Half-year Report

RNS Number : 1911W

Securities Trust of Scotland PLC

10 November 2017

Securities Trust of Scotland plc

Half-year financial report

Six months to 30 September 2017

A copy of the half-year financial report ended 30 September 2017 has been submitted to the National Storage Mechanism and will shortly be available for viewing at: www.Hemscott.com/nsm.do.

A copy of the half-year report can shortly be downloaded at www.securitiestrust.com.

FINANCIAL HIGHLIGHTS

Total return* (including reinvested dividends)	Six months ended 30 September 2017 %	Six months ended 30 September 2016 %
Net asset value per share**	1.4	13.7
Share price	1.2	17.6
Peer group***	0.8	14.2

Income

Six months ended

30 September 2017

Six months ended

30 September 2016

Revenue per share****

3.34p

3.07p

Dividend per share

2.90p

Ongoing charges*****

(as a percentage of shareholders' funds)

Six months ended

30 September 2017

Six months ended

30 September 2016

Ongoing charges

1.0

* The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or peer group.

** The net asset value ('NAV') per share total return is calculated using cum-income NAV with dividends reinvested.

*** See the half-year report for details on the company's peer group

**** For details of calculation, please refer to note 2 below.

***** 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.

INTERIM MANAGEMENT REPORT

Chairman's Statement

The six month period under review has been a positive one for the global economy. Global activity strengthened, the corporate reporting season overall beat expectations and earnings forecasts on average were upgraded. Markets as a result generally shrugged off heightened risk brought by the escalation of tensions in the Korean peninsular, an uncertain political outcome to the German elections and also increasingly tight monetary stances emerging from the ECB, Bank of England and US Federal Reserve.

Performance

Your company's NAV total return was 1.4% over the period. This was in excess of the peer group median of 0.8%. In the 18 months since appointing Mark Whitehead as portfolio manager and moving to an unconstrained global mandate, the NAV total return has been 29.7% against the peer group median of 26.7%. The share price total return was 1.2% over the six months to end September and 29.3% since the change in approach.

Discount and share buy backs

The average discount was unchanged over the period, at 6.5% (6.5% for the six months to September 2016). The company bought 22,150 shares into treasury at a cost of £37,000 and an average discount of 7.3%. The degree of liquidity that the company needed to provide to manage the discount was considerably less than in the comparable period, reflecting the positive developments in both manager and mandate (six months to September 2016: 788,887 shares bought back at a cost of £1,080,000 and an average discount of 7.6%).

Revenue return and dividend

The revenue return was 3.34p per share, an increase of 9% on the first half of the previous year and benefitted from the increased gearing facility that was drawn down at the end of September 2016. The Board is pleased to declare a second interim dividend of 1.45p which will be paid on 15 December 2017 to shareholders on the register on 24 November 2017. This represents a yield of 3.6%* and the company aims to grow the dividend in real terms over a five year period. Since Mark Whitehead took over as portfolio manager, there has been a substantial repositioning of the portfolio towards stocks with stronger cashflow and growth characteristics. Whilst this should mean better portfolio earnings growth and therefore dividend growth in the longer term, the corollary has been a lower portfolio yield. It is pleasing to see that this process is now broadly complete. In the meantime, revenue generation has benefitted from the impact of inexpensive gearing and the careful use of options writing strategies, where market volatility allows.

Outlook

Since the end of September, markets have made further upward progress and valuations are generally high in a historic context. Global growth expectations have risen and on the whole companies are beating expectations but, as our manager points out in his review below, earnings growth is needed to push markets higher. Whilst acknowledging that inflationary threats still seem modest, there is a need for central banks to continue to increase interest rates, if only to provide a monetary cushion for the next downturn. This will increase the risks of a market setback should demand respond negatively to a higher cost of capital. Against this backdrop, the benefits of a global, unconstrained mandate and active stock picking to find those pockets of value that will offer further upside have never been more relevant.

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Rachel Beagles

Chairman

10 November 2017

Manager's review

The six month period to the end of September 2017 can be characterised as a positive one for equity market returns, with the MSCI All Countries World index producing a total return of 2.6% (in sterling terms). Not particularly exciting when compared to previous periods, but a welcome gain nonetheless.

Volatility indicators, such as the VIX Index - or 'fear gauge' as it is also known - have been grinding lower throughout the summer, making record lows. This has been surprising against the backdrop of rising geo-political uncertainty. On the one hand this lower volatility might appear supportive of positive market returns, but on the other it could be interpreted as a potential sign that markets are not pricing in risk appropriately, so a degree of caution should be attached to this level of market indifference.

Over the summer, there has been a ratcheting up in the war of words between the North Korean regime and the US. This escalation in tensions, propagated by North Korea test firing ballistic missiles and detonating a hydrogen bomb, drew widespread condemnation from UN members and led to the imposition of more stringent trade sanctions. This escalation of events was at first alarming to markets, with risk assets selling off, but they quickly rebounded once the threat of war receded. Now the market seems to greet any further news headlines with greater complacency. It is interesting to note that throughout modern history, wars rarely cause stock market losses to investors one year after their inception. The political calendar had all eyes concentrated on the French and then German elections, which were held in April/ May and September respectively. The former confirmed that the fairly unknown Emmanuel Macron had won enough votes to take office. Despite his relative inexperience, his political views were not seen to be particularly extreme and so the result passed without much controversy. The German election, however, was altogether more interesting, as while Chancellor Merkel won a fourth term in office, she did so with a much lower showing. The traditional political establishment, which has held sway since the Second World War, sustained heavy loses in this election, with an increase in support for the hard-right AfD party. Such populist discontent surrounding the elite's stance on immigration, among other things, should be an alarm signal that current policies are increasingly seen as out of touch across Europe. In the meantime, Chancellor Merkel is left to build a new coalition in a deeply divided country, exhibiting a very worrying rise in right-wing nationalism.

The US equity market lagged other global markets over the summer. A reason for this could be the tardy progress of policy makers. Repeated failures to enact proposals to scrap the Affordable Care Act ('Obamacare'), was a particular low point as it was a key vote winner for Donald Trump's election campaign. We have also heard little of substance concerning the other policy proposals, such as the reduction of corporate taxation or the erection of a wall along the Mexican border. Despite all this, Trump's approval ratings have not deteriorated as sharply as one might have expected.

Against this rather mixed backdrop, global growth has been improving. Some call this the 'Goldilocks' macroeconomic environment, where inflation and wage growth seem to be kept in check, allowing corporate profitability to surge and global GDP forecasts to rise to 3.7% for 2018 (International Monetary Fund).

Up until now, there has been no urgency for the US Federal Reserve (Fed) to hike interest rates materially or to reduce the level of quantitative easing (QE), as it needs to inflate the economy to reduce the massive pile of government debt it currently holds. But the build-up of debt is becoming unpalatable, leading the Fed to begin balance-sheet normalisation - or tapering - of QE towards the end of the year. There is a lingering concern that inflation remains low despite strong employment and that the Phillips curve - the long-established relationship between unemployment and inflation - is broken. A reminder that structural vicissitudes linked to technology and demographic change can create uncertainties.

In Europe, economic data continues to strengthen. The manufacturing purchasing managers' index (PMI) for the eurozone came in at a six-and-a-half year high recently, with all of the constituent surveys (new orders, inventory levels, production, supplier deliveries and the employment environment) making up the average reporting growth. In addition, August's unemployment rate in the euro area was 9.1%, the lowest level since February 2009. Data like this is why the president of the European Central Bank, Mario Draghi, has flagged a desire to trim the bank's asset purchases too, in effect the beginning of the end of quantitative easing for Europe.

Corporate earnings were strong in the first quarter and this trend continued into the second quarter, with a large percentage of companies beating analyst estimates. Asia, and particularly China, has seen strong activity with the Chinese stock market being one of the best performers this year. North American stock markets have lagged Europe for the first time in a number of years, with the US dollar coming under some pressure - due more to the strength of other currencies such as the euro, which has been buoyed by the sharp upturn in economic activity in Europe.

Performance

During the last six months, the company's NAV lagged the wider equity market. This was in part driven by style, as higher-yielding equities struggled to keep up with index leaders. Despite this the company posted a 1.4% total return. Emerging markets have led the country performance table over the past six months, driven largely by China. The portfolio has lost out here, as we have struggled to find sustainable dividend candidates in this region, due to cyclicality, transparency on dividend policy, and on valuation grounds for the type of stock we look for. This region was closely followed by Europe, which built on earlier strong returns to leave it the best performing developed market year-to-date. Here we have been building weightings as we look to take advantage of an economic recovery that is at an earlier stage than in the US.

Of the larger markets, Pacific ex Japan has been the worst region in absolute terms, followed by North America which struggled to make a positive absolute return over the period. For the company, the North American stocks have produced a negative contribution to the absolute level of performance. However, we are confident that, in aggregate, the holdings exhibit attractive (improving) growth and value despite the short-term weakness. That said, we have been reducing exposure to the more expensive names over the past months, in favour of cheaper valuations in Europe.

In terms of sector performance, IT was by far the strongest, driven largely by the FANG (Facebook, Apple, Netflix and Google) and related stocks. We consistently carry a low weighting to the tech sector on dividend-yield grounds, as the sector has the lowest aggregate yield available in the market. However, we have not missed out completely as holdings in Apple, Taiwan Semiconductor (TSMC) and Microsoft have all risen in the period under review, with TSMC among the top 10 contributors to performance.

Financials, in particular banks and diversified businesses, have produced strong returns for the company. Banca Generali (the Italian asset manager), Credicorp (the Peruvian lending bank) and ING Groep (the retail bank based in the Netherlands), all produced very encouraging returns. We still believe these names have potential to re-rate to higher book values per share, as earnings pick up from trough levels. We also believe that the European banking sector looks interesting, as we have largely passed the political events that could have caused an increase in volatility, such as the French and German elections. Should 10-year US and German Treasury yields rise from their stubbornly low levels, banks in the portfolio will benefit in terms of profitability, with sentiment also likely to receive a further boost.

The energy sector remained weak for much of the period, but posted a strong rebound at the end of the reporting period. The company's energy stocks have provided cause for concern throughout 2017, and we have had to stay patient for the oil futures curve to move into backwardation, a signal of oil market tightness.

Consumer discretionary stocks in the portfolio have detracted from returns for this period and were by some distance the worst performing in the portfolio. The names have stock-specific issues which cannot be attributed to a region, or the sector as a whole, although we carry a lower weighting than we have done for some time. Having said that, a common theme is that of disruption from the new technology behemoths of Amazon, Google and Netflix.

Activity

Among the purchases over the period was Blackstone, a US listed alternative asset manager. We believe the increasing allocation by investors to alternatives will continue and that the largest players will continue to take market share. In quality terms Blackstone has net cash, high margins and is capital light so capital allocation, given the partnership model, is focused on distributions to shareholders. We also bought Broadcom, the third largest global semiconductor manufacturer (in terms of revenues). Its diverse portfolio mainly consists of products where it is the market leader, thanks to a technological advantage or scale, allowing it to generate very attractive returns. Other purchases were US regional bank BB&T, Leggett & Platt, the US-based pioneer of steel-coil bedsprings, global medical diagnostics company Sonic Healthcare and branded lifestyle apparel company VF Corp.

Sales included media company Time Warner, completing the sale of the stock ahead of its takeover (which we benefitted from). We also sold Japanese convenience-store operator Lawson. We now believe the convenience store environment will remain challenging for longer as competition becomes fiercer. In addition, this environment will require greater investment in new stores and renovation thus delaying the growth in cash flows and dividends that we expected.

Another sale was mobile-satellite communications provider Inmarsat. The stock has performed in line with the broader market since purchase in early 2012, but has been weak over the last year. Our initial thesis was based on the structural growth of increasing demand for mobile communication and internet accessibility in the maritime and aviation markets. Increasingly the growth we expected has been pushed out further into the future, and the cost of that growth through increased capital expenditure has risen. Other sales include pharmaceutical giant Pfizer.

With the low volatility prevalent in equity markets we have found very few opportunities to write options although we have been able to undertake a couple of trades. One of these was the sale of put options in Continental. This is a global auto-parts supplier that we believe stands to benefit from long-term structural trends as we move towards autonomous (safety) and electric vehicles (emissions). We also sold puts in ITV, after selling a small position in the UK broadcaster, and insurer Prudential.

Outlook

Volatility remains stubbornly low despite clear risks, such as an escalation in the North Korean missile fracas, other geo-political complications, the rise of populist politics or of central bank policy surprises.

Both the US and European central banks have commenced a withdrawal of the stimulus/quantitative easing that has been in place since the global financial crisis. This indicates that they are certain that economic activity is sufficiently strong; and most of the indicators they are using to confirm structural growth are showing a very healthy level of expansion. The US Institute of Supply Management (ISM)'s manufacturing index, which monitors employment, production, inventories, new orders and supplier deliveries, has been particularly strong. Non-manufacturing data also points to an expansionary mode, with the economy travelling at, or near to, full employment.

With their economies blooming, the policy setters feel it is time to begin normalising monetary and fiscal activity. But, it is our contention that both the Federal Reserve and the ECB have to tread carefully. They must not withdraw stimulus too fast, as it may well cause a toxic shock, igniting a sell-off in bond markets that could trigger a contraction in activity and shift in sentiment. The economy's sensitivity to adjustments in interest rates must not be underestimated, and there is a real chance of policy error here. Policymakers are therefore unlikely to withdraw the stimulus too aggressively, so lower-for-longer interest rates should allow economic growth to build; and the prolonged business cycle should be good for equities, despite their heady valuations.

Much of the equity strength we have see in recent years has been driven by valuation expansion, as investors have agreed to pay a greater multiple of the level of profits generated. This is unusual, as the longer-term drivers of equity returns are dividends and corporate profits. We therefore believe the sustainability of the current equity market rally is dependent on corporate earnings growth. However, against this backdrop of chronically low rates, equities offer investors the best opportunity for accessing returns and Securities Trust of Scotland is well placed to deliver an attractive absolute level of yield for those in retirement that should also grow over time to give inflation protection, as well as capital growth. If anything, this environment highlights the need to find, and ultimately invest in, companies exhibiting genuine, sustainable growth. We believe that our investment process which combines robust research, unique income analysis and disciplined portfolio construction will enable us to deliver on our aim of providing income and capital growth over the long term.

Mark Whitehead

10 November 2017

Principal 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 latest annual report. The principal 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.

Risks are regularly monitored at board meetings and the board's planned mitigation measures are described in the latest annual report. The board maintains a risk register and also carries out a risk workshop annually. The board has identified the following principal risks to the company:

Ø Loss of s1158-9 status

Ø Long-term investment underperformance

Ø Market, financial and interest rate risk

Further details of these risks and how the board manages them can be found in the 2017 annual report and on the company's website www.securitiestrust.com.

Directors' responsibility

In accordance with Chapter 4 of the Disclosure and Transparency Rules, and to the best of their knowledge, each director of the company confirms that the financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom accounting standards and applicable law) and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014. The directors are satisfied that the financial statements give a true and fair view of the assets, liabilities, financial position and profit of the company. Furthermore, each director certifies that the interim management statement includes an indication of important events that have occurred during the first six months of the financial year, and their impact on the financial statements, together with a description of the principal risks and uncertainties that the company faces. In addition, each director of the company confirms with the exception of management, secretarial fees, and directors' fees and directors' shareholdings, that there have been no related party transactions during the six months to 30 September 2017.

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 and manager's review. The financial position of the company as at 30 September 2017 is shown on the unaudited condensed statement of financial position. The unaudited condensed statement of cash flow of the company is set out below.

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, and C.1.3 of the 2016 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 primarily 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 risks disclosed above and have reviewed revenue forecasts. They believe that the company has adequate financial resources to continue its operational existence for the foreseeable future and for at least one year from the date of signing of these financial statements. Accordingly, the directors continue to adopt the going concern basis in preparing these financial statements.

By order of the board

Rachel Beagles, Chairman

10 November 2017

Portfolio Summary Portfolio distribution as at 30 September 2017
By region (excluding cash)	As at 30 September 2017	As at 31 March 2017
	%	%
North America	50.7	49.6
Developed Europe	37.1	38.0
Developed Asia Pacific ex Japan	12.2	10.9
Japan	-	1.5
	100.0	100.0

By sector (excluding cash)	As at 30 September 2017	As at 31 March 2017
	%	%
Financials	29.9	26.3
Industrials	14.9	15.2
Consumer goods	12.3	10.5
Technology	9.9	8.0
Healthcare	9.8	10.3
Oil & gas	6.6	7.7
Basic materials	6.6	6.1
Consumer services	3.8	8.3
Telecommunications	3.6	4.8
Utilities	2.6	2.8
	100.0	100.0


By asset class (including cash and borrowings)	As at 30 September 2017	As at 31 March 2017
	%	%
Equities	111.3	111.5
Options*	-	-
Cash	1.4	1.5
Less borrowings	(12.7)	(13.0)
	100.0	100.0

*Options held as at 30 September 2017 were (0.04%) (31 March 2017: (0.03%)).

Largest 10 holdings	30 September 2017	30 September 2017	31 March 2017	31 March 2017
	Market value	% of total	Market value	% of total
	£000	portfolio	£000	portfolio
Apple	7,495	3.4	7,503	3.4
Philip Morris International	6,545	3.0	7,142	3.2
Chevron	6,190	2.8	7,262	3.3
ING Groep	5,729	2.6	5,041	2.3
Roche Holdings	5,538	2.5	6,951	3.2
Givaudan	5,487	2.5	5,170	2.3
Taiwan Semiconductor	5,403	2.5	5,069	2.3
Microsoft	5,310	2.4	5,040	2.3
Waste Management	5,240	2.4	6,333	2.9
Credicorp	5,181	2.4	4,428	2.0

Unaudited Condensed Statement of Comprehensive Income

		(Unaudited) Six months to 30 September 2017			(Unaudited) Six months to 30 September 2016
	Note	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Net (losses)/ gains on investments	5	-	(881)	(881)	-	20,149	20,149
Net currency gains/(losses)		(6)	627	621	71	(10)	61
Income	3	4,716	-	4,716	4,334	-	4,334
Investment management fee		(215)	(399)	(614)	(192)	(356)	(548)
Other expenses		(299)	-	(299)	(311)	-	(311)
Net return before finance costs and taxation		4,196	(653)	3,543	3,902	19,783	23,685
Finance costs		(96)	(157)	(253)	(72)	(131)	(203)
Net return on ordinary activities before taxation		4,100	(810)	3,290	3,830	19,652	23,482
Taxation on ordinary activities	4	(352)	-	(352)	(388)	-	(388)
Net returns attributable to ordinary redeemable shareholders		3,748	(810)	2,938	3,442	19,652	23,094
Net returns per ordinary redeemable share	2	3.34p	(0.72p)	2.62p	3.07p	17.50p	20.57p

		(Audited)
		Year to 31 March 2017
		Revenue	Capital	Total
	Note	£000	£000	£000
Net (losses)/gains on investments	5	-	37,335	37,335
Net currency gains/(losses)		86	(143)	(57)
Income	3	8,174	-	8,174
Investment management fee		(404)	(751)	(1,155)
Other expenses		(603)	-	(603)
Net return before finance costs and taxation		7,253	36,441	43,694
Finance costs		(174)	(295)	(469)
Net return on ordinary activities before taxation		7,079	36,146	43,225
Taxation on ordinary activities	4	(639)	-	(639)
Net returns attributable to ordinary redeemable shareholders		6,440	36,146	42,586
Net returns per ordinary redeemable share	2	5.74p	32.21p	37.95p

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 2014').

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the six months.

The notes below form part of these condensed financial statements.

Unaudited Condensed Statement of Financial Position

		(Unaudited) As at 30 September 2017		(Unaudited) As at 30 September 2016		(Audited) year to 31 March 2017
	Note	£000	£000	£000	£000	£000	£000
Fixed assets
Investments and derivatives at fair value through profit or loss*	5		219,446		196,223		219,809

Current assets
Trade and other receivables	6	2,085		14,080		2,790
Cash and cash equivalents		2,847		12,868		2,911
		4,932		26,948		5,701

Current liabilities
Trade payables - amounts falling due within one year	7	(10,466)		(24,727)		(10,502)
Net current assets/(liabilities)			(5,534)		2,221		(4,801)
Total assets less current liabilities			213,912		198,454		215,008
Trade payables - amounts falling due after more than one year	8		(14,968)		(15,208)		(15,545)
Net assets			198,944		183,246		199,463

Capital and reserves
Called up ordinary share capital			1,223		1,223		1,223
Capital redemption reserve			78		78		78
Share premium reserve			30,040		30,040		30,040
Special distributable reserve**			95,655		95,715		95,692
Capital reserve**			69,710		54,026		70,520
Revenue reserve**			2,238		2,164		1,910
Total shareholders' funds			198,944		183,246		199,463
Net asset value per ordinary redeemable share	2		177.41p		163.35p		177.83p

* Derivatives at fair value as at 30 September 2016 has been reclassified to Investments at fair value.

**These reserves are distributable.

The company is registered in Scotland no. SC283272.

The notes below form part of these condensed financial statements.

The financial statements were approved by the board of directors on 10 November 2017 signed on its behalf by Rachel Beagles, Chairman.

Unaudited Condensed Statement of Changes in Equity

For the period to 30 September 2017 (Unaudited)	Called up ordinary share capital £000	Capital redemption reserve £000	Share premium account £000	Special distributable capital reserve* £000	Capital reserve* £000	Revenue reserve* £000	Total £000
As at 31 March 2017	1,223	78	30,040	95,692	70,520	1,910	199,463
Net return attributable to shareholders**	-	-	-	-	(810)	3,748	2,938
Ordinary shares bought back during the period	-	-	-	(37)	-	-	(37)
Dividends paid	-	-	-	-	-	(3,420)	(3,420)

Balance at 30 September 2017	1,223	78	30,040	95,655	69,710	2,238	198,944

For the period to 30 September 2016 (Unaudited)	Called up ordinary share capital £000	Capital redemption reserve £000	Share premium account £000	Special distributable capital reserve* £000	Capital reserve* £000	Revenue reserve* £000	Total £000
As at 31 March 2016	1,223	78	30,040	96,795	34,374	1,978	164,488
Net return attributable to shareholders**	-	-	-	-	19,652	3,442	23,094
Ordinary shares bought back during the period	-	-	-	(1,080)	-	-	(1,080)
Dividends paid	-	-	-	-	-	(3,256)	(3,256)
Balance at 30 September 2016	1,223	78	30,040	95,715	54,026	2,164	183,246

For the year to 31 March 2017 (Audited)	Called up ordinary share capital	Capital redemption reserve	Share premium account	Special distributable capital reserve*	Capital reserve*	Revenue reserve*	Total
	£000	£000	£000	£000	£000	£000	£000
As at 31 March 2016	1,223	78	30,040	96,795	34,374	1,978	164,488
Net return attributable to shareholders**	-	-	-	-	36,146	6,440	42,586
Ordinary shares bought back during the year	-	-	-	(1,103)	-	-	(1,103)
Dividends paid	-	-	-	-	-	(6,508)	(6,508)

Balance at 31 March 2017	1,223	78	30,040	95,692	70,520	1,910	199,463

* 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 Condensed Statement of Comprehensive Income above, and therefore this is also the 'Total comprehensive income' for the period.

The notes below form part of these condensed financial statements.

Unaudited Condensed Statement of Cash Flow

		(Unaudited) Six months to		(Unaudited) Six months to		(Audited) Year to
		30 September 2017		30 September 2016		31 March 2017
	Note	£000	£000	£000	£000	£000	£000
Cashflows from operating activities
Profit before tax			3,290		23,482		43,225
Adjustments for:
Losses/(gains) on investments	5	881		(20,149)		(37,335)
Finance costs		253		203		469
Purchases of investments*	5	(30,108)		(47,831)		(102,716)
Sales of investments*	5	29,590		51,650		100,145
Dividend income	3	(4,413)		(3,879)		(7,136)
Interest income	3	-		-		(3)
Stock lending income	3	(23)		(25)		(115)
Premium income - written options	3	(280)		(430)		(920)
Dividends received		4,642		4,281		7,348
Interest income received		-		-		3
Stock lending income received		87		28		54
Premium income received - written options		280		430		920
Decrease/(increase) in receivables		412		(13,565)		(1,994)
(Decrease)/increase in payables		(32)		14,345		116
Overseas withholding tax suffered	4	(352)		(361)		(639)
			937		(15,303)		(41,803)
Net cash flows from operating activities			4,227		8,179		1,422
Cash flows from financing activities
Repurchase of ordinary share capital		(37)		(1,336)		(1,359)
Movement in bank borrowings - revolving loan		-		8,208		8,545
Exchange movement on bank borrowings		(577)		-		-
Equity dividends paid		(3,420)		(3,256)		(6,508)
Interest paid on borrowings		(257)		(194)		(456)
Net cash flows from financing activities			(4,291)		3,422		222
Net (decrease)/increase in cash and cash equivalents			(64)		11,601		1,644
Cash and cash equivalents at the start of the year			2,911		1,267		1,267
Cash and cash equivalents at the end of the period/year	9		2,847		12,868		2,911

* 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 company's dealing operations.

The notes below form part of these condensed financial statements.

Notes to the Condensed Financial Statements

Note 1: Accounting policies

For the period ended 30 September 2017 the company received (and the year ending 31 March 2017), 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.

These condensed financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS 102 issued by the FRC in September 2015, FRS 104 Interim Financial Reporting issued by the FRC in March 2015 and the revised Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ('SORP') issued by the AIC in November 2014.

Note 2: Returns and net asset value

	(Unaudited) Six months to 30 September 2017	(Unaudited) Six months to 30 September 2016	(Audited) Year to 31 March 2017
Revenue return
Revenue return attributable to ordinary redeemable shareholders	£3,748,000	£3,442,000	£6,440,000
Weighted average number of shares in issue during the period*	112,143,357	112,295,644	112,230,759
Revenue return per ordinary redeemable share**	3.34p	3.07p	5.74p
Capital return
Capital return attributable to ordinary redeemable shareholders	(£810,000)	£19,652,000	£36,146,000
Weighted average number of shares in issue during the period*	112,143,357	112,295,644	112,230,759
Capital return per ordinary redeemable share	(0.72p)	17.50p	32.21p
Total return
Total return per ordinary redeemable share	2.62p	20.57p	37.95p
Net asset value per share
Net assets attributable to shareholders	£198,944,000	£183,246,000	£199,463,000
Number of shares in issue at period end	112,140,218	112,176,599	112,162,368
Net asset value per share	177.41p	163.35p	177.83p

* Calculated excluding shares held in treasury.

** During the six months to 30 September 2017 special dividends of £59,000 (30 September 2016: £49,000) were received and treated as income.

During the six months to 30 September 2017 there were 22,150 shares bought back into treasury at a cost of £37,000. (Six months to 30 September 2016: 788,887 shares bought back into treasury at a cost of £1,080,000; twelve months to 31 March 2017: 803,118 shares bought back into treasury at a cost of £1,103,000). Between 1 October and 8 November 2017, 56,104 ordinary shares of 1p each were bought back into treasury at a cost of £95,000. There have been no shares issued from treasury during the six months to 30 September 2017. (Six months to 30 September 2015: no shares were issued from treasury; twelve months to 31 March 2017: no shares were issued from treasury). There have been no shares cancelled from treasury during the six months to 30 September 2017. (Six months to 30 September 2016: no shares were cancelled from treasury; twelve months to 31 March 2017: no shares were cancelled from treasury).

Note 3: Income

	(Unaudited) Six months to 30 September 2017 £000	(Unaudited) Six months to 30 September 2016 £000	(Audited) Year to 31 March 2017 £000
From listed investments
UK - equities	753	568	815
Overseas - equities	3,660	3,311	6,321
	4,413	3,879	7,136
Other revenue
Interest on deposits	-	-	3
Premium - written options	280	430	920
Stock lending	23	25	115
	4,716	4,334	8,174

Note 4: Taxation on ordinary activities

(Unaudited)

Six months to

30 September 2017

£000

(Unaudited)

Six months to

30 September 2016

£000

(Audited)

Year to

31 March 2017

£000

Foreign tax

352

388

639

Note 5: Investments and derivatives at fair value through profit or loss

	(Unaudited) As at 30 September 2017 £000	(Unaudited) As at 30 September 2016 £000	(Audited) As at 31 March 2017 £000
UK listed investments held at fair value through profit or loss	29,383	20,309	35,183
Overseas listed investments held at fair value through profit or loss	190,146	176,096	184,683
Total value of financial asset investments	219,529	196,405	219,866
Derivative financial instruments - value of written option contracts	(83)	(172)	(57)
Valuation of investments and derivatives	219,446	196,233	219,809
Opening valuation	219,809	179,903	179,903
Opening unrealised gains	(47,059)	(19,286)	(19,286)
Opening cost	172,750	160,617	160,617
Acquisition at cost	30,108	47,831	102,716
Disposal proceeds	(29,590)	(51,650)	(100,145)
Gains on disposal of investments and derivatives	6,831	3,666	9,562
Disposals at cost	(22,759)	(47,984)	(90,583)
Closing cost	180,099	160,464	172,750
Add: unrealised gains	39,347	35,769	47,059
Closing valuation	219,446	196,233	219,809
(Losses)/gains on investments and derivatives
Net gains on disposal of investments and derivatives	6,831	3,666	9,562
Movement in unrealised (losses)/ gains	(7,712)	16,483	27,773
	(881)	20,149	37,335

Transaction costs

During the period, expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains/ (losses) on investments in the statement of comprehensive income. The total costs were as follows:

	(Unaudited) Six months to 30 September 2017 £000	(Unaudited) Six months to 30 September 2016 £000	(Audited) Year to 31 March 2017 £000
Acquisitions	57	90	208
Disposals	42	74	145
	99	164	353

Note 6: Trade and other receivables

	(Unaudited) As at 30 September 2017 £000	(Unaudited) As at 30 September 2016 £000	(Audited) As at 31 March 2017 £000
Dividends receivable	253	274	464
Cash collateral held at broker for derivatives	1,645	916	2,039
Due from brokers	-	8,189	-
Tax recoverable	189	225	201
Prepayments and other debtors	13	4,473	19
Stock lending income receivable	3	3	67
	2,085	14,080	2,790

Note 7: Trade payables - amounts falling due within one year

	(Unaudited) As at 30 September 2017 £000	(Unaudited) As at 30 September 2016 £000	(Audited) As at 31 March 2017 £000
Interest accrued	12	12	16
Due to brokers	-	9,809	-
Sterling bank revolving loan	10,000	10,000	10,000
Other trade payables	454	4,906	486
	10,466	24,727	10,502

Note 8: Trade payables - amounts falling due after one year

(Unaudited)

As at

30 September 2017

£000

(Unaudited)

As at

30 September 2016

£000

(Audited)

As at

31 March 2017

£000

Bank loan

14,968

15,208

15,545

On 19 September 2016 the company entered into a new agreement with the Royal Bank of Scotland Plc (the lender) for £1,500,000 (Facility A), €4,500,000 (Facility B) and US$12,750,000 (Facility C) term loans and £10,000,000 (Facility D) multi-currency revolving credit facility agreement.

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 0.5% plus LIBOR rate. Under this agreement £10,000,000 was drawn at 22 September 2017 at a rate of 0.826880% with a maturity date of 22 December 2017.

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 19 September 2018.

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 30 September 2017 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 £3,965,000 (€4,500,000), Facility C £9,503,000 (US$12,750,000) and Facility D £10,000,000.

Note 9: Analysis of net debt

	(Audited) As at 31 March 2017 £000	Cash flow £000	Exchange movements £000	(Unaudited) As at 30 September 2017 £000
Cash at bank	2,911	(64)	-	2,847
Bank borrowings	(25,545)	-	577	(24,968)
Net debt	(22,634)	(64)	577	(22,121)

Note 10: Stock lending

The company has a Securities Lending Authorisation Agreement with State Street Bank & Trust Company.

As at 30 September 2017 £9,255,000 of investments were subject to stock lending agreements and £9,953,000 was held in collateral. The collateral was held in the form of cash, government securities issued by any of the OECD countries or equity securities listed and/or traded on an exchange in the following countries: Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, Switzerland and USA. (Six months to 30 September 2016: £17,454,000 of investments subject to stock lending, £18,673,000 held as collateral; year to 31 March 2017: £23,416,000 of investments subject to stock lending, £25,236,000 held as collateral).

The gross earnings and the fees payable for the period are £31,000 (six months to 30 September 2016: £33,000; year to 31 March 2017: £153,000) and £8,000 (six months to 30 September 2016: £8,000; year to 31 March 2017 £38,000).

Note 11: Interim financial report

The financial information contained in this interim financial report does not constitute statutory accounts as defined in s434 - 436 of the Companies Act 2006. The financial information for the six months ended 30 September 2017 and 30 September 2016 have not been audited.

The information for the year to 31 March 2017 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under s498 (2), (3) or (4) of the Companies Act 2006.

Note 12: Fair value hierarchy

The company has early adopted the amendments to FRS 102, 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', where 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).

	As at 30 September 2017 (Unaudited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	219,446	-	-	219,446
Net fair value	219,466	-	-	219,446
	As at 30 September 2016 (Unaudited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	196,233	-	-	196,233
Net fair value	196,233	-	-	196,233
	As at 31 March 2017 (Audited)
	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	219,809	-	-	219,809
Net fair value	219,809	-	-	219,809