Annual Financial Report
BlackRock Income and Growth Investment Trust plc
Annual Results Announcement for the year ended 31 October 2016
PERFORMANCE RECORD
FINANCIAL SUMMARY
| As at 31 October | As at 31 October |
Change |
|
| 2016 | 2015 | % | |
| Assets | |||
| Net asset value per ordinary share | 190.53p | 187.69p | +1.5 |
| – with income reinvested | +5.2 | ||
| Ordinary share price (mid-market) | 185.00p | 184.25p | +0.4 |
| – with income reinvested | +4.1 | ||
| FTSE All-Share Index (total return) | 6,218.71 | 5,541.71 | +12.2 |
| Net assets* (£’000) | 48,307 | 49,231 | -1.9 |
| Discount to net asset value | 2.9% | 1.8% |
* The change in net assets reflects the market movements during the year and the purchase of the Company’s own shares.
| Year ended | Year ended | ||
| 31 October | 31 October | Change | |
| 2016 | 2015 | % | |
| Revenue | |||
| Revenue return per ordinary share | 6.93p | 6.68p | +3.7 |
| Net revenue return after taxation (£’000) | 1,803 | 1,758 | +2.6 |
| Dividends | |||
| Interim | 2.40p | 2.40p | – |
| Final | 3.90p | 3.60p | +8.3 |
| ---------------- | ---------------- | ---------------- | |
| Total dividends paid and payable | 6.30p | 6.00p | +5.0 |
| ========= | ========= | ========= |
CHAIRMAN'S STATEMENT
I am pleased to present the annual report and financial statements of BlackRock Income and Growth Investment Trust plc for the year ended 31 October 2016.
PERFORMANCE
During the year the Company’s net asset value per share (NAV) returned 5.2% and the share price returned 4.1%. By comparison, the Company’s benchmark, the FTSE All-Share Index, returned 12.2% (all percentages with income reinvested). This relatively disappointing performance follows on from last year’s strong returns, where the NAV and share price returns were 13.5% and 13.8% respectively. The benchmark return over that period was 3.0%.
The underperformance relative to the FTSE All-Share Index during the year was partly attributable to the portfolio’s lower weighting in the mining sector relative to the benchmark; a feature which has previously served the portfolio well. The sector rallied strongly during the year following a long period of underperformance and mining stocks make up a significant proportion of the FTSE All-Share Index. The portfolio’s exposure to domestic financial and consumer services stocks also detracted from overall performance as those sectors weakened following the outcome of the EU Referendum. Further details of the factors which have contributed and detracted from overall performance can be found in the Investment Managers’ report which follows. Since the year end, and up to close of business on 19 December 2016, the Company’s NAV has risen by 2.2% compared with a rise in the benchmark of 1.5% over the same period.
With an investment objective to provide growth in capital and income over the long term, it is important to review the Company’s NAV and share price performance against its benchmark over a longer period than one year only. Taking the three year period to 31 October 2016, NAV and share price returns have been 26.9% and 24.6% respectively against the FTSE All-Share Index return of 16.8%.
REVENUE RETURN AND DIVIDENDS
The Company’s revenue return per share for the year to 31 October 2016 amounted to 6.93 pence compared with 6.68 pence for the previous year, representing an increase of 3.7%.
An interim dividend of 2.40 pence per share (2015:2.40 pence) was distributed to shareholders on 2 September 2016. The Directors are mindful of shareholders’ desire for income in addition to capital growth and are proposing a final dividend per share of 3.90 pence (2015: 3.60 pence) giving total dividends for the year of 6.30 pence per share. This represents a 5.00% increase over the prior year (2015: 6.00 pence per share). Subject to approval at the Annual General Meeting, the final dividend will be paid on 10 March 2017 to shareholders on the Company’s register at the close of business on 17 February 2017 (ex dividend date is 16 February 2017).
POLICY ON SHARE PRICE DISCOUNT
The Directors recognise the importance to investors that the Company’s share price should not trade at a significant discount to NAV, and therefore, in normal market conditions, may use the Company’s share buy back, sale of shares from treasury and share issue powers to ensure that the share price is broadly in line with the underlying NAV.
The existing authority to buy back up to 14.99% of the Company’s issued share capital (excluding treasury shares) will expire at the conclusion of the 2017 Annual General Meeting and a resolution will be put to shareholders to renew the authority at that meeting. Currently, ordinary shares representing up to 35% of the Company’s issued ordinary share capital can be allotted as new ordinary shares or sold from treasury. It is proposed to renew this authority at the forthcoming Annual General Meeting.
During the year, a total of 875,000 ordinary shares were purchased at an average price of 181.26 pence per share, for a total consideration of £1,585,000. These shares were placed in treasury for potential reissue, thereby saving the associated costs of an issue of new shares if demand arises. No shares were issued or sold from treasury this year. Subsequent to the year end, no further ordinary shares have been purchased.
GEARING
The Company operates a flexible gearing policy which depends on prevailing market conditions and is subject to a maximum level of 20% of net assets at the time of investment. The maximum gearing used during the year was 3.2% and at 31 October 2016 net gearing was 1.3%. The Company’s previous borrowing facility of up to £4 million, as provided by ScotiaBank (Ireland) Limited, expired on 31 October 2016 and was repaid. The Company has entered into a new two year unsecured revolving credit facility, provided by ING Luxembourg S.A, which has a limit of £4 million. This new credit facility has been arranged on more favourable terms than the expiring facility, thereby reducing the Company’s overall cost of borrowing.
OUTLOOK
The UK electorate’s vote in June to leave the European Union came as a surprise to many. Stock markets fell sharply following the announcement, with the FTSE 250 hit hardest, reflecting its greater domestic exposure. Markets have since recovered and a detrimental impact of the vote on the UK economy, as forecast by many, has yet to materialise. The depreciation of sterling since the date of the referendum has also been beneficial to stock market investors, given that UK listed companies derive around two thirds of their earnings overseas, but is likely to entail higher inflation down the road.
In his autumn statement to Parliament, the Chancellor of the Exchequer announced that the Office of Budget Responsibility had revised its UK growth forecasts for the coming year, down from 2.2% to 1.4%. However, overall growth is expected to remain positive and levels of employment in the UK are expected to rise over the next five years. The UK Government has committed to additional spending on major infrastructure, focusing on areas that it believes will boost productivity and competitiveness and has also agreed to reduce the rate of corporation tax to 17% by 2020, all of which should be supportive of the economy. However, there remains concern that the present lack of clarity on the terms of the UK’s exit from the EU may deter investment in the short term.
As you will read in their report which follows, market volatility has created opportunities for the investment managers to add to existing holdings which they believe are well positioned to benefit as the economy adjusts post Brexit. They have also introduced new stocks to the portfolio which they believe can take advantage of the changing economic landscape. Their fundamental strategy has not changed and they continue to seek to identify companies with robust business models, strong cash flows and favourable industry characteristics, which are led by management teams capable of ‘self-help’. The focus remains on bottom–up stock selection, assembling a portfolio of individual companies which, taken as a whole, should prove capable of growing the Company’s revenue and supporting dividend growth into the future. Your Board is fully supportive of this approach.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting will be held on Wednesday, 8 March 2017 at 12 noon at the offices of BlackRock at 12 Throgmorton Avenue, London, EC2N 2DL. Details of the business of the meeting are set out in the Notice of Annual General Meeting on pages 66 to 69 of the Annual Financial Report. The Investment Manager will make a presentation to shareholders on the Company’s progress and the outlook for the year ahead. This year, for the first time, shareholders who are unable to attend the meeting in person will be able to watch the meeting via a live stream. Further details of how to register for this are set out on page 60 of the Annual Financial Report.
JONATHAN CARTWRIGHT
Chairman
21 December 2016
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for the year ended 31 October 2016.
INVESTMENT OBJECTIVE
The Company’s objective is to provide growth in capital and income over the long term through investment in a diversified portfolio of principally UK listed equities.
BUSINESS AND MANAGEMENT OF THE COMPANY
BlackRock Income and Growth Investment Trust plc is an investment trust company that has a premium listing on the London Stock Exchange. 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.
Investment trusts, unlike unit trusts, have the ability to borrow for investment purposes and to manage dividend distributions through revenue reserves. They also enjoy, unlike unit trusts, the benefit of continuous dealing during market hours.
The Company is an Alternative Investment Fund in accordance with the Alternative Investment Fund Managers Directive (AIFMD). BlackRock Fund Managers Limited (the Manager) is the Company’s Alternative Investment Fund Manager. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager. The Manager, operating under guidelines determined by the Board, has direct responsibility for decisions relating to the running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to BlackRock Investment Management (UK) Limited (BIM (UK) or the Investment Manager), which in turn sub-delegates these services to Bank of New York Mellon (International) Limited and also sub-delegates registration services to the Registrar, Computershare Investor Services PLC. Other service providers include the Depositary, BNY Mellon Trust & Depositary (UK) Limited. Details of the contractual terms with these service providers are set out in the Directors’ Report on pages 19 and 20 of the Annual Financial Report.
BUSINESS MODEL
The Company invests in accordance with the investment objective. 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 reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring the performance of service providers, including the Manager.
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 which is the principal service provider.
INVESTMENT STRATEGY AND POLICY
The Company’s policy is that the portfolio will usually consist of approximately 30-60 securities and will only invest in UK securities, which include the shares of companies listed, domiciled or carrying out the majority of their business in the UK.
The Company may hold a maximum of 10% of the issued ordinary share capital of any company. No more than 15% of the gross asset value of the Company may be invested in the securities of any one issuer, calculated at the time of any relevant investment. Cash or non-benchmark stocks may not exceed 10% of the net asset value of the Company. Each stock held is subject to a lower limit of 0% and an upper limit of plus 4 percentage points against its weighting in the FTSE All-Share Index (total return) on an ongoing basis, subject to an absolute sector weighting upper limit of 20% of the Company’s net assets at any time.
The Company may deal in derivatives, including options, futures, contracts for difference and derivatives not traded on or under the rules of a recognised or designated investment exchange for the purpose of efficient portfolio management. Derivatives and exchange traded funds may be dealt in only with the prior consent of the Board.
The performance of the Company is measured by reference to the FTSE All-Share Index (the Index) on a total return basis. The Company achieves an appropriate spread of risk by investing in a diversified portfolio of securities.
No material change can be made to the investment policy without the approval of shareholders by ordinary resolution.
INVESTMENT APPROACH AND PROCESS
In assembling the Company’s portfolio, a relatively concentrated approach to investment is adopted to ensure that the fund manager’s best ideas contribute significantly to returns. We believe that it is the role of the portfolio overall to achieve a premium level of yield rather than every individual company within it. This gives increased flexibility to invest where returns are most attractive. This relatively concentrated approach results in a portfolio which differs substantially from the Index and in any individual year, the returns will vary, sometimes significantly from those of the Index. Over longer periods the objective is to achieve returns greater than the Index.
The foundation of the portfolio, approximately 70% by value, is in high free cash flow companies that can sustain cash generation and pay a growing yield whilst aiming to deliver a double digit total return. Additionally, the investment managers seek to identify and invest 20% by value of the portfolio in ‘growth’ companies that have significant barriers to entry and scalable business models that enable them to grow consistently. Turnaround companies are also sought, at around 10% by value, which represent those companies that are out of favour by the market, facing temporary challenges with high yields/very low valuations, but with recovery potential. The return from this segment is expected to contribute meaningfully to returns over time.
GEARING AND BORROWINGS
The appropriate use of gearing can add value and the Company may, from time to time, use borrowings to achieve this. The Board is responsible for the level of gearing in the Company and reviews the position at every meeting. Gearing, including borrowings and gearing through the use of derivatives (which requires prior Board approval), when aggregated with underwriting participations, will not exceed 20% of the net asset value at the time of investment, drawdown or participation. Any borrowing, except for short term liquidity purposes, is used for investment purposes or to fund the purchase of the Company’s own shares.
The Company has entered into a two year unsecured sterling revolving credit facility of £4 million, provided by ING Luxembourg S.A. The Company’s previous borrowing facility, provided by ScotiaBank (Ireland) Limited, expired on 31 October 2016. At the date of this report the existing facility is drawn down by £2 million.
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 year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The Company’s revenue earnings for the year amounted to 6.93p per share (2015: 6.68p per share). Details of dividends paid and declared in respect of the year are set out in the Chairman’s Statement above.
KEY PERFORMANCE INDICATORS
A number of performance indicators (KPIs) are used to monitor and assess the Company’s success in achieving its objectives and to measure its progress and performance.
The principal KPIs are described below:
Performance against the benchmark
The performance of the portfolio together with the performance of the Company’s net asset value and share price are reviewed at each Board meeting and compared to the return on the Company’s benchmark.
Premium/discount to NAV
At each meeting the Board monitors the level of the Company’s premium or discount to NAV and considers strategies for managing any premium or discount. Further details of the discount policy are provided on page 22 of the Annual Financial Report. In the year to 31 October 2016, the Company’s share price to NAV traded in the range of a premium of 3.1% to a discount of 4.8%, both on a cum income basis. The Company bought back a total of 875,000 ordinary shares during the year at an average discount of 2.1% and an average price of 182.2p per share. The total consideration (including costs) was £1,585,000. No further ordinary shares have been bought back since the year end. No shares were issued or sold from treasury.
Ongoing charges
The ongoing charges represent the Company’s management fee and all other recurring operating and investment management expenses, excluding finance costs, expressed as a percentage of average net assets.
The Board reviews the ongoing charges and monitors the expenses incurred by the Company at each meeting. The Board also compares the level of ongoing charges against those of its peers.
PERFORMANCE
The Board also regularly reviews the Company’s performance attribution analysis to understand how performance was achieved. This provides an understanding of how components such as sector exposure, stock selection and asset allocation impact performance.
The table below provides performance information for the current and prior year. Further details are provided in the Investment Manager’s Report which follows.
| Year ended | Year ended | |
| 31 October 2016 | 31 October 2015 | |
| NAV per share1 | 190.53p | 187.69p |
| Share price2 | 185.00p | 184.25p |
| Change in benchmark index3 | 12.2% | 3.0% |
| Discount to net asset value | 2.9% | 1.8% |
| Revenue return per share | 6.93p | 6.68p |
| Ongoing charges4 | 1.00% | 1.02% |
1 Calculated in accordance with AIC guidelines.
2 Calculated on a mid to mid basis.
3 FTSE All-Share Index (total return).
4 Ongoing charges represent the Company’s management fee and all other recurring operating and investment management expenses, excluding finance costs, expressed as a percentage of average net assets.
Performance against the Company’s peers
Whilst the principal objective is to achieve growth in capital and income relative to the benchmark, the Board also monitors performance relative to a range of competitor funds, particularly those also within the AIC UK Equity Income sector.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. The Board has in place a robust process to identify, assess and monitor the principal risks of the Company. A core element of this process 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 controls established for mitigation. A residual risk rating is then calculated for each risk. The risk register is regularly reviewed and the risks reassessed. The risk environment in which the Company operates is also monitored and regularly appraised. New risks are also added to the register as they are identified which ensures that the document continues to be an effective risk management tool.
The risk register, its method of preparation and the operation of 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 functions. The Audit Committee also reviews Service Organisation Control (SOC 1) reports from the Company’s service providers.
As required by the UK Corporate Governance Code (2014 Code), the Board has undertaken a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Those principal risks have been described in the table below, together with an explanation of how they are managed and mitigated. The Board will continue to assess these risks on an ongoing basis.
The current risk register includes a range of risks which are categorised under the following headings:
- investment performance;
- income/dividend;
- gearing;
- legal and regulatory compliance;
- operational;
- market; and
- financial.
Principal Risk |
Mitigation/Control |
|
Investment performance |
||
| The Board is responsible for: · setting the investment strategy to fulfil the Company’s objective; and · monitoring the performance of the Investment Manager and the implementation of the investment strategy. An inappropriate investment strategy may lead to: · poor performance compared to the Benchmark Index and the Company’s peer group; · a widening discount to NAV; · a reduction or permanent loss of capital; and · dissatisfied shareholders and reputational damage. |
To manage this risk the Board: · regularly reviews the Company’s investment mandate and long term strategy; · is required to provide prior consent to the use of derivatives and exchange traded funds; · has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on; · reviews changes in gearing and the rationale for the composition of the investment portfolio · monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; and · moinitors the discount to NAV and use of the granted buyback powers effectively. |
|
| Income/Dividend | ||
| The amount of dividends and future dividend growth will depend on the Company’s underlying portfolio. Changes in the composition of the portfolio, any change in the tax treatment of the dividends or interest received by the Company may alter 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. The Company also has a revenue reserve and powers to pay dividends from capital which could potentially be used to support the Company’s dividend if required. | |
| Gearing | ||
| The Company’s investment strategy may involve the use of gearing to enhance investment returns. Gearing may be generated through borrowing money or increasing levels of market exposure through the use of derivatives. The Company currently has an unsecured revolving credit facility with ING Luxembourg S.A. The use of gearing exposes the Company to the risks associated with borrowing. Gearing provides an opportunity for greater returns where the return on the Company’s underlying assets exceeds the cost of borrowing. It is likely to have the opposite effect where the return on the underlying assets is below the cost of borrowings. Consequently, the use of borrowings by the Company may increase the volatility of the NAV. |
To manage this risk the Board has limited gearing, including borrowings and gearing through the use of derivatives, to 20% of NAV at the time of investment, drawdown or participation. The Investment Manager will only use gearing when confident that market conditions and opportunities exist to enhance investment returns. |
|
| Legal and Regulatory Compliance | ||
| The Company has been accepted by HM Revenue & Customs as an investment trust, subject to meeting the relevant eligibility conditions and operating as an investment trust in accordance with sections 1158 and 1159 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. Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. The Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers Directive, the Market Abuse regulations, the UK Listing Rules and the FCA’s Disclosure & Transparency Rules. Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010. |
Compliance with the accounting rules affecting investment trusts are regularly monitored. 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. The results are reported to the Board at each meeting. The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulation. 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. The Market Abuse regulation came into force across the EU on 3 July 2016. The Board has taken steps to ensure that individual Directors (and their Perons Closely Associated) are aware of their obligations under the regulation and has updated internal processes, where necessary, to ensure the risk of non-compliance is effectively mitigated. |
|
| Operational | ||
| The Company relies on the services provided by third parties. Accordingly, it 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 (the Fund Accountant), who maintain the Company’s assets, dealing procedures and accounting records. The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these third party service providers. Disruption to the accounting, payment systems or custody records, as a result of a cyber-attack or otherwise, could prevent the accurate reporting and monitoring of the Company’s financial position. |
Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board. The Fund Accountant’s and the Manager’s internal control processes are regularly tested and monitored throughout the year and are evidenced through their Service Organisation Control (SOC 1) reports, which are subject to review by an Independent Service Assurance Auditor. The SOC 1 reports provide assurance in respect of the effective operation of internal controls. These reports are reviewed by the Audit Committee. The Company’s assets are subject to a strict liability regime and in the event of a loss of assets, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control. The Board reviews the overall performance of the Manager, Investment Manager and all other third party service providers on a regular basis and compliance with the Investment Management Agreement regularly. The Board also considers the business continuity arrangements of the Company’s key service providers. |
|
| Market | ||
| Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments at a time of negative market movements. There is the potential for the Company to suffer loss through holding investments in a period of negative market movements. |
The Board considers the diversification of the portfolio, asset allocation, stock selection, 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 | ||
| The Company’s investment activities expose it to a variety of financial risks that include interest rate risk. | Details of these risks are disclosed in note 17 to the financial statements, together with a summary of the policies for managing these risks. |
VIABILITY STATEMENT
In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines.
The Board conducted this review for the period up to the AGM in 2022, being a five year period from the date that this annual report will be approved by Shareholders. 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 Company is required to undertake a continuation vote in 2018 and has also reviewed the potential impact that this may have on the Company’s viability. Particular consideration has been given to the following:
- good communication with major shareholders; at the present time there has been no indication that the continuation vote would not be successful; and
- at the close of business on 19 December 2016, the Company’s shares were trading at a discount to NAV of 2.7%.
Having considered the above factors, the Board believes that the scheduled continuation vote does not have a detrimental impact on the Company’s viability.
The Board has also considered a number of financial metrics in its assessment, including:
- the level of ongoing charges, both current and historical;
- the level at which the shares trade relative to NAV;
- the level of income generated;
- future income forecasts; and
- the liquidity of the portfolio.
The Board has concluded that the Company would be able to meet its ongoing operating costs as they fall due as a consequence of:
- a liquid portfolio; and
- overheads which comprise a small percentage of net assets.
Therefore, the Board has concluded that even in exceptionally stressed operating conditions, the Company would comfortably be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges. These include regulatory changes, changes to the tax treatment of Investment Trusts, a significant decrease in size due to substantial share buy back activity, which may result in the Company no longer being of sufficient market capitalisation to represent a viable investment proposition or no longer being able to continue in operation.
The Board has also considered the current and potential impact on the Company of the UK’s decision to leave the European Union following the referendum held in June of this year. It has concluded that the Company’s business model and strategy are not threatened by this event and therefore it does not believe that it represents a principal risk to the Company.
In reaching this conclusion the Board considered whether this event has, or would be likely to have, a significant impact on the Company’s activities and whether or not the Investment Manager would be materially impeded in achieving its investment objectives as a result of the impact of the leave vote.
The Board also considered the impact of potential changes in law, regulation, foreign exchange and taxation. However, due to the complexity and general lack of information available at present, it is challenging to assess accurately the future impact of UK’s exit from the European Union. Therefore, the Board intends to monitor closely the situation as it develops and will regularly reappraise its position.
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 the achievement of income and capital growth. The future performance of the Company is dependent upon the success of the investment strategy.
The outlook for the Company is discussed in the Chairman’s Statement above and in the Investment Manager’s Report which follows.
EMPLOYEES, SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
The Company has no employees and all of its Directors are non-executive, therefore, there are no disclosures to be made in respect of employees.
The Company believes that it is in shareholders’ interests to consider human rights issues, environmental, social and governance factors when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on page 30 of the Annual Financial Report.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. The Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 31 October 2016, all of whom held office throughout the year, are set out in the Governance Structure and Directors’ biographies on page 18 of the Annual Financial Report.
The Board recognises the importance of having a range of experienced Directors with the right skills and knowledge to enable it to fulfil its obligations. As at 31 October 2016, the Board consisted of four male Directors. The Company does not have any employees as stated above.
BY ORDER OF THE BOARD
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
21 December 2016
RELATED PARTY TRANSACTIONS
BlackRock Fund Managers Limited (BFM) was appointed as the Company’s AIFM with effect from 2 July 2014. BFM provides management and administration services to the Company under a contract which is terminable on six months’ notice. BFM has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BlackRock Investment Management (UK) Limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors’ Report in the Annual Financial Report.
The investment management fee for the year was £281,000 (2015: £288,000), as disclosed in note 4 below. At the year end, an amount of £140,000 was outstanding in respect of these fees (2015: £146,000). In addition to the above services, BlackRock has provided the Company with marketing services. The total fees recognised for these services for the year ended 31 October 2016 amounted to £(8,000) including VAT (2015: £3,000). Marketing fees of £12,000 including VAT were outstanding at 31 October 2016 (2015: £49,000).
The Company held an investment in BlackRock’s Institutional Cash Series plc – Sterling Liquidity Fund of £1,508,000 (2015: £869,000) which for the year ended 31 October 2016 has been presented in the financial statements as a cash equivalent.
The Board consists of four non-executive Directors, all of whom are considered to be independent of the Investment Manager by the Board. None of the Directors has a service contract with the Company. For the years ended 31 October 2016 and 2015, the Chairman received an annual fee of £28,000, the Chairman of the Audit Committee received an annual fee of £22,500 and each of the other Directors received an annual fee of £19,000. Directors’ fees were last increased with effect from 1 November 2014.
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report on pages 24 to 26 of the Annual Financial Report. At 31 October 2016, £131,000 (2015: £84,000) was outstanding in respect of Directors’ fees.
As at 31 October 2016 and 2015, the Directors’ interests in the Company’s ordinary shares were as follows:
| 31 October | 31 October | |
| 2016 | 2015 | |
| J H Cartwright (Chairman) | 20,000 | 20,000 |
| N R Gold | 20,000 | 20,000 |
| G M Luckraft | – | – |
| C R Worsley | 987,5392 | 487,5391 |
1. Including a non-beneficial interest in 155,500 ordinary shares.
2. Including a non-beneficial interest in 655,500 ordinary shares.
The information in the table above has been audited.
All of the holdings of the Directors and their families are beneficial, except as stated. No changes to these holdings had been notified up to the date of this report.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards.
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 as at the end of each financial year and of the profit or loss of the Company for that year.
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 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 applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are also responsible for preparing the Strategic Report, the Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit Committee 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 Manager for the maintenance and integrity of the Company’s corporate and financial information included on the BlackRock 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 18 of the Annual Financial Report, confirm to the best of their knowledge that:
- the financial statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
- the Strategic Report contained in the Annual Report and Financial Statements 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 requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Financial Statements fulfils these requirements. The process by which the Audit Committee has reached these conclusions is set out in the Audit Committee’s report on pages 32 to 35 of the Annual Financial Report. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 31 October 2016, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
JONATHAN CARTWRIGHT
Chairman
21 December 2016
INVESTMENT MANAGER'S REPORT
PERFORMANCE
Over the year to 31 October 2016, the Company’s NAV rose by 5.2% and the share price by 4.1%. Over the same period, the FTSE All-Share Index returned 12.2%. (All percentages are in sterling with income reinvested).
MARKET REVIEW
The UK equity market rose strongly led by a recovery in resource companies, particularly the mining sector as the negative trend in commodity prices which dominated markets in 2015, reversed abruptly. The sharp fall in sterling following the vote to leave the European Union (EU) meant that share price moves were largely demarcated by their domestic and international exposure given the translational impact on earnings. The swift appointment of Theresa May, as the new Prime Minister, helped limit the immediate political uncertainty, and the Bank of England responded with a 0.25% interest rate cut and an expansion of its bond purchase programme. Towards the end of the year markets began to anticipate reflationary trends with inflation indicators recovering in China and the United States.
CONTRIBUTORS TO PERFORMANCE
While there were several stock specific positives during the year, this was offset by significant macro driven moves which we were not positioned for. At the sector level, the outperformance of the mining sector acted as a material drag on relative performance given the portfolio’s absence of holdings. Domestic financial and consumer goods and services stocks were also weak following the EU referendum. Consequently, positions in Sky, Lloyds Banking Group, Next, BT Group and Dixons Carphone all detracted from overall performance. However, since the year end Sky has received a bid from News Corporation.
On the positive side, there were several contributors to performance, including ARM Holdings, Rentokil Initial and John Laing Group. ARM Holdings agreed a £24 billion bid from the Japanese company Softbank. Despite having a low dividend yield, the Company held ARM Holdings given its attractive cashflow characteristics, the long duration qualities of customer licences and secular growth; qualities which also attracted Softbank. John Laing Group is a good example of a company that continues to drive growth through active management even if the wider macro environment has challenges. This investor and manager of infrastructure assets continued to deliver ongoing growth in asset value which is set using a high discount rate. The pipeline of potential infrastructure investments is healthy and management continues to recycle the portfolio to enhance longer term returns for shareholders. Rentokil Initial continued to perform well after reporting solid results, demonstrating strong momentum in the underlying business and excellent cash generation.
PORTFOLIO ACTIVITY
During the year we reduced exposure to financials reflecting a more challenging operating environment by selling Aviva, Legal & General Group and Barclays. Brexit created market volatility which we used as an opportunity to add to positions in ITV, BT Group and Sky at levels that we believed were discounting a significant UK recession. We also established new positions in BAE Systems and Kier Group. After many years of depressed defence spending, budgets across the developed world, particularly in the US, are slowly recovering. Kier Group is a contractor focusing on roads and social housing, both areas with potential upside should the government seek to stimulate the economy through fiscal measures.
OUTLOOK
Macroeconomic volatility has been an important driver of equities in 2016 which has tended to overwhelm the stock specific factors at the heart of our process. However, over the longer term, earnings and cash flow growth tend to be the dominant driver of share prices. If equity markets fail to recognise this, corporates buyers have the potential to; the bid for ARM Holdings during the summer was a good reminder of that dynamic. Markets are likely to remain skittish given macro headwinds, likely volatility in bond markets and an increasing level of political risks. However, we continue to find opportunities in those companies that can generate cash flow from strong business models, have favourable industry characteristics or scope for management driven self-help. While sometimes unnerving, we will continue to use market volatility to provide buying opportunities in those types of companies.
ADAM AVIGDORI AND MARK WHARRIER
BlackRock Investment Management (UK) Limited
21 December 2016
PORTFOLIO
Ten largest equity investments as at 31 October 2016
British American Tobacco: 6.5% (2015: 5.7%) is one of the world’s leading tobacco groups, with more than 200 brands in the portfolio selling in approximately 180 markets worldwide.
Unilever: 5.2% (2015: 2.9%) is a global supplier of food, home and personal care products. With more than 400 brands focused on health and wellbeing, the portfolios range from nutritionally balanced foods to ice creams, soaps, shampoos and household care products.
AstraZeneca: 4.7% (2015: 5.0%) is a global pharmaceutical company, operating in the research, development, manufacture and marketing of pharmaceutical products, including the areas of cardiovascular and metabolic disease, oncology, respiratory, inflammation and autoimmunity.
BT Group: 4.1% (2015: 4.2%) is a communications services company, involved in the provisions of fixed line services, broadband, mobile and television products and services in the United Kingdom and globally. The Company operates in five segments: BT Global Services, BT Business, BT Consumer, BT Wholesale and Openreach.
RELX (previously Reed Elsevier): 4.0% (2015: 4.3%) is a global provider of professional information solutions that includes publication of scientific, medical, technical and legal journals. It is also the world’s leading exhibitions, conference and events business.
Vodafone: 3.8% (2015: nil) is a telecommunications company organised into two geographic regions: Europe and Africa, Middle East and Asia Pacific. The company provides a range of services, including voice, messaging and data across mobile and fixed networks.
Royal Dutch Shell ‘B’: 3.7% (2015: 3.6%) is an oil and gas company based in the UK. The company operates both upstream and downstream. Upstream is engaged in searching for and recovering crude oil and natural gas, the liquefaction and transportation of gas. Downstream is engaged in manufacturing, distribution and marketing activities for oil products and chemicals.
John Laing Group: 3.6% (2015: 1.5%) formerly Henderson Infrastructure Holdco (UK) Limited, is an originator and active investor and manager of greenfield infrastructure projects. The company operates through segments, including primary investment, secondary investment and asset management.
Lloyds Banking Group: 3.6% (2015: 4.8%) is a UK based financial services group, providing a wide range of banking and financial services, focused on personal and commercial customers. Its main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision.
GlaxoSmithKline: 3.3% (2015: 2.5%) is a global health care group operating in the research, development, manufacture and marketing of pharmaceutical products, including vaccines, over-the-counter medicines and health related consumer products.
All percentages reflect the value of the holding as a percentage of total investments. The percentages in brackets represent the value of the holding as at 31 October 2015 (comparative percentages have been re-worked following the reclassification of the BlackRock’s Institutional Cash Series plc - Sterling Liquidity Fund to cash).
Together, the ten largest investments represent 42.5% of total investments (ten largest investments as at 31 October 2015: 42.5%).
DISTRIBUTION OF INVESTMENTS AS AT 31 OCTOBER 2016
ANALYSIS OF PORTFOLIO BY SECTOR
| % of investments | Benchmark | ||
| 1 | Pharmaceuticals & Biotechnology | 9.4 | 8.7 |
| 2 | Travel & Leisure | 9.3 | 4.3 |
| 3 | Tobacco | 9.1 | 5.7 |
| 4 | Media | 8.8 | 3.7 |
| 5 | Support Services | 7.1 | 5.0 |
| 6 | Banks | 6.8 | 10.2 |
| 7 | Financial Services | 6.6 | 2.6 |
| 8 | Oil & Gas Producers | 6.5 | 12.1 |
| 9 | Food Producers | 5.2 | 0.7 |
| 10 | General Industrials | 4.4 | 0.8 |
| 11 | General Retailers | 4.4 | 2.0 |
| 12 | Fixed Line Telecommunications | 4.1 | 1.5 |
| 13 | Mobile Telecommunications | 3.8 | 2.8 |
| 14 | Non-life Insurance | 3.2 | 1.0 |
| 15 | Food & Drug Retailers | 2.9 | 1.4 |
| 16 | Construction & Materials | 2.5 | 1.3 |
| 17 | Aerospace & Defence | 2.3 | 1.8 |
| 18 | Real Estate Investment & Services | 2.0 | 0.5 |
| 19 | Chemicals | 1.1 | 0.6 |
| 20 | Real Estate Investment Trusts | 0.5 | 1.9 |
INVESTMENT SIZE
| Number of investments | % of investments | |
| < £1m | 18 | 20.9 |
| £1m to £2m | 20 | 58.6 |
| £2m to £3m | 4 | 20.5 |
Source: BlackRock.
INVESTMENTS AS AT 31 OCTOBER 2016
| Market value £’000 |
% of Investments |
|
| Pharmaceuticals & Biotechnology | ||
| AstraZeneca | 2,284 | 4.7 |
| GlaxoSmithKline | 1,631 | 3.3 |
| Shire | 688 | 1.4 |
| --------------- | --------------- | |
| 4,603 | 9.4 | |
| --------------- | --------------- | |
| Travel & Leisure | ||
| Carnival | 1,310 | 2.7 |
| Intercontinental Hotels Group | 1,180 | 2.4 |
| Stagecoach Group | 1,021 | 2.1 |
| Patisserie Holdings | 528 | 1.1 |
| Cineworld Group | 489 | 1.0 |
| --------------- | --------------- | |
| 4,528 | 9.3 | |
| --------------- | --------------- | |
| Tobacco | ||
| British American Tobacco | 3,173 | 6.5 |
| Imperial Brands | 1,254 | 2.6 |
| --------------- | --------------- | |
| 4,427 | 9.1 | |
| --------------- | --------------- | |
| Media | ||
| RELX | 1,940 | 4.0 |
| Sky | 1,582 | 3.2 |
| ITV | 775 | 1.6 |
| --------------- | --------------- | |
| 4,297 | 8.8 | |
| --------------- | --------------- | |
| Support Services | ||
| Rentokil Initial | 1,525 | 3.1 |
| Wolseley | 1,206 | 2.5 |
| Hays | 482 | 1.0 |
| Babcock International | 240 | 0.5 |
| --------------- | --------------- | |
| 3,453 | 7.1 | |
| --------------- | --------------- | |
| Banks | ||
| Lloyds Banking Group | 1,740 | 3.6 |
| HSBC Holdings | 1,581 | 3.2 |
| --------------- | --------------- | |
| 3,321 | 6.8 | |
| --------------- | --------------- | |
| Financial Services | ||
| John Laing Group | 1,750 | 3.6 |
| Provident Financial | 799 | 1.6 |
| Hargreaves Lansdown | 696 | 1.4 |
| --------------- | --------------- | |
| 3,245 | 6.6 | |
| --------------- | --------------- | |
| Oil & Gas Producers | ||
| Royal Dutch Shell ‘B’ | 1,788 | 3.7 |
| BP Group | 1,390 | 2.8 |
| --------------- | --------------- | |
| 3,178 | 6.5 | |
| --------------- | --------------- | |
| Food Producers | ||
| Unilever | 2,532 | 5.2 |
| --------------- | --------------- | |
| 2,532 | 5.2 | |
| --------------- | --------------- | |
| General Industrials | ||
| RPC Group | 1,150 | 2.3 |
| DS Smith | 1,026 | 2.1 |
| --------------- | --------------- | |
| 2,176 | 4.4 | |
| --------------- | --------------- | |
| General Retailers | ||
| Inchcape | 1,158 | 2.4 |
| Dixons Carphone | 536 | 1.1 |
| Next | 466 | 0.9 |
| --------------- | --------------- | |
| 2,160 | 4.4 | |
| --------------- | --------------- | |
| Fixed Line Telecommunications | ||
| BT Group | 2,019 | 4.1 |
| --------------- | --------------- | |
| 2,019 | 4.1 | |
| --------------- | --------------- | |
| Mobile Telecommunications | ||
| Vodafone | 1,855 | 3.8 |
| --------------- | --------------- | |
| 1,855 | 3.8 | |
| --------------- | --------------- | |
| Non-life Insurance | ||
| Admiral Group | 858 | 1.7 |
| Direct Line Insurance | 719 | 1.5 |
| --------------- | --------------- | |
| 1,577 | 3.2 | |
| --------------- | --------------- | |
| Food & Drug Retailers | ||
| Tesco | 1,406 | 2.9 |
| --------------- | --------------- | |
| 1,406 | 2.9 | |
| --------------- | --------------- | |
| Construction & Materials | ||
| Kier Group | 790 | 1.6 |
| Forterra | 438 | 0.9 |
| --------------- | --------------- | |
| 1,228 | 2.5 | |
| --------------- | --------------- | |
| Aerospace & Defence | ||
| BAE Systems | 1,149 | 2.3 |
| --------------- | --------------- | |
| 1,149 | 2.3 | |
| --------------- | --------------- | |
| Real Estate Investment & Services | ||
| U and I Group | 504 | 1.0 |
| Foxtons Group | 479 | 1.0 |
| --------------- | --------------- | |
| 983 | 2.0 | |
| --------------- | --------------- | |
| Chemicals | ||
| Elementis | 544 | 1.1 |
| --------------- | --------------- | |
| 544 | 1.1 | |
| --------------- | --------------- | |
| Real Estate Investment Trusts | ||
| Derwent London | 244 | 0.5 |
| --------------- | --------------- | |
| 244 | 0.5 | |
| --------------- | --------------- | |
| Total Value of Securities | 48,925 | 100.0 |
| ========= | ========= |
All investments are in ordinary shares unless otherwise stated.
The total number of holdings as at 31 October 2016 was 42 (31 October 2015: 41).
At 31 October 2016 the Company did not hold any equity interests representing more than 3% of any company’s share capital.
INCOME STATEMENT FOR THE YEAR ENDED 31 OCTOBER 2016
| Revenue | Revenue | Capital | Capital | Total | Total | ||
| Notes | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Gains on investments held at fair value through profit or loss | – |
– |
654 |
4,534 |
654 |
4,534 |
|
| Income from investments held at fair value through profit or loss | 2,078 |
2,047 |
– |
– |
2,078 |
2,047 |
|
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Total income | 2,078 | 2,047 | 654 | 4,534 | 2,732 | 6,581 | |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Investment management fee | 4 | (70) | (72) | (211) | (216) | (281) | (288) |
| Operating expenses | 5 | (198) | (207) | (3) | (4) | (201) | (211) |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Total operating expenses | (268) | (279) | (214) | (220) | (482) | (499) | |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Net profit before finance costs and taxation | 1,810 | 1,768 | 440 | 4,314 | 2,250 | 6,082 | |
| Finance costs | 6 | (7) | (10) | (21) | (30) | (28) | (40) |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Net profit on ordinary activities before taxation | 1,803 | 1,758 | 419 | 4,284 | 2,222 | 6,042 | |
| Taxation | – | – | – | – | – | – | |
| ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ---------------- | ||
| Net profit on ordinary activities after taxation | 8 | 1,803 | 1,758 | 419 | 4,284 | 2,222 | 6,042 |
| ========== | ========== | ========== | ========== | ========== | ========== | ||
| Earnings per ordinary share | 8 | 6.93p | 6.68p | 1.62p | 16.29p | 8.55p | 22.97p |
| ========== | ========== | ========== | ========== | ========== | ========== |
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 (AIC). All items in the above statement derive from continuing operations and no operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The net profit for the year disclosed above represents the Company’s total comprehensive income.
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER 2016
| Called-up | Share | Capital | ||||||
| share | premium | redemption | Special | Capital | Revenue | |||
| Notes | capital | account | reserve | reserve | reserves | reserve | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| For the year ended 31 October 2016 | ||||||||
| At 31 October 2015 | 329 | 14,819 | 220 | 22,857 | 8,682 | 2,324 | 49,231 | |
| Total comprehensive income: | ||||||||
| Profit for the year | – | – | – | – | 419 | 1,803 | 2,222 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Shares purchased and held in treasury | – |
– |
– |
(1,585) |
– |
– |
(1,585) |
|
| Dividends paid* | 7 | – | – | – | – | – | (1,561) | (1,561) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 October 2016 | 329 | 14,819 | 220 | 21,272 | 9,101 | 2,566 | 48,307 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| For the year ended 31 October 2015 | ||||||||
| At 31 October 2014 | 329 | 14,819 | 220 | 23,306 | 4,398 | 2,122 | 45,194 | |
| Total comprehensive income: | ||||||||
| Profit for the year | – | – | – | – | 4,284 | 1,758 | 6,042 | |
| Transactions with owners, recorded directly to equity: | ||||||||
| Shares purchased and held in treasury | – |
– |
– |
(449) |
– |
– |
(449) |
|
| Dividends paid** | 7 | – | – | – | – | – | (1,556) | (1,556) |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | ||
| At 31 October 2015 | 329 | 14,819 | 220 | 22,857 | 8,682 | 2,324 | 49,231 | |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | --------------- |
* Final dividend of 3.60p per share for the year ended 31 October 2015, declared on 15 January 2016 and paid on 4 March 2016, and the interim dividend of 2.40p per share for the six months ended 30 April 2016, declared on 29 June 2016 and paid on 2 September 2016.
** Final dividend of 3.50p per share for the year ended 31 October 2014, declared on 8 January 2015 and paid on 6 March 2015, and the interim dividend of 2.40p per share for the six months ended 30 April 2015, declared on 23 June 2015 and paid on 4 September 2015.
BALANCE SHEET AS AT 31 OCTOBER 2016
| Notes | 2016 | 2015 | |
| £’000 | £’000 | ||
| Fixed assets | |||
| Investments held at fair value through profit or loss | 48,925 | 50,388 | |
| --------------- | --------------- | ||
| Current assets | |||
| Debtors | 507 | 195 | |
| Cash and cash equivalents | 1,581 | 991 | |
| --------------- | --------------- | ||
| 2,088 | 1,186 | ||
| --------------- | --------------- | ||
| Creditors – amounts falling due within one year | |||
| Bank loan | (2,000) | (2,000) | |
| Other creditors | (706) | (343) | |
| --------------- | --------------- | ||
| (2,706) | (2,343) | ||
| --------------- | --------------- | ||
| Net current liabilities | (618) | (1,157) | |
| --------------- | --------------- | ||
| Net assets | 48,307 | 49,231 | |
| --------------- | --------------- | ||
| Capital and reserves | |||
| Called-up share capital | 9 | 329 | 329 |
| Share premium account | 10 | 14,819 | 14,819 |
| Capital redemption reserve | 10 | 220 | 220 |
| Special reserve | 11 | 21,272 | 22,857 |
| Capital reserves | 10 | 9,101 | 8,682 |
| Revenue reserve | 10 | 2,566 | 2,324 |
| --------------- | --------------- | ||
| Total shareholders’ funds | 8 | 48,307 | 49,231 |
| ========= | ========= | ||
| Net asset value per ordinary share | 8 | 190.53p | 187.69p |
| ========= | ========= |
The financial statements were approved and authorised for issue by the Board of Directors on 21 December 2016 and signed on its behalf by Mr J H Cartwright, Chairman.
BlackRock Income and Growth Investment Trust plc
Registered in England, No. 4223927
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 2016
| Notes | 2016 | 2015 | |
| £’000 | £’000 | ||
| Operating activities | |||
| Net profit before taxation | 2,222 | 6,042 | |
| Interest expense | 28 | 40 | |
| Gains on investments held at fair value through profit or loss | (654) | (4,534) | |
| Special dividends credited to capital | 198 | 113 | |
| Sales of investments held at fair value through profit or loss | 22,194 | 29,253 | |
| Purchase of investments held at fair value through profit or loss | (20,222) | (30,754) | |
| Decrease in debtors | (1) | (92) | |
| Decrease in other creditors | (3) | (95) | |
| --------------- | --------------- | ||
| Net cash generated from/(used in) operating activities | 3,762 | (27) | |
| --------------- | --------------- | ||
| Financing activities | |||
| Purchase of ordinary shares | (1,583) | (449) | |
| Interest paid | (28) | (40) | |
| Dividends paid | 7 | (1,561) | (1,556) |
| --------------- | --------------- | ||
| Net cash used in financing activities | (3,172) | (2,045) | |
| --------------- | --------------- | ||
| Increase/(decrease) in cash and cash equivalents | 590 | (2,072) | |
| --------------- | --------------- | ||
| Cash and cash equivalents at beginning of year | 991 | 3,063 | |
| --------------- | --------------- | ||
| Cash and cash equivalents at end of year | 1,581 | 991 | |
| --------------- | --------------- | ||
| Comprising: | |||
| Cash at bank | 73 | 122 | |
| BlackRock’s Institutional Cash Series plc – Sterling Liquidity Fund | 1,508 | 869 | |
| --------------- | --------------- | ||
| 1,581 | 991 | ||
| ========= | ========= |
NOTES TO THE FINANCIAL STATEMENTS
1. PRINCIPAL ACTIVITY
The Company conducts its business so as to qualify as an investment trust company within the meaning of sub-section 1158 of the Corporation Tax Act 2010.
2. ACCOUNTING POLICIES
(a) Basis of preparation
This is the first year that the Company has presented its results and financial position under FRS 102, ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (FRS 102), which forms part of revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013 and which came into effect for accounting periods beginning on or after 1 January 2015. The last financial statements prepared under the previous UK GAAP were for the year ended 31 October 2015.
The financial statements have been prepared on a going concern basis in accordance with FRS 102 and the revised Statement of Recommended Practice – ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014.
As a result of the first time adoption of New UK GAAP and the revised SORP, comparative amounts and presentation formats have been amended where required. The changes to accounting policies relate to the composition of cash and cash equivalents, changes in the presentation of cash flows (see below) and fair value hierarchy of financial instruments (see note 17). There were no adjustments to the Company’s Income Statement for the financial year ended 31 October 2015 and the total equity as at 1 November 2014 and 31 October 2015 between UK GAAP as previously reported and FRS 102 as a result of changes to accounting policies.
The Company’s Statement of Cash Flows reflects the presentation requirements of FRS 102, which are different to that prepared under previous UK GAAP. In addition, the Statement of Cash Flows reconciles to cash and cash equivalents, whereas under previous UK GAAP the Statement of Cash Flows reconciled to cash. Cash and cash equivalents are defined in FRS 102 as ‘cash in hand and demand deposits, bank overdrafts repayable on demand and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value’ whereas cash is defined in previous UK GAAP as ‘cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand’. The Company’s investment in BlackRock’s Institutional Cash Series plc – Sterling Liquidity Fund of £1,508,000 (2015: £869,000) is managed as part of the Company’s cash management policy and, accordingly, this investment along with purchases and sales of this investment has been classified in the Balance Sheet and Statement of Cash Flows as cash and cash equivalents. The comparative figures in the Balance Sheet and Statement of Cash Flows have been restated.
The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, 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 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 accounted for 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.
Special dividends are recognised on an ex-dividend basis and are treated as a capital or revenue item depending on the facts and circumstances of each dividend.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserves.
Deposit interest receivable is accounted for on an accruals basis. Underwriting commission is recognised when the issue underwritten closes.
(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 book cost of the investments. Details of transaction costs on the purchases and sales of investments are disclosed in note 11 on page 49 of the Annual Financial Report;
· the investment management fee has been allocated 75% to the capital column and 25% 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.
(f) Finance costs
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, 75% to the capital column and 25% 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 obtained in respect of those expenses is allocated between capital and revenue on the marginal basis using the Company’s effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements.
A deferred tax asset is recognised when it is more likely than not that the asset will be recoverable. Deferred tax is measured on a non-discounted basis at the rate of corporation tax that is expected to apply when the timing differences are expected to reverse.
(h) Investments 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 Sections 11 and 12 of FRS 102 and are managed and evaluated on a fair value basis in accordance with its investment strategy and information about the investments is provided on this basis to the Board of Directors.
Investments held at fair value through profit or loss are initially recognised at fair value. After initial recognition, these continue to be measured at fair value, which for quoted investments is either the bid price or the last traded price depending on the convention of the exchange on which the investment is listed. Purchases and sales of financial assets are recognised on the trade date, being the date which the Company commits to purchase or sell the assets.
Investment holding gains or losses reflect differences between fair value and book cost and therefore include transaction costs in relation to the purchases or sale of investments. Net gains or losses arising on realisation of investments are taken to capital reserve.
Amendments to FRS 102 – Fair value hierarchy disclosures amends paragraphs 34.22 and 34.42 of FRS 102, revising the disclosure requirements for financial instruments held at fair value and aligning the disclosures with those required by EU-adopted IFRS. The Company has chosen to adopt early these amendments to FRS 102; however, there were no changes to the classification within the fair value hierarchy. There are no accounting policy or disclosure changes as a result of this adoption.
The fair value hierarchy consists of the following three levels:
Level 1 – Quoted market price for identical instruments in active markets
Level 2 – Valuation techniques using observable inputs
Level 3 – Valuation techniques using significant unobservable inputs
(i) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency, being the currency in which the Company predominately operates. The functional and reporting currency is sterling, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated into sterling at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into sterling at the rates of exchange ruling at the Balance Sheet date. Profits and losses thereon are recognised in the capital column of the Income Statement and taken to the capital reserve.
(j) Dividends payable
Under Section 32 of FRS 102, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date. Interim dividends are recognised only when paid.
(k) Share repurchases
Shares repurchased and subsequently cancelled – share capital is reduced by the nominal value of the shares repurchased, and the capital redemption reserve is correspondingly increased in accordance with section 733 Companies Act 2006. The full cost of the repurchase is charged to the special reserve.
Shares repurchased and held in treasury – the full cost of the repurchase is charged to the special reserve. Where treasury shares are subsequently reissued, any surplus is taken to the share premium account.
3. INCOME
| 2016 | 2015 | |
| £’000 | £’000 | |
| Investment income: | ||
| UK listed dividends | 2,010 | 2,031 |
| UK REITs | 23 | 4 |
| UK scrip dividends | 19 | – |
| Overseas listed dividends | 14 | 12 |
| Underwriting commission | 12 | – |
| --------------- | --------------- | |
| Total income | 2,078 | 2,047 |
| ========= | ========= |
Special dividends of £198,000 have been recognised in capital (2015: £113,000).
4. INVESTMENT MANAGEMENT FEE
| 2016 | 2015 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Investment management fee | 70 | 211 | 281 | 72 | 216 | 288 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| 70 | 211 | 281 | 72 | 216 | 288 | |
| ========= | ========= | ========= | ========= | ========= | ========= | |
Under the terms of the investment management agreement with BFM, BFM is entitled to a fee of 0.6% per annum of the Company’s market capitalisation. There is no additional fee for company secretarial and administration services.
At the year end, £140,000 was outstanding in respect of the management fee (2015: £146,000).
5. OPERATING EXPENSES
| 2016 | 2015 | |
| £’000 | £’000 | |
| Taken from revenue: | ||
| Custody fee | 1 | 1 |
| Audit fees | 21 | 22 |
| Registrars’ fees | 21 | 16 |
| Depositary fee | 7 | 7 |
| Directors’ emoluments | 92 | 95 |
| Marketing fees | (8) | 3 |
| Other administration costs | 64 | 63 |
| --------------- | --------------- | |
| 198 | 207 | |
| ========= | ========= | |
| Taken from capital: | ||
| Transaction charges | 3 | 4 |
| --------------- | --------------- | |
| 201 | 211 | |
| ========= | ========= | |
| The Company’s ongoing charges, calculated as a percentage of average shareholders’ funds and management fees, operating expenses, finance costs, and taxation were: | 1.00% | 1.02% |
| ========= | ========= |
6. FINANCE COSTS
| 2016 | 2015 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Interest and charges payable – sterling bank loan | 7 | 21 | 28 | 10 | 30 | 40 |
| --------------- | --------------- | --------------- | --------------- | --------------- | --------------- | |
| 7 | 21 | 28 | 10 | 30 | 40 | |
| ========= | ========= | ========= | ========= | ========= | ========= | |
7. DIVIDENDS
| 2016 | 2015 | |
| Dividends paid on equity shares: | £’000 | £’000 |
| Final dividend of 3.60p per ordinary share paid 4 March 2016 (2015: 3.50p – 6 March 2015) | 944 | 927 |
| Interim dividend of 2.40p per ordinary share paid 2 September 2016 (2015: 2.40p – 4 September 2015) | 617 | 629 |
| --------------- | --------------- | |
| 1,561 | 1,556 | |
| ========= | ========= |
The Directors have proposed a final dividend of 3.90p per share in respect of the year ended 31 October 2016. The proposed final dividend will be paid, subject to shareholders’ approval, on 10 March 2017 to shareholders on the Company’s register on 17 February 2017. The final dividend has not been included as a liability in these financial statements as final dividends are only recognised in the financial statements when they have been approved by shareholders, or in the case of interim dividends, recognised when paid to shareholders.
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 the legislation.
| 2016 | 2015 | |
| Dividends paid or proposed on equity shares: | £’000 | £’000 |
| Interim paid 2.40p per ordinary share paid 2 September 2016 (2015: 2.40p) | 617 | 629 |
| Final proposed 3.90p* payable 10 March 2017 (2016: 3.60p) | 989 | 944 |
| --------------- | --------------- | |
| 1,606 | 1,573 | |
| ========= | ========= |
* Based upon 25,354,268 ordinary shares (excluding treasury shares) in issue.
The proposed final dividend is based on the number of shares in issue at the year end. However, the dividend payable will be based on the number of shares in issue on the record date and will reflect any purchases and cancellations of shares by the Company settled subsequent to the year end.
8. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital returns per share are shown below and have been calculated using the following:
| 2016 | 2015 | |
| Net revenue profit attributable to ordinary shareholders (£’000) | 1,803 | 1,758 |
| Net capital profit attributable to ordinary shareholders (£’000) | 419 | 4,284 |
| --------------- | --------------- | |
| Total profit attributable to ordinary shareholders (£’000) | 2,222 | 6,042 |
| --------------- | --------------- | |
| Total shareholders’ funds (£’000) | 48,307 | 49,231 |
| --------------- | --------------- | |
| The weighted average number of ordinary shares in issue during each year, on which the earnings per ordinary share was calculated, was: | 26,003,176 | 26,300,501 |
| --------------- | --------------- | |
| The actual number of ordinary shares in issue at the end of each year, on which the net asset value was calculated, was: | 25,354,268 | 26,229,268 |
| ========= | ========= |
| 2016 | 2015 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| p | p | p | p | p | p | |
| Earnings per share | ||||||
| Calculated on weighted average number of shares in issue during the year | 6.93 | 1.62 | 8.55 | 6.68 | 16.29 | 22.97 |
| Calculated on actual number of shares in issue at the year end | ||||||
| Net asset value per share | 190.53* | 187.69** | ||||
| --------------- | --------------- | |||||
| Ordinary share price | 185.00 | 184.25 | ||||
| --------------- | --------------- | |||||
* The net asset value is based on 25,354,268 ordinary shares in issue. An additional 7,579,664 shares were held in treasury.
** The net asset value is based on 26,229,268 ordinary shares in issue. An additional 6,704,664 shares were held in treasury.
9. SHARE CAPITAL AND SHARES HELD IN TREASURY
| Ordinary | Treasury | Nominal | ||
| shares | shares | Total | value | |
| number | number | shares | £’000 | |
| Allotted, called-up and fully paid share capital comprised: | ||||
| Ordinary shares of 1p each | ||||
| At 31 October 2015 | 26,229,268 | 6,704,664 | 32,933,932 | 329 |
| Shares purchased and held in treasury | (875,000) | 875,000 | – | – |
| --------------- | --------------- | --------------- | --------------- | |
| At 31 October 2016 | 25,354,268 | 7,579,664 | 32,933,932 | 329 |
| ========= | ========= | ========= | ========= |
During the year 875,000 ordinary shares were purchased and held in treasury (2015: 250,000 were purchased and held in treasury) for a total consideration of £1,585,000 (2015: 449,000). No shares were cancelled from treasury during the year (2015: nil).
10. SHARE PREMIUM AND CAPITAL RESERVES
| Capital reserves | ||||
| arising on | ||||
| revaluation | ||||
| Share | Capital | arising on | of | |
| premium | redemption | investments | investments | |
| account | reserve | sold | held | |
| £’000 | £’000 | £’000 | £’000 | |
| At 1 November 2015 | 14,819 | 220 | 5,656 | 3,026 |
| Movement during the year: | ||||
| Loss on realisation of investments | – | – | (1,152) | – |
| Change in investment holding gains | – | – | – | 1,608 |
| Special dividends allocated to capital | – | – | 198 | – |
| Finance costs, investment management and other fees charged to capital | – | – | (235) | – |
| --------------- | --------------- | --------------- | --------------- | |
| At 31 October 2016 | 14,819 | 220 | 4,467 | 4,634 |
| ========= | ========= | ========= | ========= | |
11. DISTRIBUTABLE RESERVES
| Special | Revenue | |
| reserve | reserve | |
| £’000 | £’000 | |
| At 1 November 2015 | 22,857 | 2,324 |
| Movement during the year: | ||
| Purchase of ordinary shares to be held in treasury | (1,585) | – |
| Return for the year | – | 1,803 |
| Dividends paid during the year | – | (1,561) |
| --------------- | --------------- | |
| At 31 October 2016 | 21,272 | 2,566 |
| ========= | ========= |
12. CONTINGENT LIABILITIES
There were no contingent liabilities at 31 October 2016 (2015: 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 2016 Annual Report and Financial Statements will be filed with the Registrar of Companies shortly.
The report of the auditor for the year ended 31 October 2016 contains no qualification or statement under Section 498(2) or (3) of the Companies Act 2006. This announcement was approved by the Board of Directors on 21 December 2016.
14. ANNUAL REPORT
Copies of the Annual Report will be sent to members shortly and will be available from the registered office c/o The Company Secretary, BlackRock Income & Growth Investment Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
15. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12 Thorgmorton Avenue, London EC2N 2DL on Wednesday, 8 March 2017 at 12.00 noon.
ENDS
The Annual Report will also be available on the BlackRock website at blackrock.co.uk/brig. 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:
Simon White, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 5284
Press enquires:
Lucy Horne, Lansons Communications - 020 7294 3689
E-mail: lucyh@lansons.com
21 December 2016
12 Throgmorton Avenue
London
EC2N 2DL
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