8 |
|
|
|
Paychex |
Industrials |
United States |
3,266 |
1.7 |
|
|
|
Leggett & Platt |
Consumer goods |
United States |
2,280 |
1.2 |
|
|
|
Vail Resorts |
Consumer services |
United States |
2,200 |
1.2 |
|
|
Developed Europe |
|
77,427 |
40.7 |
|||
|
ZurichInsuranceGroup Financials |
Switzerland |
8,083 |
4.3 |
|||
|
KoninklijkeDSM Basicmaterials |
Netherlands |
7,093 |
3.7 |
|||
|
SSE Utilities |
United Kingdom |
6,279 |
3.3 |
|||
|
Danone Consumergoods |
France |
5,713 |
3.0 |
|||
|
CivitasSocialHousing Financials |
United Kingdom |
5,542 |
2.9 |
|||
|
KoninklijkePhilips Industrials |
Netherlands |
5,140 |
2.7 |
|||
|
Prudential Financials |
United Kingdom |
4,614 |
2.4 |
|||
|
Unilever Consumergoods |
Netherlands |
4,385 |
2.3 |
|||
|
Britvic Consumergoods |
United Kingdom |
4,144 |
2.2 |
|||
|
Beazley Financials |
United Kingdom |
4,116 |
2.2 |
|||
|
Victrex Basicmaterials |
United Kingdom |
3,690 |
1.9 |
|||
|
GreencoatUKWind Financials |
United Kingdom |
3,430 |
1.8 |
|||
|
SecuritasAB Industrials |
Sweden |
3,308 |
1.7 |
|||
|
PublicisGroupe Consumerservices |
France |
3,211 |
1.7 |
|||
|
Sanofi Healthcare |
France |
3,205 |
1.7 |
|||
|
Compagnie Financière Richemont Consumer goods |
Switzerland |
3,083 |
1.6 |
|||
|
Ibstock Industrials |
United Kingdom |
2,391 |
1.3 |
|||
|
Developed Asia Pacific ex Japan |
|
31,518 |
16.7 |
|||
|
Taiwan Semiconductor Technology |
Taiwan |
7,331 |
3.9 |
|||
|
SamsungElectronics Technology |
Korea |
7,215 |
3.8 |
|||
|
Tencent Holdings Technology |
Hong Kong |
5,599 |
3.0 |
|||
|
TransurbanGroup Industrials |
Australia |
5,436 |
2.9 |
|||
|
AIAGroup Financials |
Hong Kong |
3,004 |
1.6 |
|||
|
UnitedOverseasBank Financials |
Singapore |
2,933 |
1.5 |
|||
|
Total portfolio |
|
189,669 |
100.0 |
|||
STRATEGIC REPORT
Business model
The company, as an investment trust, is a UK closed- end public limited company which invests in a diversified portfolio of assets meeting certain tax conditions. The primary objective is to achieve rising income and long-term capital growth which it seeks to deliver for shareholders through investment in a balanced portfolio constructed from global equities. With effect from 1 April 2018 the performance of the company has been measured against the median of all relevant open and closed-ended peers (sourced from the Morningstar Global Equity Income Sector and AIC Global Equity Income Sector) on a rolling three-year basis. The peer group total return performance for the year end 31 March 2020 was -9.5%. In addition, and to ensure that the investment objective is met, the manager aims to grow both the revenue earnings and the cum income NAV in real terms over a rolling five year period.
The company has no employees, and the board outsources its entire operational infrastructure to third party organisations. In particular, the board appoints and oversees an independent investment manager to manage the investment portfolio. The board sets the company's strategy, decides the appropriate financial policies to manage the assets and liabilities of the company, ensures compliance with tax, legal and regulatory requirements and reports regularly to shareholders on the company's performance. The directors do not envisage any change to this model in the foreseeable future.
For more information on investment trusts please visit www.theaic.co.uk .
Purpose and values
Purpose
To achieve rising income and long term capital growth which it seeks to deliver for shareholders through investment in a balanced portfolio constructed from global equities.
Values
Independence: to act independently in the interests of shareholders.
Sustainability: to ensure that the companies in which the company invests are supportive of good environmental, social and governance practices and that the manager encourages continuous improvement in these areas.
Transparency: to report transparently and accurately to shareholders on the condition, performance and prospects of the company.
Culture
The board considers that its culture of open debate combined with strong governance and the benefits of a diverse board is central to delivering its purpose, values and strategy. The board monitors and reviews its culture as part of its annual evaluation process and monitors the culture within the manager to ensure that it is closely aligned with that of the company.
During the year the board received a presentation from the manager on developments in its organisational culture and its alignment to that of the company.
Environmental, Social and Governance (ESG)
ESG issues are integral to the company's values and investment philosophy, and the approach taken by the manager has been rewarded with the highest possible rating (A+) from the PRI across its three key criteria and a Tier 1 ranking from the UK Financial Reporting Council (FRC). The company and manager believe that good ESG practices are a fundamental component of a quality company which may include shareholder rights, accounting standards, remuneration, board structure, supply chain, data protection, pollution/hazardous waste policies, water usage and climate change policies. The manager's ESG analysis may influence key financial assumptions such as cost of capital, revenues or costs and thus the estimate of a company's intrinsic value which are discussed in greater detail on pages 10 to 12. A poor governance, environmental or social track record for a company can indicate wider sustainability issues and could lessen the attractiveness of the investment.
Strategy
The board's principal strategies are:
Investment
The company invests primarily in global equities. The majority of the portfolio is invested in large capitalisation companies; companies with market capitalisations over £1 billion. The resulting diversified portfolio of international quoted companies is focused, containing between 35 and 55 high conviction stocks selected on the basis of detailed research analysis. This active portfolio management strategy will inevitably involve separate periods where, at different times, the company's portfolio outperforms and underperforms the market as a whole (as represented by the company's reference peer group).
Investment policy and objective
The investment objective of the company is to achieve rising income and long-term capital growth through investment in a balanced portfolio constructed from global equities. The board does not impose any limits on the manager's discretion to select stocks, except that:
• no more than 10% of the company's gross assets may be invested in listed investment companies (including UK-listed investment trusts);
• the board must approve in advance all investments in Martin Currie sponsored investment schemes;
• the sum of all holdings over 5% of the total portfolio must not exceed 40% of the portfolio;
• no more than 15% of the total portfolio can be invested in collective investment schemes, of which no holding can exceed 10% of the value of the collective investment scheme; and
• warrants cannot exceed 5% of the total portfolio.
Beyond this, the investment manager analyses the overall shape of the portfolio to ensure that investment risk is dominated by the high conviction stocks in the portfolio and that the combination of stocks held does not lead to unintended reliance on a particular macroeconomic factor (for example, a higher oil price or lower interest rates). The board monitors investment risk on an ongoing basis.
Risk management
As set out above, risk management is largely focused on managing investment risk in accordance with the investment policy guidelines set by the board. The board has established risk parameters for the investment manager within which the portfolio will be managed. The board reviews, at each board meeting, the relevant risk metrics presented by the manager and monitors investment risk on an ongoing basis. The wider corporate risks relate mainly to the challenges of managing the company in an increasingly regulated and competitive market place. These risks are each actively managed through mitigation measures which the board has put in place and which are discussed later of this report.
Marketing
The marketing strategy seeks to:
• increase demand for the company's shares;
• obtain ratings and buy recommendations from key wealth managers; and
• grow the profile of the company across the wider market.
This is achieved through active promotion by the investment manager and through the company's website which contains information relating to performance, outlook and significant developments as they occur. In addition, the company utilises best practice marketing tools such as advertising, public relations and promotional marketing. The manager also meets regularly with existing and potential institutional shareholders.
Financial
The main focus is on the management of shareholder capital; the use of gearing; and the management of the risks to assets and
liabilities of the company. The board's principal goal for the management of shareholder capital is to achieve rising income and long- term capital growth.
Dividend policy
The company's dividend policy is to provide shareholders with regular income paid quarterly in January, April, July and October. At the AGM in 2012 the board received shareholder approval to permit dividends to be paid out of capital reserves.
Gearing and bank facilities
From time to time the company finances its operations through bank borrowings. However, the board monitors such borrowings (gearing) closely and takes a prudent approach.
The company currently has a two year revolving credit facility for £10 million and a multi-currency seven year fixed facility for £15.8 million drawn in three tranches (£1,500,000, €4,500,000 and US$12,750,000). The facilities are fully drawn down in sterling, US dollars and euros with the intention of increasing income and of improving future investment returns. The gearing is being effectively employed by the portfolio manager in two different ways. Firstly, by investing the majority of the proceeds in global equities and secondly, with the tactical use of options, in a careful and controlled manner. In accordance with the investment policy the current limit on gearing is 20% of net assets. The revolving facility that expires in September 2020 is currently being renegotiated and the board expects a new facility to be put in place. Further information on the Company's covenants can be found in note 11.
Options writing strategy
The company predominantly sells single stock put options for income enhancement but may occasionally sell call options on existing portfolio positions (covered calls). Single stock put options will be sold typically "out of the money" on stocks that have come through the research system and are rated buy and the manager would be happy to buy at the strike price. Call options will only ever be sold on existing cash equity positions held in the portfolio (covered call writing).
Duty to promote the success of the company
The company is required to provide a statement which describes how the directors have had regard to the matters set out in Section 172 of the Companies Act 2006 when performing their duty to promote the success of the company, including:
• The likely consequence of any decision in the long-term;
• The interests of the company's employees;
• The need to foster the company's business relationships with suppliers, customers, and others;
• The impact of the company's operations on the community and the environment;
• The desirability of the company maintaining a reputation for high standards of business conduct; and
• The need to act fairly as between members of the company.
The board is focused on promoting the long-term success of the company and regularly reviews the company's long-term strategic objectives, including consideration of the impact of the manager's actions on the marketability and reputation of the company and the likely impact on the company's stakeholders of the company's principal strategies.
The main stakeholders in the company are its shareholders, together with a number of external third-party suppliers engaged by the board to provide investment management, company secretarial, custodial, depository, banking, registry and legal services along with the wider community in which the company operates.
The company as an investment trust does not have any employees and its customers are also its shareholders. The management engagement committee is tasked with reviewing the performance of the investment manager and the audit committee receives reports from and reviews the service, quality and value for money provided by other third- party suppliers. The manager is tasked with maintaining a constructive relationship with such other third-party suppliers, on behalf of the company. The board is responsible for setting the strategic priorities of the company along with monitoring its corporate governance and risk and controls. It is also responsible for monitoring the investment performance and marketing activities undertaken by the manager on its behalf.
The board is committed to maintaining and demonstrating high standards of corporate governance and the company's corporate governance statement, together with the compliance statement details how the company maintains high standards of business conduct. The company works closely with the manager to develop and monitor its investment strategy and activities, not just to achieve its investment objective, but also to deliver the company's values of Independence, Sustainability and Transparency, which are discussed earlier. The board also expects good governance standards to be maintained at the companies in which the company is invested and reviews the engagement and voting activities which are undertaken by the manager. Further details of the ESG engagement during the year are discussed in the Chairman's statement with the company's purpose, values and strategy outlined earlier. The ESG strategy followed by the manager is detailed in the managers report. During the year the board continued to monitor the discount/premium levels at which the company's shares are traded, and in the second half of the year was able to issue 700,000 shares from Treasury. The board also undertook a review of the new AIC Code and has renamed the nominations committee as the nomination and remuneration committee to better reflect its obligations under the Code and taken forward other updates to its governance arrangements.
The board receives regular reports from the manager on shareholder engagement, with the manager tasked with maintaining regular and open dialogue with larger shareholders. Directors, primarily through the chairman, also meet regularly with major shareholders to understand their views and to help inform the board's decision-making process. The company maintains an award-winning website which hosts copies of the annual and interim reports along with factsheets and other relevant materials. Shareholders are normally invited to attend the AGM (subject to COVID-19 restrictions) at which they have the opportunity to speak directly with directors.
Principal developments and future prospects
The principal business developments over the course of the year are set out in the Chairman's statement and the manager's review. The future performance of the company depends upon the success of the company's investment strategy in light of economic factors and equity markets developments. Please refer to the Chairman's statement and the manager's review for an update on future prospects for the company. In particular, the impact of COVID-19.
On 3 June 2020, the company announced that it had served protective notice under its management agreement with Martin Currie Fund Management Limited. This followed the board becoming aware that Mark Whitehead, the company's portfolio manager and two other members of the global income team, had resigned from Martin Currie and would be leaving on 1 December 2020. Mark Whitehead will remain fully engaged in the management of the company until 1 December 2020. The board has commenced a review of its management arrangements, which process will include Martin Currie, and will update shareholders in due course.
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. Whilst there remains some uncertainty, the board believes that the geography and diversification of the company's assets will provide some insulation from Brexit related risks. There is a small exposure to the domestic British economy although there is also direct exposure to the European Union. Where UK listed stocks are held, generally the companies' activities are conducted in many different regions diversifying their own revenue and profits streams. Also, the companies may operate in industries where there is long term structural demand for their products and services, such as for utilities, infrastructure and insurance. Currency rate and borrowings drawn down by the company may be affected by Brexit developments particularly in relation to movements in Sterling/U.S. Dollar/Euro rates. All these factors could affect the value of the company's shares.
COVID-19
The COVID-19 situation continues to evolve rapidly, and the board monitors closely the impact of COVID-19 on the operational resilience of the manager and other significant service suppliers. At this stage it is not possible to forecast the duration or severity of the global downturn following COVID-19 but it will undoubtedly test those businesses which are financially exposed. Volatility in the stock markets is expected to continue at least in the short term. The board is satisfied that its mitigation measures are appropriate even in current conditions. The investment manager is actively assessing both the threats and opportunities arising from markets' reaction to COVID-19 and this is explained in more detail in his report. The board believes that the processes of internal control that the company has adopted and oversight by the investment manager continue to be effective.
Principal and emerging risks and uncertainties
Risk and mitigation
The company's business model is longstanding and resilient to most of the short-term uncertainties that it faces, which the board believes are effectively mitigated by its internal controls and the oversight of the investment manager, as described in the table below. The principal and emerging risks and uncertainties are therefore largely longer term and driven by the inherent uncertainties of investing in global equity markets.
The board believes that it is able to respond to these longer-term risks and uncertainties with effective mitigation so that both the potential impact and the likelihood of these seriously affecting shareholders' interests are materially reduced. Operational and management risks along with a review of potential emerging risks, are regularly monitored at board meetings and the board's planned mitigation measures for the principal and emerging risks are described in the table below. As part of its annual strategy meeting, the board carries out a robust assessment of the principal and emerging risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity.
The board maintains a risk register and also carries out a risk workshop as part of its annual strategy meeting. The board has identified the following principal and emerging risks to the company:
Pandemic Risk
The principal and emerging risks were reviewed in depth by the Audit Committee in January 2020 and again following the emergence of COVID-19. COVID-19 has developed rapidly to become a pandemic which has delivered an abrupt, exogenous shock to the global economy of considerable magnitude and become a principal risk. The company is exposed to the risk of market volatility and falling equity markets brought about by the pandemic. The resilience of the operations undertaken by the manager and other key providers of operational services to the company could be reduced as a result of the effects of the pandemic, representing a risk to the company. The board has reviewed the mitigation measures which the manager and other key service providers have in place to maintain operational resilience and are satisfied that these are appropriate even in the current conditions.
Relevant business continuity plans have been invoked at those service providers and the board has been given updates by each of them that these plans are operating satisfactorily and in line with expectations in order to preserve operational resilience. Working from home arrangements have been implemented where appropriate and government guidance is being followed.
Loss of S1158-9 Tax status
Loss of S1158-9 tax status would have serious consequences for the attractiveness of the company's shares. The board considers that, given the regular oversight of this risk carried out by the investment manager and reviewed by the board, the likelihood of this risk occurring is minimal. The audit committee regularly reviews the eligibility conditions and the company's compliance against each, including the minimum dividend requirements and shareholder composition for close company status.
Long-term investment underperformance
The board manages the risk of investment underperformance by relying on good manager stock selection skills within a framework of diversification and other investment restrictions and guidelines. The board monitors the implementation and results of the investment process with the manager (who attends all board meetings) and reviews data that shows statistical measures of the company's risk profile. Should investment underperformance be sustained despite the mitigation measures taken by the investment manager, the board would assess the cause and be able to take appropriate action to manage this risk.
Market, financial and interest rate risk
The company's portfolio is invested in listed equities and is therefore exposed to market risk. Adherence to investment process is intended to ensure portfolios are optimally positioned for market turbulence. The majority of the company's investment portfolio is invested in overseas securities and the balance sheet can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, and currently does, match specific overseas investment with foreign currency borrowings. As a consequence of investing in overseas securities the statement of comprehensive income is subject to currency fluctuation arising on overseas income.
In order to retain its place in the FTSE All-Share index, the company must satisfy the liquidity test criteria set by the FTSE at each annual review. The liquidity of the company's shares is monitored by the board, the investment manager and the company's broker with a report being reviewed at every board meeting. The board regularly discusses ways to improve the liquidity position of the company. The company intends to use its authority to distribute some capital profit by way of dividend if so required. If the company distributes capital profit by way of dividend, the board is aware that it cannot support the payment of dividends partly out of capital on an indefinite basis in certain investment scenarios. The board actively manages this risk with the investment manager by seeking to grow the company's income and capital in real terms over the longer term.
Operational Risk
The company has outsourced its entire operational infrastructure to third party providers. Contracts and service level agreements have been arranged to ensure that the service provided by each third- party provider is of a sufficiently professional and technically high standard. The board receives and reviews control reports from all service providers. Periodically, the board requests representatives from third party service providers to attend board meetings to give the board the opportunity to discuss the controls that are in place directly with the third-party providers. The board receives and reviews control reports from all service providers. The board carries out an annual evaluation of its service providers and gives regular feedback to the investment manager through the management engagement committee.
Following the ongoing assessment of the principal and emerging risks facing the company, and its current position, the board is confident that the company will be able to continue in operation and that the processes of internal control that the company has adopted and oversight by the investment manager continue to be effective.
Key Performance Indicators
The board provides certain key performance indicators ('KPIs') to monitor and assess the performance of the company. The principal KPIs are:
1. Performance relative to the peer group
The target is for the NAV total return to exceed the median of the peer group on a three-year rolling basis, since changing to peer group performance measurement on 1 June 2016. The total return of NAV during the three years to 31 March 2020 was 1.0% against the peer group total return NAV of (4.3%), resulting in an outperformance of 5.3%. The Chairman's statement and the manager's review, , provide more information on performance.
2. Growth in net assets
The growth in net assets is measured by the growth in the cum income NAV per share during the financial year. The company's cum income NAV per share fell to 162.72p at 31 March 2020, from 183.21p as at 31 March 2019, a decrease of 11.2%. The Chairman's statement and the manager's review provide more information on performance.
3. Ongoing charges
The board monitors the ongoing charges to ensure it stays at or below 1.0%. The ongoing charges for the year end 31 March 2020 were 0.9% (2019: 0.9%) and therefore the KPI was achieved.
4. Discount
The company has a policy of maintaining the average ex income discount in the last 12 weeks of the financial year at below 7.5%. The average discount over the 12-week period to 31 March 2020 based on the ex income NAV was a premium of 1.8%.
5. Rising income
The board aims to achieve rising income through investment in a balanced portfolio constructed from global equities. The annual dividend for the year end 31 March 2020 was 6.41p, an increase of 2.6% on the annual dividend for the year end 31 March 2019 of 6.25p.
|
Summary of KPI's |
Target |
Actual |
Achieved |
|
1. Performance relative to peer group |
Total return to exceed the median over three years on a rolling basis |
5.3% |
yes |
|
2. Growth in net assets |
Growth in cum income NAV |
(11.2%) |
No |
|
3. Ongoing charges |
Below 1.0% |
0.9% |
Yes |
|
4. Average discount |
Below 7.5% |
Premium 1.8% |
Yes |
|
5. Rising income |
Dividend per share growth |
2.6% |
yes |
DIRECTORS REPORT
The directors present their report and the audited financial statements of the company for the year ended 31 March 2020.
Status
The company carries on business as an investment trust and its shares have a premium listing on the London Stock Exchange. The company has been approved by the HM Revenue & Customs as an investment trust in accordance with section 1158 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011. The company will continue to conduct its affairs in a manner which will enable it to retain this status. The company is domiciled in the UK and is an investment company within the meaning of section 833 of the Companies Act 2006. It is not a close company for taxation purposes. The company is a public company limited by shares.
Business Review
The investment manager
Martin Currie is an international equity specialist based in Edinburgh, managing money for a wide range of global clients. Its investment process is focused on selecting stocks through fundamental proprietary research and constructing well-balanced high conviction portfolios. The board closely monitors investment performance and the manager attends each board meeting to present a detailed update to the board. The board uses this opportunity to challenge the manager on any aspect of the portfolio's management.
Continued appointment of the investment manager
The board, through the work of the management engagement committee, conducts an annual performance appraisal of the investment manager against a number of criteria, including operational performance, investment performance and other contractual considerations. At the appraisal carried out by the management engagement committee in March 2020, the committee considered the past investment performance of the company and the ability of the investment manager to produce satisfactory investment performance in the future. It also considered the management agreement and fees payable to the investment manager, together with the standard of other services provided, which include company secretarial, accounting and marketing services.
The acquisition of Legg Mason by Franklin Resources was announced in February 2020 and is expected to complete in September 2020. The board has been assured that Martin Currie will maintain its autonomy as an affiliate and its investment philosophy and processes will remain unchanged. Following this review, it was the directors' opinion that the continuing appointment of the investment manager on the terms agreed was in the best interests of shareholders as a whole.
Subsequent to the year end on 2 June 2020 the company became aware that the portfolio manager had resigned from Martin Currie and would be leaving on 1 December 2020. It announced on 3 June 2020 that it had served protective notice under the management agreement. The board has commenced a review of its management arrangements, which will include Martin Currie.
AIFM and company secretary fee
Martin Currie is paid an AIFM and company secretary fee which is calculated quarterly at an annual rate of 0.6% of the company's net asset value up to £200 million and an annual rate of 0.4% of the company's net asset value above £200 million. The net asset value is defined as the NAV adjusted by adding back any borrowings of the company. Martin Currie earned an AIFM and company secretary fee during the financial year of £1,284,000 (2019: £1,244,000) of which £113,000 plus VAT (2019: £110,000 plus VAT) has been treated as a secretarial fee. Assets invested in companies or funds that are managed by a member of the Martin Currie group are excluded when calculating the fee.
For the year end 31 March 2020 the management fee has been allocated 65% to capital and 35% to revenue. The allocation was based on the board's expected long-term split of returns in the form of capital gains and income.
Main features of the contractual arrangement with the investment manager
The AIFM and secretarial agreement can be terminated by either party on six months' notice, or by the company immediately if Martin Currie ceases to be capable of managing investment trust business or to be authorised by the FCA, or becomes insolvent, is wound up or liquidated. In the event that the company terminates the AIFM and secretarial agreement otherwise than as set out above, Martin Currie is entitled to receive compensation equivalent to twice the amount of the quarterly fee payable to them immediately prior to the date of termination.
Further contractual arrangements essential to the business of the company
The operational infrastructure of the company has been outsourced to third party organisations. Contracts and service level agreements have been defined to ensure that the service provided by each of the third-party organisations is of a sufficiently professional and of a technically high standard as required. The audit and management engagement committees review all third-party service providers on a regular basis.
Directors
The board currently consists of four non-executive directors. The names and biographies of the current directors are on the website and annual report, indicating their range of experience as well as length of service. As indicated in the Chairman's statement, Rachel Beagles retired from the board on 17 September 2019 and was replaced as chairman by John Evans. In line with best practice all directors stand annually for either election or re-election at the AGM. The board considers that it has a balance of skills and experience relevant to the leadership and direction of the company and that all directors contribute effectively. The role of the board and its governance arrangements are set out in the company's corporate governance statement which forms part of this Report of the directors.
Directors' insurance and indemnities
The directors have the benefit of the indemnity provisions contained in the company's articles of association ('Articles') and the company has maintained throughout the year Directors and Officers' liability insurance for the benefit of the company and the directors. The company has entered into qualifying third-party indemnity arrangements for the benefit of all its directors in a form and scope which comply with the requirements of the Companies Act 2006 and which were in force throughout the year and remain in force.
Environmental matters and social/community issues
As an externally managed investment company with no employees, the company's greenhouse gas emissions are negligible. The company does not have explicit environmental, social or corporate governance (ESG) policies but encourages and actively oversees Martin Currie's application of its ESG policies in the investment processes. Martin Currie continues to have the highest possible (A+) rating from the PRI across all three categories (Strategy, Integration and Active Ownership). The board receives regular reports of both voting and other engagements by Martin Currie with the managements of companies in the portfolio. Details of Martin Currie's ESG related policies and activities can be found on its website at martincurrie.com. The board believes companies that exhibit positive ESG behaviours contribute to increasing value over the long term.
The company complies with the principles of the FRC Stewardship Code. The company's compliance statement can be found on the company's website.
Share capital
As at 31 March 2020, the company had 104,760,635 ordinary shares of 1p ('ordinary shares') in issue (2019: 104,496,248) and 17,538,513 ordinary shares held in Treasury (2019: 17,802,900). The company repurchased 435,613 shares to be held in Treasury at a cost of £803,116 during the year. This represented 0.4% of the called up issued share capital at the year end and had a nominal value of £4,356. During the year 700,000 shares held in Treasury were reissued. A special resolution to renew the authority to repurchase shares will be put to shareholders for approval at the annual general meeting ('AGM'). The full text of the resolution is set out in the notice of meeting.
|
Shareholders analysis as at 31 March 2020 |
% of shareholders |
% of equity capital |
|
Individuals and trustees |
74.7 |
10.3 |
|
Banks and nominee companies |
23.5 |
73.6 |
|
Insurance & Investment companies |
0.1 |
0.0 |
|
Other holders |
1.7 |
16.1 |
|
|
100.0 |
100.0 |
Substantial interests
As at 31 March 2020 the company had received notification in accordance with the FCA's Disclosure and Transparency Rule 5.1.2R of the following interests in 3% or more of the voting rights attaching to the company's issued share capital:
|
As at 31 March 2020 |
% issued share capital |
|
Rathbone Nominees |
12.04 |
|
Charles Stanley |
5.70 |
|
Smith & Williamson Holdings |
5.15 |
|
WM Thomson |
4.82 |
|
Brooks Macdonald |
3.83 |
|
Hargreaves Lansdown |
3.19 |
|
JM Finn |
3.13 |
As at 26 June 2020 the company has not been notified of any changes to the above table.
As at 26 June 2020, the last practicable date prior to printing of this report, the company has 104,738,537 ordinary shares in issue (excluding treasury shares).
Shareholder and voting rights
Each Ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote for every share held. The Ordinary shares carry a right to receive dividends which are declared from time to time by the company. On a winding-up, after meeting the liabilities of the company, any surplus assets would be paid to Ordinary shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of Ordinary shares in the company other than certain restrictions which may from time to time be imposed by law (for example, insider trading law) and there are no special rights attached to any of the Ordinary shares. The company is not aware of any agreements between shareholders which may result in restrictions on the transfer of Ordinary shares or the voting rights attached to them.
Corporate governance statement
The company's corporate governance statement forms part of this report of the directors.
Revenue and dividends
The net revenue return for the year after expenses, interest and taxation was £6,735,000 (2019: £6,647,000), equivalent to a return of 6.46p per share (2019: 6.23p). Interim dividends totalling 4.35p have been paid during the year. The directors recommend a fourth interim dividend of 2.06p per share to be paid on 31 July 2020 to holders on the register at the close of business on 10 July 2020, making a total for the year of 6.41p (2019: 6.25p). The revenue reserves as at 31 March 2020 are £2,321,000 and £2,158,000 of this will be used to fund the fourth interim dividend.
Regulatory
The European AIFM Directive
Under the AIFMD the company is required to appoint an external depositary and an external AIFM who is supervised by the Financial Conduct Authority. On 22 July 2014 the company appointed Martin Currie Fund Management Limited ('MCFM') as its AIFM, an associated company of Martin Currie Investment Management Limited. There has been no changes to the way the company's assets are invested as a result of AIFMD.
Voting policy and the UK Stewardship Code
The company has given discretionary voting powers to Martin Currie. With respect to voting on behalf of clients, Martin Currie's policy is to:
• vote at all general meetings of companies in which its clients are invested;
• vote in favour of proposals which Martin Currie expects to enhance shareholder value; on routine issues Martin Currie is generally supportive of management;
• vote against proposals which it believes may damage shareholders' rights or economic interests;
• abstain on proposals which it feels unable to support, but where Martin Currie believes that it could be against its clients' interests to oppose publicly;
• ensure in all situations that the economic interests of its clients are paramount; and
• vote consistently on behalf of all clients who are invested in the particular company.
The directors are aware that Martin Currie gives consideration to operational performance, corporate social responsibility and corporate governance issues, among many other factors, when investment decisions are taken. Martin Currie has gained the highest A+ rating from the United Nations Principles for Responsible Investment ('UNPRI') and is a tier 1 signatory of the FRC Stewardship Code. The board has noted Martin Currie's adoption of the FRC Stewardship Code, and a copy of the policies and voting records can be found at www.martincurrie.com .
Martin Currie's 2020 Stewardship Annual Report is available at www.martincurrie.com/insights/stewardship-report-2020 .
Disclosure of information to the auditor
As required by Section 418 of the Companies Act 2006 each of the directors of the company at the time when this report was approved:
• so far as each of the directors is aware, there is no relevant audit information (as defined in the Companies Act) of which the company's auditor is unaware; and
• each of the directors has taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information (as defined) and to establish that the company's auditor is aware of that information.
Listing Rule 9.8.4R
Listing Rule 9.8.4R requires the company to include certain information in a single identifiable section of the Annual Report or across reference table indicating where the information is set out. The directors confirm that there are no disclosures to be made in this regard.
Going concern status
The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review, strategic report and the report of the directors. The financial position of the company as at 31 March 2020 is shown on the statement of financial position. The cash flows of the company are set out below. Note 15 sets out the company's risk management policies, including those covering market price risk, liquidity risk and credit risk.
The company has a two year revolving credit facility for £10,000,000 which expires in September 2020, and a multicurrency seven year fixed facility, which expires in September 2023, in three tranches of £1,500,000, €4,500,000 and US$12,750,000, all of which were fully drawn down at the year-end date. The company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facilities.
In accordance with the 2019 AIC Code of Corporate Governance and the 2018 UK corporate Governance Code, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal and emerging risks and uncertainties disclosed above, in particular those related to COVID-19. They have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future, and at least one year from the date of this annual report.
As explained in the viability statement, notwithstanding the company's continuing viability from a financial perspective, there is material uncertainty over the outcome of the review of the investment manager, which may cast doubt as to the likelihood of the company continuing as a going concern. Possible outcomes include the appointment of a new investment manager or corporate restructuring such as a merger with another vehicle, in which case shareholders would be offered the opportunity to roll over into another vehicle and continue investing and the existing company would be wound up. Whilst recognising this material uncertainty, the directors consider it appropriate to continue to adopt the going concern basis in preparing these accounts.
Viability Statement
The company's business model is designed to achieve rising income and long-term capital growth through investment in a balanced portfolio constructed from global equities unconstrained by geography, sector, stock or market capitalisation. The business model is based on having no fixed or limited life provided global equity markets continue to operate normally. The board served protective notice of termination on the current investment manager and is currently engaged in a review of the investment management arrangements. The board has assessed its viability over a three year period in accordance with provision 31 of the UK Corporate Governance Code as it believes this is an appropriate period over which it does not expect there to be any significant change to the principal risks (save in the case of the pandemic risk) and adequacy of the mitigating controls in place. The board considers that this reflects the minimum period which should be considered in the context of its long-term objective but one which is limited by the inherent and increasing uncertainties involved in assessment over a longer period. In making this assessment the directors have considered the following risks to its ongoing viability:
• the principal and emerging risks and uncertainties and the mitigating actions set out above, including the potential impact of COVID-19;
• the mitigation measures which key service providers including the manager have in place to maintain operational resilience particularly in light of COVID-19;
• the company has served protective notice to the manager and is undertaking a review of its management arrangements;
• the ongoing relevance of the company's investment objective in the current environment;
• the level of income forecast to be generated by the company and the liquidity of the company's portfolio; and
• the level of fixed costs and debt relative to its liquid assets.
• the expectation is that the current portfolio could be liquidated to the extent of 95.8% within three trading days.
At the date of this report it is not possible to predict whether an outcome of the review of the investment management arrangements might be a corporate event, such as a merger, or the appointment of a new investment manager, except to the extent that, in seeking to act in the best interests of shareholders, the board aims to select an investment manager that will merit such support. In the event of a corporate restructuring or merger, shareholder would be offered the opportunity to roll over into another vehicle and continue investing and the existing company would be wound up. Notwithstanding the company's continuing viability from a financial perspective, there is material uncertainty over the outcome of the prospective change of investment manager which may cast doubt on the likelihood of the company continuing as a going concern.
Despite this material uncertainty the financial statements have been prepared on a going concern basis and, subject to that uncertainty, the directors confirm that they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over at least the next three years.
Related party transactions
With the exception of the management and secretarial fees, directors' fees and directors' shareholdings there were no related party transactions through the financial year.
Performance, outlook and trends likely to affect future performance
Please refer to the Chairman's statement and the manager's review for an update on the performance of the company over the year and outlook for 2020, together with information on the trends likely to affect the future performance of the company.
Annual general meeting
The AGM of the company will be held at 12.30pm on 24 September 2020, at Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. Given the current COVID-19 situation and government restrictions, you are encouraged to vote by proxy. Questions to the AGM may be written on the form of proxy in the space provided, and a written response will be posted on the company's website following the meeting. Under current COVID-19 restrictions, shareholders should not attempt to attend the meeting. Resolutions relating to the following items of business will be proposed:
Remuneration report - ordinary resolution
In accordance with the provisions of the Companies Act 2006 the directors' remuneration report will be put to an annual shareholder vote by ordinary resolution. The vote is advisory in nature and is in respect of the overall remuneration package which is in place for directors of the company, and not specific to individual levels of remuneration.
Remuneration policy - ordinary resolution
In accordance with the provisions of The Directors' Remuneration Policy is subject to a binding shareholder vote at least every three years and was last approved at the company's AGM in 2017. There have been no changes made to the Remuneration policy and if approved by shareholders will continue. As is currently the case the company will be unable to make a remuneration payment to a current or prospective director or a payment for loss of office to a current or past director, unless such payment is consistent with the Policy or has been approved by a resolution of the Company's shareholders.
Election and re-election of directors - ordinary resolutions
Biographical detail of the directors can be found on page 22 of the annual report and accounts. In accordance with the principles of good governance set out in the UK Corporate Governance Code all directors who will continue following the AGM will seek re-election. In proposing the election and re-election of the directors, the chairman has confirmed that, following the most recent board evaluation, each director continues to make an effective and valuable contribution to the board and demonstrates commitment to their role.
Dividend policy - ordinary resolution
As a result of the timing of the payment of the company's quarterly dividends in January, April, July and October, the company's shareholders are unable to approve a final dividend each year. As an alternative the board will put the company's dividend policy to shareholders for approval on an annual basis. Resolution 4, which is an ordinary resolution, relates to the approval of the company's dividend policy which is as follows: Dividends on the Ordinary shares are payable quarterly in January, April, July and October. The payment of dividends in accordance with this dividend policy is subject always to market conditions and the company's financial position and outlook.
Allotment of shares - ordinary resolution
Section 551 of the Companies Act 2006 provides that the directors may not allot new shares without shareholder approval. Resolution 11 seeks to renew the directors' authority to allot shares up to a maximum aggregate nominal amount of £349,128 (being an amount equal to one third of the issued share capital of the company (excluding treasury shares) as at 26 June 2020, being the last practicable date before the date of this document). The board intends to exercise this power only once the number of shares held by the company in treasury is not sufficient to support share issuance by the company. As at 26 June 2020, being the last practicable date prior to the publication of this document, the company held 17,560,611 ordinary shares in treasury, representing approximately 16.76% of the company's issued share capital (excluding treasury shares).
The authority will expire on 30 September 2021 or, if earlier, at the AGM of the company to be held in 2021, unless previously cancelled or varied by the company in general meeting.
Disapplication of statutory pre-emption rights - special resolution
Resolution 12 proposes as a special resolution to continue the directors' authority under s570 and s573 of the Companies Act 2006 to allot shares for cash in certain circumstances otherwise than pro rata to all the shareholders up to an aggregate nominal amount of £52,369 (representing 5% of the company's issued share capital as at 26 June 2020, the latest practicable date before publication of the accounts) and to modify statutory pre- emption rights to deal with legal, regulatory or practical problems that may arise on a rights or other pre-emptive offer or issue. Any issue of shares would be made in accordance with the company's articles of association. This authority would enable the directors to issue shares for cash to take advantage of changes in market conditions that may arise in order to increase the amount of the company's issued share capital. The purpose of such an increase would be to improve the liquidity of the market in the company's shares and to spread the fixed costs of administering the company over a wider base. For the purposes of this resolution, allotment of shares includes the sale of treasury shares. As at 26 June 2020, being the last practicable date prior to the publication of this document, the company held 17,560,611 ordinary shares in treasury, representing approximately 16.76% of the company's issued share capital (excluding treasury shares).
Purchase of own shares - special resolution
Each year the directors seek authority from shareholders to purchase the company's own shares. The directors recommend that shareholders renew this authority by passing resolution 13. Any shares purchased pursuant to this authority may be automatically cancelled or held in treasury pursuant to the Companies (Acquisition of own shares) (Treasury shares) Regulations 2003. Resolution 13 specifies the maximum number of shares that may be acquired being 14.99% of the issued share capital as at 26 June 2020, being the last practicable date prior to the publication of this document, and the maximum and minimum prices at which they may be bought and, if passed, would lapse at the company's AGM in 2021. The main effect of any share buybacks (whether for cancellation or to be held in treasury) will be to enhance the net asset value of the remaining ordinary shares, as the shares will only be acquired at a cost that is less than their net asset value. Purchases can provide liquidity for shareholders wishing to sell their ordinary shares and may have a beneficial effect on the discount to their net asset value at which the ordinary shares currently trade. The purpose of holding some shares in treasury is to allow the company to re-issue those shares quickly and cost effectively, thus providing the company with greater flexibility in the management of its capital base. Whilst in treasury no dividends are payable on or voting rights attached to the shares. Purchase by the company of its own shares will be funded either by using available cash resources, by selling investments in the portfolio or through borrowings. During the year ended 31 March 2020, the company bought back 435,613 ordinary shares to be held in treasury. As at 31 March 2020, the company holds 17,538,513 shares in treasury representing 14.34% of the issued share capital of the company. As at 26 June 2020 being the last practicable date before publication of the accounts, the company holds 17,560,611 shares in the treasury representing 16.76% of the issued share capital of the company (excluding treasury shares).
Recommendation
The directors believe all the resolutions proposed are in the best interests of the company and the shareholders as a whole and recommend all shareholders to vote in favour of all the resolutions. The results of the votes on the resolutions at the AGM will be published on the company's website www.securitiestrust. com .
Statement of directors' responsibilities
The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'. Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; 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 comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The financial statements are published on the www.securitiestrust.com website, which is maintained by the investment manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and profit or loss of the company;
• 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; and
• the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.
This responsibility statement was approved by the board of directors on 1 July 2020 and is signed on its behalf by:
John Evans
1 July 2020
Corporate Governance
Corporate governance is the process by which the board seeks to look after shareholders' interests and protect and enhance shareholder value. Shareholders hold the directors responsible for the stewardship of the company, delegating authority and responsibility to the directors to manage the company on their behalf and holding them accountable for its performance. The board is ultimately responsible for framing and executing the company's strategy and for closely monitoring risks. It aims to run the company in a manner which is responsible and consistent with our belief in honesty, transparency and accountability. In our view, good governance means managing our business well and engaging effectively with investors. The board consider the practice of good governance to be an integral part of the way it manages the company and are committed to maintaining high standards of financial reporting, transparency and business integrity.
This report, which is part of the Report of the directors, explains how the board addresses its responsibility, authority and accountability.
Compliance with the Principles of the AIC Code
The board of the company has considered the Principles and Provisions of the 2019 AIC Code of Corporate Governance ('AIC Code'). The AIC Code addresses the principles and provisions set out in the 2018 UK Corporate Governance Code (the 'UK Code'), as well as setting out additional principles on issues that are of specific relevance to the company. The board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed by the Financial Reporting Council provides more relevant information to shareholders. The AIC Code is available on the AIC website (www.theaic. co.uk). It includes an explanation of how the AIC Code adapts the Principles and Provisions set out in the UK Code to make them relevant for investment companies. Details of the AIC principles and how the company complies with them can be found on the company's website at www.securitiestrust.com .
Role of the board
Investment companies have a board of directors whose duty it is to govern the company to secure the best possible return for shareholders within the framework set out in the company's Articles of Association - in other words, to look after the interests of shareholders. Your board of four experienced independent non-executive directors met five times during the year on a formal basis and on an ad-hoc basis when required, to consider the company's strategy and monitor the company's performance (see table below). The directors are directly answerable to shareholders.
An investment trust board provides a very specific and proactive form of direct oversight of the investment of the shareholders' funds. Your board takes this responsibility extremely seriously and serves shareholders by ensuring that the interests of the investment manager are aligned as closely as possible with those of shareholders.
The board consists of a chairman and three non-executive directors, all of whom are considered under the Code to be independent of the manager and free of any relationship which could materially interfere with the exercise of their independent judgement on issues of strategy, performance, resources and standards of conduct. Biographies for all of the directors are on the website, which demonstrate a breadth of investment knowledge, business and financial skills which enable them to provide effective strategic leadership and proper governance of the company.
The number of routine board and committee meetings attended by each director during the year compared to the total number of meetings that each director was eligible to attend is provided in the table below. The board meets formally at least five times a year, and more frequently where business needs require. In addition, the board maintains regular contact with the manager.
The primary focus at regular board meetings is a review of investment performance and associated matters including asset allocation, promotion and investor relations, peer group information and industry issues. To enable the board to function effectively and allow directors to discharge their responsibilities, full and timely access is given to all relevant information. In the case of board meetings, this consists of a comprehensive set of papers, including the portfolio manager's review, performance reports and discussion documents regarding specific matters. directors have made further enquiries where necessary.
The board sets the company's values and objectives and ensures that its obligations to its shareholders are met. It has formally adopted a schedule of matters which are required to be brought to it for decision, thus ensuring that it maintains full and effective control over appropriate strategic, financial, operational and compliance issues. The board undertakes an annual review of culture, policies and practices to ensure that they are aligned with the company's values and objectives.
The role of the Chairman and Senior Independent Director
The chairman is responsible for providing effective leadership to the board, by setting the tone of the company, demonstrating objective judgement and promoting a culture of openness and debate. The chairman facilitates the effective contribution, and encourages active engagement, by each director. The chairman also ensures that directors receive accurate, timely and clear information to assist them with effective decision-making. The chairman leads the evaluation of the board and individual directors, and acts upon the results of the evaluation process by recognising strengths and addressing any weaknesses. The chairman also engages with major shareholders and ensures that all directors understand shareholder views.
The Senior Independent Director acts as a sounding board for the chairman and acts as an intermediary for other directors, when necessary. Working closely with the nomination and remuneration committee, the Senior Independent Director takes responsibility for the annual appraisal of the chairman's performance and is available to shareholders to discuss any concerns they may have.
Committee structure
Following the release of the 2019 AIC code the board reviewed the committee structure and renamed the nominations committee as the nomination and remuneration committee to better reflect its areas of responsibilities. The terms of reference for the board and each committee were also reviewed and updated versions adopted for all committees. Terms of reference for each of the committees are available via the company secretary. Directors who are not members of committee's may attend at the invitation of the committee chairman. The board also regularly reviews the performance of the investment manager. The management engagement committee meets to review the continuing appointment of the investment manager and reviews the terms of the investment management and secretarial agreement, to ensure that it remains competitive and in the best interest of shareholders along with reviewing the continuing appointment of other key service providers. The audit committee also reviews the controls reports from key service providers as part of its internal controls monitoring.
Directors' meetings
The following table shows the number of formal board and board committee meetings held during the year and the number attended by each director or committee member. In addition to the formal board meetings, there were several additional meetings of the board and a strategy meeting held during the financial year.
|
|
Formal board meetings (5 meetings) |
Management engagement committee (1 meeting) |
Audit committee (3 meetings) |
Nomination and remuneration committee (2 meetings) |
Marketing and communications committee (3 meeting) |
|
John Evans |
5/5 |
1/1 |
1/1** |
2/2 |
3/3 |
|
Angus Gordon Lennox |
5/5 |
1/1 |
3/3 |
2/2 |
3/3 |
|
Sarah Harvey |
5/5 |
1/1 |
3/3 |
2/2 |
3/3 |
|
Mark Little |
5/5 |
1/1 |
3/3 |
2/2 |
3/3 |
|
Rachel Beagles* |
2/2 |
- |
1/1 |
2/2 |
1/1 |
*Retired on 17 September 2019. **John Evans stood down as a member of the audit committee upon becoming chairman on 17 September 2019.
planning
The board consists of four non-executive directors, each of whom is considered independent. Directors are initially appointed until the following general meeting when, under the company's articles of association, it is required that they be elected by shareholders. The board has decided that all directors will stand for annual re-election in line with the AIC Code best practice.
The board does not believe that length of service in itself necessarily disqualifies a director from seeking re-election but, when making a recommendation, the board will take into account the ongoing requirements of the AIC Code, including the need to refresh the board and its committees.
All of the directors are considered under the AIC Code to be independent of the investment manager, Martin Currie Investment Management Limited. They are free of any relationship which could materially interfere with the exercise of their independent judgement on issues of strategy, performance, resources and standards of conduct and demonstrate a breadth of investment knowledge, business and financial skills which enable them to provide effective strategic leadership and proper governance of the company.
As a result of the board's evaluation process the chairman confirms that all directors continue to be effective and their re-election is recommended.
The board plans for its own succession with the assistance of the nomination and remuneration committee. This process ordinarily involves the identification of the need for a new appointment, and the preparation of a brief including a description of the role and specification of the capabilities required. Following the retirement of Ms Beagles as chairman of the company, the nomination and remuneration committee recommended to the board that Mr John Evans become chairman of the board following the AGM on 17 September 2019. The nomination and remuneration committee seeks assistance in identifying suitable candidates by appointing an external recruitment firm. It considers candidates from a wide range of backgrounds, having consideration for the diversity of the board as a whole, including but not limited to gender.
Tenure
The board has adopted a Tenure Policy for all directors, including the chairman, which states that the board believes that it is an advantage to have the continuous contribution of directors over a period of time during which they are able to develop awareness and insight of the company and thereby be able to make a valuable contribution to the board as a whole. The board believes that it is appropriate for a director to serve for up to 9 years following their initial election, and it is expected that directors will stand down from the board after that time. However, a flexible approach to tenure has been adopted and that period may be extended for a limited time to facilitate effective succession planning whilst still ensuring regular refreshment and diversity on the board.
Board diversity
The nomination and remuneration committee considers diversity, including the balance of skills, knowledge, gender, social and ethnic backgrounds, cognitive and personal strengths and experience, amongst other factors when reviewing the composition of the board. However, it does not consider that it is appropriate to establish targets or quotas in this regard. The board comprises four non-executive directors of whom one is female thereby constituting 25% female representation. The company has no employees as its investments are managed by Martin Currie, the appointed investment manager.
Induction & Training
The investment manager provides all directors with induction training on appointment, tailored to the needs of individual appointees. The induction programme includes one-to-one meetings with representatives of the investment manager. Regular briefings are provided on changes in regulatory requirements that affect the company and directors. Directors are encouraged to attend industry and other seminars covering issues and developments relevant to investment trusts. Board meetings regularly include agenda items on recent developments in governance and investment trust issues.
Directors' indemnity
The company provides a Deed of Indemnity to each director to the extent permitted by United Kingdom law whereby the company is able to indemnify such a director against any liability incurred in proceedings brought by the company against a director in which the director successfully defends. The company also has in place a Director and Officer Liability Insurance Policy that is renewed annually.
Performance evaluation
A formal, annual, appraisal system has been agreed for the evaluation of the board, its committees and the individual directors, including the chairman. Board and committee evaluation questionnaires are drawn up by the company secretary and completed by each director. The responses are collated and discussed. The chairman leads the evaluation of the board, committee and individual directors, including consideration of the time commitment, skills and experience of the directors, while the senior independent director leads the evaluation of the chairman's performance. The board has given consideration to appointing an external board evaluator, however, it does not believe it is necessary at this time. The results of the evaluation process were presented to and considered by the board. There were no significant actions arising from the evaluation process and it was agreed that the current composition of the board and its committees reflected a suitable mix of skills and experience. It concluded that the board as a whole, the individual directors and its committees were functioning effectively. As a result of the board's evaluation process the chairman confirms that all remaining directors continue to be effective and their re-election is recommended.
The board also regularly reviews the performance of the investment manager. The management engagement committee meets to review the continuing appointment of the investment manager and reviews the terms of the investment management and secretarial agreement, to ensure that it remains competitive and in the best interest of shareholders along with the continuing appointment of other key service providers.
Company secretary
The board has direct access to company secretarial advice and services of the investment manager which, through its nominated representative, is responsible for ensuring that board and committee procedures are followed, and that applicable regulations are complied with.
Conflicts of interest
The board has approved a policy of directors' conflicts of interest. Under this policy, directors are required to disclose all actual and potential conflicts of interest to the board as they arise for consideration and approval. The board may impose restrictions or refuse to authorise such conflicts if deemed appropriate. The board regularly monitors the interests of each director and a register of directors' interests, including potential conflicts of interest, is maintained by the company. Directors who have potential conflicts of interest will not take part in any discussions which relate to that particular conflict. The board considers that the framework has worked effectively throughout the year under review.
Anti-Bribery
The board has a zero tolerance policy towards bribery and ensures that its service providers and associated persons have adequate anti-bribery policies and procedures in place which are high level, proportionate and risk based. In relation to the corporate offence of failing to prevent tax evasion, it is the company's policy to conduct all business in an honest and ethical manner. The company takes a zero- tolerance approach to facilitation of tax evasion whether under UK law or under the law of any foreign country and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships.
Employees, social, community and human rights issues
The company believes that it is in shareholders' interests to consider environmental, social and governance factors when selecting and retaining investments. Full details of the ESG analysis are contained in the Manager's review on pages 10 to 12 and further information is contained in the section entitled Duty to promote the success of the company on page 17. The company has no employees and all the directors are nonexecutive, therefore, there are no disclosures to be made in respect of employees.
Relations with Shareholders
The company places great importance on communication with shareholders. It aims to provide shareholders with a full understanding of the company's activities and performance and reports formally to shareholders twice a year by way of the annual report and the half-yearly report. The net asset value of the company's shares is available daily through the London Stock Exchange and the company's monthly updates are available on the website. In addition, the chairman meets major shareholders annually or as necessary without the manager present.
The board monitors the shareholder profile of the company at every board meeting. The board communicates directly with major shareholders when reviewing marketing and strategy initiatives. All shareholders have the opportunity, and, subject to COVID-19 restrictions in 2020, are normally encouraged to attend the company's AGM at which the directors and representatives of the investment manager are available to meet shareholders and answer questions. The manager also presents a review of the company's performance and invites questions from shareholders.
The investment manager provides a dedicated client services team which maintains regular contact with the company's shareholders and reports regularly to the board. Shareholders can also contact the directors throughout the year, through the company secretary.
Board committees
Management engagement committee
The committee, chaired by John Evans and comprising of all directors, met once during the year and its responsibilities include:
• reviewing the continuing appointment of the investment manager;
• reviewing the performance of the investment manager in terms of investment performance and the company secretarial, marketing and administration services provided;
• reviewing the terms of the investment management and secretarial agreement, to ensure that it remains competitive and in the best interests of shareholders; and
• reviewing the performance of other service providers to the company including the depositary, registrar and broker.
Nominations and remuneration committee
The committee, chaired by Angus Gordon Lennox and comprising of all directors, met twice during the year and its responsibilities include:
• assessing the skills, knowledge, experience and diversity required on the board and the extent to which each are represented;
• establishing processes for the review of the performance of the board committees and the board as a whole;
• establishing processes for the identification of suitable candidates for appointment to the board;
• overseeing succession planning for the board;
• reviewing the performance of each director during the period in which they have been a member of the board and considering the recommendation to shareholders to approve their re-appointment; and
• to consider the directors' remuneration policy and approve any changes to directors' remuneration arising as a result of such policy.
Marketing and communications committee
The committee, chaired by Sarah Harvey and comprising of all directors, met three times during the year and its responsibilities include:
• considering the marketing strategy for the company;
• reviewing the company's communications with its shareholders;
• reviewing the company's marketing budget; and
• reviewing the design and contents of the company's financial statements.
Audit committee
The committee, chaired by Mark Little met three times during the year and comprises all directors with the exception of John Evans. Further information may be found in the Audit committee's report.
Internal control
The AIC Code and the Disclosure and Transparency Rules require directors, at least annually, to review the effectiveness of the company's system of internal control and include a description of the main features relating to the financial reporting process.
Since investment management and all administrative services are provided to the company by Martin Currie, the company's system of internal control mainly comprises monitoring the services provided by Martin Currie, including the operating controls established by them, to ensure that they meet the company's business objectives. The company does not have an internal audit function of its own, but relies on the risk and compliance department of Martin Currie. This arrangement is kept under review. Martin Currie also carries out a review of the custodial and administration activities carried out by State Street.
The board, either directly or through committees, reviews the effectiveness of the company's system of internal control by monitoring the operation of the key controls of Martin Currie and:
• reviews an internal control report as provided to the board twice yearly by the investment manager. This report details significant risks, regulatory issues, error management and complaint handling;
• reviews the terms of the management agreement;
• reviews reports on the internal controls and the operations of the investment manager and of the custodian; and
• reviews the risk profile of the company and considers investment risk at every board meeting.
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the company including the principal and emerging risks as outlined above. This process accords with the FRC's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting'.
During the course of its review of internal controls, the board has not identified or been advised of any failings or weaknesses which it has determined to be significant, and is satisfied with the arrangements.
Internal control and risk management systems in relation to the financial reporting process
The directors are responsible for the company's system of internal control, designed to safeguard the company's assets, maintain proper accounting records and ensure that financial information used within the business, or published, is reliable. Martin Currie has in place stringent controls that monitor the following activities within the financial reporting process:
• investment and related cash transactions are completely and accurately recorded and settled in a timely manner;
• corporate actions and proxy voting instructions are identified and generated respectively, and then processed and recorded accurately and in a timely manner;
• investment income is accurately recorded in the proper period;
• investments are valued using current prices obtained from independent external pricing sources;
• cash and securities positions are completely and accurately recorded and reconciled to third party data; and
• investment management fees are accurately calculated and recorded.
The system of internal control can only be designed to manage rather than eliminate the risk of failure to achieve business objectives and therefore can provide only reasonable, but not absolute, assurance against fraud, material mis-statement or loss. By the means of the procedures set out above, the board confirms that it has reviewed the effectiveness of the company's systems of internal control for the year ended 31 March 2020, and to the date of approval of this annual report.
John Evans
Chairman
1 July 2020
STATEMENT OF COMPREHENSIVE INCOME
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Note |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
Net (losses)/gainsoninvestments 8 |
- |
(20,635) |
(20,635) |
- |
15,195 |
15,195 |
|
Net currency gains/(losses) |
104 |
(26) |
78 |
(14) |
(565) |
(579) |
|
Income 3 |
8,700 |
- |
8,700 |
8,539 |
- |
8,539 |
|
Investment management fee |
(410) |
(761) |
(1,171) |
(397) |
(737) |
(1,134) |
|
Otherexpenses 4 |
(587) |
- |
(587) |
(614) |
- |
(614) |
|
Net return before finance costs and taxation |
7,807 |
(21,422) |
(13,615) |
7,514 |
13,893 |
21,407 |
|
Financecosts 5 |
(205) |
(365) |
(570) |
(196) |
(355) |
(551) |
|
Net return on ordinary activities before taxation |
7,602 |
(21,787) |
(14,185) |
7,318 |
13,538 |
20,856 |
|
Taxation onordinaryactivities 7 |
(867) |
- |
(867) |
(671) |
- |
(671) |
|
Net return attributable to ordinary redeemable shareholders |
6,735 |
(21,787) |
(15,052) |
6,647 |
13,538 |
20,185 |
|
Net return perordinaryredeemable 2 |
6.46p |
(20.89p) |
(14.43p) |
6.23p |
12.70p |
18.93p |
The total columns of this statement are the profit and loss accounts of the company.
The revenue and capital items are presented in accordance with the Association of Investment Companies (AIC) Statement of Recommended Practice (SORP 2019).
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The notes below form part of these financial statements.
STATEMENT OF FINANCIAL POSITION
|
|
|
|
As at 31 March 2020 |
As at 31 March 2019 |
||||||
|
|
|
Note |
£000 |
£000 |
£000 |
£000 |
||||
|
|
Fixed Assets |
|
|
|
|
|
||||
|
|
Investments at fair value through profit or loss |
8 |
|
189,669 |
|
212,678 |
||||
|
|
Current Assets |
|
|
|
|
|
||||
|
|
Trade and other receivables |
9 |
3,408 |
|
830 |
|
||||
|
|
Cash and cash equivalents |
|
5,101 |
|
5,034 |
|
||||
|
|
|
|
|
8,509 |
|
|
||||
|
|
Current Liabilities |
|
|
|
|
5,964 |
||||
|
|
Trade payables - amounts falling due within one year |
10 |
(10,430) |
|
(10,521) |
|
||||
|
|
Dividend payable |
6 |
(1,518) |
|
(1,515) |
|
||||
|
|
Total current liabilities |
|
(11,948) |
|
(12,036) |
|
||||
|
|
Net current liabilities |
|
|
(3,439) |
|
(6,072) |
||||
|
|
Total assets less current liabilities |
|
|
186,230 |
|
206,606 |
||||
|
|
Trade payables - amounts falling due after more than one year |
11 |
|
(15,765) |
|
(15,162) |
||||
|
Total net assets |
|
|
170,465 |
|
191,444 |
|
||||
|
Capital and reserves |
|
|
|
|
|
|
||||
|
Called up share capital |
12 |
1,223 |
|
1,223 |
|
|
||||
|
Capital redemption reserve |
|
78 |
|
78 |
|
|
||||
|
Share premium account |
|
30,401 |
|
30,040 |
|
|
||||
|
Special distributable reserve* |
|
82,943 |
|
82,709 |
|
|
||||
|
Capital reserve* |
12 |
53,499 |
|
75,286 |
|
|
||||
|
Revenue reserve* |
|
2,321 |
|
2,108 |
|
|
||||
|
Total shareholders' funds |
|
|
170,465 |
|
191,444 |
|
||||
|
Net asset value per ordinary share |
2 |
|
162.72p |
|
183.21p |
|
||||
*These reserves are distributable.
The company is registered in Scotland no.SC283272.
The notes below form part of these financial statements.
The financial statements were approved by the board and signed on its behalf by
John Evans
Chairman
1 July 2020
STATEMENT OF CHANGES IN EQUITY
|
For the year ended 31 March 2020 |
|
Calledup ordinary share capital |
Capital redemption reserve |
Share premium reserve |
Special distributable reserve* |
Capital reserve* |
Revenue reserve* |
Total |
|
|
|
Note |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
|
As at 31 March 2019 |
|
1,223 |
78 |
30,040 |
82,709 |
75,286 |
2,108 |
191,444 |
|
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
(21,787) |
6,735 |
(15,052) |
|
|
Ordinary shares issued during the year |
12 |
- |
- |
361 |
1,046 |
- |
- |
1,406 |
|
|
Ordinary shares boughtback during the year |
12 |
- |
- |
- |
(812) |
- |
- |
(811) |
|
|
Dividends paid |
6 |
- |
- |
- |
- |
- |
(6,522) |
(6,522) |
|
|
As at 31 March 2020 |
|
1,223 |
78 |
30,401 |
82,943 |
53,499 |
2,321 |
170,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 March 2019 |
|
Calledup ordinary share capital |
Capital redemption reserve |
Share premium reserve |
Special distributable reserve* |
Capital reserve* |
Revenue reserve* |
Total |
|
|
|
Note |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
|
As at 31 March 2018 |
|
1,223 |
78 |
30,040 |
92,772 |
62,041 |
1,630 |
187,784 |
|
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
13,538 |
6,647 |
20,185 |
|
|
Ordinary shares bought back during the year |
12 |
- |
- |
- |
(10,063) |
- |
- |
(10,063) |
|
|
Dividends paid from revenue |
6 |
- |
- |
- |
- |
- |
(6,169) |
(6,169) |
|
|
Dividendspaid from capital |
6 |
- |
- |
- |
- |
(293) |
- |
(293) |
|
|
As at 31 March 2019 |
|
1,223 |
78 |
30,040 |
82,709 |
75,286 |
2,108 |
191,444 |
|
*These reserves are distributable.
**The company does not have any other income or expenses that are not included in the 'Net return attributable to ordinary redeemable shareholders' as disclosed in the Statement of Comprehensive Income, and therefore this is also the 'Total comprehensive income' for the year.
The notes below form part of these financial statements.
STATEMENT OF CASHFLOW
|
|
|
Year ended 31 March 2020 |
Year ended 31 March 2019 |
||
|
|
Note |
£000 |
£000 |
£000 |
£000 |
|
Cash flows from operating activities (Loss)/profit before tax |
|
|
(14,185) |
|
20,856 |
|
Adjustments for: Losses/(gains) on investments |
8 |
20,635 |
|
(15,195) |
|
|
Finance costs |
5 |
570 |
|
551 |
|
|
Exchange movement on bank borrowings |
13 |
603 |
|
628 |
|
|
Purchases of investments* |
8 |
(85,742) |
|
(78,397) |
|
|
Sales of investments* |
8 |
88,116 |
|
87,587 |
|
|
Dividend income |
3 |
(7,806) |
|
(7,836) |
|
|
Other income |
3 |
(4) |
|
(3) |
|
|
Stock lending income |
3 |
- |
|
(31) |
|
|
Premium income - written options |
3 |
(890) |
|
(669) |
|
|
Dividend income received |
|
8,183 |
|
7,608 |
|
|
Other income received |
|
4 |
|
3 |
|
|
Stock lending income received |
|
- |
|
33 |
|
|
Premium income received - written options |
|
890 |
|
669 |
|
|
(Increase)/decrease in receivables |
|
(2,739) |
|
1,583 |
|
|
(Decrease)/increase in payables |
|
(72) |
|
33 |
|
|
Overseas withholding tax suffered |
7 |
(867) |
|
(671) |
|
|
|
|
|
20,881 |
|
(4,107) |
|
Net cash flows from operating activities |
|
|
6,696 |
|
16,749 |
|
Cash flows from financing activities |
|
|
|
|
|
|
Repurchase of ordinary share capital |
|
(829) |
|
(10,094) |
|
|
Issue of ordinary share capital |
|
1,240 |
|
- |
|
|
Equity dividends paid from revenue |
|
(6,519) |
|
(6,256) |
|
|
Equity dividends paid from capital |
|
- |
|
(293) |
|
|
Interest paid on borrowings |
|
(571) |
|
(551) |
|
|
Net cash flows from financing activities |
|
|
(6,679) |
|
(17,194) |
|
Net increase /(decrease) in cash and cash equivalents |
|
|
17 |
|
(445) |
|
Cash and cash equivalents at the start of the year |
|
|
5,084 |
|
5,529 |
|
Cash and cash equivalents at the end of the year |
|
|
5,101 |
|
5,084 |
*Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from operating activities because they form part of the fund's dealing operations.
NOTES TO THE FINANCIAL STATEMENTS
Note 1. Accounting policies
(a) For the year ended 31 March 2020, the company is applying Financial Reporting Standard 102 ('FRS 102') applicable in the UK and Republic of Ireland, which forms part of the Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council ('FRC') in 2015.
The financial statements have been prepared on a going concern basis. As at the date of this report and following protective notice of termination under its management agreement with Martin Currie Fund Management Limited on 3 June 2020, i t is not possible to predict whether an outcome of the review of the investment management arrangements might be a corporate event, such as a merger, or he appointment of a new investment manager, there is therefore a material uncertainty over the outcome of the prospective change of investment manager. In the event of a corporate restructuring or merger, shareholders would be offered the opportunity to roll over into another vehicle and continue investing and the existing company would be wound up. The directors recognise that this may cast doubt on the likelihood of the company continuing as a going concern. Despite this managerial uncertainty the directors confirm that they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due. Further information is given in the Viability Statement and the Going Concern Statement.
These financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS102 issued by the FRC in 2015 as revised subsequently and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the AIC in October 2019.
Statement of estimation uncertainty - in the application of the company's accounting policies, the board is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not always readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may vary from these estimates. There have been no significant judgements, estimates or assumptions for the year.
Functional currency - the company is required to nominate a functional currency, being the currency in which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared. This is also the currency in which all expenses and dividends are paid in.
(b) Income from equity investments is determined on the date on which the investments are quoted ex-dividend, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Income from fixed interest securities is recognised on an effective yield basis. UK dividends received are accounted for at the amount receivable and are not grossed up for any tax credit. Other income includes any taxes deducted at source. Gains and losses arising from the translation of income denominated in foreign currencies are recognised in the revenue reserve. Scrip dividends are treated as unfranked investment income; any excess in value of shares received over the amount of the cash dividend is recognised in capital reserve.
Income from underwriting commission and traded options are recognised as earned.
(c) Interest receivable and payable and management expenses are treated on an accruals basis.
(d) The management fee and interest costs are allocated 65% to capital and 35% to revenue in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. All other expenses are wholly allocated to revenue.
(e) Gains and losses on the realisation of investments and changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms, together with exchange adjustments to overseas currencies are taken to capital reserve.
(f) Acquisitions in foreign currencies are recorded in the functional currency of the company at the prevailing exchange rate on the date of the transaction and retranslated at the rates of exchange ruling on the date of the statement of financial position. Investments are recognised initially as at the trade date of a transaction. Subsequent to this, the disposal of an investment is accounted for once again as at the trade date of a transaction.
(g) Revenue received and interest paid in foreign currencies are translated at the rates of exchange on the transaction date. Any exchange differences between the recognition and settlement both for revenue transactions are recognised as revenue in the statement of comprehensive income.
(h) The company's investments are classified as 'financial assets at fair value through profit or loss' and are valued at fair value. For listed investments this is deemed to be bid market prices. Gains and losses arising from changes in fair value are included in the capital return for the year.
(i) All other financial assets and liabilities are recognised in the financial statements at amortised cost.
(j) Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the statement of financial position date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the statement of financial position date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Timing differences are differences arising between the company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
(k) Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the statement of comprehensive income.
(l) The cost of share buybacks include the amount of consideration paid, including directly attributable costs and are deducted from the special distributable reserve until the shares are cancelled. Proceeds received from the reissue of shares held in treasury are treated in accordance with Section 731 of the Companies Act 2006. Proceeds equivalent to the original cost, calculated by applying a weighted average price, are credited to the Special Distributable Reserve to replenish the profits available for distribution; proceeds in excess of the original cost are credited to the Share Premium account.
(m) The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on dividends received in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. The company does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently re-measured to the fair value at each reporting date. The resulting gain or loss is recognised as revenue or capital in the statement of comprehensive income depending on the nature and motive of each derivative transaction.
During the year ending 31 March 2017 the company commenced the writing of options, continuing through to the year ending 31 March 2020. These derivatives are held at fair value based on the bid/offer prices of the options written to which the company is exposed. The value of the option is subsequently marked-to-market to reflect the fair value of the option based on traded prices. The primary purpose behind the writing of options is to receive the premium, thus any premium received is considered to be revenue in nature and presented under revenue in the statement of comprehensive income.
When an option is closed out or exercised, the gain or loss is accounted for as a capital gain or loss.
(n) Stock lending income is received net of associated costs and recognised in revenue as earned.
(o) Nature of distributable reserve accounts
Capital reserve
Gains and losses on realisations of fixed asset investments, and transactions costs, together with appropriate exchange differences, are dealt with in this reserve.
Increases and decreases in the valuation of fixed asset investments are also dealt with in this reserve along with payment of capital dividend. Also taken to this reserve are 65% of the management fees as detailed in note (d).
Revenue reserve
Net revenue profits and losses of the company and the fair value costs of share based payments which are revenue in nature are recorded within this reserve, together with the dividend payment made by the company. The remaining 35% of the management fees are taken to this reserve.
Special distributable reserve
Records transactions of which are capital in nature - shares bought back into treasury and the related stamp duty incurred. Also taken to this reserve are proceeds received, based on weighted average purchase price, on shares issued from treasury.
Note 2: Returns and net asset value
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
|
Revenue return |
|
|
|
Revenue return attributable to ordinary redeemable shareholders |
£6,735,000 |
£6,647,000 |
|
Weighted average number of shares in issue during the year |
104,294,951 |
106,621,950 |
|
Revenue return per ordinary redeemable share (basic and diluted) |
6.46p |
6.23p |
|
Capital return |
|
|
|
Capital return attributable to ordinary redeemable shareholders |
(£21,787,000) |
£13,538,000 |
|
Weighted average number of shares in issue during the year |
104,294,951 |
106,621,950 |
|
Capital return per ordinary redeemable share (basic and diluted) |
(20.89p) |
12.70p |
|
Total return |
|
|
|
Total return per ordinary redeemable share (basic and diluted) |
(14.43p) |
18.93p |
|
Net asset value per share |
|
|
|
Net assets attributable to shareholders |
£170,465,000 |
£191,444,000 |
|
Number of shares in issue at the year end |
104,760,635 |
104,496,248 |
|
Net asset value per share |
162.72p |
183.21p |
Total return
The total return per share for the company is the combined effect of the rise and fall in the share price or NAV together with the reinvestment of the quarterly dividends paid.
The tables below provide the NAVs and share prices of the company on the dividend reinvestment dates for the year ended 31 March 2020 and 31 March 2019.
|
2020 |
Dividend rate |
NAV |
Share price |
|
31 March 2019 |
n/a |
183.21 |
169.50 |
|
4 July 2019 |
1.90 |
199.22 |
199.50 |
|
3 October 2019 |
1.45 |
196.21 |
191.00 |
|
24 December 2019 |
1.45 |
205.99 |
206.50 |
|
26 March 2020 |
1.45 |
166.20 |
164.75 |
|
31 March 2020 |
n/a |
162.72 |
168.5 |
|
Total return |
|
(8.3%) |
2.7% |
|
2019 |
|
|
|
|
31 March 2018 |
n/a |
170.02 |
160.50 |
|
5 July 2018 |
1.75 |
180.61 |
168.00 |
|
4 October 2018 |
1.45 |
183.95 |
170.00 |
|
27 December 2018 |
1.45 |
162.84 |
151.00 |
|
28 March 2019 |
1.45 |
181.37 |
169.00 |
|
31 March 2019 |
n/a |
183.21 |
169.50 |
|
Total return |
|
11.4% |
9.6% |
Note 3. Revenue
|
|
Year to 31 March 2020 £000 |
Year to 31 March2019 £000 |
|
From listed investments |
|
|
|
UK - equities |
1,765 |
1,716 |
|
Overseas - equities |
6,041 |
6,120 |
|
|
7,806 |
7,836 |
|
Other revenue |
|
|
|
Premium - written options |
890 |
669 |
|
Stock lending |
- |
31 |
|
Other Income |
4 |
3 |
|
|
8,700 |
8,539 |
During the year ended 31 March 2020, the company received no special dividends treated as capital (2019: £nil).
Note 4. Other expenses
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
|
|
£000 |
£000 |
|
Bank charges and custody fees |
21 |
25 |
|
Depositary fees |
43 |
49 |
|
Directors' fees |
128 |
127 |
|
Employers' national insurance contributions |
12 |
12 |
|
Legal fees |
1 |
7 |
|
Printing and postage |
16 |
19 |
|
Registrar's fees |
65 |
58 |
|
Secretarial fee |
135 |
132 |
|
VAT |
(31) |
(27) |
|
Other |
163 |
188 |
|
Total |
553 |
590 |
|
Auditors' remuneration*: |
|
|
|
- audit services |
34 |
22 |
|
- non-audit services |
- |
2 |
|
|
587 |
614 |
*The audit fees for 2020 are payable to Ernst & Young LLP. There were no non-audit services for the year ended 31 March 2020 (2019: £1,500 plus VAT). The non-audit services for the year end 31 March 2019 relate to the assessment of 'ready to tag' accounts and design process for iXBRL purposes.
|
|
Year ended 31 March 2020 |
Year ended 31 March 2019 |
|||||
|
|
|
|
|
|
|
||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
|
Ongoing charges are calculated with reference to the following figures: |
|||||||
|
Investment management fee |
(410) |
(761) |
(1,171) |
(397) |
(737) |
(1,134) |
|
|
Other expenses |
(587) |
- |
(587) |
(614) |
- |
(614) |
|
|
Total expenses |
(997) |
(761) |
(1,758) |
(1,011) |
(737) |
(1,748) |
|
|
Average net assets over the year |
|
|
204,048 |
|
|
190,587 |
|
|
Ongoing charges |
|
|
0.90% |
|
|
0.90% |
|
Note 5. Finance costs
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
|
Interest on bank loans and overdrafts |
205 |
365 |
570 |
196 |
355 |
551 |
Note 6. Dividends
|
|
Year to 31 March 2020 £000 |
Year to 31 March 2019 £000 |
|
|
Year ended 31 March 2018 - fourth interim dividend from income of 1.48p |
- |
1,603 |
|
|
Year ended 31 March 2018 - fourth interim dividend from capital of 0.27p |
- |
293 |
|
|
Year ended 31 March 2019 - first interim dividend of 1.45p |
- |
1,532 |
|
|
Year ended 31 March 2019 - second interim dividend of 1.45p |
- |
1,519 |
|
|
Year ended 31 March 2019 - third interim dividend of 1.45p |
- |
1,515 |
|
|
Year ended 31 March 2019 - fourth interim dividend of 1.90p |
1,982 |
- |
|
|
Year ended 31 March 2020 - first interim dividend of 1.45p |
1,513 |
- |
|
|
Year ended 31 March 2020 - second interim dividend of 1.45p |
1,509 |
- |
|
|
Year ended 31 March 2020 - third interim dividend of 1.45p |
1,518 |
- |
|
|
|
6,522 |
6,462 |
|
|
Set out below are the total dividends in respect of the period, which forms the basis on which the requirements of sections 1158-1159 of the Corporation Tax Act 2010 are considered. |
|||
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
|
|
|
£000 |
£000 |
|
|
First interim dividend of 1.45p for the year ended 31 March 2020 (2019: 1.45p) |
1,513 |
1,532 |
|
|
Second interim dividend of 1.45p for the year ended 31 March 2020 (2019: 1.45p) |
1,509 |
1,519 |
|
|
Third interim dividend of 1.45p for the year ended 31 March 2020 (2019: 1.45p) |
1,518 |
1,515 |
|
|
Proposed fourth interim dividend of 2.06p for the year ended 31 March 2020 (2019: 1.90p) |
2,158 |
1,985 |
|
|
|
6,698 |
6,551 |
|
During the year the directors received dividends of 6.25p (2019: 4.62p) per share. Directors' shareholdings are disclosed in the annual report and accounts. The revenue reserves as at 31 March 2020 are £2,321,000, of this £2,158,000 will be used to fund the fourth interim dividend. At the AGM held on 16 May 2012, the board received shareholder approval to amend the articles of association of the company to enable dividends to be paid out of capital.
Note 7. Taxation on ordinary activities
|
|
|
|
|
|
Year to 31 March 2020 £000 |
Year to 31 March2019 £000 |
|
Foreign tax |
867 |
671 |
The corporation tax rate was 19.00% (2019: 19.00%). The tax charge for the year differs from the charge resulting from applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below:
|
|
Year to 31 March 2020 £000 |
Year to 31 March2019 £000 |
|
Net return before taxation |
(14,185) |
20,856 |
|
Corporation tax at rate of 19% (2019: 19%) |
(2,695) |
3,963 |
|
Effects of: |
|
|
|
Losses/(gains) on investments not taxable |
3,921 |
(2,887) |
|
Non taxable UK dividend income |
(288) |
(292) |
|
Overseas dividends not taxable |
(1,053) |
(1,030) |
|
Overseas tax suffered |
867 |
671 |
|
Currency losses not taxable |
5 |
107 |
|
Increase in excess management and loan expenses |
120 |
150 |
|
Impact of expensed foreign tax |
(10) |
(11) |
|
Total tax charge |
867 |
671 |
As at 31 March 2020, the company had unutilised management expenses of £16,815,000 (2019: £16,186,000) carried forward. Due to the company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
Note 8. Investments at fair value through profit or loss
|
|
As at 31 March2020 |
As at 31 March 2019 |
|
|
£000 |
£000 |
|
Opening book cost |
182,754 |
188,442 |
|
Opening investment holding gains |
29,924 |
18,231 |
|
Opening market value |
212,678 |
206,673 |
|
Acquisitions at cost |
85,742 |
78,397 |
|
Disposals proceeds received |
(88,116) |
(87,587) |
|
(Losses)/gains on investments |
(20,635) |
15,195 |
|
Market value of investments held at31March |
189,669 |
212,678 |
|
Closing book cost |
182,216 |
182,754 |
|
Closing investment holding gains |
7,453 |
29,924 |
|
Closingmarketvalue |
189,669 |
212,678 |
The company received £88,116,000 (2019: £87,587,000) from investments sold in the year. The book cost of these investments when they were purchased was £86,280,000 (2019: £84,085,000).
The transaction costs in acquiring investments during the year were £145,000 (2019: £141,000). For disposals, transaction costs were
£51,000 (2019: £39,000).
Note 9. Trade and other receivables
|
|
As at 31 March 2020 |
As at 31 March 2019 |
|
|
£000 |
£000 |
|
Dividends receivable |
398 |
775 |
|
Cash collateral held at broker for derivatives |
2,631 |
1 |
|
Tax recoverable |
191 |
69 |
|
Prepayments and other debtors |
22 |
35 |
|
Amount due for Ordinary shares issued |
166 |
- |
|
|
3,408 |
880 |
|
None of the company's trade receivables are past due or impaired. |
||
Note 10. Trade payables - amounts falling due within one year
|
|
As at 31 March 2020 |
As at 31 March 2019 |
|
|
£000 |
£000 |
|
Interest accrued |
13 |
14 |
|
Sterling bank revolving loan |
10,000 |
10,000 |
|
Amount due for Ordinary shares bought back |
- |
18 |
|
Other trade payables |
417 |
489 |
|
|
10,430 |
10,521 |
Note 11. Trade payables - amounts falling due after more than one year
|
|
As at 31 March 2020 |
As at 31 March 2019 |
|
|
£000 |
£000 |
|
Bank loan |
15,765 |
15,162 |
The term loans carry an annual fixed rate interest of 2.1408%, 1.4175% and 3.1925% for Facility A, Facility B and Facility C respectively. The rate of interest for the revolving credit facility is set at each roll-over date and is made up of a fixed margin of 0.65% plus LIBOR rate. Under this agreement £10,000,000 was drawn at 27 March 2020 at a rate of 0.90413% with a maturity date of 27 April 2020.
The repayment date of the term loans is the same as their termination date which is the 19 September 2023. The repayment date of the revolving facility is the last day of its interest period and the termination date is the 30 September 2020.
Under the loan agreements the company is to ensure that, at each month end, the aggregate principal amount outstanding in respect of monies borrowed does not exceed an amount equal to 25% of its net tangible assets and, unless otherwise agreed with the lender, net tangible assets are not less than £100,000,000. Also the company shall not enter into any obligations except with the prior consent of the Lender and not enter into any option writing programme which the value of its transactions, at any time, exceed 15% of its net tangible assets.
As at 31 March 2020 the company had drawn down the full amount of the loan and the balances as at that date were for Facility A
£1,500,000, Facility B £3,982,000 (€4,500,000), Facility C £10,283,000 (US$12,750,000) and Facility D £10,000,000 (31 March 2019: Facility A £1,500,000, Facility B £3,877,00 (€4,500,000), Facility C £9,785,000 (US$12,750,000) and Facility D £10,000,000).
Note 12. Called up share capital
|
|
Number ofshares |
Asat 31 March2020 |
Number ofshares |
Asat 31 March2019 |
|
|
as at 2020 |
£000 |
as at 2019 |
£000 |
|
Ordinary shares of 1p |
|
|
|
|
|
Ordinary shares in issue at the beginningofthe year |
104,496,248 |
1,045 |
110,446,792 |
1,105 |
|
Ordinary shares issued from Treasuryduringthe year |
700,000 |
7 |
- |
- |
|
Ordinary shares bought back toTreasuryduring the year |
(435,613) |
(4) |
(5,950,544) |
(60) |
|
Ordinary shares in issue at the end oftheyear |
104,760,635 |
1,048 |
104,496,248 |
1,045 |
|
Treasury shares (ordinary shares 1p) |
|
|
|
|
|
Treasury shares in issue at the beginningofthe year |
17,802,900 |
178 |
11,852,356 |
118 |
|
Ordinary shares issued from Treasuryduringthe year |
(700,000) |
(7) |
- |
- |
|
Ordinary shares bought back toTreasuryduring the year |
435,613 |
4 |
5,950,544 |
60 |
|
Treasury shares in issue at the end oftheyear |
17,538,513 |
175 |
17,802,900 |
178 |
|
Total ordinary shares in issue and in Treasury at the end of the year |
122,299,148 |
1,223 |
122,299,148 |
1,223 |
There were 435,613 shares bought back during the year to 31 March 2020 at a cost of £811,000 (2019: 5,950,544 at a cost of £10,063,000). During the year, the company issued 700,000 shares at a cost of £1,406,000 (2019: no shares issued). The share premium represents the surplus amount over the nominal value of the issued share capital excluding costs, with any related issuance cost allocated to the special distributable capital reserve.
The analysis of the capital reserve is as follows:
|
|
Realised capital reserve £000 |
Investment holding gains £000 |
Total capital reserve £000 |
|
As at 31 March 2019 |
45,362 |
29,924 |
75,286 |
|
Gains on realisation of investments at fair value |
1,836 |
- |
1,836 |
|
Realised currency losses during the year |
(26) |
- |
(26) |
|
Movement in unrealised losses |
- |
(22,471) |
(22,471) |
|
Capital expenses |
(1,126) |
- |
(1,126) |
|
As at 31 March 2020 |
46,046 |
7,453 |
53,499 |
The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts', 2019.
Note 13. Analysis of debt
|
|
As at 31 March 2019 |
Cash flows |
Exchange movements |
As at 31 March 2020 |
|
|
£000 |
£000 |
£000 |
£000 |
|
Cash at bank |
5,084 |
17 |
- |
5,101 |
|
Bank borrowings |
(25,162) |
- |
(603) |
(25,765) |
|
Net debt |
(20,078) |
17 |
(603) |
(20,664) |
Note 14. Related party transactions
With the exception of the management and secretarial fees , directors' fees) and directors' shareholdings (disclosed within the company's annual report and accounts), there have been no related party transactions during the year, or in the prior year.
Note 15. Derivatives and other financial instruments
The company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, for the purpose of managing currency and market risks arising from the company's activities.
The main risks the company faces from its financial instruments are (a) market price risk (comprising of (i) interest rate risk, (ii) currency risk and (iii) other price risk), (b) liquidity risk and (c) credit risk.
The board regularly reviews and agrees policies for managing each of these risks. The manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term receivables and creditors, other than for currency disclosures.
(a) Market price risk
The fair value or future cash flows of a financial instrument held by the company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, foreign currency risk and other price risk.
(i)
Market risk arising from interest rate risk
Interest rate movements may affect:
• the fair value of the investments in fixed interest rate securities;
• the level of income receivable on cash deposits; and
• the level of interest payable on borrowings.
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
The board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The company has a revolving loan with The Royal Bank of Scotland International Limited which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 20 per cent of the net tangible assets of the company. Details of borrowings at 31 March 2020 are shown in notes 10 and 11.
Interest risk profile
The interest rate risk profile of the portfolio of financial assets and liabilities at the date of the statement of financial position was as follows:
|
|
Interest rate |
Local currency |
Foreign |
GBPsterling equivalent |
|
As at 31 March 2020 |
% |
000 |
exchange rate |
£000 |
|
Assets: |
|
|
|
|
|
Sterling |
0.00 |
4,667 |
1.000 |
4,667 |
|
Euro |
(0.75) |
190 |
1.130 |
168 |
|
US dollar |
0.00 |
94 |
1.240 |
77 |
|
Swedish krona |
(1.25) |
307 |
12.285 |
25 |
|
Swiss franc |
(1.75) |
196 |
1.200 |
164 |
|
Total |
|
|
|
5,101 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling term loan |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling revolving loan |
0.90 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.130 |
3,982 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.240 |
10,283 |
|
Total |
|
|
|
25,765 |
|
|
|
|
|
GBP sterling |
|
|
Interest rate |
Local currency |
Foreign |
equivalent |
|
As at 31 March 2019 |
% |
000 |
exchange rate |
£000 |
|
Assets: |
|
|
|
|
|
Sterling |
0.07 |
4,391 |
1.000 |
4,391 |
|
Euro |
(0.60) |
523 |
1.160 |
450 |
|
US dollar |
0.50 |
87 |
1.303 |
67 |
|
Swedish krona |
(1.50) |
307 |
12.086 |
25 |
|
Swiss franc |
(1.75) |
196 |
1.298 |
151 |
|
Total |
|
|
|
5,084 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling term loan |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling revolving loan |
1.48 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.160 |
3,877 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.303 |
9,785 |
|
Total |
|
|
|
25,162 |
Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates at the statement of financial position date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
The following table illustrates the sensitivity of the return after taxation to an increase or decrease of 75 (2019: 75) basis points in interest rates.
|
|
Year to 31 March 2020 |
Year to 31 March 2019 |
||
|
|
Increase in rate £000 |
Decrease in rate £000 |
Increase in rate £000 |
Decrease in rate £000 |
|
Effect on revenue return |
(13) |
13 |
(13) |
13 |
|
Effect on capital return |
(25) |
25 |
(25) |
25 |
|
Effect on total return and on net assets |
(38) |
38 |
(38) |
38 |
In the opinion of the directors, the above sensitivity analysis may not be representative of the year as a whole, since exposure may change as investments are made, borrowings are drawn down and may be repaid throughout the year.
(ii)
Market risk arising from foreign currency risk
A significant proportion of the company's investment portfolio is invested in overseas securities and the statement of financial position can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, from time to time, match specific overseas investment with foreign currency borrowings.
The revenue account is subject to currency fluctuation arising on overseas income.
Foreign currency risk profile
Foreign currency risk exposure by currency of denomination:
|
|
As at 31March2020 |
As at 31 March2019 |
||||
|
|
Investment exposure |
Net monetaryexposure |
Total currency exposure |
Investment exposure |
Net monetaryexposure |
Total currency exposure |
|
£000 |
£000 |
£000 |
£000 |
£000 |
£000 |
|
|
US dollar |
82,940 |
(8,078) |
74,862 |
95,369 |
(9,506) |
85,863 |
|
Euro |
28,747 |
(3,011) |
25,736 |
41,841 |
(3,103) |
38,738 |
|
Swiss franc |
11,166 |
289 |
11,455 |
10,481 |
169 |
10,650 |
|
Hong Kong dollar |
8,603 |
- |
8,603 |
7,588 |
- |
7,588 |
|
Korean won |
7,215 |
98 |
7,313 |
3,410 |
17 |
3,427 |
|
Australian dollar |
5,436 |
- |
5,436 |
5,662 |
- |
5,662 |
|
Canadian dollar |
5,115 |
63 |
5,178 |
9,649 |
61 |
9,710 |
|
Swedish krona |
3,308 |
25 |
3,333 |
4,052 |
26 |
4,078 |
|
Singapore dollar |
2,933 |
- |
2,933 |
2,500 |
- |
2,500 |
|
Total overseas investments |
155,463 |
(10,614) |
144,849 |
180,552 |
(12,336) |
168,216 |
|
Pound Sterling |
34,206 |
(8,590) |
25,616 |
32,126 |
(8,898) |
23,228 |
|
Total |
189,669 |
(19,204) |
170,465 |
212,678 |
(21,234) |
191,444 |
The asset allocation between specific markets can vary from time to time based on the manager's opinion of the attractiveness of the individual markets.
Foreign currency sensitivity
At 31 March 2020, if sterling had strengthened by 10% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 10% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts.
|
|
As at 31 March2020 £000 |
As at 31 March2019 £000 |
|
US dollar |
7,486 |
8,586 |
|
Euro |
2,574 |
3,874 |
|
Swiss franc |
1,146 |
1,065 |
|
Hong Kong dollar |
860 |
759 |
|
Korean won |
731 |
343 |
|
Australian dollar |
544 |
566 |
|
Canadian dollar |
518 |
971 |
|
Swedish krona |
333 |
408 |
|
Singapore dollar |
293 |
250 |
(iii)
Market
risk
arising
from other price
risk
Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
It is the board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, as set out above both act to reduce market risk. The manager actively monitors market prices throughout the year and reports to the board, which meets regularly in order to review investment strategy. All investments held by the company are listed on stock exchanges worldwide.
Other price risk sensitivity
The following table illustrates the sensitivity of the return after taxation and the net asset value to an increase or decrease of 15% in the fair value of the company's equities. The calculations are based on the portfolio valuations as at the respective statement of financial position date, and the consequent impact on the investment management fees for the year, and are not representative of the year as a whole.
|
|
Year to 31March 2020 |
Year to 31 March2019 |
||
|
|
Increase in fairvalue |
Decreasein fairvalue |
Increasein fair value |
Decreasein fair value |
|
£000 |
£000 |
£000 |
£000 |
|
|
Effect on revenue return |
(60) |
60 |
(67) |
67 |
|
Effect on capital return |
28,339 |
(28,339) |
31,777 |
(31,777) |
|
Effect on total return and on net assets |
28,279 |
(28,279) |
31,710 |
(31,710) |
(a) Liquidity risk
This is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk is not considered to be significant as the company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (see notes 10 and 11 for more details).
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:
|
|
As at 31 March 2020 |
As at 31 March 2019 |
||||
|
|
Three months or less £000 |
More than three months £000 |
Total £000 |
Three months or less £000 |
More than three months £000 |
Total £000 |
|
Bank loans |
10,127 |
17,125 |
27,252 |
10,152 |
16,872 |
27,024 |
|
Amount due for ordinary shares bought back |
- |
- |
- |
18 |
- |
18 |
|
Other trade payables |
417 |
- |
417 |
489 |
- |
489 |
|
|
10,544 |
17,125 |
27,669 |
10,659 |
16,872 |
27,531 |
* Interest accrued disclosed in prior year has been included within bank loans.
(c) Credit risk
This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the company suffering a loss.
The risk is not considered to be significant by the board, and is managed as follows:
• investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amounts that may be due from any one broker; and
• cash is held only with reputable banks with high quality external credit ratings.
The maximum credit risk exposure as at 31 March 2020 was £8,509,000 (2019: £5,964,000). This was due to trade receivables and cash as per notes 9 and 13.
Fair value of financial assets and financial liabilities
All financial assets and liabilities of the company are included in the statement of financial position at fair value or the statement of financial position amount is a reasonable approximation of fair value.
(d) Counterparty risk
The table below shows the counterparty risk as at the Balance Sheet date:
|
|
Derivative exposure |
Collateral posted |
Collateral received |
Collateral |
|||
|
As at 31 March 2020 |
£000 |
£000 |
£000 |
asset class |
|||
|
Counterparty UBS |
- |
2,631 |
- |
Cash |
|||
|
Total |
- |
2,631 |
- |
|
|||
|
|
|
|
|
|
|||
|
|
Derivative exposure |
Collateral posted |
Collateral received |
Collateral |
|||
|
As at 31 March 2019 |
£000 |
£000 |
£000 |
asset class |
|||
|
Counterparty UBS |
- |
1 |
- |
Cash |
|||
|
Total |
- |
1 |
- |
|
|||
Note 16. Capital management policies and procedures
The company's capital management objectives are:
• to ensure that the company will be able to continue as a going concern; and
• to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt.
The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.
The board monitors and reviews the broad structure of the company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.
Note 17. Fair value hierarchy
Under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc); or
• Level 3: significant unobservable input (including the company's own assumptions in determining the fair value of investments).
The financial assets measured at fair value through profit and loss are grouped into the fair value hierarchy as follows:
|
At 31 March 2020 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities |
189,669 |
- |
- |
189,669 |
|
Net fair value |
189,669 |
- |
- |
189,669 |
|
At 31 March 2019 |
Level1 £000 |
Level2 £000 |
Level3 £000 |
Total £000 |
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities |
212,678 |
- |
- |
212,678 |
|
Net fair value |
212,678 |
- |
- |
212,678 |
Note 18. Stock lending
During 2019 the company terminated the Securities Lending Authorisation Agreement with State Street Bank & Trust Company.
As at 31 March 2020 none of the investments were subject to stock lending agreements and no assets were held in collateral (2019: £nil of investments subject to stock lending, £nil held as collateral).
The gross earnings and the fees paid for the year are £nil (2019: £42,000) and £nil (2019: £11,000).
Note 19. Post year end events
On 1 July 2020 the board declared a fourth interim dividend of 2.06p per share. As at 26 June 2020, the company bought back a further 22,098 ordinary shares at an average price of 187.4p per share. Between 1 April 2020 and 26 June 2020 the net asset of the company fell from £170,465,000 to £199,978,000 a rise of 17.31% and the cum-income NAV per share (as published by the AIC) rose 17.3% from 162.72p to 190.93p.
On 3 June 2020, the company announced that it had served protective notice of termination under its management agreement with Martin Currie Fund Management Limited. The ongoing review of its management arrangements is causing the directors to state that there is a material uncertainty as to going concern in relation to the outcome, as stated in Note 1 (a).
Note 20. AIFMD disclosures
In accordance with the AIFM Directive, information in relation to the company's leverage and the remuneration of the company's AIFM, Martin Currie Fund Management ('MCFM'), is required to be made available to investors. In accordance with the Directive, the AIFM's remuneration policy is available from MCFM on request (see contact details on the back cover). The numerical remuneration disclosures in relation to the AIFM's year ended 31 March 2020 and 31 March 2019 are available from the company secretary on request.
The company's maximum and actual leverage levels at 31 March 2020 are shown below:
|
Leverage Exposure |
Gross Method |
Commitment Method |
|
Maximum permitted limit |
300% |
200% |
|
Actual |
107% |
109% |
The leverage limits are set by the AIFM and approved by the board and are in line with the maximum leverage levels permitted in the company's articles of association. The AIFM is also required to comply with the gearing parameters set by the board in relation to borrowings.
The company's maximum and actual leverage levels at 31 March 2019 are shown below:
|
Leverage Exposure |
Gross method |
Commitment method |
|
Maximum permitted limit |
300% |
200% |
|
Actual |
107% |
109% |
Website
Securities Trust of Scotland Trust has its own dedicated website at www.securitiestrust.com .
This offers shareholders, prospective investors and their advisers a wealth of information about the company. Updated daily, it includes the following: latest prices, manager videos, performance data, portfolio information, latest monthly update, research, press releases and articles, annual and half yearly reports.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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