Final Results
BlackRock Income Strategies Trust plc
Annual Results Announcement
for the year ended 30 September 2015
Financial Highlights
| 30 September 2015 | 30 September 2014 | Change % | |
| Net Assets (£’000)1 | 374,832 | 426,865 | -12.23 |
| Net Asset value per share (debt at market value) | 131.00p | 143.30p | -8.6 |
|
137.28p | 143.30p | -4.22 |
| Ordinary share price | 130.50p | 134.00p | -2.6 |
|
137.21p | 134.00p | +2.42 |
| Premium/(Discount) to net asset value4 | 0.9% | (5.5%) |
| 1 | Net Assets at 30 September 2015 are before provision for the third interim dividend of 1.67p per share, paid on 9 October 2015; Net Assets at 30 September 2014 are before provision for the third interim dividend of 1.53p per share, paid on 10 October 2014. |
| 2 | Calculations assume that dividends are reinvested at the relevant share price or NAV prevailing at the ex-dividend date for NAV and share price return calculations respectively. |
| 3 | The change in net assets reflects market movements during the year and share buy backs. |
| 4 | The premium and discount to NAV in the table above have been calculated based on the ex-dividend NAV of 129.33 pence per share and 141.77 pence per share as at 30 September 2015 and 2014 respectively, and not the Company’s NAV per share as disclosed on the Company’s balance sheet and in the table above. This is because accounting standards do not permit interim quarterly dividends to be reflected in the accounts until they have been paid. As the third quarterly dividends for 2015 and 2014 respectively had gone ex-dividend in the Company’s share price at 30 September as disclosed in the table above, any share rating calculated based on this ex-dividend price also needs to be calculated using an ex-dividend NAV. |
| Year ended 30 September 2015 |
Year ended 30 September 2014 |
Change % |
|
| Net revenue return after taxation (£’000) | 20,163 | 20,298 | -0.7 |
| Revenue return per share | 7.07p | 7.01p | +0.9 |
| Dividends: | |||
| First quarterly dividend | 1.500p | 1.485p | +1.0 |
| Second quarterly dividend | 1.670p | 1.530p | +9.2 |
| Third quarterly dividend | 1.670p | 1.530p | +9.2 |
| Fourth quarterly dividend | 1.700p | 1.895p | -10.3 |
| ----------- | ------------ | ----------- | |
| Total dividends | 6.540p | 6.440p | +1.6 |
CHAIRMAN’S STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2015
HIGHLIGHTS:
-
New multi-asset strategy successfully implemented
-
BlackRock appointed
-
Nil discount policy adopted
-
Shares issued post year end
-
Tender mechanism put in place
-
Premium to NAV achieved
-
Total dividends for 2015 of 6.54p representing a yield of 5.0% (based on the share price at 30 September 2015)
Dear Shareholder,
A YEAR OF CHANGE
I am delighted to be able to present my first, encouraging annual report as Chairman of your Company.
2015 has been one of the most exciting years in the Company’s history. At a General Meeting in February, investors voted overwhelmingly in favour of a new investment objective which seeks to achieve a total portfolio return of UK Consumer Price Index (CPI) plus 4% per annum (before ongoing charges) over the medium term (five to seven years). The Board also committed to delivering long term real dividend growth and capital preservation for shareholders. At the same time, the Board decided to move the investment management of your Company to BlackRock Fund Managers Limited in place of F&C Investment Business Limited.
These changes were inspired and made possible by the new freedom in the UK savings and pensions market that will allow thousands of investors to determine how best to save. It is to too early to judge the impact of the Government’s plans but a recent study by BlackRock indicates that not only are more Britons now saving for retirement than a year ago but they are also feeling more optimistic about their financial futures. The Board believes strongly that your Company has a key role to play in meeting investors’ long term goals and has been pleased with progress since the changes were effected.
To implement this strategy it is vital that we maintain a strong and complementary set of skills on the Board. I am therefore delighted that Julian Sinclair joined as a non-executive Director of the Company with effect from 21 July 2015. As Chief Investment Officer at Talisman Global Asset Management Limited Julian is an experienced investment professional with a strong multi-asset/asset allocation background. He will also serve as a member of the Company’s Audit, Management Engagement and Nomination Committees.
The Company’s performance this year is split into two periods, pre and post the appointment of BlackRock as Manager. For each period, performance has been set out compared to the relevant target index in the table below.
| Target Index | ||||||
| Period | Manager | NAV Performance1 | NAV Performance (before costs) | Share Price | UK Consumer Price Index + 4 per cent. |
Composite Benchmark2 |
| 1 October 2014 to 26 February 2015 | F&C | 3.7% | 4.1% | 2.5% | 0.9% | 7.6% |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| 27 February to 30 September 2015 | BlackRock | -7.7% | -7.4% | -0.2% | 2.9% | -8.5% |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Year to 30 September 2015 | -4.2% | -3.6% | 2.4% | 3.8% | -1.6% | |
| -------- | -------- | -------- | -------- | -------- | -------- |
1 Based on cum-income NAV with debt at market value and with income reinvested.
2 Composite index of 80% FTSE All-Share Index and 20% FTSE World Ex UK Index.
The Board also assesses the Manager’s delivery against the three main components of the Company’s investment objective as follows:
1. PRESERVE CAPITAL IN REAL TERMS
The Company’s NAV per share is down by 4.2% for the year under review. Since BlackRock assumed responsibility for managing the portfolio the Company’s NAV has fallen by 7.7%. This was partly due to the impact of realigning the portfolio during March when the market was notably volatile. In addition, the market value of the Company’s liability to its bond holders has increased as interest rate expectations moderated, further impacting performance by -0.3%. Despite these factors, the NAV outperformed UK and Global equities: the Company’s previous composite index of 80% FTSE All-Share Index and 20% FTSE World Ex UK Index fell by 8.5% since BlackRock was appointed.
2. GROW THE DIVIDEND AT LEAST IN LINE WITH INFLATION
We know that our dividend is very important to our shareholders, and the Board is pleased to declare a fourth and final quarterly interim dividend of 1.70 pence per share which will be paid on 29 January 2016 to shareholders on the register on 4 January 2016. This brings the total dividends for the year to 6.54 pence per share, representing an increase of 1.6% versus a marginal fall in the rate of inflation (as measured by CPI) of 0.2%, and a yield of 5% (based on the share price at 30 September 2015). This level of dividend is supported by the Company’s revenue earnings for the year which amounted to 7.07 pence per share (2014: 7.01 pence per share). The Board expects that the Company’s investment strategy will continue to provide an attractive level of income via multiple sources, and that this will enable the Company to continue to pay dividends at least at the current level and to grow the dividend at least in line with inflation. From 1 October 2015, it is the Board’s intention to set a quarterly dividend rate in the first quarter that will be paid across the first three quarters of the year, with any adjustments that may be required to the total dividends paid for the year to be made to the fourth quarterly dividend.
3. TOTAL PORTFOLIO RETURN OF UK INFLATION (CPI) + 4% PA OVER FIVE TO SEVEN YEAR CYCLE
Shareholders who elected to reinvest their dividends over the 12 months ending 30 September will have received a total return of 2.4% versus CPI+4% of 3.8%. Increased demand for our shares following the implementation of our new strategy has seen the discount to NAV at which the shares traded (6.6% on 27 February 2015) become a premium of 0.9% as at 30 September 2015.
One of the questions I am often asked is how we measure and evaluate our performance on an ongoing basis given that our investment objective is set over a five to seven year period. In particular, we know that the portfolio is likely to decline in absolute terms during shorter term periods of falling equity markets due to the relatively high equity exposure of the Company. The Board continues to monitor the key performance metrics that are set out in the Strategic Report (Key Performance Indicators), which I commend to your attention.
NIL DISCOUNT POLICY
The Board is committed to a nil discount policy, which we believe will enhance the attractiveness of the Company to investors by increasing the liquidity of the shares and enhancing the Company’s ability to grow over time (thereby reducing the ongoing charges per share). This policy is being implemented through a combination of share buybacks at a narrow discount to NAV and the issue of new shares at a premium to NAV. Since the change of investment manager to BlackRock in February 2015 your Company has bought back 13,975,000 shares (which equates to approximately 5.0% of your Company’s share capital) at an average discount of 2.5% per share (based on the latest published NAV at the time of purchase). The Board believes that this has been a significant contributory factor to your Company’s discount narrowing considerably, from around 7% at 26 February 2015 to a premium of 1.7%, based on the share price and NAV at close of business on 30 November 2015.
Indeed, demand for your Company’s shares has increased to a level where the Board has also used the share issue authority available to it, and as at the date of this report, 200,000 shares have been issued in the period since the year end at a premium to NAV (after adjusting for issue costs) for a total consideration of £271,200.
TENDER MECHANISM
In connection with the proposals to amend the investment objective and move the management of your Company’s assets to BlackRock in February 2015, the Board had the discretion to implement a tender offer for up to 20% of shares in issue prior to 31 August 2015. The Board exercised its discretion not to implement this tender authority, as the Company’s discount had narrowed significantly and, having consulted a number of major long term shareholders, it was determined that, given the narrow discount and the desire amongst shareholders for a large and liquid investment trust, it was not in the interests of shareholders as a whole to proceed with the tender offer. This decision was announced on 20 July 2015, and at this date the Company’s shares were trading at a discount of just under 2%, a market price higher than the proposed tender price (of NAV less 2% plus costs) would have been had it been calculated at the same date. The Board notes that by 31 August 2015, the date by which the tender would have been implemented, the Company’s shares were trading at a premium to NAV of 0.5%.
Notwithstanding the decision not to implement the August tender, the Board sought and received shareholder approval at the General Meeting on 4 September to implement future tender offers for up to 20% of issued share capital, at the Board’s discretion, and to the extent that this was considered to be in the best interests of shareholders as a whole and depending on market conditions at the time. The Board views this as a valuable additional mechanism to support the nil discount policy, although to date it has not been necessary to use it.
The Board will seek to renew the Company’s existing 14.99% share buyback authority, the 20% tender authority and the 5% share issue authority at the forthcoming AGM in 2016.
GEARING
Gross gearing in the portfolio as at 30 September 2015 was approximately 14% via the Company’s 6.25% Bonds 2031. The portfolio is not currently geared through the use of derivatives as at the date of publication of this report but the Manager will consider increasing exposure when suitable opportunities arise.
ANNUAL GENERAL MEETING
The AGM of the Company will be held at BlackRock's offices at 12 Throgmorton Avenue, London EC2N 2DL on Monday 22 February 2016 at 11.00 a.m. Details of the business of the meeting are set out in the Notice of Meeting contained within the Annual Report and the Investment Manager will be making a presentation to shareholders on the Company's progress and the investment outlook.
OUTLOOK
With more than 100 years of history your Company takes a long term view and while the new strategy is only seven months old the Board is encouraged by the progress to date. The Company’s shares are being sought by investors in all areas of the market, from individual savers to large institutions, and we will continue our marketing efforts to identify and capture the opportunities presented by the Government’s changes to pensions. As we approach 2016, and the economic and geo-political uncertainties that seem set to underpin market sentiment, the Board believes that a diversified multi-asset portfolio will be best placed to generate the long term capital and income upon which our shareholders depend.
James M Long
Chairman
2 December 2015
Strategic report
The Directors present the Strategic Report of the Company for the year ended 30 September 2015. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed in their duty to promote the success of the Company for the collective benefit of shareholders.
PRINCIPAL ACTIVITY
The Company carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment thus spreading, although not eliminating, investment risk.
OBJECTIVE
The Company’s investment objective is, over the medium term (five to seven years), to aim to preserve capital in real terms and grow the dividend in line with inflation. The Company targets a total portfolio return of UK Consumer Price Index (“CPIâ€) plus 4% per annum (before ongoing charges), over a five to seven year cycle.
STRATEGY, BUSINESS MODEL & INVESTMENT POLICY
Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long term success of the Company and is its governing body. There is a clear division of responsibility between the Board and the Manager. Matters for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing (both borrowings and the effect of derivatives), capital structure, governance, and appointing and monitoring of performance of service providers, including the Manager.
Business Model
The Company’s business model follows that of an externally managed investment trust, therefore the Company does not have any employees and outsources its activities to third party service providers including the Manager who is the principal service provider.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager, operating under an Investment Management Agreement, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
Other service providers include the Depositary, BNY Mellon Trust & Depositary (UK) Limited. The Company also delegates Fund accounting services to BIM (UK), which in turn sub-delegates these services to Bank of New York Mellon (International) Limited (“The Administratorâ€) and the Registrar, Computershare Investor Services PLC (Computershare). Details of the contractual terms with third party service providers are set out in the Directors’ report contained within the Annual Report.
Investment Policy
The Company invests globally using a flexible multi-asset approach. The Company has not set maximum or minimum exposures for any geographical regions or sectors and will achieve an appropriate spread of risk by investing in a diversified portfolio of securities and other assets. It is the current intention that approximately 40% of the portfolio will be invested in UK equity income stocks and the balance of the portfolio will be invested on a tactical asset allocation basis, including in pooled investment funds, but these allocations may change significantly over time.
No individual company exposure in the portfolio may exceed 10% of the Company’s total assets at the time of investment, other than in money market funds, treasuries and gilts. No more than 15% of the Company’s total assets, at the time of investment, may be invested in aggregate in unlisted alternative assets (including direct lending, commercial property, renewable energy and mortgage strategies). The Company will not normally invest more than 2% of its total assets in the unlisted securities issued by any individual company at the time of investment, with the exception of pooled investment funds. The Company may invest in exchange-traded funds provided they are listed on a recognised investment exchange.
No more than 10% of the Company’s total assets may be invested in aggregate in other listed closed-ended investment companies unless such investment companies themselves have published investment policies to invest no more than 15% of their total assets in other closed-ended investment companies, in which case the limit is 15%.
The Company may use derivatives to enhance portfolio returns (of a capital or income nature) and efficient portfolio management, that is, to reduce, transfer or eliminate risk in its investments, including protection against currency risks, or to gain exposure to a specific market.
The Company uses gearing, through borrowings and derivatives, to enhance income and capital returns over the long term. The borrowings may be in sterling or other currencies. The Company’s articles of association contain a borrowing limit equal to the value of its adjusted total of capital and reserves. However, borrowings would not normally be expected to exceed 20% of shareholders’ funds. Total gearing, including net derivative exposure, would not normally be expected to result in a net economic equity exposure in excess of 120%.
The Company may invest from time to time in funds managed by BlackRock. To the extent that management or performance fees are charged in respect of these holdings, the Company will be rebated these fees on a regular basis to ensure that no double charging occurs.
No material change will be made to the Company’s investment policy without shareholder approval.
PERFORMANCE
Details of the Company’s performance for the year are given in the Chairman’s Statement. The Investment Manager’s Report includes a review of the main developments during the period, together with information on investment activity within the Company’s portfolio.
MARKETING
Following the Government’s savings and pension reforms the Board is determined to ensure that investors are aware of the Company’s new proposition. Our belief is that a well-executed marketing strategy will enhance the demand for our shares, help grow the Company, and support an ongoing premium over Net Asset Value (NAV). We believe that our marketing programme in 2015 has been a contributory factor to our share price moving to a premium to NAV, as compared to the previous discount.
During the year the Company contributed to a sales and marketing initiative operated by BlackRock on behalf of the investment trusts under its management. The Company’s contribution, which is matched by BlackRock, enables it to achieve efficiencies by combining certain sales and marketing activities. Since the appointment of BlackRock on 27 February 2015 the Company contributed £93,000 (approximately 0.03% per annum of the net assets of £434,621,481 as at 26 February 2015 (prorated for the period to 31 December 2015)). In addition, BlackRock contributed a further £100,000 to this initiative for the year to 31 December 2015.
Through the marketing programme we seek to engage with three key audiences: direct shareholders, many of whom access the shares via online platforms; discretionary wealth managers and financial advisers. Our activity in 2015 has utilised online and print media to reach these audiences in a cost effective manner and we have combined this with extensive use of regional marketing and conferences. PR has also been an effective tool in helping shareholders understand the changes to the investment objective and the Board was delighted to win the 2015 AIC award for best communication. Collectively our marketing programme benefits investors by increasing demand for the Company's shares, improving liquidity and helping to sustain the stock market rating of the Company.
RESULTS AND DIVIDENDS
The Company’s revenue return for the year amounted to 7.07 pence per share (2014: 7.01 pence per share).
The Company’s ongoing charges for the year were 0.7% of shareholders’ funds (2014: 0.7%).
A first quarterly interim dividend of 1.50 pence per share was paid on 10 April 2015, and second and third quarterly interim dividends of 1.67 pence per share were paid on 10 July and 9 October 2015 respectively. On 2 December 2015, the Board declared a fourth and final quarterly interim dividend of 1.70 pence per share which will be paid on 29 January 2016 to shareholders on the register on 4 January 2016. This brings the total dividends for the year to 6.54 pence per share, representing an increase of 1.6% as compared to the total dividends for the year ended 30 September 2014 of 6.44 pence per share.
KEY PERFORMANCE INDICATORS
The Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (“KPIsâ€) used to measure the progress and performance of the Company over time are set out below.
Performance measured against the target of CPI plus 4%
At each meeting the Board reviews the performance of the portfolio as well as the net asset value and share price for the Company and compares this to the return on the Company’s target of CPI plus 4%.
Our performance has been as follows:
| Period from 27 Feb to 30 Sep 2015 |
Period from 1 Oct to 26 Feb 2015 |
Year ended 30 Sep 2014 |
|
| Manager | BlackRock | F&C | |
| Change in NAV1 | -7.7 | 3.7 | -4.2 |
| Change in share price2 | -0.2 | 2.5 | 2.4 |
| CPI plus 4% / change in target index3 | 2.9 | 7.6 | N/A |
| 1 | Calculations based on NAV with debt at market value, with income reinvested. |
| 2 | With income reinvested. |
| 3 | The Company’s benchmark prior to 27 February 2015 was a composite index of 80% FTSE All-Share Index and 20% FTSE World ex UK Index. With effect from 27 February 2015, the Company’s objective is to return, on a NAV less costs basis, CPI plus 4% over a 5 to 7 year cycle. |
Source: BlackRock and F&C
Portfolio Beta & Active Risk
Risk analysis for a multi-asset portfolio is more complex due to the need to ensure that correlation of risk is appropriate across the various portfolio strategies as well as within individual portfolios. To ensure that the risks being taken within the portfolio are appropriately diversified and relevant to the Company’s portfolio objectives and market conditions, the Board reviews the portfolio Beta and the level of active portfolio risk.
The Beta of a portfolio is a number describing the relation of the portfolio’s returns with those of the financial market as a whole. A portfolio has a Beta of zero if its returns change independently of changes in the market’s returns. A positive Beta means that the portfolio’s returns have a degree of correlation to the market’s returns. A negative Beta means that the portfolio’s returns are negatively correlated to the market’s returns. The Company’s capital preservation strategy results in a low portfolio Beta of less than one.
The Portfolio Risk statistics which the Board reviews estimate the level of return above or below the return on cash (which is measured by the ML GBP 3 Month Cash Index) that the Company is expected to deliver in two out of any three years. For example, a Portfolio Risk percentage of 8% means that the Company’s portfolio would be expected to deliver returns of up to 8% above or below the return that would be generated from cash (as measured by the ML GBP 3 Month Cash Index) two years out of three, or with a 2/3 probability. The Company’s Portfolio Beta and Portfolio Risk statistics are set out in the table below.
| As at 30 September 2015 |
||
| Portfolio Beta (vs MSCI World Index) | 0.7 | |
| Portfolio Risk | 8.2% |
Source: BlackRock
The Board monitors the portfolio Beta and looks at the percentage return on the Company’s NAV multiplied by the portfolio Beta to see how this compares to the MSCI World Index. As at 30 September 2015, the Company’s portfolio had a Beta of 0.7 meaning that for a movement of 1% in the MSCI World Index, the NAV of the Company would be expected to move in the same direction by 0.7%.
Premium/discount to net asset value (“NAVâ€)
At each Board meeting, the Board monitors the level of the Company’s premium or discount to NAV and considers strategies for managing this. The Company bought back a total of 14,975,000 shares during the year, and issued a further 200,000 shares subsequent to the Company’s year end. More details are given in the Strategic Report contained within the Annual Report.
Information regarding the Company’s share rating is set out in the table below and also in the graph in the Performance Record of the Annual Report.
| As at 30 Sep 2015 |
As at 26 Feb 2015 |
As at 30 Sep 2014 |
|
| Premium/(discount) to NAV (debt at market value) | 0.9% | (6.6%) | (5.5%) |
Source: BlackRock
Ongoing charges
The ongoing charges ratio reflects those expenses which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective investment fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments. The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company. The Company’s ongoing charges for the year to 30 September 2015 were 0.7% of net assets.
Performance measured against other opportunity sets
As the Company’s target of CPI plus 4% references a medium term period of five to seven years, the Board also reviews performance across a range of other opportunity sets in the market place to assess how the Company’s performance compares in the shorter term, given the limited relevance of the target index over shorter periods. These opportunity sets include UK Equities, Global Equities, Gold, Commodities, Gilts, Index Linked Gilts, US 10 year Treasury Stock, German 10 year Bunds, UK Corporate Bonds, Global Corporate Bonds, Global High Yield Bonds, Emerging Market Debt, Real Estate Investment Trusts and Cash. Details of how the portfolio has performed against these opportunity sets for the period since 27 February 2015 is shown in the chart below.
PERFORMANCE VERSUS WIDER OPPORTUNITY SET FROM 27 FEBRUARY 2015 TO 30 SEPTEMBER 2015
| % Return | |
| BlackRock Income Strategies Trust plc NAV | -7.7 |
| UK Equities | -8.7 |
| Global Equities | -8.4 |
| Emerging Market Equities | -11.1 |
| Gold | -8.4 |
| Commodities | -18.2 |
| Oil | -9.6 |
| Index Linked Gilts | 2.8 |
| Gilts | 1.6 |
| US 10yr Treasuries | 0.6 |
| German 10yr Bunds | -1.8 |
| UK Corporate Bonds | -2.7 |
| Global Corporate Bonds | -0.6 |
| Global High Yield Bonds | -2.6 |
| Emerging Market Debt | -9.4 |
| Real Estate Investment Trusts | -7.2 |
Source: BlackRock
Yield measured against other asset classes
The Company aims to grow the dividend at least in line with inflation and to ensure that the dividend is not cut in absolute terms. In seeking to deliver attractive yields to shareholders, the Board monitors the yield on the Company’s portfolio and compares this to the yield that investors can obtain from the opportunity set asset classes listed in the paragraph above. The yield comparison between the Company and the asset classes in the opportunity set is shown in the table below.
YIELD COMPARISON: BLACKROCK INCOME STRATEGIES TRUST PLC VS OTHER ASSET CLASSES
| % | |
| BlackRock Income Strategies Trust plc NAV | 5.2 |
| UK Equities | 3.7 |
| Global Equities | 2.7 |
| Gilts | 1.6 |
| US 10yr Treasuries | 2.1 |
| German 10yr Bunds | 0.6 |
| UK Corporate Bonds | 3.9 |
| Global Corporate Bonds | 2.9 |
| Global High Yield Bonds | 8.4 |
| Emerging Market Debt | 7.6 |
| Real Estate Investment Trusts | 4.4 |
Source: BlackRock
The Board also regularly reviews a number of indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection.
SHARE RATING, SHARE BUY BACKS AND SHARE ISSUES
The Directors believe that it is in the best interests of shareholders that shares trade at a price as close as possible to their underlying NAV (debt at market value) during normal market conditions and the Company operates a nil discount policy to achieve this.
For the year ended 30 September 2015, the Company has bought back 14,975,000 shares at a cost of £20,256,259 (of which 13,975,000 shares at a cost of £17,553,213 have been bought back since the change of investment manager to BlackRock on 27 February 2015). These shares were bought back at an average discount of 2.6% per share (based on the latest published NAV at the time of purchase).
Your Board believes that this has been a significant contributory factor to your Company’s discount narrowing considerably, from around 7% at 26 February 2015 to a premium of 1.7% based on the share price and NAV at close of business on 30 November 2015.
Subsequent to the year end, 200,000 shares have been issued at a premium to NAV for total proceeds of £271,200, before the deduction of issue costs. The shares were allotted to Cenkos (the Company’s brokers).
Given the Board’s continuing commitment to a nil discount policy, a resolution will be put to shareholders at the AGM in 2016 to renew the Company’s existing 14.99% share buyback authority and also the 5% share issue authority.
TENDER OFFERS
In addition to renewing the share buyback authority, the Board has the authority to implement future tender offers at its absolute discretion, for up to 20% of the shares in issue (excluding treasury shares), if it considers such action to be appropriate taking into account the interests of shareholders as a whole and the market conditions at the time. This authority was approved by shareholders at the General Meeting on 4 September 2015. Given that the Company’s shares have traded at an average premium of 1.3% to the Company’s NAV (with debt at fair value) for the period since the tender authority was approved, the Board has not seen a need to exercise its discretion to implement a tender.
It is the Board’s intention that this ongoing tender authority will be renewed at the Company’s next Annual General Meeting.
The Board will continue to limit the number of shares held in treasury to no more than 10% of the issued share capital of the Company.
PRINCIPAL RISKS
The key risks faced by the Company are set out below. The Board has in place a robust process to assess and monitor the principal risks of the Company. A core element of this is the Company’s risk register, which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk, and the quality of the controls operating to mitigate the risk. A residual risk rating is then calculated for each risk based on the outcome of this assessment. This approach allows the effect of any mitigating procedures to be reflected in the final assessment.
The register, its method of preparation and the operation of the key controls in the Manager’s and third party service providers systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of the Manager’s and other third party service providers’ risk management processes and how these apply to the Company’s business, the Audit Committee periodically receives presentations from BlackRock’s Internal Audit and Risk & Quantitative Analysis teams, and reviews Service Organisation Control (SOC 1) reports from BlackRock and from the Company’s custodian (Bank of New York Mellon (International) Limited). The custodian is appointed by the Company’s Depositary and does not have a direct contractual relationship with the Company.
In relation to the 2014 update to the UK Corporate Governance Code, the Board is confident that the procedures that the Company has in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout 2015.
The principal risks and uncertainties faced by the Company in 2015, together with the potential effects, controls and mitigating factors, are set out below and on the following pages.
Performance risk – The Board is responsible for determining the investment policy to fulfil the Company’s objectives and for monitoring the performance of the Company’s investment manager (“Investment Managerâ€) and the strategy adopted. An inappropriate policy or strategy may lead to poor performance, dissatisfied Shareholders and a widening discount. The Company may invest in unlisted alternative investments (such as direct lending, commercial property, renewable power or mortgage strategies). These types of investments are expected to have a different risk and return profile to the rest of the Company’s investment portfolio. They may be relatively illiquid and it may be difficult for the Company to realise these investments over a short time period, which may have a negative impact on performance. The Company may also use derivative instruments for the purposes of efficient portfolio management and/or to hedge market and currency risk. In addition, the Company may use complex derivative strategies in pursuit of the proposed investment policy including the creation of synthetic short positions to take advantage of negative investment views, using synthetic long positions to gain market exposure or a combination of long and short strategies to implement investment views in respect of one or more issuers, whilst neutralising market exposure within the transaction.
To manage these risks the Board regularly reviews the Company’s investment mandate and long term strategy, and has put in place appropriate limits over levels of unlisted alternative assets, gearing and the use of derivatives. No more than 15% of the Company’s total assets, at the time of investment, may be invested in aggregate in unlisted alternative assets. Total gearing, including net derivative exposure, would not normally be expected to result in net economic equity exposure in excess of 120%. Derivative strategies will only be undertaken within guidelines established by the Board.
Levels of portfolio exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions, are reported regularly to the Board and monitored. The Board also reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intraday monitoring of exposures to ensure these are within set limits. The Investment Manager provides an explanation of significant stock selection decisions, the rationale for the composition of the investment portfolio and movements in the level of gearing. The Board monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the Company’s investment policy.
Gearing risk – The Company has the power to borrow money or increase levels of market exposure through the use of derivatives (gearing) and does so when the Investment Manager is confident that market conditions and opportunities exist to enhance investment returns. However, if the investments fall in value, any borrowings will magnify the extent of this loss. In addition, the Company has in place fixed borrowings in the form of a £60 million 6.25% Bond 2031. All borrowings require the approval of the Board and gearing levels are reviewed regularly by the Board and the Investment Manager. Borrowings (including the Bond) would not normally be expected to exceed 20% of shareholders’ funds. Total gearing, including net derivative exposure, would not normally be expected to result in net economic equity exposure in excess of 120%.
Income/dividend risk – The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. Any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls imposed by jurisdictions in which the Company invests) may reduce the level of dividends received by shareholders. The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting.
Regulatory risk – The Company operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. The Investment Manager monitors investment movements, the level and type of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers’ Directive (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risks that the requirements of this Directive are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company.
Operational risk – In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of the Manager, BNY Mellon Trust & Depositary (UK) Limited (the Depositary) and the Bank of New York Mellon (International) Limited, who maintain the Company’s accounting records. The security of the Company’s assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These have been regularly tested and monitored throughout the year which is evidenced through their SOC 1 reports to provide assurance regarding the effective operation of internal controls which are reported on by their reporting accountants and give assurance regarding the effective operation of controls. The Board also considers succession arrangements for key employees of the Investment Manager and the business continuity arrangements for the Company’s key service providers.
Market Risk – Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Company invests in global equities across a range of countries, and changes in general economic and market conditions in certain countries, such as interest rates, exchange rates, rates of inflation, industry conditions, competition, political events and trends, tax laws, national and international conflicts, economic sanctions and other factors can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price. The Board considers the diversification of the portfolio, the portfolio risk and portfolio beta, asset allocation, stock selection, unquoted investments and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager.
Financial risks – The Company’s investment activities expose it to a variety of financial risks which include foreign currency risk and interest rate risk. Further details are disclosed in note 18 to the financial statements, in the Annual Report, together with a summary of the policies for managing these risks.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2014 Code on UK Corporate Governance, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the “Going Concern†provision. The Board conducted this review for the period up to the AGM in 2021, being a five year period from the date that this Annual Report is due to be approved by shareholders. The five year review period was selected because it is aligned with the medium term performance period of five to seven years over which the Company is assessed in its objective of targeting a total portfolio return of CPI plus 4%.
In making this assessment the Board has considered the following factors:
- The Company’s principal risks as set out above;
- The ongoing relevance of the Company’s investment objective in the current environment; and
- The level of demand for the Company’s shares.
The Board has also considered a number of financial metrics, including:
- The level of current and historic ongoing charges incurred by the Company;
- The premium or discount to NAV;
- The level of income generated by the Company;
- Future income forecasts; and
- The liquidity of the Company’s portfolio.
As an investment Company with a relatively liquid portfolio and largely fixed overheads which comprise a very small percentage of net assets (0.7%), the Board has concluded that, even in exceptionally stressed operating conditions, the Company would easily be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges, such as a significant decrease in size through tenders or share buy-back activity resulting in the company no longer being of sufficient market capitalisation to represent a viable investment proposition and to continue in operation.
The Board is committed to a nil discount policy and the Company has a number of discount control mechanisms in place to help to manage the share rating. In September 2015, the Board received shareholder approval for the discretion to implement tenders of up to 20% of the Company’s share capital. In addition, the Company has in place the authority to buy back up to 14.99% of issued share capital. The Board is seeking to renew both of these authorities at the Company’s next AGM in 2016. The Board has considered the potential impact of operating both of these discount control mechanisms on the Company’s market capitalisation over the five year time horizon under review, and in particular has noted the following:
- The Company’s investment policy (which offers both risk diversification through the use of a multi asset portfolio and aims to continue to pay dividends at least at the current level and to grow the dividend in line with inflation) continues to be attractive to investors;
- The Company’s discount has narrowed significantly over the period since the new investment policy was adopted in February 2015;
- The Company’s shares have traded at an average premium of 1.3% since the tender mechanism was introduced on 4 September 2015 and up to the date of this report; and
- The tender mechanism is operated at the sole discretion of the Board, who will only implement a tender to the extent that this is deemed to be in the best interests of shareholders as a whole.
Having considered the above factors, the Board is confident that the discount control mechanisms that the Company has in place will not have a detrimental impact on the Company’s viability.
Based on the results of their analysis, 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 period of their assessment.
FUTURE PROSPECTS
The Board’s main focus is to aim to preserve capital in real terms and to grow the dividend at least in line with inflation. The future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in both the Chairman’s Statement and in the Investment Manager’s Report.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders’ interests to consider environmental, social and governance factors and human rights issues when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out in the Corporate Governance Statement contained withing the Annual Report.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 30 September 2015, all of whom held office throughout the year, are set out in the Directors’ Biographies section of the Annual Report. The Board consists of five men and one woman. The Company does not have any employees.
By order of the Board
BlackRock Investment Management (UK) Limited
Company Secretary
2 December 2015
Statement of Directors’ Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable United Kingdom law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under UK Generally Accepted Accounting Practice (UK Accounting Standards and Applicable Law). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
- present fairly the financial position, financial performance and cash flows of the Company;
- select suitable accounting policies and then apply them consistently;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- make judgements and estimates that are reasonable and prudent;
- state whether the financial statements have been prepared in accordance with UK Accounting Standards, subject to any material departures disclosed and explained in the financial statements;
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are also responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report and the Corporate Governance Statement in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. The Directors have delegated responsibility to the Investment Manager and the AIFM for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 26 of the Annual Report, confirm to the best of their knowledge that:
- the financial statements, which have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and
- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2014 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Accounts are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit and Management Engagement Committee advise on whether it considers that the Annual Report and Accounts fulfils these requirements. The process by which the Committee has reached these conclusions is set out in the Audit Committee’s report contained within the Annual Report. As a result, the Board has concluded that the Annual Report for the year ended 30 September 2015, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
For and on behalf of the Board
JAMES M LONG
Chairman
2 December 2015
INVESTMENT MANAGER’S REPORT
Writing this, the summer seems a long time ago. This is probably a good thing as it turned out to be a memorable one but perhaps for the wrong reasons. For once I’m not referencing the weather, nor even the cricket, where the one-sided nature of the tests against Australia means it won’t go down as a classic Ashes series (although as an Englishman I applaud the result). No, instead I’m referring to markets, where we’ve seen some significant events that in turn have led to considerable gyrations across a wide range of geographies and asset classes. As a result, it has been anything but a relaxing period to be an investor, and perhaps foretells something about the future.
I’m getting ahead of myself however – I should start by saying what a privilege it is to be writing my first commentary for the Company’s Annual Report, having taken over management at the end of February this year. As such, I will focus my comments on the changes we have made to the Company’s investment strategy since then, the success (or otherwise) of these changes, and how I see the shape of the investment world going forward.
In the half yearly report I ran through the change in investment objective and the logic behind these so I won’t repeat those here. Instead, I’d point anyone not familiar with them to read my comments under the Investment Manager’s section of the half yearly report which can be found on the Company’s website (www.blackrock.co.uk/bist).
The changes we have introduced to the Company have been focused on broadening out the investment universe, and to do so whilst navigating a period of uncertainty in financial markets. So what have we done?
EQUITIES – TACTICAL ALLOCATION PORTFOLIO
The first stage was to reduce the exposure to UK equities. It’s perhaps important to note that this is not a statement on the prospects for the UK market, but rather to free up capital to invest elsewhere; indeed we still retain around 40% of the Company’s assets in UK companies (‘the UK Equity Portfolio’) with a focus on those paying attractive dividends.
The second stage was to use the cash to invest in equity markets around the globe where we think the return prospects are above average. The first port of call was Europe where economic prospects have improved noticeably, helped by the European Central Bank’s Quantitative Easing (QE) program. The improvements have been most evident in the ‘peripheral’ economies such as Portugal, Spain, Italy and Ireland and so our preference has been to gain exposure to this turnaround by owning a basket of stocks who have a big proportion of their revenue (typically 75% or more) coming from within Europe.
Travelling East, we have invested in Japanese equities at the overall market index level (as opposed to picking individual stocks), feeling that the prospects for corporate profitability in Japan are favourable. These profits could be improved further if we see any further policies either by the government or the central bank aimed at boosting growth and consumption.
Continuing Eastwards, a consistent theme in recent years has been how robust the US economy has been relative to others. Our holdings in US equities have typically been as part of global equity exposures (the US is around 50% of the world equity market in capitalisation terms). Here we have focused on high-quality companies paying attractive dividends, as well as a basket of stocks which we think will benefit materially from energy prices being lower for longer.
One area in which we have made very little investment has been emerging markets, where our exposure has typically been less than 5%. This may seem odd given the perceived wisdom about stronger growth here when compared to developed economies, but from our perspective this picture is challenged. The obvious example of this is China where the policy makers continue in their attempt to shift the economy’s main driver away from exports and towards higher domestic consumption – a move which means reducing the growth rates of 8-10% they enjoyed in the last decade to perhaps just half of that. Given the huge size of China’s economy (it is now second only to the US in GDP terms) this was always going to be a tough challenge with bumps along the way, and this year those bumps have been huge when measured in stock market returns, with the ripples felt globally and a key factor in the uncertainty noted above. To put some colour on this, the local Shanghai stock market witnessed a rally in the first half of the year gaining over 50% by June, before giving it all back by September – some round trip! In other emerging economies the challenges may be different in nature but have the same effect when it comes to us considering investing - patience is a virtue as we will very likely get an opportunity to buy into them at better levels. The one exception to this is in India where we believe the changes driven by Prime Minister Modi are very real in their long-term impact, and the fall in energy prices is a significant benefit given India’s dependence on oil imports. As such, we are happy to have a long-term holding in Indian stocks.
FIXED INCOME PORTFOLIO
Moving away from equities, we have invested approximately a quarter of the Company’s available assets into bond markets. Key exposures are in corporate bonds, both investment grade (those companies with a very strong balance sheet) and high yield (where the balance sheet is less robust). Given the focus here is on income generation rather than capital gain, these investments have been made in a highly diversified fashion to ensure that exposures to the debt of any particular company are very small at the overall Fund level. At this stage, we have avoided any significant exposure to the main government bond markets such as UK gilts or US treasuries given the likelihood that interest rates in these markets will rise at some point in the not too distant future.
One area where we have been slower to enact significant change has been in alternatives (i.e. investments outside of mainstream bond and equity markets). At the outset, we have talked of wanting to broaden the Company’s investments beyond traditional markets in order to capture some interesting opportunities for generating attractive levels of income. However, these investments tend to have lower levels of liquidity (the ability to buy and sell) than regular bond and equity holdings. As such, it has always been our intention to take our time to build up the exposures so we continue to work on some interesting ideas which I look forward to discussing in future reports.
UK EQUITY PORTFOLIO
As noted above, the Company retains a 40% exposure to UK equities. The UK equity market was volatile during the period given on-going macro uncertainties. The UK General Election, a faltering Chinese economy and Emerging Market currency weakness all contributed to significant moves at an individual stock level. Whilst such a backdrop can be unsettling, it tends to be a fertile environment for a stockpicker and we have endeavoured to take advantage of opportunities.
The UK Equity portfolio outperformed the FTSE All-Share Index by approximately 3.5% during the period, driven by a variety of holdings. The largest contributor to performance came from the holding in Carnival which is delivering on its profit improvement plan in a market where long term demographics are supportive. Other positives include Cineworld, a leading UK cinema chain, which reported strong first half results; Next, the retailer, which again demonstrated encouraging growth from its online business and Berkeley Group, which benefited from the continued buoyancy of the domestic housing market.
We made several changes to the portfolio during the period to recycle holdings where the investment thesis has played through into fresh ideas. Berkeley Group and Howden Joinery were sold. While these remain fine businesses, we feel they are now fully valued in an environment where the UK consumer recovery is maturing. We added to holdings in UK banks with purchases of Barclays and Lloyds. The former is now going through a period of accelerated restructuring under a new chairman and the latter has scope for significant dividend growth over the next few years. To provide additional flexibility, the Manager has the discretion to invest up to 20% of the UK Equity portfolio in non-UK listed stocks, although this discretion is used sparingly. The Company purchased a position in Altria where industry consolidation in the US tobacco market should result in stronger profit growth for the market leader. Given the ongoing backdrop of subdued economic growth we continue to focus on those companies that have scope for self-help, have a clear commitment to returning capital to shareholders or where there is a clear growth strategy. Such companies should continue to perform well in a low inflation environment.
OUTLOOK
So what has this meant for shareholders of BlackRock Income Strategies Trust? In my opening remarks I noted that it had been an “interesting†summer for investors, and in my comments on emerging markets I noted the bubble created in Chinese equities and its subsequent bursting. In addition, China has devalued its currency, the Federal Reserve (the decision-making body for US interest rates) have held off in raising interest rates raising fears about the durability of global growth, and commodity producers have come under intense pressure given the collapse of raw materials prices. All this culminated in a dramatic day on 24 August where many of the world’s equity markets fell by 5% or more.
Whilst this has created some challenges for us in transitioning the portfolio, it does validate the Board’s decision to move to a multi-asset approach; in the period since we became Manager of the Company to the end of September, the FTSE 100 Index fell by 5.1%; shareholders, however, saw a share price return of -3.7% and received dividends totalling 4.84p per share, resulting in a comparable total share price return over the period of -0.2%. I should point out that part of this is due to the discount to NAV being virtually eliminated but, none-the-less, I think this vindicates the changes made as well as giving shareholders comfort about our ability to navigate challenging market conditions.
So what does the future hold? In the half yearly report I referenced Bob Dylan’s “The Times They Are a-Changin’†when discussing the outlook for US interest rates, and it certainly wasn’t my intention to set a precedent for musical analogies. However, when re-assessing the current situation another tune sprung to mind; this time it was The Clash’s 1981 punk classic “Should I Stay or Should I Go?†which seems to reflect accurately the debate on interest rates both in the US and the UK. On either side of the Atlantic unemployment has dropped sharply to around 5% suggesting the need for higher interest rates, but travails in China and further falls in headline inflation have clearly raised questions in the minds of the respective decision-makers. The subsequent lines of the song are “If I go there will be trouble, And if I stay it will be double, So come on and let me know!†and that was certainly the case at the September meeting of the Federal Reserve where the “stay†decision led to a sharp fall in equities. This was clearly markets delivering the answer “Go†– it remains to be seen how closely policy-makers were listening!
Why does this matter you may ask? Well, interest rates (particularly those in the US) are the basis for valuing all other assets, so clearly the level and direction of travel are a critical ingredient in assessing the prospects for all asset classes. My belief is that a rate rise sooner rather than later would signal an optimistic assessment on the growth outlook and encourage investors to think longer-term about market prospects, which remain reasonable. However, whilst we remain in a world where the refrain remains “Should I Stay or Should I Go?â€, we would be well not to forget the recent summer experience, as it may be a useful roadmap for markets shorter-term.
PORTFOLIO ANALYSIS AS A PERCENTAGE OF SHAREHOLDERS FUNDS
| % | |
| 6.25% 2031 Bond1 | -15.9 |
| UK Equity Income | 45.3 |
| Tactical Allocation Equities | 19.3 |
| Listed Alternatives | 3.7 |
| Fixed Income | 23.7 |
| Cash and Cash Equivalents2 | 1.0 |
| Cash held to back Derivatives2 | 22.8 |
| Net current liabilities | 0.1 |
1 Further definitions in relation to financial terminology used in the above graph and elsewhere in this report are given in the glossary in the Annual report.
2 In total, Cash and Cash Equivalents and Cash held to back Derivatives in the above table equate to 23.8% of the Company’s net assets. In the investment listing that follows, these amounts are held in the Cash and Cash Equivalents total of 8.4% and the holding in BlackRock’s Institutional Cash fund of 15.4%. The level of cash held is linked to the multi-asset nature of the Company’s portfolio which means that the Company has the ability to obtain exposure to a range of investment strategies through derivative instruments. To the extent the Investment Manager has elected not to be geared through the use of such instruments, the Company will always hold a level of cash (or equivalent holding in an Institutional Cash Fund) on its balance sheet representative of the difference between the market value of the underlying shares to which the portfolio is exposed via the relevant derivative contract and the lower cost of using a derivative contract to gain exposure to these holdings. The Company is limited to any gearing through the use of derivative instruments such that net economic equity exposure will not exceed 120% of the Company’s net assets.
Source: BlackRock
ADAM RYAN
BlackRock Investment Management (UK) Limited
2 December 2015
British Assets Trust: F&C performance review for the period from 1 October 2014 to 26 February 2015
The portfolio was managed throughout most of the period with a view to the likelihood of substantial further changes given the forthcoming change in Manager. In addition, to ease the transition and provide liquidity in the event of any share buyback requirements, gearing was substantially reduced – the short term borrowing facility was repaid in full in January – and many of the less liquid smaller holdings were realised.
Given the circumstances above, no new holdings were initiated. Total equity purchases amounted to £15.8m – the major individual additional shares bought were in Royal Dutch Shell, CRH, UBS, Intermediate Capital and Ashmore (all over £1.5m). No new shares were purchased after the end of December. Equity sales totalled £52.1m, the most significant of which were holdings in Microsoft, ICICI Bank, WPP, BP, Las Vegas Sands, Lancashire Holdings and Doric Nimrod Air 2 (all over £3m).
The equity holdings within the portfolio generated a return of around 5% compared to a composite benchmark return of c. 7.7% (Source: F&C Factset). The portfolio benefited from strong stock picking in the bank (Industrial & Commercial Bank of China, ICICI Bank and Barclays) and media sectors alongside individual stocks such as CRH and Inmarsat.
However, in aggregate, relative returns were disappointing. Unsurprisingly, given the fall in the oil price in the fourth quarter of 2014, holdings in the oil sector (Hunting, Total and Occidental) were particularly detrimental to performance. Elsewhere, stock specific issues at Sanofi, Premier Farnell and Digital Barriers, which each issued profit warnings, and a stock overhang at Greenko were also notable negatives. Exposure to the mining sector was also a negative factor with a convertible bond holding losing its entire value and the impact of a fall in Freeport-Mcmoran more than offsetting generally positive stock picking elsewhere.
The return of the separate bond portfolio (excluding the convertible bond holding referred to above) was in line with that delivered by the equities over the period, but again behind the composite benchmark.
F&C Investment Business Limited
22 May 2015
Ten largest equity investments
BGF Global Equity Income Fund: 5.7% (2014: nil) invests in a global portfolio, with at least 70% of its total assets in the equity securities of companies domiciled in, or exercising the predominant part of their economic activity in, developed markets. The fund is managed by BlackRock.
BlackRock Throgmorton Trust plc: 2.6% (2014: nil) an investment trust company with an investment objective to provide shareholders with capital growth and an attractive total return by investing primarily in UK smaller companies and mid-capitalisation companies listed on the main market of the London Stock Exchange. The company’s benchmark is the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index. The company has a contracts for difference portfolio of approximately 30% of net assets. The company is managed by BlackRock.
British American Tobacco: 2.5% (2014: 1.5%) is one of the world’s leading tobacco groups, with more than 200 brands in the portfolio selling in approximately 180 markets worldwide.
AstraZeneca: 2.5% (2014: 1.0%) is a global pharmaceutical company, operating in the research, development, manufacture and marketing of pharmaceutical products.
HSBC Holdings: 2.2% (2014: 5.2%) is a global banking and financial services organisation.
Lloyds Banking Group: 2.1% (2014: 1.6%) is a UK-based financial services company, providing a range of banking and financial services to individual and business customers.
RELX: 1.9% (2014: nil) is a world-leading provider of information solutions for professional customers across industries.
Next: 1.8% (2014: nil) is a retail chain offering clothes, shoes and accessories for women, as well as collections for men, children and the home. Next trades from more than 500 stores in the UK and Eire and around 200 stores in more than 40 countries.
BGF Emerging Markets Equity Income Fund: 1.6% (2014: nil) is a diversified portfolio of predominantly emerging market equities selected for their ability to generate income from dividends. The fund can also hold developed market securities that have significant business operations in emerging markets. The fund is managed by BlackRock.
Royal Dutch Shell ‘B’: 1.6% (2014: 3.3%) is a global group of energy and petrochemicals companies with around 94,000 employees in more than 70 countries and territories. The group uses advanced technologies and takes an innovative approach to help build a sustainable energy future.
Largest fixed income investments (included within top ten overall portfolio holdings)
BGF Global Corporate Bond Fund: 5.8% (2014: nil) the Fund aims to maximise returns through a combination of capital growth and income from the Fund’s assets. The Fund invests globally, and at least 70% of its total assets are held in fixed income securities. These include bonds and money market instruments. At least 70% of the Fund’s total assets will be issued by companies and will be investment grade at the time of purchase. The Fund is managed by BlackRock.
Portugal 4.1% 15 Feb 2045: 3.3% (2014: nil). This is a long-duration 30 year government bond held for income and capital appreciation, and reflecting a positive view on European assets.
BlackStone GSO Loan Financing: 2.4% (2014: nil) the Fund is a United Kingdom-based closed-ended investment company. The Company’s investment objective is to provide shareholders with stable and growing income returns, and to grow the capital value of the investment portfolio by exposure predominately to floating rate senior secured loans directly and indirectly through collateralized loan obligation income notes. The Company invests in sectors, such as healthcare and pharmaceuticals; business services; chemical, plastic and rubber; capital equipment; construction and building; broadcast and subscription; retail; beverage, food and tobacco; hotel, gaming and leisure, and banking and finance. The fund is managed by BlackRock.
All percentages reflect the value of the holding as a percentage of total investments. Percentages in brackets represent the value of the holding as at 30 September 2014. Together, the ten largest equity investments represent 24.5% of the Company’s portfolio (ten largest investments at 30 September 2014: 31.6%).
Portfolio analysis
| PORTFOLIO ASSETS | |
| % | |
| UK Equity Portfolio | 39.3 |
| Overseas Equity Income Sleeve | 4.3 |
| Equities (Tactical Allocation) | 15.1 |
| Fixed Income | 19.4 |
| Listed Alternatives | 3.2 |
| Cash & Cash Equivalents | (0.5) |
| Cash held to back Derivatives | 19.2 |
| --------- | |
| 100.0 | |
| ===== |
| UK EQUITY PORTFOLIO | |
| % | |
| Financials | 27.2 |
| Consumer Services | 22.2 |
| Consumer Goods | 13.3 |
| Industrials | 13.3 |
| Health Care | 9.1 |
| Oil & Gas | 6.9 |
| Telecommunications | 3.2 |
| Basic Materials | 3.1 |
| Technology | 1.7 |
| --------- | |
| 100.0 | |
| ===== |
| FIXED INCOME | |
| % | |
| Global BGF Corporate Bond Fund1 | 28.2 |
| Portugal | 16.5 |
| Australia | 15.4 |
| Europe | 14.9 |
| United Kingdom | 6.0 |
| New Zealand | 5.0 |
| South Africa | 4.2 |
| France | 2.9 |
| Germany | 1.8 |
| Spain | 1.7 |
| Italy | 1.6 |
| United States | 1.3 |
| Other | 0.5 |
| --------- | |
| 100.0 | |
| ===== |
1 The fund is managed by BlackRock.
| EQUITIES (TACTICAL ALLOCATION) | |
| % | |
| BGF Global Equity Income Fund1 | 34.8 |
| BlackRock Throgmorton Trust plc1 | 15.7 |
| BGF Emerging Markets Equity Income Fund1 | 9.7 |
| IShares UK Property1 | 7.6 |
| Lyxor ETF MSCI India | 6.9 |
| Scottish Mortgage Investment Trust | 6.9 |
| BGF Asian Dragon Fund1 | 6.2 |
| Woodford Patient Capital Trust | 5.1 |
| Lyxor ETF MSCI Athex Large Cap | 4.4 |
| BGF ASEAN Leaders Fund1 | 2.7 |
| --------- | |
| 100.0 | |
| ===== |
1 The fund is managed by BlackRock.
Portfolio valuation as at 30 September 2015
| Company | Country of risk | Gross market exposure1 £ |
Market value £’000 |
Market value as a % of net assets |
| Equities (Tactical Allocation Portfolio) | ||||
| Collective Investment Vehicles | ||||
| BGF ASEAN Leaders Fund2 | Global | 1,760 | 0.5 | |
| BGF Asian Dragon Fund2 | Global | 4,076 | 1.1 | |
| BGF Emerging Markets Equity Income Fund2 | Global | 6,372 | 1.7 | |
| BGF Global Equity Income Fund2 | Global | 22,881 | 6.1 | |
| BlackRock Throgmorton Trust plc2 | United Kingdom | 10,315 | 2.8 | |
| iShares UK Property2 | United Kingdom | 4,997 | 1.3 | |
| Lyxor ETF MSCI Athex Large Cap | Greece | 2,881 | 0.8 | |
| Lyxor ETF MSCI India | India | 4,519 | 1.2 | |
| Scottish Mortgage Investment Trust | United Kingdom | 4,552 | 1.2 | |
| Woodford Patient Capital Trust | United Kingdom | 3,378 | 0.9 | |
| --------------------- | ------------- | ------------ |
1 Gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract.
2 BlackRock managed fund. Fees are rebated to ensure that there is no double charging of management fees. Additional information regarding rebates is set out in note 19 of the Annual Report.
| Options | |||||
| CBOE SPX Call Option 20/01/16 22 | United States | 4,749,724 | 983 | 0.3 | |
| CBOE SPX Call Option 20/01/16 30 | United States | (4,764,944) | (996) | (0.3) | |
| DAX Put Option 16/10/15 9500 | Germany | 4,168,880 | (195) | (0.1) | |
| Euro Stoxx 50 Put Option 18/12/15 3300 | Germany | (3,137,189) | 390 | 0.1 | |
| Euro Stoxx 50 Put Option 16/10/15 3150 | Germany | 5,330,764 | (300) | (0.1) | |
| Euro Stoxx 50 Put Option 16/10/15 3300 | Germany | (3,934,618) | 305 | 0.1 | |
| Euro Stoxx 50 Put Option 18/12/15 3150 | Germany | 4,802,949 | (525) | (0.1) | |
| Euro Stoxx UTI 50 Call Option 18/12/15 300 | Germany | 204,459 | 7 | 0.0 | |
| Euro Stoxx UTI 50 Put Option 18/12/15 265 | Germany | 5,802,702 | (773) | (0.2) | |
| FTSE 100 Call Option 18/12/15 7000 | United Kingdom | 100,410 | 2 | 0.0 | |
| FTSE 100 Put Option 18/12/15 6000 | United Kingdom | 4,055,643 | (331) | (0.1) | |
| Gold OTC Call Option 18/12/15 106 | United States | (5,247,626) | (340) | (0.1) | |
| Gold OTC Call Option 18/12/15 112 | United States | 5,625,777 | 278 | 0.1 | |
| Nikkei Put Option 09/10/15 16750 | Japan | 4,091,413 | (134) | 0.0 | |
| S&P 500 Put Option 20/11/15 1750 | United States | 3,077,602 | (174) | 0.0 | |
| S&P 500 Put Option 20/11/15 1900 | United States | (3,974,244) | 252 | 0.1 | |
| S&P 500 Call Option 19/12/15 2050 | United States | 5,171,321 | 198 | 0.1 | |
| Equity/Bonds ‘Worst-of’ Put Option: SPX 2050 CMS 2.335% | United States | 190,332 | 243 | 0.1 | |
| USD/AUD Call Option | Australia | 1,236,617 | 9 | 0.0 | |
| USD/CNH Put Option | China | 1,115,904 | (23) | 0.0 | |
| USD/CNH Put Option | China | 2,759,897 | 50 | 0.0 | |
| USD/CNH Put Option | China | 2,324,124 | 42 | 0.0 | |
| USD/CNH Put Option | China | 939,709 | (19) | 0.0 | |
| ------------- | -------------- | --------------- | ---------------- | ||
| Total Return Swaps | |||||
| iTraxx Xover Super Senior Tranche CDS | United States | 25,445,927 | (321) | (0.1) | |
| Total Return Swap Dynavol | United States | 8,887,737 | (922) | (0.2) | |
| Total Return Swap European Recovery Basket | Europe | 16,058,751 | (1,738) | (0.5) | |
| Total Return Swap Deutsche Bank V2X/VIX Strategy | United States | 15,235,015 | 310 | 0.1 | |
| Total Return Swap Goldman Sachs Vol Carry Basket | Europe | 4,656,094 | (229) | (0.1) | |
| Total Return Swap Oil Beneficiaries Basket | United States | 8,936,009 | (555) | (0.1) | |
| Total Return Swap ML Vol Carry Basket | United States | 4,573,515 | (173) | 0.0 | |
| Total Return Swap MS Volnet Wave | United States | 9,113,757 | (669) | (0.2) | |
| Total Return Swap BAML Vortex Strategy | United States | 8,630,089 | (275) | (0.1) | |
| ------------------ | --------------- | --------------- | --------------- | ||
| Futures | |||||
| S&P 500 Dec 15 | United States | (6,552,566) | (30) | 0.0 | |
| TOPIX Dec 15 | Japan | 17,350,613 | (847) | (0.2) | |
| FTSE 100 Dec 15 | United Kingdom | (29,791,575) | 79 | 0.0 | |
| FTSE 250 Dec 15 | United Kingdom | (3,615,530) | 226 | 0.1 | |
| ---------------------- | ------------------ | ---------------- | ---------------- | ||
| Total | 59,536 | 16.2 | |||
| ====== | ====== | ||||
1 Gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract.
| Country of risk | Sector | Market value £’000 |
Market value as a % of net assets |
|
| Overseas Equities | ||||
| Accenture ‘A’ | United States | Industrials | 199 | 0.0 |
| Altria Group | United States | Consumer Goods | 3,989 | 1.1 |
| Amazon.com | United States | Consumer Services | 226 | 0.1 |
| American Airlines | United States | Consumer Services | 190 | 0.0 |
| BHP Billiton | Australia | Basic Materials | 4,410 | 1.2 |
| Block (H&R) | United States | Consumer Services | 239 | 0.1 |
| Boeing | United States | Industrials | 171 | 0.0 |
| Brown-Forman ‘B’ | United States | Consumer Goods | 189 | 0.0 |
| CBS Corporation ‘B’ | United States | Consumer Services | 141 | 0.0 |
| CVS Health Corporation | United States | Consumer Services | 180 | 0.0 |
| Davita Healthcare | United States | Health Care | 178 | 0.0 |
| Dow Chemical | United States | Basic Materials | 162 | 0.0 |
| Du Pont (E.I) De Nemours | United States | Basic Materials | 147 | 0.0 |
| Dun & Bradstreet | United States | Consumer Services | 168 | 0.0 |
| Eastman Chemical | United States | Basic Materials | 158 | 0.0 |
| Edgewell Personal Care | United States | Consumer Goods | 1,649 | 0.4 |
| Edwards Lifesciences | United States | Health Care | 195 | 0.1 |
| Eli Lilly | United States | Health Care | 196 | 0.1 |
| Equifax | United States | Financials | 196 | 0.1 |
| Facebook ‘A’ | United States | Technology | 205 | 0.1 |
| Fedex | United States | Industrials | 165 | 0.0 |
| Flir Systems | United States | Industrials | 178 | 0.0 |
| Fluor | United States | Industrials | 156 | 0.0 |
| FMC | United States | Basic Materials | 126 | 0.0 |
| General Dynamics | United States | Industrials | 190 | 0.0 |
| Goodyear Tire & Rubber | United States | Consumer Goods | 190 | 0.0 |
| International Paper | United States | Basic Materials | 155 | 0.0 |
| Intuit | United States | Technology | 172 | 0.0 |
| Kellogg Co | United States | Consumer Goods | 208 | 0.1 |
| Lockheed Martin | United States | Industrials | 218 | 0.1 |
| MasterCard ‘A’ | United States | Financials | 189 | 0.0 |
| McGraw Hill Financial | United States | Financials | 168 | 0.0 |
| Monsanto | United States | Consumer Goods | 157 | 0.0 |
| Motorola Solutions | United States | Technology | 197 | 0.1 |
| Northrop Grumman | United States | Industrials | 205 | 0.1 |
| Nucor | United States | Basic Materials | 167 | 0.0 |
| Pitney Bowes | United States | Technology | 187 | 0.0 |
| Plum Creek Timber | United States | Financials | 190 | 0.0 |
| Qualcomm | United States | Technology | 168 | 0.0 |
| Raytheon | United States | Industrials | 223 | 0.1 |
| Rockwell Collins | United States | Industrials | 147 | 0.0 |
| Southern Company | United States | Utilities | 182 | 0.0 |
| Teradata Corporation | United States | Technology | 153 | 0.0 |
| Textron | United States | Industrials | 165 | 0.0 |
| Tyco International | United States | Industrials | 166 | 0.0 |
| United Parcel Service | United States | Industrials | 199 | 0.1 |
| United Technologies | United States | Industrials | 157 | 0.0 |
| Varian Medical Systems | United States | Health Care | 171 | 0.0 |
| Verisign | United States | Technology | 224 | 0.1 |
| Vertex Pharmaceuticals | United States | Health Care | 165 | 0.0 |
| Viacom ‘B’ | United States | Consumer Services | 131 | 0.0 |
| Yum! Brands | United States | Consumer Services | 174 | 0.0 |
| --------------- | --------------- | |||
| Total | 18,831 | 4.0 | ||
| ======== | ======== |
| Country of risk | Market value £’000 |
Market value as a % of net assets |
|
| Fixed Income | |||
| AA Bond 5.5% 31 Jul 2043 | United Kingdom | 232 | 0.1 |
| Abengoa Finance 7% 15 Apr 2020 | Spain | 113 | 0.0 |
| ABN Amro 5.75% Perpetual | Netherlands | 287 | 0.1 |
| Aguila 7.875% 31 Jan 2018 | United States | 133 | 0.0 |
| Altice 7.25% 15 May 2022 | France | 231 | 0.1 |
| Ardagh Packaging Finance 4.25% 15 Jan 2022 | Ireland | 249 | 0.1 |
| Aroundtown Property 3% 05 May 2020 | Germany | 324 | 0.1 |
| Aroundtown Property 3% 09 Dec 2021 | Germany | 279 | 0.1 |
| Assicurazioni Generali Spa 6.416% Perpetual | Italy | 252 | 0.1 |
| Australia 4.75% 21 Oct 2015 | Australia | 4,294 | 1.1 |
| AVOCA CLO 15 E FRN 28/11/28 | Europe | 268 | 0.1 |
| AVOCA CLO 15 F FRN 28/11/28 | Europe | 156 | 0.0 |
| Banco Espirito Santo 4% 21 Jan 2019 | Portugal | 205 | 0.1 |
| Banco Espirito Santo 4.75% 15 Jan 2018 | Portugal | 279 | 0.1 |
| Banco Popular Espanol 11.5% convertible bond | Spain | 237 | 0.1 |
| Banco Santander 6.25% Perpetual | Spain | 278 | 0.1 |
| Barclays 7.875% Perpetual | United Kingdom | 196 | 0.1 |
| BBVA 6.75% Perpetual | Spain | 284 | 0.1 |
| Belden 5.5% 15 Apr 2023 | United States | 238 | 0.1 |
| BGF Global Corporate Bond Fund1 | Global | 23,782 | 6.3 |
| BL Superstores Finance FRN 04 Oct 2030 | United Kingdom | 2 | 0.0 |
| BlackStone GSO Loan Financing | Europe | 9,843 | 2.6 |
| BNP Paribas 7.375% Perpetual | France | 233 | 0.1 |
| Boparan Finance 5.25% 15 Jul 2019 | United Kingdom | 186 | 0.0 |
| Care UK Health & Social Care FRN 15 Jul 2019 | United Kingdom | 238 | 0.1 |
| CE Energy 7% 01 Feb 2021 | Czech Republic | 250 | 0.1 |
| Cirsa Funding Luxembourg 5.875% 15 May 2023 | Spain | 237 | 0.1 |
| CPUK Finance 7% 28 Feb 2042 | United Kingdom | 150 | 0.0 |
| Crown European 3.375% 15 May 2025 | France | 249 | 0.1 |
| Enel Spa 6.625% 15 Sep 2076 | Italy | 227 | 0.1 |
| Fiat Finance 5.625% 12 Jun 2017 | United States | 26 | 0.0 |
| Gates Global LLC 5.75% 15 Jul 2022 | United States | 115 | 0.0 |
| Grifonas FRN 28 Aug 2039 | United Kingdom | 127 | 0.0 |
| Horizon 7.25% 01 Aug 2023 | France | 251 | 0.1 |
| House of Fraser FRN 15 Sep 2020 | United Kingdom | 251 | 0.1 |
| Ibercaja Banco 5% 28 Jul 2025 | Spain | 278 | 0.1 |
| IDH Finance 6% 01 Dec 2018 | United Kingdom | 247 | 0.1 |
| Ineos Finance 4% 01 May 2023 | United Kingdom | 241 | 0.1 |
| Intesa Sanpaolo 7.7% Perpetual | Italy | 129 | 0.0 |
| Jaguar Land Rover 5% 15 Feb 2022 | United Kingdom | 238 | 0.1 |
| JH-Holding Finance 8.25% 01 Dec 2022 | Germany | 151 | 0.0 |
| LGE Holdco 7.125% 15 May 2024 | Netherlands | 248 | 0.1 |
| Lloyds Banking 7.625% Perpetual | United Kingdom | 202 | 0.1 |
| Logistics FRN 20 Aug 2025 | United Kingdom | 245 | 0.1 |
| London Mining 12% Cnv 30 Apr 2019 | United Kingdom | – | 0.0 |
| Magnolia 9% 01 Aug 2020 | France | 156 | 0.0 |
| Matterhorn Telecom 3.875% 01 May 2022 | Switzerland | 245 | 0.1 |
| Moy Park Bond Co 6.25% 29 May 2021 | United Kingdom | 203 | 0.1 |
| New Look Secured Issuer 6.5% 01 Jul 2022 | United Kingdom | 285 | 0.1 |
| New South Wales 3.5% 20 Mar 2019 | Australia | 4,366 | 1.2 |
| New Zealand 3% 15 Apr 2020 | New Zealand | 4,187 | 1.1 |
| Novafives 4.5% 30 Jun 2021 | France | 205 | 0.1 |
| Numericable 5.625% 15 May 2024 | France | 247 | 0.1 |
| Pfleiderer 7.875% 01 Aug 2019 | Germany | 246 | 0.1 |
| Portaventura Entertainment 7.25% 01 Dec 2020 | Netherlands | 150 | 0.0 |
| Portugal 4.1% 15 Feb 2045 | Portugal | 13,456 | 3.6 |
| Progroup 5.125% 01 May 2022 | Germany | 254 | 0.1 |
| PSPC Escrow 6% 01 Feb 2023 | United States | 212 | 0.1 |
| Punch Taverns 5.267% 30 Mar 2024 | United Kingdom | 176 | 0.0 |
| Queensland 3.5% 21 Sep 2017 | Australia | 4,289 | 1.1 |
| Royal Bank of Scotland 7.5% Perpetual | United Kingdom | 254 | 0.1 |
| R&R Ice Cream 9.25% 15 May 2018 | United Kingdom | 255 | 0.1 |
| Santander 7.375% Perpetual | United Kingdom | 246 | 0.1 |
| Sealed Air Corp 4.5% 15 Sep 2023 | United States | 149 | 0.0 |
| SGD 5.625% 15 May 2019 | France | 247 | 0.1 |
| SNAI 7.625% 15 Jun 2018 | Italy | 253 | 0.1 |
| South Africa 8.25% 31 Mar 2032 | South Africa | 3,570 | 1.0 |
| Telecom Italia Finance 7.75% 24 Jan 2033 | Italy | 241 | 0.1 |
| Telenet Finance 6.75% 15 Aug 2024 | Belgium | 158 | 0.0 |
| Telenet Finance 4.875% 15 Jul 2027 | Belgium | 268 | 0.1 |
| Tesco Property Finance 5.744% 13 Apr 2040 | United Kingdom | 224 | 0.1 |
| Thom Europe 7.375% 15 Jul 2019 | France | 307 | 0.1 |
| Trinseo 6.375% 01 May 2022 | Luxembourg | 244 | 0.1 |
| UBS 7% Perpetual | Switzerland | 244 | 0.1 |
| UPCB Finance 4% 15 Jan 2027 | Cayman Islands | 237 | 0.1 |
| Unique Pub Finance 6.464% 30 Mar 2032 | United Kingdom | 261 | 0.1 |
| Unitymedia KabelBW 4% 15 Jan 2025 | Germany | 236 | 0.1 |
| Virgin Media Secured Finance 4.875% 15 Jan 2027 | United Kingdom | 265 | 0.1 |
| Vougeot Bidco 7.875% 15 Jul 2020 | United Kingdom | 104 | 0.0 |
| Voyage Care Bond Co 6.5% 01 Aug 2018 | United Kingdom | 239 | 0.1 |
| VRX Escrow 4.5% 15 May 2023 | Canada | 229 | 0.1 |
| Washington Mutual Bank 5.5% 10 Jun 2019 | United States | – | 0.0 |
| WFS Global Holdings 9.5% 15 Jul 2022 | France | 290 | 0.1 |
| Wind Acquisition Finance 4% 15 Jul 2020 | Italy | 249 | 0.1 |
| XPO Logistics 5.75% 15 Jun 2021 | United States | 226 | 0.1 |
| --------------- | --------------- | ||
| Total | 84,354 | 23.8 | |
| ======== | ======== |
1 The fund is managed by BlackRock. Fees are rebated to ensure that there is no double charging of management fees. Additional information regarding rebates is set out in note 19 of the Annual Report.
| Fund | Country of risk | Market value £’000 |
Market value as a % of net assets |
| Listed Alternatives | |||
| BlueCrest BlueTrend | United Kingdom | 5,034 | 1.3 |
| Foresight Solar Fund | United Kingdom | 4,867 | 1.3 |
| NB Distressed Debt Investment Fund | United Kingdom | 4,161 | 1.1 |
| -------------- | --------------- | ||
| Total | 14,062 | 3.7 | |
| ======== | ======== |
| Company | Country of risk | Sector | Market value £’000 |
Market value as a % of net assets |
| UK Equity Portfolio | ||||
| Admiral Group | United Kingdom | Financials | 3,139 | 0.8 |
| Arm Holdings | United Kingdom | Technology | 2,861 | 0.8 |
| Ashmore Group | United Kingdom | Financials | 2,477 | 0.7 |
| AstraZeneca | United Kingdom | Health Care | 10,036 | 2.7 |
| Aviva | United Kingdom | Financials | 5,728 | 1.5 |
| Barclays | United Kingdom | Financials | 5,332 | 1.4 |
| Berkeley Group Holdings | United Kingdom | Consumer Goods | 940 | 0.3 |
| Bodycote | United Kingdom | Industrials | 2,392 | 0.6 |
| BP Group | United Kingdom | Oil & Gas | 5,439 | 1.5 |
| British American Tobacco | United Kingdom | Consumer Goods | 10,256 | 2.7 |
| BT Group | United Kingdom | Telecommunications | 5,487 | 1.5 |
| Carnival | United States | Consumer Services | 6,230 | 1.7 |
| Cineworld Group | United Kingdom | Consumer Services | 3,489 | 0.9 |
| Direct Line Insurance | United Kingdom | Financials | 3,930 | 1.0 |
| Dixons Carphone | United Kingdom | Consumer Services | 2,357 | 0.6 |
| GlaxoSmithKline | United Kingdom | Health Care | 5,392 | 1.4 |
| Hargreaves Lansdown | United Kingdom | Financials | 2,185 | 0.6 |
| Hays | United Kingdom | Industrials | 3,832 | 1.0 |
| HSBC Holdings | United Kingdom | Financials | 9,033 | 2.4 |
| IMI | United Kingdom | Industrials | 2,157 | 0.6 |
| Imperial Tobacco Group | United Kingdom | Consumer Goods | 6,080 | 1.6 |
| Intertek Group | United Kingdom | Industrials | 1,993 | 0.5 |
| Legal & General Group | United Kingdom | Financials | 6,178 | 1.6 |
| Lloyds Banking Group | United Kingdom | Financials | 8,342 | 2.2 |
| Next | United Kingdom | Consumer Services | 7,296 | 1.9 |
| Pearson | United Kingdom | Consumer Services | 2,624 | 0.7 |
| RELX | United Kingdom | Consumer Services | 7,872 | 2.1 |
| Rentokil Initial | United Kingdom | Industrials | 4,521 | 1.2 |
| Rio Tinto | United Kingdom | Basic Materials | 5,341 | 1.4 |
| Royal Dutch Shell ‘B’ | Netherlands | Oil & Gas | 6,343 | 1.7 |
| Sky | United Kingdom | Consumer Services | 4,826 | 1.3 |
| Smith (DS) | United Kingdom | Industrials | 2,201 | 0.6 |
| Stagecoach Group | United Kingdom | Consumer Services | 3,054 | 0.8 |
| Unilever | United Kingdom | Consumer Goods | 5,395 | 1.4 |
| Wolseley | United Kingdom | Industrials | 5,644 | 1.5 |
| --------------- | --------------- | |||
| Total | 170,402 | 45.2 | ||
| ======== | ======== |
| Country of risk | Sector | Market value £’000 |
Market value as a % of net assets |
|
| Individual Equities (legacy) | ||||
| Caithness Petroleum | United States | – | 0.0 | |
| Ienergizer | United Kingdom | 213 | 0.1 | |
| --------------- | ---------------- | |||
| Total | 213 | 0.1 | ||
| ======== | ======== |
| Nominal Currency | Gross market exposure1 £’000 |
Market value £’000 |
Market value as a % of net assets |
||
| Forward Currency Contracts | |||||
| Canadian Dollar vs UK Sterling | CA$9,065,000 | 4,463,648 | 27 | 0.0 | |
| Canadian Dollar vs US Dollar | CA$9,795,695 | 9,695,537 | (50) | 0.0 | |
| Euro vs UK Sterling | EUR350,000 | 257,922 | 2 | 0.0 | |
| Euro vs US Dollar | EUR9,476,009 | 14,083,239 | (112) | 0.0 | |
| Indian Rupee vs US Dollar | INR351,299,550 | 7,045,329 | (3) | 0.0 | |
| Japanese Yes vs US Dollar | JPY1,658,782,870 | 18,327,983 | (35) | 0.0 | |
| New Zealand Dollar vs US Dollar | NZ$11,584,023 | 9,856,624 | (90) | 0.0 | |
| Norwegian Kroner vs US Dollar | NOK34,046,845 | 5,341,759 | (74) | 0.0 | |
| Polish Zloty vs Euro | PLN27,563,055 | 9,575,314 | (15) | 0.0 | |
| Singapore Dollar vs US Dollar | SG$10,345,625 | 9,616,104 | (17) | 0.0 | |
| South African Rand vs US Dollar | ZAR48,341,330 | 4,717,712 | (121) | 0.0 | |
| Taiwan Dollar vs US Dollar | TW$273,475,936 | 11,035,084 | (96) | 0.0 | |
| UK Sterling vs Australian Dollar | £14,530,538 | 14,779,787 | (213) | (0.1) | |
| UK Sterling vs Canadian Dollar | £15,332,500 | 15,756,949 | (425) | (0.1) | |
| UK Sterling vs Euro | £47,558,666 | 48,091,378 | (573) | (0.2) | |
| UK Sterling vs Japanese Yen | £9,922,741 | 10,283,845 | (370) | (0.1) | |
| UK Sterling vs New Zealand Dollar | £3,890,557 | 3,973,985 | (70) | 0.0 | |
| UK Sterling vs South African Rand | £3,685,000 | 3,691,408 | 24 | 0.0 | |
| UK Sterling vs Swiss Franc | £7,353,437 | 7,367,745 | (29) | 0.0 | |
| UK Sterling vs US Dollar | £10,797,124 | 11,166,859 | (372) | (0.1) | |
| US Dollar vs Chinese Yuan | US$5,320,000 | 7,095,117 | (50) | 0.0 | |
| US Dollar vs Korean Won | US$9,735,232 | 12,833,058 | 39 | 0.0 | |
| US Dollar vs Russian Ruble | US$4,100,000 | 5,568,670 | (112) | 0.0 | |
| US Dollar vs Singapore Dollar | US$17,376,000 | 22,770,855 | 190 | 0.0 | |
| US Dollar vs South African Rand | US$3,650,000 | 4,741,350 | 98 | 0.0 | |
| US Dollar vs Taiwan Dollar | US$19,416,000 | 28,057,208 | 187 | 0.0 | |
| US Dollar vs Turkish Lira | US$5,320,000 | 6,987,922 | 90 | 0.0 | |
| -------------- | -------------- | ||||
| Total | (2,170) | (0.4) | |||
| ======== | ======== | ||||
| 1 Gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract. | |||||
| Total | 345,228 | 92.4 | |||
| ======== | ======== | ||||
| Market value £’000 |
Market value as a % of net assets |
|||
| BlackRock’s Institutional Sterling Liquidity Fund1 | 57,637 | 15.4 | ||
| Add: Forward Currency contracts | 2,170 | 0.6 | ||
| Add: Derivatives (Options and Futures) | 6,195 | 1.4 | ||
| Total investments | 411,230 | 109.8 | ||
| Cash and cash equivalents | 31,318 | 8.4 | ||
| Net other liabilities | (67,716) | (18.2) | ||
| ------------- | ------------ | |||
| Net assets | 374,832 | 100.0 | ||
| ======= | ======= |
1 The fund is managed by BlackRock. Fees are rebated to ensure that there is no double charging of management fees. Additional information regarding rebates is set out in note 19 of the Annual Report.
At 30 September 2015, the Company did not hold any equity interests comprising more than 3% of any company’s share capital other than as disclosed in the table below:
| Company | % owned | |||
| Bluecrest Bluetrend | 13.3 | |||
| BlackRock Throgmorton Trust plc1 | 4.2 | |||
| Blackstone GSO Loan Financing | 4.1 |
1 The fund is managed by BlackRock.
Income Statement
for the year ended 30 September 2015
| Notes | Revenue 2015 |
Revenue 2014 |
Capital 2015 |
Capital 2014 |
Total 2015 |
Total 2014 |
|
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| (Losses)/gains on investments held at fair value through profit or loss | – | – | (33,380) | 9,596 | (33,380) | 9,596 | |
| Exchange gains | – | – | 4,306 | 969 | 4,306 | 969 | |
| Income from investments held at fair value through profit or loss | 3 | 23,024 | 23,549 | – | – | 23,024 | 23,549 |
| Other income | 3 | 96 | 59 | – | – | 96 | 59 |
| Investment management fees | 4 | (624) | (700) | (1,159) | (1,301) | (1,783) | (2,001) |
| Other operating expenses | 5 | (957) | (711) | (24) | – | (981) | (711) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net return before finance costs and taxation | 21,539 | 22,197 | (30,257) | 9,264 | (8,718) | 31,461 | |
| Finance costs | 6 | (1,410) | (1,460) | (2,616) | (2,711) | (4,026) | (4,171) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net return on ordinary activities before taxation | 20,129 | 20,737 | (32,873) | 6,553 | (12,744) | 27,290 | |
| Taxation on ordinary activities | 34 | (439) | – | – | 34 | (439) | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net return on ordinary activities after taxation | 8 | 20,163 | 20,298 | (32,873) | 6,553 | (12,710) | 26,851 |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Return per ordinary share | 8 | 7.07p | 7.01p | (11.52p) | 2.26p | (4.45p) | 9.27p |
| ======== | ======== | ======== | ======== | ======== | ======== |
The total column of this statement represents the profit or loss of the Company. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. The Company had no recognised profits or losses other than those disclosed in the Income Statement. All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.
Reconciliation of Movement in Shareholders’ Funds
for the year ended 30 September 2015
| Note | Called up share capital |
Capital redemption reserve |
Capital reserves |
Revenue reserve |
Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | ||
| For the year ended 30 September 2015 | ||||||
| At 30 September 2014 | 72,778 | 15,563 | 302,990 | 35,534 | 426,865 | |
| Return for the year | – | – | (32,873) | 20,163 | (12,710) | |
| Ordinary shares purchased into treasury | – | – | (20,256) | – | (20,256) | |
| Tender offer costs | – | – | (50) | – | (50) | |
| Dividends paid* | 7 | – | – | – | (19,017) | (19,017) |
| -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2015 | 72,778 | 15,563 | 249,811 | 36,680 | 374,832 | |
| -------- | -------- | -------- | -------- | -------- | ||
| For the year ended 30 September 2014 | ||||||
| At 30 September 2013 | 72,778 | 15,563 | 296,437 | 33,567 | 418,345 | |
| Return for the year | – | – | 6,553 | 20,298 | 26,851 | |
| Dividends paid** | 7 | – | – | – | (18,331) | (18,331) |
| -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2014 | 72,778 | 15,563 | 302,990 | 35,534 | 426,865 | |
| ======== | ======== | ======== | ======== | ======== | ||
* Third quarterly interim dividend of 1.53p per share for the year ended 30 September 2014, paid on 10 October 2014. Final dividend of 1.895p per share for the year ended 30 September 2014, paid on 30 January 2015. First quarterly dividend of 1.50p per share for the year ended 30 September 2015, paid on 10 April 2015. Second quarterly dividend of 1.67p per share for the year ended 30 September 2015, paid on 10 July 2015.
** Third quarterly interim dividend of 1.4853p per share for the year ended 30 September 2013, paid on 11 October 2013. Final dividend of 1.8396p per share for the year ended 30 September 2013, paid on 31 January 2014. First quarterly interim dividend of 1.485p per share for the year ended 30 September 2014, paid on 11 April 2014. Second quarterly interim dividend of 1.53p per share for the year ended 30 September 2014, paid on 11 July 2014.
Balance Sheet
as at 30 September 2015
| Notes | 30 September 2015 |
30 September 2014 |
|
| £’000 | £’000 | ||
| Fixed assets | |||
| Investments held at fair value through profit or loss | 411,230 | 490,690 | |
| -------- | -------- | ||
| Current assets | |||
| Debtors | 4,546 | 5,420 | |
| Derivative financial instruments | 3,374 | - | |
| Collateral pledged with brokers | 17,524 | - | |
| Cash | 14,678 | 14,790 | |
| ---------- | ----------- | ||
| 40,122 | 20,210 | ||
| Creditors – amounts falling due within one year | |||
| Collateral received from brokers | (884) | – | |
| Derivative financial instruments | (9,569) | – | |
| Other creditors | (6,488) | (24,482) | |
| -------- | -------- | ||
| (16,941) | (24,482) | ||
| -------- | -------- | ||
| Net current assets/(liabilities) | 23,181 | (4,272) | |
| -------- | -------- | ||
| Total assets less current liabilities | 434,411 | 486,418 | |
| Creditors – amounts falling due after more than one year | (59,579) | (59,553) | |
| -------- | -------- | ||
| Net assets | 374,832 | 426,865 | |
| -------- | -------- | ||
| Capital and reserves | |||
| Called up share capital | 9 | 72,778 | 72,778 |
| Capital redemption reserve | 15,563 | 15,563 | |
| Capital reserves | 249,811 | 302,990 | |
| Revenue reserve | 36,680 | 35,534 | |
| -------- | -------- | ||
| Total shareholders’ funds | 8 | 374,832 | 426,865 |
| -------- | -------- | ||
| Net asset value per ordinary share (debenture at par value) | 8 | 136.58p | 147.49p |
| ======== | ======== | ||
| Net asset value per ordinary share (debenture at fair value) | 8 | 131.00p | 143.30p |
| ======== | ======== |
Cash flow statement
for the year ended 30 September 2015
| Notes | Year ended 30 September 2015 |
Year ended 30 September 2014 |
|
| £’000 | £’000 | ||
| Net cash inflow from operating activities | 5(b) | 6,812 | 21,217 |
| Servicing of finance | (3,987) | (4,152) | |
| Capital expenditure and financial investment | |||
| Purchase of investments | (550,639) | (351,175) | |
| Proceeds from sale of investments | 602,681 | 356,482 | |
| -------- | -------- | ||
| Net cash inflow from capital expenditure and financial investment | 52,042 | 5,307 | |
| -------- | -------- | ||
| Equity dividends paid | 7 | (19,017) | (18,331) |
| -------- | -------- | ||
| Net cash inflow before financing | 35,850 | 4,041 | |
| -------- | -------- | ||
| Financing | |||
| Shares purchased to be held in treasury | (20,256) | – | |
| Tender offer costs paid | (50) | – | |
| Outflow from repayment of revolving loan facility | (19,962) | (5,023) | |
| -------- | -------- | ||
| Net cash outflow from financing | (40,268) | (5,023) | |
| ======== | ======== | ||
| Decrease in cash in the year | (4,418) | (982) | |
| ======== | ======== |
Notes to the financial statements
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.
2. ACCOUNTING POLICIES
(a) Basis of preparation
The Company’s financial statements have been prepared on a going concern basis and on the historical cost basis of accounting, except for investments which are managed and evaluated on a fair value basis in accordance with the provisions of the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (“UK GAAPâ€) and with the Statement of Recommended Practice (“SORPâ€) for investment trusts and venture capital trusts issued by the Association of Investment Companies (“AICâ€), issued in January 2009.
Expenses which are allocated to capital are available to reduce the Company’s liability to corporation tax. The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue. This is known as the ‘marginal method’ of allocating tax relief between capital and revenue. The Company does not adopt the marginal method for two reasons. Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders’ funds. Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future. Had this allocation been made, the charge to revenue and corresponding credit to capital for the year ended 30 September 2015 would have been £1,403,000 (2014: £102,000).
The principal accounting policies adopted by the Company are set out below. The policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company’s operations are of a continuing nature.
The Company’s financial statements are presented in Sterling, which is the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand pounds (£’000) except where otherwise stated.
(b) Presentation of Income Statement
In order to reflect better the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and a capital nature has been presented alongside the Income Statement.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are treated as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provisions are made for dividends not expected to be received. Fixed returns on non-equity securities are recognised on a time apportionment basis. Interest income is accounted for on an accruals basis.
Special dividends are treated as a capital receipt or a revenue receipt depending on the facts or circumstances of each particular case.
Dividends are accounted for in accordance with Financial Reporting Standard 16 ‘Current Taxation’ (FRS 16) on the basis of income actually receivable, without adjustment for the tax credit attaching to the dividends. Dividends from overseas companies continue to be shown gross of withholding tax.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the amount of the cash dividend foregone is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend foregone is recognised in capital reserve.
Options may be written over securities held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. Where the purpose of the option is the maintenance of capital, the premium is treated as a capital item. The value of the option is subsequently marked to market to reflect the fair value of the option based on traded prices.
Option premium income is recognised as revenue evenly over the life of the option contract and included in the revenue column of the Income Statement unless the option has been written for the maintenance and enhancement of the Company’s investment portfolio and represents an incidental part of a larger capital transaction, in which case any premia arising are allocated to the capital column of the Income Statement. Where the premium is taken to revenue, an appropriate amount is shown as capital return such that the total return reflects the overall change in the fair value of the option. When an option is closed out or exercised the gain or loss is accounted for as capital.
Credit Default Swaps (CDS) may be held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the CDS is the generation of income (i.e. sell protection), the premium received is treated as a revenue item. Where the purpose of the CDS is the maintenance of capital (buy protection), the premium paid is treated as a capital item. The value of the CDS is subsequently modelled to reflect the fair value of the CDS option based on available financial sources.
CDS premium income is recognised as revenue evenly over the life of the CDS contract and included in the revenue column of the Income Statement unless the CDS has been written for the maintenance and enhancement of the Company’s investment portfolio, in which case any premia arising are allocated to the capital column of the Income Statement. When a CDS is closed out the gain or loss is accounted for as capital.
Collateralized Loan Obligations (CLO) may be held in the portfolio for generating or maintaining revenue returns. The income stream is treated as a revenue item and is recognised evenly over the life of the instrument and is included in the revenue column of the Income Statement. The value of the CLO is subsequently marked to market to reflect the fair value of the CLO based on traded prices.
Total Return Swaps (TRS) may be held in the portfolio for generating or protecting capital returns, or potentially for generating or maintaining revenue returns. Where the purpose of the TRS is the generation of income, the premium received is treated as a revenue item. Where the purpose of the TRS is the maintenance of capital, the premium paid is treated as a capital item. The value of the TRS is subsequently marked to market to reflect the fair value of the TRS based on traded prices.
The Company also invests in Equity Index Futures and Forward Currency Contracts but no income component can be derived in these instruments and, as such, they are marked to market to reflect their fair value with the gains and losses taken to the capital column of the Income Statement as per policy (h).
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses have been treated as revenue except as follows:
- expenses including fInance costs which are incidental to the acquisition or disposal of investments are included within the cost of the investments. Details of transaction costs on the purchases and sales of investments are disclosed in note 11 to the Financial Statements in the Annual Report;
- the investment management fee has been allocated 65% to the capital column and 35% to the revenue column of the Income Statement in line with the Board’s expected long term split of returns, in the form capital gains and income respectively, from the investment portfolio. BlackRock has agreed to waive the management fees payable to the Company in 2015 up to the level of transition and restructuring costs, which are estimated to be in the region of £762,000 (additional fees are given in note 4). As a result the cost of the transition of Manager was fully offset and did not result in any increase to the Company’s net operating costs.
(f) Borrowings and finance costs
Borrowings are measured initially at the fair value of proceeds received less transaction costs and subsequently at amortised cost using the effective interest rate. Finance costs are accounted for on an accruals basis. Finance costs are allocated, insofar as they relate to the financing of the Company’s investments, 65% to the capital column and 35% to the revenue column of the Income Statement, in line with the Board’s expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.
(g) Taxation
Where expenses are allocated between capital and revenue any tax relief in respect of the expenses is allocated between capital and revenue returns on the marginal basis using the Company’s effective rate of corporation taxation for the accounting period.
Deferred taxation is recognised in respect of all timing differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on a non-discounted basis.
(h) Investments designated as held at fair value through profit or loss
The Company’s investments are classified as held at fair value through profit or loss in accordance with FRS 26 - ‘Financial Instruments: Recognition and Measurement’ and are managed and evaluated on a fair value basis in accordance with its investment strategy.
All investments are designated upon initial recognition as held at fair value through profit or loss. The sales of assets are recognised at the trade date of the disposal. Proceeds will be measured at fair value which will be regarded as the proceeds of sale less any transaction costs.
The fair value of the financial investments is based on their quoted bid price at the balance sheet date, on the exchange on which the investment is quoted, without deduction for the estimated future selling costs.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as ‘Gains or losses on investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the purchase or sale of investments.
In order to improve the disclosure of how companies measure the fair value of their financial investments, the disclosure requirements in FRS 29 have been extended to include a fair value hierarchy. The fair value hierarchy consists of the following three levels:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability
Level 3 – inputs for the asset or liability that are not based on observable market data
Unquoted investments are valued by the Directors at fair value using International Private Equity and Venture Capital Valuation Guidelines. This policy applies to unquoted fixed asset investments held by the Company.
(i) Valuation of derivative financial instruments
Derivatives are classified as fair value through profit or loss – held for trading, and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value. The gain or loss on remeasurement is taken to the Income Statement. The sources of the return under the derivative contract (e.g. notional dividends, financing costs, interest returns and capital charges) are allocated to the revenue and capital columns of the Income Statement in alignment with the nature of the underlying source of income and in accordance with the guidance given in the AIC SORP.
(j) Dividends payable
Under FRS 21 dividends proposed after the balance sheet date should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date.
Dividends payable to equity shareholders are recognised in the Reconciliation of Movements in Shareholders’ Funds when they have been approved by shareholders and have become a liability of the Company.
(k) Foreign currency translation
All transactions in foreign currencies are translated into Sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities at the balance sheet date are translated into Sterling at the exchange rates ruling at that date. Exchange differences arising on the revaluation of investments held as fixed assets are included in the capital column of the Income Statement. Exchange differences arising on the translation of foreign currency assets and liabilities are taken to the capital column of the Income Statement. Other foreign exchange differences arising on translation are recognised in the Income Statement as either a revenue or capital item depending on the nature of the income or expense to which they relate.
(l) Shares repurchased and held in treasury
The full cost of shares repurchased and held in treasury is charged to capital reserves. Where treasury shares are subsequently reissued, any surplus is taken to the share premium account.
(m) Debtors
Debtors include sales for future settlement, other debtors, pre-payments and accrued income in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer) they are classified as current assets. If not, they are presented as non-current assets. Debtors are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
(n) Creditors
Creditors include purchases for future settlements, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Creditors are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
3. INCOME
| 2015 £’000 |
2014 £’000 |
|
| Investment Income: | ||
| UK listed dividends | 10,619 | 15,869 |
| Overseas listed dividends | 3,522 | 4,402 |
| Fixed interest income | 2,566 | 3,164 |
| Derivative income | 6,317 | 114 |
| -------- | -------- | |
| 23,024 | 23,549 | |
| -------- | -------- | |
| Other income: | ||
| -------- | -------- | |
| Deposit interest | 77 | 32 |
| ======== | ======== | |
| Underwriting commission | 19 | 27 |
| ======== | ======== | |
| 96 | 59 | |
| ======== | ======== | |
| Total | 23,120 | 23,608 |
| ======== | ======== |
Special dividends of £364,000 have been recognised in capital (2014: nil).
4. INVESTMENT MANAGEMENT FEES
| 2015 | 2014 | |||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Investment management fee – F&C | 287 | 523 | 810 | 700 | 1,301 | 2,001 |
| Investment management fee – BlackRock | 337 | 636 | 973 | – | – | – |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Total | 624 | 1,159 | 1,783 | 700 | 1,301 | 2,001 |
| ======== | ======== | ======== | ======== | ======== | ======== |
With effect from 27 February 2015, BlackRock Fund Managers Limited has been appointed as the Company’s Alternative Investment Fund Manager in place of F&C Investment Business Limited. There has been no change to the investment management fee, which contines to be levied at a rate of 0.4% per annum of the Company’s total assets less current liabilities (excluding loans) and is allocated 35% to the revenue column and 65% to the capital column of the income statement.
BlackRock has agreed to waive the management fees payable to the Company up to the level of transition and restructuring costs, which are estimated to be in the region of £762,000. The fees in the above table that are shown as accrued to BlackRock have been credited to a payables account on the Company’s balance sheet, offsetting amounts debited to the same account in respect of transition costs. As at 30 September 2015 management fees totalling £973,000 had been accrued and costs of £762,000 had been offset on this account, leaving a payable balance due to BlackRock of £211,000.
The Company also receives a rebate on the management fees levied on its underlying investments in other BlackRock managed funds in the normal course of business to ensure that no double counting occurs. These are recognised on an accruals basis and are treated as reduction in management fee expense and allocated between revenue and capital in accordance with the Company’s policy for allocation of management fees. Additional information is given in note 19 of the Annual Report.
5. OPERATING ACTIVITES
| 2015 £’000 |
2014 £’000 |
|
| (a) Other operating expenses: | ||
| Custody fee | ||
| Auditor’s remuneration: | 12 | 110 |
| – statutory audit | 34 | 27 |
| – taxation compliance services | 1 | 10 |
| – other services: | ||
| Review of Bond compliance certificate | 1 | 1 |
| Review of transition | 5 | – |
| Review of interim report | 7 | – |
| Depositary fees | 47 | 8 |
| Registrar’s fees | 98 | 71 |
| Marketing fees | 107 | 75 |
| Directors’ emoluments | 232 | 157 |
| Other administrative expenses | 413 | 252 |
| -------- | -------- | |
| 957 | 711 | |
| -------- | -------- | |
| Transaction costs – capital | 24 | – |
| -------- | -------- | |
| 981 | 711 | |
| -------- | -------- | |
| The Company’s ongoing charges - calculated as a percentage of average shareholders’ funds and using operating expenses, excluding finance costs and taxation were: | 0.68% | 0.65% |
| ======== | ======== |
| £’000 | £’000 | |
| (b) Reconciliation of net return before finance costs and taxation to net cash flow from operating activities | ||
| Total return before finance costs and taxation | (8,718) | 31,461 |
| Less losses/(gains) on investments held at fair value through profit or loss | 33,380 | (9,596) |
| ---------- | ---------- | |
| 24,662 | 21,865 | |
| Exchange gains of a capital nature | (4,320) | (969) |
| Decrease in other debtors | 387 | 853 |
| Movement in forward currency contracts | 2,138 | 32 |
| Increase/(decrease) in other creditors | 585 | (36) |
| Net movement in collateral pledged in respect of derivatives | (16,640) | – |
| Tax on investment income included within gross income | – | (528) |
| -------- | -------- | |
| Net cash inflow from operating activities | 6,812 | 21,217 |
| -------- | -------- |
6. FINANCE COSTS
| 2015 | 2014 | |||||
| Revenue £’000 |
Capital £’000 |
Total £’000 |
Revenue £’000 |
Capital £’000 |
Total £’000 |
|
| Debt repayable within 5 years | ||||||
| – Revolving advance facility | 80 | 148 | 228 | 138 | 257 | 395 |
| – Overdraft interest | 8 | 14 | 22 | – | – | – |
| Debt repayable in more than 5 years | ||||||
| – 6.25% Bonds 2031 | 1,322 | 2,454 | 3,776 | 1,322 | 2,454 | 3,776 |
| ---- -------- | -------------- | ---- -------- | ---- -------- | ----- -------- | -------------- | |
| 1,410 | 2,616 | 4,026 | 1,460 | 2,711 | 4,171 | |
| ======== | ======== | ======== | ======== | ======== | ======== |
Finance costs have been allocated in the ratio 35% to revenue and 65% to capital.
7. DIVIDENDS
| Dividends paid on equity shares | Record date |
Payment date |
2015 £’000 |
2014 £’000 |
| – third quarterly dividend of 1.530p (2013: 1.4853p) | 12 September 2014 | 10 October 2014 | 4,428 | 4,299 |
| – final dividend of 1.895p (2013: 1.8396p) | 30 December 2014 | 30 January 2015 | 5,465 | 5,324 |
| – first quarterly dividend of 1.50p (2014: 1.485p) | 13 March 2015 | 10 April 2015 | 4,326 | 4,298 |
| – second quarterly dividend of 1.67p (2014: 1.53p) | 12 June 2015 | 10 July 2015 | 4,817 | 4,428 |
| – unclaimed dividends from previous years | (19) | (18) | ||
| -------------- | -------------- | |||
| 19,017 | 18,331 | |||
| ======== | ======== |
The total dividends payable in respect of the year which form the basis of determining retained income for the purposes of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amounts proposed meet the relevant requirements as set out in this legislation.
| Dividends paid or proposed on equity shares: | 2015 £’000 |
2014 £’000 |
| – first quarterly dividend of 1.50p (2014: 1.4850) | 4,326 | 4,298 |
| – second quarterly dividend of 1.67p (2014: 1.530p) | 4,817 | 4,428 |
| – third quarterly dividend of 1.67p (2014: 1.530p) | 4,583 | 4,428 |
| – fourth quarterly dividend of 1.70p* (2014: 1.895p) | 4,669 | 5,465 |
| -------------- | -------------- | |
| 18,395 | 18,619 | |
| ======== | ======== |
* Based upon 274,637,282 ordinary shares (excluding treasury shares) in issue on 2 December 2015.
8. RETURN AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital earnings per share are shown below and have been calculated using the following:
| 2015 | 2014 | |
| Net revenue attributable to ordinary shareholders (£’000) | 20,163 | 20,298 |
| Net capital return attributable to ordinary shareholders (£’000) | (32,873) | 6,553 |
| ------------- | -------- | |
| Total return (£’000) | (12,710) | 26,851 |
| ------------- | ----------- | |
| Total equity shareholders’ funds (£’000) | 374,832 | 426,865 |
| ---------------- | ----------------- | |
| The weighted average number of ordinary shares in issue during the year on which the earnings per ordinary share was calculated, was: | 285,283,310 | 289,412,282 |
| ---------------- | ----------------- | |
| The actual number of ordinary shares in issue at the end of the year on which the net asset value per ordinary share was calculated, was: | 274,437,282 | 289,412,282 |
| ----------------- | ----------------- | |
| The number of ordinary shares in issue including treasury shares at the year end, was: | 291,112,282 | 291,112,282 |
| ---------------- | ----------------- |
| 2015 | 2014 | |||||
| Revenue p |
Capital p |
Total p |
Revenue p |
Capital p |
Total p |
|
| Return per share | ||||||
| Calculated on weighted average number of ordinary shares | 7.07 | (11.52) | (4.45) | 7.01 | 2.26 | 9.27 |
| Calculated on actual number of ordinary shares at 30 September | 7.35 | (11.98) | (4.63) | 7.01 | 2.26 | 9.27 |
| Net asset value per share (debenture at par value) | 136.58 | 147.49 | ||||
| ---------- | ----------- | |||||
| Net asset value per share (debenture at fair value)* | 131.00 | 143.30 | ||||
| ---------- | ----------- |
* The fair value of the 6.25% bond using the last available quoted offer price from the London Stock Exchange as at 30 September 2015 was 124.84p per bond, a total of £74,904,000 (30 September 2014: 119.45p, a total of £71,670,000).
9. CALLED UP SHARE CAPITAL
| Ordinary shares (number) |
Treasury shares (number) |
Total shares (number) |
£’000 | |
| Allotted, called up and fully paid share capital comprised: | ||||
| ordinary shares of 25p each | ||||
| ------------------ | -------------- | ----------------- | ---------- | |
| At 30 September 2014 | 289,412,282 | 1,700,000 | 291,112,282 | 72,778 |
| ------------------ | -------------- | ---------------- | ---------- | |
| Shares purchased and held in treasury | (14,975,000) | 14,975,000 | – | – |
| ------------------ | -------------- | ---------------- | ---------- | |
| At 30 September 2015 | 274,437,282 | 16,675,000 | 291,112,282 | 72,778 |
| ========== | ======== | ========= | ====== |
During the year 14,975,000 ordinary shares were purchased and placed in treasury (2014: nil). The number of ordinary shares in issue at the year end, excluding treasury shares, was 274,437,282 (2014: 289,412,282). Subsequent to the year end, and as at the date of this report, 200,000 shares were issued at a premium, for proceeds of £271,200.
The ordinary shares (excluding any shares held in treasury) carry the right to receive any dividends and have one voting right per ordinary share. There are no restrictions on the voting rights of the ordinary shares or on the transfer of ordinary shares.
10. TRANSACTIONS WITH THE AIFM AND MANAGER
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s AIFM with effect from 27 February 2015. BIM (UK) acts as the Company’s Investment Manager under a delegation agreement with BFM. Further details of the investment management contract are disclosed in the Directors’ Report contained within the Annual Report.
The management fee for the year was £1,783,000 (2014: £2,001,000), as disclosed in note 4 to the Financial Statements. At the year end, an amount of £227,000 was outstanding in respect of these fees (2014: £nil).
In addition to the above services, BlackRock has provided the Company with marketing services. The total fees paid or payable for these services for the year ended 30 September 2015 amounted to £107,000 including VAT of which £107,000 was outstanding at year end.
The Company also has investments in several funds managed by BlackRock and details of the amounts invested as at 30 September 2015 are set out in the table below. As disclosed in note 4, management fees may be levied on some of these investments. To the extent that any such management fees have been charged in respect of these holdings, the Company is rebated these management fees on a regular basis to ensure that no double charging occurs. For the period from 27 February 2015 to 30 September 2015, fees of £180,000 were levied in respect of the BGF Global Equity Income Fund, the BGF Emerging Markets Equity Income Fund, BlackRock Throgmorton Trust plc and the iShares UK Property Fund and were rebated in full to the Company.
| Fund | Value at 30 September 2015 £’000 |
| BlackRock’s Institutional Sterling Liquidity Fund | 57,637 |
| BGF Global Corporate Bond Fund | 23,782 |
| BGF Global Equity Income Fund | 22,881 |
| BlackRock Throgmorton Trust plc | 10,315 |
| BGF Emerging Markets Equity Income Fund | 6,372 |
| iShares UK Property Fund | 4,997 |
| BGF Asian Dragon Fund | 4,076 |
| BGF ASEAN Leaders Fund | 1,760 |
11. RELATED PARTY DISCLOSURE
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are given below and in the Directors’ Remuneration Report contained within the Annual Report.
Director remuneration
A single figure for total remuneration of each Director is set out in the table below for the year ended 30 September 2015:
| Year ended 30 September 2015 |
Year ended 30 September 2014 |
||||||
| Base Salary £ |
Payments for additional transition work £ |
Taxable benefits1 £ |
Total £ |
Base Salary £ |
Taxable Benefits1 £ |
Total £ |
|
| James Long (Chairman)2 | 35,188 | 13,875 | 713 | 49,776 | 26,470 | 1,212 | 27,682 |
| Ian Russell2 | 26,083 | 11,875 | 8,523 | 46,481 | 23,750 | 2,625 | 26,375 |
| Jimmy West | 25,750 | 12,875 | 1,356 | 39,981 | 25,750 | 2,100 | 27,850 |
| Lynn Ruddick3 | 30,729 | 20,250 | 4,452 | 55,431 | 40,500 | 1,638 | 42,138 |
| Jim Grover | 23,750 | 11,875 | – | 35,625 | 23,750 | 195 | 23,945 |
| Julian Sinclair4 | 4,620 | – | – | 4,620 | N/A | N/A | N/A |
| James MacLeod5 | – | – | – | – | 8,952 | 1,317 | 10,269 |
| Total | 146,120 | 70,750 | 15,044 | 231,914 | 149,172 | 7,770 | 156,942 |
1 Taxable benefits relate to travel and subsistence costs.
2 James Long was Audit Committee Chairman up until 26 February 2015, when he was appointed Chairman of the Company. Ian Russell took over the role of Audit Committee Chairman on 26 February 2015.
3 Lynn Ruddick stood down as Chairman of the Company on 26 February 2015.
4 Appointed a non-executive Director on 21 July 2015.
5 James MacLeod retired as a Director of the Company on 27 January 2014.
Directors share holding
The interests of the Directors in the ordinary shares of the Company at 30 September 2015 are set out in the table below:
| 2015 | 2014 | |
James Long (Chairman)1 |
29,802 |
16,266 |
| Ian Russell2 | 27,500 | 20,000 |
| Jimmy West | 63,400 | 38,400 |
| Lynn Ruddick3 – beneficial | 165,482 | 62,844 |
| – non-beneficial | 6,874 | 5,743 |
| Jim Grover | 27,500 | 20,000 |
| Julian Sinclair4 | 36,200 | N/A |
1 Appointed Chairman with effect from 26 February 2015; previously Audit Committee Chairman.
2 Appointed Chairman of the Audit Committee with effect from 26 February 2015.
3 Ms Ruddick was Chairman up to 26 February 2015. Her holding includes 63,290 shares held by Ms Ruddick’s husband, Mr Dewar.
4 Appointed a non-executive Director on 21 July 2015.
Subsequent to the year end, Mr Long purchased an additional 7,534 shares, bringing his total holding to 37,336 shares at the date of this report. Ms Ruddick purchased an additional 74 shares (as part of a dividend reinvestment plan), bringing her total beneficial holding to 165,482 shares and her non-beneficial holding to 6,948 shares at the date of this report.
12. CONTINGENT LIABILITIES
There were no contingent liabilities at 30 September 2015 (2014: nil).
13. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The Annual Report and Financial Statements for the year ended 30 September 2015 will be filed with the Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditor, whose report for the year ended 30 September 2015 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock Income Strategies Trust plc for the year ended 30 September 2014, which have been filed with the Registrar of Companies. The report of the auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act 2006.
14. ANNUAL REPORT AND FINANCIAL STATEMENTS
Copies of the Annual Report and Financial Statements will be published shortly and will be available from the Company Secretary, BlackRock Income Strategies Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
15. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on Monday, 22 February 2016 at 11.00 a.m.
12 Throgmorton Avenue
London
EC2N 2DL
ENDS
The Annual Report and Financial Statements will also be available on the BlackRock website atwww.blackrock.co.uk/bist. Neither the contents of the Manager’s website nor the contents of any website accessible from hyperlinks on the Manager’s website (or any other website) is incorporated into, or forms part of, this announcement.
For further information, please contact:
Mark Johnson, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2300
Adam Ryan, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2761
Emma Phillips, Media & Communications, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2922
2 December 2015
12 Throgmorton Avenue
London EC2N 2DL
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