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Edinburgh Inv. Trust (EDIN)

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Wednesday 12 June, 2019

Edinburgh Inv. Trust

Annual Financial Report

 The Edinburgh Investment Trust plc

Annual Financial Report Announcement

For the Year Ended 31 March 2019

Financial Information and Performance Statistics

Year Ended Year Ended
Total Return(1)(2)(3) (with dividends reinvested) 31 March 2019 31 March 2018
Net asset value(1) (NAV) – debt at market value +2.9% –5.9%
Share price +4.6% –6.7%
FTSE All-Share Index +6.4% +1.2%
The Company’s benchmark is the FTSE All-Share Index.


At 31 March At 31 March Change
2019 2018 %
Capital Return(1)
Net asset value – debt at market value 696.91p 703.34p -0.9
Share price(2) 644.0p 642.0p +0.3
FTSE All-Share Index(2) 3,978.28 3,894.17 +2.2
Discount(1)(3) – debt at market value (7.6)% (8.7)%
Gearing (debt at market value)(1)(3) – gross gearing 11.0% 12.1%
– net gearing 10.8% 11.8%
Year Ended Year Ended Change
Revenue and Dividends(3) 31 March 2019 31 March 2018 %
Revenue return per ordinary share 28.7p 29.3p —2.0
Dividends – first interim 6.25p 5.80p
Dividends – second interim 6.25p 5.80p
Dividends – third interim 6.25p 5.80p
Dividends – final proposed 9.25p 9.20p
                 – total dividends 28.00p 26.60p +5.3
Retail Price Index(2)  – annual change 2.4% 3.3%
Dividend Yield(1)(3)(4) 4.3% 4.1%
Ongoing Charges Ratio(1)(3) 0.56% 0.57%


(1) The term is defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, in the annual financial report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges.

(2) Source: Refinitiv.

(3) Key Performance Indicator.

(4) Based on year end figures.

Chairman’s Statement

Dear Shareholder

As you will read in the Performance section below, the Company had a disappointing year – the third year of underperformance relative to our benchmark. Mark Barnett, the portfolio manager, has reported on the performance in detail in his Portfolio Manager’s Report which follows, but I would like to make a few observations here.

As stated on page 1, the Company has two objectives for the medium to long term: the first is to outperform the FTSE All-Share Index over the long term on a net asset value (NAV) capital return basis and, second, to produce dividend growth in excess of UK inflation, by investing primarily in a portfolio of UK listed shares. The Board has delegated discretion to Mark to manage the portfolio (subject to certain prudential restrictions) and we meet regularly with him to discuss, challenge and oversee his actions. As shown in the table below, over the past five years, both these objectives have been met: in that period, the Company’s NAV capital return with debt at market was 13.6% cumulatively, whilst the Company’s benchmark over the same period returned 11.9%. In addition, annualised dividend growth of 3.6% over the past five years compares favourably with annualised inflation measured in term of the Retail Prices Index of 2.3%.

Mark’s approach to investment is based on fundamental research and he builds his portfolios based on the convictions that result from his research. As a result, the portfolio tends to be concentrated in a number of sectors and holdings. This approach has the potential to deliver significant outperformance over the medium to long-term, but a concentrated portfolio of this kind may also result in periods of underperformance, as has been the case in the past three years.

In the light of the Company’s underperformance during the past three years, the Board stepped up its scrutiny of the way that the portfolio is managed: probing once again the nature of investment, risk management and challenge processes. We continue to believe that Mark’s approach, accompanied by appropriate Invesco and Board support, oversight and challenge, is the right one to meet the Company’s objectives.


The table below shows the track record on the basis of the NAV capital return (i.e. excluding dividends paid) which is one of the Company’s objectives and on the basis of the NAV total return which includes the dividends reinvested.

For the year ended 31 March 2019, the Company’s net asset value (NAV) total return was 2.9%, with debt at market value, whilst the Company’s benchmark index returned 6.4%. The portfolio was adversely affected by the exposure to domestic stocks (in a year when more global stocks have outperformed) as well as to particular issues at a number of companies. A more detailed explanation is set out in the Portfolio Manager’s Report.

Over the past three years, the Company’s NAV total return has been 11.6% cumulatively, with the Company’s benchmark index returning 31.3% over the same period. Over the past five years, the Company’s NAV total return with debt at market value has been 35.9% cumulatively, with the Company’s benchmark Index returning 34.5% over that period.

Returns to 31 March 2019

Capital Returns Total Returns
(excluding dividends paid) (with dividends reinvested)
NAV (debt at FTSE All-Share NAV (debt at FTSE All-Share
market value) Index market value) Index
1yr –0.9% 2.2% 2.9% 6.4%
3yr 0.2% 17.2% 11.6% 31.3%
5yr 13.6% 11.9% 35.9% 34.5%

Discount and share buy backs

The Company’s share price ended the year at 644p, an increase of 0.3% from the previous year’s closing price of 642p.  This reflects the increase in NAV but also a modest narrowing of the discount:  with debt at market value, the discount narrowed to 7.6% from 8.7% at the end of the previous year.

The Board has in place the authority to buy back shares and in exercising this power, considers a variety of factors including the degree of resulting NAV enhancement, the general market environment, the pattern of supply and demand and the rating of the peer group.

During the year, the Company’s discount traded in a range of 6.3% to 10.7%, and the average discount was 8.6%. In the third quarter of the calendar year, the Company’s discount widened, along with that of the peer group, and the Board bought back 185,000 shares. The discount subsequently narrowed.

Since the Company’s year-end, the peer group and the Company’s discounts have again widened, and the Board has again exercised its buy back powers.

At 11 June 2019, the latest practical date before the signing of this report, the NAV and share price had fallen and were respectively 685.8p and 592p and the resultant discount has widened to 13.7% with debt at market value.


In line with our policy of recent years to rebalance the interim and final dividend towards the interim dividend, in the year to 31 March 2019, the Board has declared three interim dividends of 6.25p (2018: 5.80p) and is proposing a final dividend of 9.25p (2018: 9.20p) per share. This results in a total dividend of 28.0p for the year, an increase of 1.40p. This represents an increase of 5.3% in the total dividend over the previous year, which is in excess of the 2.4% annual increase in the Retail Price Index, reflecting the Board’s commitment to providing income growth which exceeds the rate of inflation. The final dividend, which is subject to approval by shareholders, will be paid on 31 July 2019 to shareholders on the register on 21 June 2019.

Borrowings and Gearing

The Company has in place a mixture of fixed and floating rate debt comprising of the Company’s 7¾% 2022 debenture; and a £150 million, 364 day committed credit facility. By these means, Mark has the ability to vary the gearing level of the portfolio depending on his view of the market. Borrowings at the start of the year were £143.9 million (equivalent to gross gearing with debt at market of 12.1%), aggregate borrowings during the year ranged between £100 million and £177.6 million and ended the year at £130.8 million, equivalent to gross gearing with debt at market of 11.0%, reflecting the Manager’s more cautious outlook.


The ongoing charges ratio fell, marginally, from 0.57% to 0.56%. A significant proportion of the ongoing charges are paid to Invesco for a variety of services including portfolio management, administration, regulation and compliance, shareholder communication, support services and supervision of the arrangements with other key service providers. The Board continues to look for ways to reduce the impact of charges further.

Board Composition and Succession Planning

After serving on the Board for over 14 years, Sir Nigel Wicks, will retire as a Director of the Company at the forthcoming AGM. Sir Nigel has made a very significant contribution to the Company which has benefited from his knowledge and commitment. The Board would like to record its thanks to him for his services to the Company and shareholders.

During the year, the Nomination Committee carried out a review of the composition and skills of the Board and the Company’s succession plan. Following this, the Board appointed Odgers Berndtson, an external search consultant, to conduct the search for two new directors and as a result, the Board is pleased to propose the election of Steven Baldwin and Elisabeth Stheeman as non-executive Directors at the forthcoming AGM.

Annual General Meeting and London Shareholder Presentation

The Company’s AGM will be held at 11am on 25 July 2019 at The Merchants Hall, 22 Hanover Street, Edinburgh EH2 2EP. Mark Barnett will give a presentation about the Company after the AGM and be available to answer shareholder questions. I hope as many of you as possible will attend. The Board has considered all resolutions proposed in the Notice of AGM and believe all are in the interests of shareholders as a whole.

The Company is also pleased to invite shareholders to a presentation by Mark Barnett on 16 September 2019 at 12 noon. This will be held at 43-45 Portman Square, London W1H 6LY. I do hope that shareholders unable to attend the AGM will be able to attend this meeting to hear from the portfolio manager and meet with Directors.  Please note that shareholders will not be able to vote at this meeting.

Shareholders can register to attend both events by visiting the Invesco website

Glen Suarez


12 June 2019


Portfolio Manager’s Report

For the year ended 31 March 2019

Market Review

The UK equity market provided a positive return over the twelve month period to 31 March 2019. However, the market’s mid-single digit rise masks periods of significant volatility. The UK equity market rallied strongly in the second quarter of 2018 and, having peaked in May, the FTSE All-Share Index sold off sharply in the second half of 2018. The principal causes of this change were the outlook for US interest rates, heightened fears of a global economic slowdown and the escalation of US-Sino trade tensions. Against a backdrop of declining global equity markets, the UK equity market fell to an eighteen-month low in December 2018. However, a shift in the stance on interest rate policy from the US Federal Reserve and a cooling of the previously negative trade rhetoric between the US and China, laid the foundations for a strong equity market rally during the first quarter of 2019. This resulted in a positive UK equity market return for the period under review.

Against this challenging global backdrop, the question of the UK’s exit from the European Union continued to dominate the domestic agenda. The extended political uncertainty saw the value of Sterling fall materially through the year, reaching a twenty-month low of US$1.23 in December 2018, as a vote of no confidence against Theresa May was called over the terms of the negotiated EU Withdrawal Agreement.

The Bank of England’s (BoE) Monetary Policy Committee voted to increase the UK’s base interest rate by 0.25% at its August 2018 meeting, but kept rates on hold for the rest of the period as the political impasse continued. In February 2019, the BoE cut its UK growth forecast from 1.7% to 1.2% for the year. Despite this, economic data proved remarkably robust in 2018. We saw a return to real wage growth, whilst the number of people in work increased by 350,000, more than three times the increase in the size of the working age population.

Portfolio Strategy and Review

The Company’s net asset value, including reinvested dividends, provided a return of 2.9% during the period under review, compared with a return of 6.4% (£ total return) by the FTSE All-Share Index.

The portfolio’s themes have remained broadly consistent over the past year. The tilt towards UK domestic opportunities has been emphasised, as persistent negativity towards domestic sectors has created further opportunities, whilst exposure to more internationally orientated growth stocks has been modestly reduced. Exposure to the tobacco sector remains prominent, and a significant proportion of the portfolio is invested in non-correlated financials, a theme which offers the portfolio both risk diversification benefits and diversified sources of income.

The portfolio’s exposure to UK domestic opportunities supported absolute performance over the period, as stock selection proved crucial across a range of sectors. Most notable was the holding in Next, which defied the well-publicised crises facing many high-street retailers to deliver full-year results in line with expectations. The 15% rise in online sales offset more challenging declines in in-store retail sales, emphasising that the company’s multi-channel offering allows it to see the growth of online shopping as an opportunity not a threat. Meanwhile the 4.5% increase in the annual dividend reaffirmed the company’s focus on shareholder returns. Holdings in Drax, Tesco, Legal & General and BCA Marketplace further supported returns.

Sterling weakness and prolonged political uncertainty saw the internationally orientated companies of the FTSE All-Share Index outperform. Stock selection within this theme contributed to the portfolio’s relative underperformance over the year. The portfolio’s zero weighting in the metals and mining sector detracted from relative performance. Mining companies have historically paid dividends from current earnings, which are highly correlated to commodity prices. Given the inherent volatility underpinning earnings within the sector, I believe there are alternative areas of the market better-suited to the objectives of the portfolio.

Elsewhere, the leisure sector faced some challenging trading conditions during the period. The portfolio’s positions in Thomas Cook and easyJet suffered as a result of rising oil prices, an unusually hot summer across Northern Europe and the Brexit impasse, which impacted demand within the sector.

The portfolio has a significant weighting in the oil & gas sector, namely in BP and Royal Dutch Shell, which performed well over the period. BP provided the portfolio’s strongest contribution to performance, releasing better-than-expected results for 2018 in February. I believe that the sector’s outlook is dependent on the market’s confidence in these companies’ ability to cover their cash flow and dividends. Unlike other sectors, I believe that this is reliant on capital discipline within the sector, rather than price strength in the underlying commodity.

In absolute terms, the portfolio’s standout return was provided by holdings in international healthcare stocks as Roche, Novartis and BTG which provided a strong positive contribution. Roche and Novartis traded strongly over the period, whilst the share price of BTG rose sharply in November, as the company accepted an offer from US biopharmaceutical firm Boston Scientific. The portfolio’s holding in AstraZeneca also supported absolute performance over the period, although the decision to sell the position mid-way through 2018, coupled with the non-inclusion of GlaxoSmithKline, proved challenging for relative returns.

Other notable contributors included HomeServe. The emergency home repairs and services provider released strong full-year results in May 2018, which included a 25% increase in the company’s dividend following a year of “record profit growth”. The company’s share price continued to trade positively, supported by a positive trading update in July 2018, analyst upgrades and an acquisition.

Tobacco remains a prominent theme, with investments in Altria, British American Tobacco (BAT) and Imperial Brands, which have delivered exceptional returns for shareholders over the long term. However, the headwinds noted in my 2017 commentary persisted into 2018, as the market continued to weigh concerns around regulation and the outlook for next generation technologies. In November, the United States Food & Drug Administration (FDA) announced plans to pursue a ban on the sale of menthol products, which caused further weakness across the sector. The portfolio’s holding in BAT was most impacted, given the company’s revenue exposure to menthol sales.

It is my view that the prospect of a total menthol ban remains unlikely, given the requirement to evidence “additional harm” versus non-menthol products. Furthermore, the real impact of a ban remains uncertain, as consumers may move to non-menthol tobacco alternatives. Meanwhile, the tobacco majors are at the forefront of new technologies, with the resources to drive successful innovation in the sector. In 2019 the sector has recovered somewhat, buoyed by the surprise resignation of the Head of the FDA and the release of strong full-year results from BAT, which included meaningful growth in the dividend.

Amid challenging and uncertain market conditions the need to secure diversified income streams for the portfolio remains crucial. The portfolio retains a significant exposure to the final theme of non-correlated financials, which can offer strong cash flow and income generation potential that is not correlated to traditional business cycles. Notable contributors over the period included litigation finance company Burford Capital, which continued to support portfolio returns after posting very strong half and full year results for 2018. In December 2018, the company’s share price was further supported by confirmation that it has secured an additional US$1.6 billion in new litigation investments, whilst full-year results released in March 2019 confirmed a 14% increase in the full-year dividend, a second consecutive year of double-digit growth. The significant underweight position in mainstream banks was a positive decision, as the sector underperformed the overall market, affirming my view of the importance of non-correlated stocks within the portfolio.

Conversely, the portfolio’s holdings in the non-standard lending sector weighed on performance. Amigo performed poorly following its initial public offering last summer as the market became concerned about increased regulatory scrutiny of guarantor-lending. Provident Financial (PFG) also traded down over the period; a result of the slower than expected pace of profit recovery under the new management team. The non-standard lending sector has historically been a strong contributor to portfolio returns and it remains my view that the sector plays an important role in the lending market, providing a competitively priced alternative to borrowers who would otherwise be excluded from access to traditional credit. Furthermore, Amigo and PFG, as regulated entities, are well placed within the industry to respond to an evolving regulatory environment. In February 2019 PFG received an unsolicited takeover bid from Non-Standard Finance, a smaller rival, which saw further volatility in the company’s share price as PFG publicly sought to resist the hostile takeover.  The offer has now lapsed.

Elsewhere in the financials sector, a recently initiated position in the financial trading platform Plus500 proved volatile. The company has met with challenges in clearly explaining to the market the short term revenue volatility that can arise in trading of contracts-for-difference (derivative instruments).

Having maintained a zero weighting in mainstream banks for a number of years, a significant new investment was made in Royal Bank of Scotland (RBS). The newly initiated position reflects the portfolio manager’s confidence that RBS is the best capitalised of all UK banks, with the clearest line of sight to delivering substantially improved total shareholder returns. New investments were also made in Cranswick, Draper Esprit, Whitbread, Plus500, Amigo and Urban Exposure. The holdings in AstraZeneca and RELX were sold.

Portfolio Manager outlook

The portfolio’s positioning has evolved incrementally over the past year to take advantage of the best risk-adjusted opportunities at the most interesting valuations. The portfolio continues to offer a sustainable flow of diversified income, with stronger dividend cover and better growth prospects compared to the wider market. However, these qualities have been largely ignored by a market that has rewarded momentum over fundamentals, such that on a price-to-book basis the portfolio is significantly undervalued. This suggests that there is an opportunity for material revaluation in the portfolio from current levels.

The performance of the UK economy continues to confound most forecasts by recording steady growth. Over the course of 2019 the overall level of growth is expected to remain solid, supported by improvements in household cash flow and rising employment, which will benefit consumption activity and economic growth. Given that the outlook for the economy appears to be more resilient than currently implied by the currency or valuations of domestic sectors, it is anticipated that political resolution will see this material differential start to close. However, valuations in the UK market as a whole remain polarised between a basket of multi-national companies, which command high valuations, and a basket of UK domestic equities, which are valued significantly lower. Given this wide valuation disparity, the portfolio has retained a large exposure to sterling revenues, which are undervalued due to the persistent caution towards the UK economy as evidenced by the weakness of the exchange rate.

The portfolio has also maintained exposure to a number of global industries, namely oil and tobacco, which despite yielding significantly higher than average dividends, remain attractively valued in a market that seeks out new disruptive business models within the context of perceived sunset industries. In many respects, the stock-market’s current sentiment towards these industries resembles behaviour that was seen during the last tech bubble. It would appear that the market is happy to discount a future decline in the cash flow from these businesses, which is much more rapid than appears likely.

Patience is an essential characteristic of successful long-term investing. Over the past 12 months this quality has been severely tested. The trend towards momentum stocks has been exacerbated by exogenous economic and political factors – primarily the sustainability of global economic growth and the protracted Brexit negotiations. As a result of these persistent uncertainties, the market has focused on supporting premium valuations for growth or highly disruptive companies, which has not suited the core investment themes of the Company. It is frustrating that the capital and income growth potential of the Company is not currently reflected in capital values, however the inherent strengths of the portfolio, detailed above, remain robust. It remains crucial that in such times of extreme momentum and somewhat irrational market pricing, the Company remains rooted in the fundamental investment process, which has worked over many stock market cycles.

Mark Barnett

Portfolio Manager

12 June 2019


Business Review

Strategy and Business Model

The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.

The business model the Company has adopted to achieve its investment objective has been to contract the services of Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is Mark Barnett and the deputy portfolio manager is James Goldstone.

In addition, the Company has contractual arrangements with Link Asset Services to act as registrar and The Bank of New York Mellon (International) Limited as depositary and custodian.

Investment Objective and Policy

Investment Objective

The Company invests primarily in UK securities with the long term objective of achieving:

1.         an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and

2.         growth in dividends per share in excess of the rate of UK inflation.

Investment Policy

The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company’s investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company’s overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company’s investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.

The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.

Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.

Results and Dividends

At the year end the share price was 644.0p per ordinary share (2018: 642.0p). The net asset value (debt at market value) per ordinary share was 696.91p (2018: 703.34p).

Subject to approval at the AGM, the final proposed dividend for the year ended 31 March 2019 of 9.25p (2018: 9.20p) per ordinary share will be payable on 31 July 2019 to shareholders on the register on 21 June 2019. The shares will be quoted ex-dividend on 20 June 2019. This will give total dividends for the year of 28.00p per share, an increase of 5.3% on the previous year’s dividends of 26.60p. The revenue return per share for the year was 28.7p, a 2% decrease on the 2018 return of 29.3p.


The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are shown on page 4. Notwithstanding that some KPIs are beyond its control, they are measures of the Company’s absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.

The Chairman’s Statement above gives a commentary on the performance of the Company during the year, the gearing and the dividend.

Expenses are reviewed at each Board meeting enabling the Board, amongst other things, to review costs and consider any expenditure outside that of its normal operations. For the year being reported, except for disappointing performance, all other KPIs are considered satisfactory.

The Board also regularly reviews the performance of the Company in relation to the 23 investment trusts in the UK Equity Income sector. As at 29 March 2019, the Company was ranked 17th by NAV performance in this sector over one year and 20th over three and 8th over five years (source: JPMorgan Cazenove).

Analysis of Performance

for year ended
31 March 2019
Total Return Basis(1)
NAV (debt at market value) 2.9
Less: Benchmark 6.4
Relative underperformance (3.5)
Analysis of Relative Performance
Portfolio total return
  including cash and
  excluding expenses 4.0
Less: Benchmark total return(1) 6.4
Portfolio underperformance (2.4)
  Net gearing effect (0.2)
  Interest (0.6)
  Market value movement 0.3
Management fee (0.5)
Other expenses (0.1)
Tax (0.1)
Share buybacks 0.1
Total (3.5)

(1) Source: Refinitiv.

Analysis of Performance – analyses the performance of the Company relative to its benchmark index.

Relative performance – represents the arithmetic difference between the NAV and benchmark returns.

Portfolio total return – represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.

Net gearing effect – measures the impact of the debenture stock, bank loan and cash on the Company’s relative performance. This will be positive if the portfolio has positive capital performance and negative if capital performance is negative.

Interest – the debenture stock and bank loan interest paid has a negative impact on performance.

Management fee – the base fee reduces the Company’s net assets and decreases returns.

Other expenses and tax – reduce the level of assets and therefore result in a negative effect on relative performance.

Share buybacks – measures the effect of ordinary shares bought back at a discount to net asset value on the Company’s relative performance.

Financial Position and Borrowings

The Company’s balance sheet on page 52 shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 73/4% debenture which matures in 2022 and £30.8 million (2018: £43.9 million) drawn down on the Company’s £150 million bank revolving credit facility. Details of this facility are contained in note 11.

Outlook, including the Future of the Company

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company follow.

Principal Risks and Uncertainties

The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the growth in RPI. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring is delegated to the Manager. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity with consideration being given to market and possible regulatory uncertainty arising from Brexit. The following sets out a description of the principal risks and how they are being managed or mitigated.

Market Risk

A great majority of the Company’s investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company’s investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, political events, including Brexit and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company’s shares and its earnings and dividends may consequently also experience volatility and may decline.

Investment Performance Risk

The Board sets performance objectives and delegates the investment management process to the Manager. The achievement of the Company’s performance objectives relative to the market requires active management of the portfolio of assets and securities. The Manager’s approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Manager is a long term investor, prepared to take substantial positions in securities and sectors which may well be out of fashion, but which the Manager believes will have potential for material increases in earnings and, in due course, dividends and share prices. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the portfolio relative to the benchmark and/or income targets. The Manager’s style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager’s high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company’s objectives of capital growth in excess of the benchmark and real dividend growth.

Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company’s performance against the benchmark and peer group is provided to the Board at each Board meeting. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company’s objectives. The Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk-reward profile.

As described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio. During the year, no forward currency contracts or derivatives were used for hedging or market exposure respectively.

Borrowing Risk

The Company may borrow to provide gearing to the equity portfolio of up to 25% of net assets. Borrowing is a mix of the Company’s £100 million debenture stock and the Company’s £150 million bank facility. Details of all borrowings are given in Notes 11 and 12. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the bank facility can be renewed and on terms acceptable to the Company.

The Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase, or restructuring of borrowing are for the Board to decide. Information related to borrowing and gearing is provided to the Directors as part of the Board papers.

Income/Dividend Risk

The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.

The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers. The Board considers the level of income at each meeting.

Share Price Risk

There is a risk that the Company’s prospects and NAV may not be fully reflected in the share price from time-to-time.

The share price is monitored on a daily basis. The Board is empowered to repurchase shares within agreed parameters. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company has repurchased 185,000 shares for holding in treasury.

Control Systems Risk

The Board delegates a number of specific risk control activities to the Manager including:

-           good practice industry standards in fund management operations;

-           financial controls;

-           meeting regulatory requirements;

-           the management of the relationship with the depositary;

-           via the depositary, the management of the custody and security of the Company’s assets; and

-           the management of the relationship with the registrar.

Consequently in respect of these activities the Company is dependent on the Manager’s control systems and those of its depositary and registrar, both of which are monitored by the Manager in the context of safeguarding the Company’s assets and interests. There is a risk that the Manager fails to ensure that these controls are operated in a satisfactory manner. In addition, the Company relies on the soundness and efficiency of the custodian for good title and timeliness of receipt and delivery of securities.

A risk-based programme of internal audits is carried out by the Manager regularly to test the controls environment. An internal controls report providing an assessment of these risks and operation of the controls is prepared by the Manager and considered by the Audit Committee, and is formally reported to and considered by the Board.

Reliance on the Manager and other Third Party Providers Risk

The Company has no employees and the Directors are all appointed on a non-executive basis. The Company is reliant upon the performance of third party providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility both for management of the Company’s portfolio and for the provision of company secretarial and administrative services is delegated. The Company has other contractual arrangements with third parties to act as auditor, registrar, depositary and broker. The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers, including fraud, sabotage or crime against the Company. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.

In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.

The Board seeks to manage these risks in a number of ways:

-        The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns are dealt with promptly and reported to the Board. The Manager formally reviews the performance and the service organisation control reports of other key third party providers and reports to the Board on an annual basis.

-        The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.

-        The day-to-day management of the portfolio is the responsibility of the named portfolio manager, Mark Barnett, Head of UK Equities at Invesco. He has worked in equity markets since 1992 and has been part of the UK equities team at Invesco for over 20 years.

-        The risk that the portfolio manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Invesco UK Equity team. Moreover James Goldstone, as deputy portfolio manager, would be able to manage the portfolio if Mark Barnett was unable to for any reason.

-        The Board has set guidelines within which the portfolio manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.

Other Risks

The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), and the perceived impact of the Manager ceasing to be involved with the Company.

The instruments in which the Company’s cash positions are invested are reviewed by the Board to ensure credit, liquidity and concentration risks are adequately managed. Where an Invesco Group vehicle is utilised, it is assessed for suitability against other similar investment options.

The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List. A breach of the conditions for approval as an investment trust could lead to the Company being subject to capital gains tax on the sale of the investments in the Company’s portfolio. A serious breach of other regulatory rules may lead to suspension from listing on the Stock Exchange.

The Manager is regulated by the Financial Conduct Authority and failure to comply with the relevant regulations could harm the Manager’s reputation with a potential detrimental effect on the Company.

The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from the service providers. The Manager’s compliance and internal audit officers produce regular reports for review by the Company’s Audit Committee.

Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.

There is an ongoing process for the Board to consider these other risks. In addition, the composition of the Board is regularly reviewed to ensure the membership offers sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.

Viability Statement

The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

In assessing the viability of the Company, the Directors considered the principal risks to which it is exposed together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the business model of the Company, which has effectively been stress tested for many years through different and difficult market cycles; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company’s borrowings – both long and short term – and the ability of the Company to meet its liabilities as they fall due; and the Company’s annual operating costs.

Based on the above, and assuming there is no significant adverse change to the regulatory environment and tax treatment of UK investment trusts, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

Board Responsibilities

As set out in the Directors’ Report in the annual financial report the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. Consistent with the Company’s nature as an investment trust, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews its relationships with other service providers at least annually.

Board Diversity

The Board considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors. The Board has considered the recommendations of the Davies and Hampton-Alexander reviews as well as the Parker review, but does not consider it appropriate to establish targets or quotas in these regards. As a norm, the Board comprises six non-executive directors of which, at present, two are female. Summary biographical details of the Directors are set out on page 24. The Company has no employees.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.

The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

This Strategic Report was approved by the Board on 12 June 2019

Invesco Asset Management Limited

Company Secretary

Investments in Order of Valuation

At 31 March 2019

UK listed ordinary shares unless otherwise stated

Value % of
Investment Sector £’000 Portfolio
BP Oil & Gas Producers  96,929 6.5
British American Tobacco Tobacco  91,312 6.1
Legal & General Life Insurance  62,420 4.2
Burford CapitalAIM Financial Services  57,326 3.8
Next General Retailers  52,676 3.5
Altria – US common stock Tobacco  52,412 3.5
Royal Dutch Shell – A shares Oil & Gas Producers  51,968 3.5
Imperial Brands Tobacco  50,486 3.4
Novartis – Swiss common stock Pharmaceuticals & Biotechnology  43,223 2.9
Derwent London Real Estate Investment Trusts  43,035 2.9
Ten Top Holdings 601,787 40.3
Roche – Swiss common stock Pharmaceuticals & Biotechnology  42,646 2.8
Hiscox Non-life Insurance  42,040 2.8
Tesco Food & Drug Retailers  39,743 2.6
Aviva Life Insurance  37,603 2.4
BAE Systems Aerospace & Defence  36,756 2.4
HomeServe Support Services  35,770 2.4
BCA Marketplace Support Services  32,322 2.2
BT Fixed Line Telecommunications  32,197 2.1
NewRiver REIT Real Estate Investment Trusts  32,023 2.1
Drax Electricity  30,008 2.0
Twenty Top Holdings 962,895 64.1
British Land Real Estate Investment Trusts  28,897 1.9
easyJet Travel & Leisure  28,717 1.9
Provident Financial Financial Services  26,893 1.8
Capita Support Services  26,253 1.8
G4S Support Services  24,443 1.6
BTG Pharmaceuticals & Biotechnology  23,724 1.6
Beazley Non-life Insurance  22,128 1.5
Babcock International Aerospace & Defence  21,552 1.4
Lancashire Non-life Insurance  21,271 1.4
CLS Real Estate Investment & Services  20,130 1.4
Thirty Top Holdings 1,206,903 80.4
Honeycomb Investment Trust Equity Investment Instruments  19,700 1.3
Royal Bank of Scotland Banks  16,485 1.1
Cranswick Food Producers  15,370 1.0
P2P Global Investments Equity Investment Instruments  15,369 1.0
Rentokil Initial Support Services  15,324 1.0
Secure Income REITAIM Real Estate Investment Trusts  15,016 1.0
Draper EspritAIM Financial Services  14,520 1.0
Whitbread Travel & Leisure  14,060 1.0
Plus500 Financial Services  13,717 0.9
Assura Real Estate Investment Trusts  13,242 0.9
Forty Top Holdings 1,359,706 90.6
Amigo Financial Services  12,387 0.8
Secure Trust Bank Banks  12,278 0.8
Eddie Stobart LogisticsAIM Industrial Transportation  11,901 0.8
TalkTalk Telecom Fixed Line Telecommunications  11,601 0.8
ReddeAIM Financial Services  11,463 0.7
IP Group Financial Services  10,930 0.7
Zegona Communications Non Equity Investment Instruments  10,871 0.7
KCOM Fixed Line Telecommunications  10,490 0.7
Vectura Pharmaceuticals & Biotechnology  10,436 0.7
Raven Property Group - Ordinary Real Estate Investment & Services 5,976
                                    – Preference 3,814
9,790 0.7
Fifty Top Holdings 1,471,853 98.0 
VPC Specialty Lending Investments Financial Services     6,150 0.4
Funding Circle SME Equity Investment Instruments     6,125 0.4
Hadrian's Wall Secured Investments Equity Investment Instruments     6,027 0.4
Urban ExposureAIM Financial Services     4,826 0.4
Thomas Cook Travel & Leisure     4,518 0.3
Circassia PharmaceuticalsAIM Pharmaceuticals & Biotechnology     1,406 0.1
Eurovestech UQ Financial Services     246 0.0
Total Holdings (57) 1,501,151 100.0

AIM     Investments quoted on AIM.

UQ      Unquoted investment.


Statement of Directors’ Responsibilities

in respect of the preparation of the Annual Financial Report

The Directors are responsible for preparing the annual financial report and 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 they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.

In preparing these financial statements, the Directors are required to:

–        select suitable accounting policies and then apply them consistently;

–        make judgements and estimates that are reasonable and prudent;

–        state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

–        assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

–        use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations. 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website, which is maintained by the Company’s Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the Directors in respect of the annual financial report 

We confirm that to the best of our knowledge: 

–        the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company; and 

–        the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face. 

We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. 

Signed on behalf of the Board of Directors

Glen Suarez


12 June 2019


For the year ended 31 March

Income Statement

2019 2018
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Losses on investments 9(c) (8,567) (8,567) (129,918) (129,918)
Foreign exchange gains/(losses) 22 22 (393) (393)
Income 2 62,916 1,002 63,918 64,154 492 64,646
Investment management fee 3 (2,124) (4,957) (7,081) (2,276) (5,312) (7,588)
Other expenses 4 (872) (1) (873) (888) (1) (889)
Net return before finance costs
  and taxation 59,920 (12,501) 47,419 60,990 (135,132) (74,142)
Finance costs 5 (2,612) (6,095) (8,707) (2,679) (6,252) (8,931)
Return on ordinary activities
  before taxation 57,308 (18,596) 38,712 58,311 (141,384) (83,073)
Tax on ordinary activities 6 (1,251) (1,251) (1,071) (1,071)
Return on ordinary activities after
  taxation for the financial year 56,057 (18,596) 37,461 57,240 (141,384) (84,144)
Return per ordinary share:
Basic 7 28.7p (9.5)p 19.2p 29.3p (72.3)p (43.0)p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

Statement of Changes in Equity

Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
Notes £’000 £’000  £’000 £’000 £’000 £’000
Balance at 31 March 2017 48,917 10,394 24,676 1,376,475 74,719 1,535,181
Dividends paid 8 (51,168) (51,168)
Net return on ordinary activities (141,384) 57,240 (84,144)
Balance at 31 March 2018  48,917 10,394 24,676 1,235,091  80,791 1,399,869
Shares bought back and held in treasury (1,258) (1,258)
Dividends paid 8 (53,635) (53,635)
Net return on ordinary activities (18,596) 56,057 37,461
Balance at 31 March 2019 48,917 10,394 24,676 1,215,237 83,213 1,382,437


Balance Sheet

2019  2018
Notes £’000 £’000
Fixed assets
Investments held at fair value through profit or loss 9(a) 1,501,151 1,535,929
Current assets
Debtors 10 8,987 6,372
Cash and cash equivalents 3,114 4,320
12,101 10,692
Creditors: amounts falling due within one year
Bank facility 11 (30,800) (43,900)
Other payables 11 (894) (3,982)
(31,694) (47,882)
Net current liabilities (19,593) (37,190)
Total assets less current liabilities 1,481,558 1,498,739
Creditors: amounts falling due after more than one year 12 (99,121) (98,870)
Net assets 1,382,437 1,399,869
Capital and reserves
Share capital 13 48,917 48,917
Share premium 14 10,394 10,394
Capital redemption reserve 14 24,676 24,676
Capital reserve 14 1,215,237 1,235,091
Revenue reserve 14 83,213 80,791
Shareholders’ funds 1,382,437 1,399,869
Net asset value per ordinary share
Basic – debt at par 15 706.75p 714.85p
Basic – debt at market value 15 696.91p 703.34p

These financial statements were approved and authorised for issue by the Board of Directors on 12 June 2019.

Glen Suarez


Signed on behalf of the Board of Directors


Notes to the Financial Statements

1. Principal Accounting Policies

Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.

A.        Basis of Preparation

Accounting Standards Applied

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014 (SORP) and updated in February 2018. The financial statements are issued on a going concern basis.

As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity is provided.

B.        Foreign Currency and Segmental Reporting

(i)      Functional and presentational currency

          The financial statements are presented in sterling, which is the Company’s functional and presentational currency and the currency in which the Company’s share capital and expenses, as well as its assets and liabilities, are denominated.

(ii)      Transactions and balances

          Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.

(iii)     Segmental reporting

          The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the UK or other recognised stock exchanges.

C.      Financial Instruments

The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.

(i)      Recognition of financial assets and financial liabilities

          The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.

(ii)      Derecognition of financial assets

          The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.

(iii)     Derecognition of financial liabilities

          The Company derecognises financial liabilities when its obligations are discharged, cancelled or have expired.

(iv)    Trade date accounting

          Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.

(v)        Classification and measurement of financial assets and financial liabilities

            –          Financial assets

The Company’s investments are classified as held at fair value through profit or loss.

Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.

–   Financial liabilities

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

D.        Cash and Cash Equivalents

Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.

E.         Hedging

Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and taken to capital reserves.

F.         Income

Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’.

Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.

Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

G.        Expenses and Finance Costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.

The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.

Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.

H.        Taxation

The liability to corporation tax is based on net revenue for the year, excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.

A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that the Company is likely to have sufficient future taxable revenue to offset against these.

I.          Dividends Payable

Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.

2. Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

2019 2018
£’000 £’000
Income from listed investments:
UK dividends
– Ordinary  47,446  48,604
– Special  955 3,335
Overseas dividends
– Ordinary  11,705 9,903
Unfranked investment income 2,785 2,299
Income from money market funds 22  9
 62,913  64,150
Other income:
Deposit interest  3  4
Total income  62,916  64,154

Special dividends of £1,002,000 were recognised in capital during the year (2018: £492,000).

3. Investment Management Fee

This note shows the fee due to the Manager. This is calculated and paid monthly.

2019 2018
Revenue Capital Total Revenue Capital Total
 £’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 2,124 4,957 7,081 2,276 5,312 7,588

Details of the investment management agreement are disclosed on page 35 in the Directors’ Report. At 31 March 2019 investment management fees of £577,000 (2018: £576,000) were accrued.

4. Other Expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

2019 2018
Revenue Capital Total Revenue Capital Total
 £’000 £’000 £’000 £’000 £’000 £’000
Other expenses  872  1  873 888 1 889
Other expenses include the following:
Directors’ remuneration 174 174 169 169
Fees payable to the Company’s auditor in relation to:
– the audit of the Company’s annual accounts (including expenses) 24 24 23 23
– audit related assurance services 7 7 7 7

The maximum Directors’ fees authorised by the Articles of Association are £250,000 per annum.

Further information on Directors’ remuneration can be found in the Directors Remuneration Report. Included within other expenses is £16,000 (2018: £16,000) of employer’s National Insurance payable on Directors’ remuneration. As at 31 March 2019, the amount outstanding on Director’s remuneration and employer’s National Insurance was £8,800 (2018: £5,900).

Fees payable to the Company’s auditor for audit related assurance services fees are for their review in connection with the half-yearly financial statements and the annual certificate to the trustee of the debenture stock, which are recognised in revenue. Fees payable to the Company’s auditor are shown excluding VAT, which is included in other expenses.

5. Finance costs

Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £100 million debenture stock and a £150 million bank revolving credit facility.

2019 2018
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Interest payable on borrowings repayable not by instalments:
– interest on bank facility  212  494  706  279  651  930
– debenture stock repayable in 3-5 years 2,325 5,425 7,750 2,325 5,425 7,750
Amortised debenture stock discount and issue costs 75  176  251 75  176  251
2,612 6,095 8,707 2,679 6,252 8,931

6. Tax on Ordinary Activities

As an investment trust the Company pays no tax on capital gains. As the Company invests principally in UK equities, it has little overseas tax and the overseas tax charge is the result of withholding tax deducted at source. This note also clarifies the basis for the Company having no deferred tax asset or liability.

(a) Tax charge
2019 2018
£’000 £’000
Overseas tax 1,251 1,071
(b) Reconciliation of tax charge
2019 2018
£’000 £’000
Total return on ordinary activities before taxation 38,712 (83,073)
UK Corporation Tax rate of 19% (2018: 19%) 7,355 (15,784)
Effect of:
– non-taxable losses on investments 1,628 24,684
– non-taxable (gains)/losses on foreign exchange movements (4) 75
– non-taxable UK dividends and scrip dividends (7,939) (8,551)
– non-taxable overseas dividends (2,175) (1,882)
– non-taxable special dividends (372) (666)
– expenses and finance costs in excess of taxable income for the year carried forward 1,507 2,124
– overseas tax 1,251 1,071
Tax charge for the year 1,251 1,071

(c) Deferred tax

Owing to the Company’s status as an investment company, and the Directors’ intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.

(d) Factors that may affect future tax changes

The Company has surplus management expenses and losses on loan relationships of £455,650,000 (2018: £447,424,000) that are available to offset future taxable revenue. A deferred tax asset of £77,461,000 (2018: £76,062,000), measured at the prospective rate of corporation tax of 17% (2018: 17%), has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.

7. Return per Ordinary Share

Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.

The basic revenue, capital and total returns per ordinary share are based on each return on ordinary shares after tax and on 195,560,762 (2018: 195,666,734) ordinary shares, being the weighted average number of shares in issue during the year.

8. Dividends on Ordinary Shares

Dividends represent the distribution of income to shareholders. The Company pays four dividends a year – three interims and one final dividend.

2019 2018
Dividends paid and recognised in the year: pence £’000 pence £’000
– third interim paid in respect of previous year  5.80 11,349  5.40 10,566
– final paid in respect of previous year  9.20 18,001  9.15 17,904
– first interim paid  6.25 12,218  5.80 11,349
– second interim paid  6.25 12,218  5.80 11,349
27.50 53,786 26.15 51,168
Return of unclaimed dividends from previous years ­– (151)
27.50 53,635 26.15 51,168
2019 2018
Dividends on shares payable in respect of the year: pence £’000 pence £’000
– first interim  6.25 12,218  5.80 11,349
– second interim  6.25 12,218  5.80 11,349
– third interim 6.25 12,218  5.80 11,349
– proposed final 9.25 18,050  9.20 18,000
28.00 54,704 26.60 52,047

The proposed final dividend is subject to approval by ordinary shareholders at the AGM.

9. Investments

The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.

Gains or losses are either:

–          realised, usually arising when investments are sold; or

–          unrealised, being the difference from cost on those investments still held at the year end.

(a) Analysis of investments by listing status
2019 2018
£’000 £’000
– investments listed on a regulated stock exchange 1,384,447 1,441,803
– AIM quoted investments 116,458 93,804
– unlisted investments at Directors’ valuation 246 322
1,501,151 1,535,929
(b) Analysis of investments gains
2019 2018
£’000 £’000
Opening valuation 1,535,929 1,731,265
Movements in year:
– purchases at cost 221,902 249,793
– sales – proceeds (248,113) (315,211)
– sales – net realised gains 111,613 100,887
Movement in investment holding gains (120,180) (230,805)
Closing valuation 1,501,151 1,535,929
Closing book cost 1,390,495 1,305,093
Closing investment holding gains 110,656 230,836
Closing valuation 1,501,151 1,535,929
There were no purchases or sales of unlisted investments during the year (2018: £nil).
(c) Losses on investments
2019 2018
£’000 £’000
Realised gains on sales 111,613 100,887
Movement in investment holding gains (120,180) (230,805)
Losses on investments (8,567) (129,918)

(d) Transaction costs

Transaction costs on purchases of £740,000 (2018: £1,157,000) and on sales of £149,000 (2018: £316,000) are included within gains and losses on investments.

(e) Significant holdings

At 31 March 2019 the Company had holdings of 3% or more of the number in issue of the following investments:

Name of Undertaking Country of Incorporation Instrument % held
Zegona Communications England & Wales Ordinary shares 4.9
Secure Trust Bank England & Wales Ordinary shares 4.9
Urban Exposure England & Wales Ordinary shares 4.7
Honeycomb Investment Trust England & Wales Ordinary shares 4.5
Hadrian's Wall Secured Investments Guernsey Ordinary shares 4.4
NewRiver REIT England & Wales Ordinary shares 4.4
Eddie Stobart Logistics England & Wales Ordinary shares 3.2
Redde England & Wales Ordinary shares 3.1

10. Debtors

Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.

2019 2018
£’000 £’000
Amounts due from brokers 2,219 1,301
Prepayments and accrued income 4,331 3,371
Tax recoverable 2,437 1,700
8,987 6,372

11. Creditors: amounts falling due within one year

Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors are the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments or amounts owed to suppliers (accruals) such as the Manager and auditor.

2019 2018
£’000 £’000
Bank facility 30,800 43,900
Other payables:
Amounts due to brokers 3,131
Accruals 894 851
894 3,982
31,694 47,882

The Company has a 364 day committed revolving credit facility (the ‘facility’) of £150 million (2018: £150 million) with the lender, The Bank of New York Mellon. The facility is due for renewal on 19 June 2019. Interest is payable at 0.70% over LIBOR with a commitment fee for undrawn amounts. Under the facility’s covenants, the Company’s total indebtedness must not exceed 25% of total assets and total assets must not be less than £700 million (2018: £700 million).

12. Creditors: amounts falling due after more than one year

These creditors are amounts that must be paid, as shown by note 11, but are due more than one year after the balance sheet date.

2019 2018
£’000 £’000
Debenture Stock 7 3/4% redeemable 30 September 2022 100,000 100,000
Unamortised discount and issue expenses on debenture stock (879) (1,130)
99,121 98,870

The debenture is secured by a floating charge on the Company, under which borrowing must not exceed a sum equal to the Adjusted Total of Capital and Reserves. The interest on the 7 3?4% debenture is payable in half-yearly instalments, in March and September, each year.

The effect on the net asset value of deducting the debenture stock at market value, rather than at par, is disclosed in note 15.

13. Share Capital

Share capital represents the total number of shares in issue.

2019 2018
£’000 £’000
Share capital:
Ordinary shares of 25p each 48,871 48,917
Treasury shares of 25p each 46
48,917 48,917
2019 2018
Number of ordinary shares in issue:
Brought forward 195,666,734 195,666,734
Shares bought back and held in treasury (185,000)
Carried forward 195,481,734 195,666,734
Number of treasury shares held:
Brought forward
Shares bought back and held in treasury 185,000
Carried forward 185,000
Total ordinary shares 195,666,734 195,666,734

During the year the Company bought back, into treasury, 185,000 ordinary shares at an average price of 675.48p. Since the year end, 350,000 shares have been bought back into treasury, at an average price of 591.46p.

The Directors’ Report on page 36 sets out the Company's share capital structure, restrictions and voting rights.

14. Reserves

This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.

The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.

15. Net Asset Value per Ordinary Share

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into NAV per ordinary share by dividing by the number of shares in issue.

The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 195,481,734 (2018: 195,666,734).

(a) NAV – debt at par

The shareholders’ funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par and the corresponding NAV per share. A reconciliation between the two sets of figures follows:

2019 2018
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
Shareholders’ funds 707.20 1,382,437 715.43 1,399,869
Unamortised discount and expenses arising from debenture issue (0.45) (879) (0.58) (1,130)
NAV – debt at par 706.75 1,381,558 714.85 1,398,739

(b) NAV – debt at market value

The market value of the debenture stock is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilt. 

The net asset value per share adjusted to include the debenture stock at market value rather than at par is as follows:

2019 2018
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
NAV – debt at par 706.75 1,381,558 714.85 1,398,739
Debenture stock – debt at par 51.15 100,000 51.11 100,000
– debt at market value (60.99) (119,220) (62.62) (122,530)
NAV – debt at market value 696.91 1,362,338 703.34 1,376,209

16. Risk Management and Financial Instruments

Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.

Financial instruments

The Company’s financial instruments mainly comprise its investment portfolio (as shown above), a debenture, a bank loan as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and cash equivalents as defined in note 1d. The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:

Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:

–   Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;

–   Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and

–   Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.

Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.

Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors’ Report.

As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. These policies are summarised below and have remained substantially unchanged for the two years under review.

16.1     Market Risk

            The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities in the annual financial report. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company’s exposure to market risk and volatility. The Company has the ability to gear by using its £100 million debenture stock 2022 and its bank facility of £150 million.

16.1.1  Currency risk

            The majority of the Company’s assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.

            Management of the currency risk

            The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company’s exposure to foreign currencies arising naturally from the Manager’s choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No forward currency contracts were used during the year (2018: none).

            Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

            The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of non-UK securities total £138.3 million (2018: £122.4 million) representing 9.2% (2018: 8.0%) of the portfolio.

            Currency exposure

            The fair values of the Company’s monetary items that have currency exposure at 31 March are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

2019 2018
£’000 £’000 £’000 £’000 £’000 £’000
Foreign currency exposure on net
  monetary items 1,474 2,189 249 507  1,603  97
Investments at fair value through profit or
  loss that are equities  52,412 85,869 53,489  68,894
Total net foreign currency exposure 53,886 88,058 249 53,996 70,497  97

The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.

Currency sensitivity

In respect of the Company’s direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 2.8% (2018: 3.4%) for the US dollar, 2.5% (2018: 2.6%) for the Swiss franc and 1.4% (2018: 2.0%) for the Euro during the year, the income statement, capital return and net assets of the Company would have increased by £3.7 million (2018: £3.6 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company’s investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.±

16.1.2  Interest rate risk

Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian, The Bank of New York Mellon.

The Company has in place a revolving credit facility (the ‘facility’), details of which are shown in note 11. The Company uses the facility when required at levels monitored by the Board. At the maximum possible facility gearing of £150 million, the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s income of £1,500,000 p.a.

The Company also has an uncommitted bank overdraft facility which it uses for settlement purposes and interest is dependent on the base rate determined by the custodian. At the year end, no amounts were overdrawn (2018: none).

The Company’s debt of £100 million (2018: £100 million) of debenture stock is fixed which exposes the Company to changes in market value in the event that the debt is repaid before maturity. Details of the debenture stock interest is shown in note 12, with details of its market value and the affect on net asset value in note 15(b).

The Company can invest in fixed income securities although at the year end none were held (2018: £nil).

Interest rate exposure

At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:

– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; and

– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.

2019 2018
Within Between Within Between
one one and one one and
year five years Total year five years Total
£’000 £’000 £’000 £’000 £’000 £’000
Exposure to floating interest rates:
  Cash and cash equivalents 3,114 3,114  4,320  4,320
  Bank facility (30,800)  (30,800) (43,900) (43,900)
Exposure to fixed interest rates:
  Debenture, excluding
    unamortised discount
    and issue expenses (100,000) (100,000) (100,000)  (100,000)
Total exposure to interest rates  (27,686) (100,000) (127,686) (39,580) (100,000) (139,580)

16.1.3  Other price risk

Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio manager to manage the portfolio to achieve the best return that he can.

Management of the other price risk

The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies, and to review investment performance.

The Company’s portfolio is the result of the Manager’s investment process and need not be highly correlated with the Company’s benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.

If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £150 million (2018: £154 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.

16.2     Liquidity risk

Liquidity risk is minimised as the majority of the Company’s investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has an overdraft facility which it can use to provide short-term funding flexibility.

Liquidity risk exposure

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:

More than
Three three months
 months but less than More than
or less one year one year Total
2019 £’000 £’000 £’000 £’000
Debenture stock  100,000  100,000
Bank facility  30,800 30,800
Interest on debenture stock  7,750 19,375 27,125
Accruals 894 894
 31,694  7,750  119,375  158,819
More than
Three three months
months but less than More than
or less one year one year Total
2018 £’000 £’000 £’000 £’000
Debenture stock 100,000 100,000
Bank facility 43,900 43,900
Interest on debenture stock 7,750 27,125 34,875
Amounts due to brokers 3,131 3,131
Accruals 851 851
47,882 7,750 127,125 182,757

16.3     Credit risk

Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. However, with the support of the depositary’s restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 5% of net assets with Short-Term Investments Company (Global Series) plc, a triple-A rated money market fund. These limits are at the discretion of the Board and are reviewed on a regular basis.

17. Fair Value

The values of the financial assets and financial liabilities are carried either at their fair value (investments), or at a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facility) or at amortised cost (debenture).

Fair Value Hierarchy Disclosures

All except one of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow.

Level 1 – the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.

The valuation techniques used by the Company are explained in the accounting policies note. During the year, one level 2 investment in Barclays Bank – Nuclear Power Notes 28 February 2019 was redeemed (2018: £94,000). In addition, the holding in Honeycomb Investment Trust of £19,700,000 (2018: £13,953,000) has been classed as a level 2 (2018: level 1) investment on the basis that, although it is listed and an unadjusted quoted price is available, it has low trading in the market. The investment in Level 3 is the result of a past corporate event on a listed security previously held; Eurovestech delisted from AIM. The holding in Eurovestech did not change during the year.

Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Financial assets designated at fair value through profit or loss
Quoted investments:
Equities 1,481,205 19,700 1,500,905
Unquoted investments 246 246
Total for financial assets 1,481,205 19,700 246 1,501,151
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Financial assets designated at fair value through profit or loss
Quoted investments:
Equities 1,535,513 1,535,513
Other securities 94 94
Unquoted investments 322 322
Total for financial assets 1,535,513 94 322 1,535,929

The book cost and fair value of the debenture stock, based on the offer value at the balance sheet date, are as follows:

2019 2018
Book Fair Book Fair
Value Value Value Value
£’000 £’000 £’000 £’000
Debenture stock repayable between one and five years:
73?4% Debenture Stock 2022 100,000  119,220 100,000  122,530
Discount on issue of debenture stock (879) (1,130)
99,121 119,220  98,870 122,530

Incorporating the fair value of the debenture, results in the reduction of the net asset value per ordinary share to 696.91p (2018: 703.34p).

18.       Capital Management

The Company’s total capital employed at 31 March 2019 was £1,512,358,000 (2018: £1,542,639,000) comprising borrowings of £129,921,000 (2018: £142,770,000) and equity share capital and other reserves of £1,382,437,000 (2018: £1,399,869,000).

The Company’s total capital employed is managed to achieve the Company’s objective and investment policy as set out on page 12, including that borrowings may be used to provide gearing of the equity portfolio up to the maximum authorised by shareholders, currently 25% of net assets. Net gearing was 10.8% (2018: 11.8%) at the balance sheet date. The Company's policies and processes for managing capital were unchanged throughout the year and the preceding year.

The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section in the annual financial report. These also explain that the Company is able to use borrowings to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.

The board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.

The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1159 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the facility by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise the debenture stock, details of which are contained in note 12, a bank facility and an overdraft facility which may be used for short-term funding requirements.

19. Contingencies, Guarantees and Financial Commitments

This note would show any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring.

There are no contingencies, guarantees or financial commitments of the Company at the year end (2018: £nil).

20. Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.

Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed in the annual financial report with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 35, and in note 3.

21. Post Balance Sheet Events

Except for the share buy backs as disclosed in note 13, there are no other significant events after the end of the reporting year requiring disclosure.

This Annual Financial Report announcement is not the Company’s statutory accounts.  The statutory accounts for the year ended 31 March 2018 have been delivered to the Registrar of Companies.  The statutory accounts for the year ended 31 March 2018 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006.  The statutory accounts for the financial year ended 31 March 2019 have been approved and audited but have not yet been filed.

The Audited Annual Financial Report will be posted to shareholders shortly.  Copies may be obtained during normal business hours from the Company’s registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.  A copy of the Annual Financial Report will be available from Invesco on the following website:

The Annual General Meeting of the Company will be held at 11.00 am on 25 July 2019 at Merchants Hall, 22 Hanover Street, Edinburgh, EH2 2EP

By order of the Board

Invesco Asset Management Limited 

Corporate Company Secretary

12 June 2019

a d v e r t i s e m e n t