Annual Financial Report

FIDELITY SPECIAL VALUES PLC

Final Results for the year ended 31 August 2023

 

Financial Highlights:

  • Fidelity Special Values PLC reports a +5.9% NAV and a +5.6% share price rise against a Benchmark return of +5.2%.

 

  • The Board recommends a final dividend of 6.27 pence per share which together with the interim dividend payment of 2.53 pence per share (totalling 8.80 pence) represents an increase of 13.5% over the prior year.

 

  • In an environment of rising interest rates, the overweight exposure to banks was the largest contributor to performance.

 

  • The Portfolio Manager believes we are potentially in the very early stages of a long-term rally in value stocks.

 

Contacts

 

For further information, please contact:

 

Smita Amin

Company Secretary

01737 836347

FIL Investments International

 

CHAIRMAN’S STATEMENT

The global backdrop for the year under review remains unsettled. The prolonged Russia/Ukraine war has affected energy prices and global trade as well as contributing to an increasingly fractious geopolitical environment. More recently, the developing conflict in the Middle East has added concerns about the impact on oil prices and disruption to global supply chains and commodity markets. In the banking sector, the collapse of Credit Suisse in Europe and several regional banks in the US raised fears of systemic contagion not seen since the Global Financial Crisis of 2008/9. Fortunately, this did not materialise. The year under review has certainly been an interesting one for the UK, featuring three Prime Ministers and as many Chancellors of the Exchequer, seven months of double-digit CPI inflation and eight consecutive base rate increases. Against this background, the UK stock market delivered rather dull returns, with the FTSE All-Share Index (“Benchmark”) delivering a total return of a little over 5% and the mid-cap and small-cap indices essentially flat year-on-year.

Your Company marginally outperformed the Benchmark, with a net asset value (“NAV”) total return of 5.9% and a share price total return of 5.6% compared with the 5.2% return for the Benchmark. While this may look unremarkable at face value, it is notable given the significant differences between the Company’s portfolio and the Benchmark. More than 80% of the Benchmark is accounted for by the largest stocks that make up the FTSE 100 Index (total return of 6.3% for the year), whereas your Company only has around a quarter of its holdings which are in the FTSE 100 Index. Overall, the weighting in small-cap and mid-cap companies hurt relative returns in the year under review, while stock selection in banks and financials, where the portfolio is overweight compared to the Benchmark, contributed most to the outperformance.

As your Portfolio Manager, Alex Wright, outlines in his report, while mid-cap and small-cap exposure detracted from returns relative to the Benchmark, these under-researched companies currently offer particularly attractively valued opportunities and have historically been a strong contributor to the Company’s long-term outperformance. Over the ten years to 31 August 2023, the Company’s NAV and share price total returns of 107.1% and 100.0% respectively are well ahead of the Benchmark total return of 70.6%. It is pleasing to see that Alex’s long-term, value-focused strategy is still working well, even as the UK remains out of favour compared with other developed markets. He is well supported by Jonathan Winton, the co-Portfolio Manager, and by Fidelity’s extensive investment research team.

DIVIDEND
Dividends are an important component of long-term total returns and the Board’s policy is to pay dividends twice yearly in order to smooth the dividend payments for the Company’s financial year.

The Company’s revenue return for the year to 31 August 2023 was 10.67 pence per share (2022: 9.42 pence). An interim dividend of 2.53 pence per share (2022: 2.30 pence) was paid on 21 June 2023. The Board recommends a final dividend of 6.27 pence per share for the year ended 31 August 2023 (2022: 5.45 pence) for approval by Shareholders at the Annual General Meeting (“AGM”) on 14 December 2023. The interim and final dividends (total of 8.80 pence) represent an increase of 1.05 pence (13.5%) over the 7.75 pence paid for the year ended 31 August 2022. The dividend will be payable on 10 January 2024 to Shareholders on the register at close of business on 1 December 2023 (ex-dividend date 30 November 2023).

The interim and final dividends for the year will provide Shareholders with a 14th consecutive year of sustained annual dividend growth. While income is not a core objective of your Company’s investment strategy, we as a Board understand the value of being ‘paid to wait’ in times of more muted stock market performance.

GEARING
Gearing has remained relatively low during the year under review, beginning the period at 10.0% and ending at 6.5%. This reflects Alex’s caution on the economic environment and, while he can find value in individual companies, there is a risk that the economic outlook may undermine their ability to deliver on forecast earnings. As he explains in his report, the current modest level of gearing means Alex has plenty of ‘dry powder’ that he can use to take advantage of any new investment opportunities in the coming year.

The Board has agreed with the Portfolio Manager that if he is able to find attractive opportunities in the market, then the Company’s gearing should be allowed to rise. Combined with Alex’s contrarian and value-focused investment philosophy, and also making effective use of the Company’s structural advantages over its open-ended counterparts, this should continue to add value for Shareholders over the long-term.

It is the current intention of the Board that, in normal market conditions, the Portfolio Manager will maintain gearing in the range of 0% to 25%. The Company remained within these levels throughout the reporting year. The maximum level of gearing allowed is 40%.

DISCOUNT
Investment trust discounts have widened significantly in the past 18 months, and at the time of writing, the investment trust sector average discount was 18.7%. After several years of trading close to, or at a premium to NAV, your Company has not been immune to this trend of widening discounts. However, in the year under review, the discount to NAV remained relatively stable, beginning the year at 8.5% and ending it at 8.8%. Under the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions and during the year it briefly reached the 10% level before quickly reverting back into single digits. While a number of our peers have elected to repurchase shares this year because of the pressure of rising discounts, we have not undertaken any share repurchases, and as at 31 August 2023, your Company remains the only one in its UK All Companies peer group to be trading at a single-digit discount to NAV. The average discount for the other companies in the peer group was 12.3%.

The Board continues to monitor the level of the Company’s discount closely and will take action when it believes to do so will be effective and to the benefit of Shareholders.

RAISING OUR PROFILE
While the strength of Alex’s investment performance over many years will have been a key factor in limiting the rise in the discount, your Board and Fidelity have also been working hard to raise the Company’s profile with both retail and institutional investors. You may have seen Alex’s articles in The Sunday Times or the Daily Express; his views on investing and the UK stock market attract a lot of media interest, and he also regularly appears at professional investor roadshows. A discount to NAV tends to arise when there are more sellers than buyers in the market, and we appreciate Alex’s efforts to make the time to ensure that your Company remains high on investors’ buy lists. External recognition is always a bonus, and we were delighted that in November 2022, the Company was named as the best UK All Companies Trust in the Investment Company of the Year awards from Investment Week magazine.

BOARD OF DIRECTORS
As part of the Board’s succession plan, Andy Irvine retired from the Board at the conclusion of the AGM on 14 December 2022, having served on the Board as a non-executive Director since 2010 and as Chairman since 2016, and we thank him for his significant contribution to the Company during this period. At the same time, I succeeded him as Chairman of the Board and Nigel Foster succeeded me as Senior Independent Director. There have been no other Board changes during the reporting year.

In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, all Directors are subject to annual re-election at the AGM on 14 December 2023. The Directors’ biographies can be found in the Annual Report, and, between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company.

ANNUAL GENERAL MEETING
The Company’s AGM is at 11.00 am on Thursday, 14 December 2023.

This is a great opportunity for Shareholders to hear Alex’s thoughts at first hand and also to meet your Company’s Directors. The Board and I hope to see as many of you as possible on the day. Details of the Company’s AGM are below.

OUTLOOK
The UK equity market has remained distinctly out of favour in a global context, particularly when compared with the US. The macro headwinds are undeniable: inflation has been stubbornly higher than in other developed economies, interest rates have risen further and faster, and there is the added uncertainty of a General Election at some point in the next 15 months. However, there are also reasons for optimism: both core and headline inflation have begun to trend downwards, there is an increasing expectation that the Bank of England base rate is at or close to a cyclical peak and upward revisions to UK GDP numbers suggest a greater likelihood of avoiding recession. Added to this, the UK stock market remains at low valuation levels compared to other developed markets, reducing downside risk and providing the potential for significant upside when sentiment becomes more positive.

Against this backdrop, we are fortunate to have a Portfolio Manager with an active and contrarian approach to stock picking that allows him to seek out pockets of opportunity that may be under-appreciated by investors both at home and internationally.

As Alex points out in his Portfolio Manager Review, there are many UK-listed stocks that may be affected by the economic cycle in the short-term but which have compelling company-specific stories that can be important drivers of their share price over time. By favouring attractively valued businesses with lower levels of debt and the resilience to navigate the climate of uncertainty, we are confident that Alex’s selections have the potential to deliver solid longer-term returns, as has been demonstrated in your Company’s strong performance compared to the Benchmark over many years.

On a final note, it was very pleasing to see at the Company’s AGM on 14 December 2022 that the Company’s three-yearly continuation resolution was passed with 99.89% of votes in favour. We thank our Shareholders for this overwhelming vote of confidence in Alex’s long-term approach and look forward to continuing to justify your support of Fidelity Special Values PLC in the years ahead.

DEAN BUCKLEY
Chairman
6 November 2023

 

ANNUAL GENERAL MEETING – THURSDAY, 14 DECEMBER 2023 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 14 December 2023 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.

For those shareholders who are unable to attend in person, we will live-stream the formal business and presentations of the meeting online.

Alex Wright, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at investmenttrusts@fil.com or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.

Properly registered Shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and we will answer as many of these as possible at an appropriate juncture during the meeting.

Further information and links to the Lumi platform may be found on the Company’s website www.fidelity.co.uk/specialvalues. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.

Please note that investors on platforms such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome online participation as a guest. Once you have accessed https://web.lumiagm.com from your web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 102-255-614. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.

 

PORTFOLIO MANAGER’S REVIEW

QUESTION
How has the Company performed in the year to 31 August 2023?

ANSWER
The Company recorded a net asset value (“NAV”) and share price total return of 5.9% and 5.6% respectively, which was slightly ahead of the FTSE All-Share Index (Benchmark) return of 5.2%. The positive returns conceal what proved to be another volatile period as markets grappled with political uncertainties at home, culminating in last October’s mini-budget debacle, persistent weaker economic indicators, stubbornly elevated inflation, and sharply rising interest rates.

In an environment of rising interest rates, our overweight exposure to banks was the largest contributor to performance, given the low starting point for valuations and the meaningful impact of higher rates on bank profits. The largest individual contributors were AIB Group, the leading personal bank and mortgage provider in Ireland, UK-listed TBC Bank Group, the largest banking group in Georgia, and Kaspi.kz, the dominant consumer finance, e-commerce and payments platform in Kazakhstan.

Despite the rising cost of living, retailer Marks & Spencer Group bucked the trend, reporting strong trading in clothing and food, taking meaningful market share in both areas. Similarly, the resurgence in travel demand after the COVID pandemic saw the share prices of low-cost airline Ryanair Holdings and passport photo booth operator ME Group International (formerly known as Photo-Me International) recover strongly. Outsourcer Mitie Group reported record full-year revenues as it posted an increase in operating profits, boosted by contract wins, renewals and acquisitions. It is now a much-improved business, with a healthier balance sheet, simplified structure and huge investments in systems and technology, allowing it to win more work at better margins.

We make a concerted effort to look for opportunities across the market, and our resulting bias to small- and mid-cap companies, which account for about 60% of the portfolio, hurt relative returns as they were seen as more vulnerable to economic weakness. However, this is an under-researched area where we continue to find particularly attractively valued opportunities.

Sector-wise, our oil and gas positions proved a drag on performance, with our holding in North Sea producer Ithaca Energy the largest detractor. The stock was affected by the introduction of a windfall tax, a policy that will hurt North Sea investments generally, and largely undermine the UK’s energy security goal. The Government is now looking to partially reverse this decision.

Government outsourcer Serco Group was a surprising underperformer given that it has delivered strong profits and recently upgraded its full year earnings forecast. It is a well-run business that is diversified both geographically and services-wise and should be capable of producing inflation protected organic growth with the potential for some margin expansion over the medium-term. Its exposure to defence and immigration contracts is particularly attractive in the current political environment, and its strong balance sheet provides mergers and acquisitions (“M&A”) and buyback optionality.

Drink distributor C&C Group suffered from a slow recovery in pub demand post-COVID, rising costs and problems with implementing a new IT system. The market seems to be assuming those issues are permanent, but we believe that C&C has an unusually dominant position as one of the only national distributors and should be able to gradually pass on price increases and overcome its operational challenges to deliver strong profitability growth over the medium-term as margins improve towards historical levels.

QUESTION
High inflation and the cost-of-living crisis persist. How has this affected the Company’s portfolio this year?

ANSWER
Overall, we have been pleased by the earnings resilience of the holdings in the Company’s portfolio. Last year, we materially reduced our consumer exposure, selling our holdings in domestic housebuilders and cutting exposure to areas more susceptible to a demand slowdown, such as big-ticket items and advertising. These decisions contributed positively to this year’s performance given the profit warnings in those industries, and with the housing market experiencing a marked slowdown. However, the profit warnings have not been as widespread as feared and in general the consumer has proved relatively resilient, helping Marks & Spencer, travel companies and airlines to beat earnings expectations. This reflects economic indicators that have been weak but not excessively so.

QUESTION
With interest rates at their highest level for 15 years, how will this affect markets and the Company’s current portfolio?

ANSWER
Rising interest rates have led to a meaningful de-rating in some areas of the market where business models are heavily dependent on debt, such as real estate and infrastructure, and have caused significant weakness in the UK housing market. These are industries where we had very low exposure.

Conversely, higher interest rates have benefited sectors such as banks and life insurers, which we favour, and which had been shunned since the global financial crisis. More generally, the combination of higher rates and the weaker economic environment is likely to remain challenging in the near-term for corporates and consumers who need to refinance their debts. As a result, we remain selective and favour companies with lower levels of debt and the resilience to navigate the uncertainty.

M&A activity has been prevalent over recent years given cheap financing and attractive valuations on offer in the UK. Holdings that exited the Company’s portfolio as a result of successful bids over the past 12 months include international power producer ContourGlobal, consultancy firm RPS Group and teleradiology services provider Medica Group. The jump in funding costs may deter some bids, especially at the larger-cap end of the market, but smaller-sized deals should be more manageable and valuations in smaller-cap companies are more appealing.

QUESTION
Value stocks have outperformed growth stocks over the last three years, do you think this will continue?

ANSWER
Over the past decade, we have experienced a prolonged period of subdued inflation, low interest rates and modest economic growth. This has favoured growth companies at the expense of those that we favour – unloved stocks with lower downside risk. While this trend began to reverse towards the end of 2020, value stocks still have significant ground to catch up.

The current market environment of higher and stickier inflation, rising interest rates and economic volatility is more aligned to the long-term pattern seen over the last 100 years. History suggests that over the long-term value tends to outperform, given generally higher discount rates and a reversion to the mean. We, therefore, believe that we are in the very early stages of a long-term rally in value stocks.

QUESTION
How is the UK market valued compared to the rest of the world? Does the UK still present a good opportunity for investors?

ANSWER
UK equities are pricing in extreme pessimism and, as a result, trade at a significant discount to other markets. While the near-term outlook is uncertain and corporate earnings could still disappoint in the UK, this is also true of other markets such as the US, where valuations are meaningfully more expensive.

To provide some context, at the time of writing (September 2023), our analysts estimate that the UK equity market (FTSE All-Share Index) trades on 10.9x 2024 earnings; continental European equities (MSCI Europe ex UK Index) trades on 13.4x earnings and the US (S&P 500 Index) trades on 18.6x earnings. Our portfolio, which trades on only 7.7x earnings, is at the very bottom of the valuation range seen over my ten year tenure, despite offering better sales and profit growth prospects, and carrying significantly less debt. When considering that the Company’s shares as at 31 August 2023 were available at a discount of 8.8% to the NAV, we believe that this could be a great investment opportunity on a three to five year view.

QUESTION
The Company’s portfolio is overweight in banking and life insurers. Why do you prefer these sectors currently?

ANSWER
Financials form the biggest part of the Company’s portfolio, with banks and life insurers comprising 16% and 8% respectively of the portfolio. Higher interest rates have enabled banks to significantly improve their profitability at a time when earnings in many industries are under pressure. Yet many investors continue to avoid banks because they are scarred from the 2008 global financial crisis. As a result, banks trade on attractive valuations. UK and Irish banks have become much higher quality businesses since the changes to the regulatory environment over the past decade. They have strengthened their balance sheets, trimmed bloated cost bases and withdrawn from riskier lending.

Our holdings in the sector are diversified both geographically and through business models, with idiosyncratic factors driving their growth. For example, our largest holding is AIB Group which is not only an interest rate story but also benefits from an improvement in Ireland’s banking industry, where the number of competing groups has recently shrunk from five to three. The rising interest rate environment is also positive for life insurers, which benefit from an acceleration in pension fund re-risking.

While our holdings in these two sectors remain attractively valued, we have taken some profits following the strong returns achieved over the past year. We have redeployed some of the proceeds into non-life insurance companies, adding to our modest exposure (c. 4% of the portfolio at the time of writing) given the improving pricing environment and moderating cost of insurance claims.

QUESTION
What do you think are the biggest risks and opportunities for the next 12 months?

ANSWER
The biggest risk is a recession and its impact on corporate earnings. While there is increasing talk of a soft landing, there is considerable historical evidence on the impact of monetary tightening to keep us cautious on company prospects in the near-term. In this uncertain environment, we favour companies with lower levels of debt and the resilience to navigate the uncertainty. We are wary of stocks where fundamentals and margins have been strong, and a deterioration is not priced in.

While we consider the current macroeconomic backdrop when we forecast financials for our holdings and potential new ideas, we feel our time is best spent on researching stocks from a bottom-up perspective and taking a long-term view of their prospects. Many of these companies will be affected by the economic cycle but have compelling company specific stories that can be important drivers of their share price over time.

Given the nature of the post-pandemic environment, there are companies that have already exhibited fundamental weakness resembling a recessionary scenario, and while corporate earnings have generally performed better than expected, there have been profit warnings in the small-and mid-cap companies’ space. Many of these companies have seen their earnings rebased and trade on low valuations with limited downside and significant upside once the environment normalises. This is starting to present us with some interesting opportunities, and we have begun to build positions in some of these stocks, particularly in smaller companies.

Nonetheless, our caution is reflected in the Company’s modest gearing. While valuations are attractive and we are finding new ideas, we are conscious of the near-term uncertainty and want to retain some dry powder to take advantage of any forced sellers and new opportunities.

ALEX WRIGHT
Portfolio Manager
6 November 2023

 

Strategic Report

Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

Climate change, which refers to a large scale shift in the planet’s weather patterns and average temperatures, continues to be a key emerging as well as a principal risk confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. Further details are in the Annual Report. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially Shareholder returns.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the risks listed below as the principal risks and uncertainties faced by the Company.

Principal Risks

Description and Risk Mitigation

Market, Economic and Political Risks

The Company may be affected by market and economic risks. The principal market related risks are market downturn, interest rate movements, inflation and market shocks, such as the post pandemic UK economy recovery, volatility from the war in Ukraine and more recently conflict in the Middle East. The Company may also be impacted by concerns over global economic growth and major political events affecting the UK market and economy and the consequences of this. Inflation remains elevated across most economies driven by a combination of increased demand following the pandemic restrictions being lifted, global labour shortages in some sectors and supply chain shortages, including energy and food security. Inflation and economic instability are leading to a prolonged cost-of-living crisis and potentially impacting investors’ risk appetite.

The Company is exposed to a number of geopolitical risks. The fast-changing global geopolitical landscape is largely shaped by the Russia and Ukraine war effects, deglobalisation trends and significant supply disruption, as well as fears of global recession amid inflationary pressures and financial distress. Russia and Ukraine are both significant net exporters of oil, natural gas and a variety of soft commodities and supply limitations have fuelled global inflation and economic instability, specifically within Western nations.

The Company’s portfolio is made up mainly of listed securities. The Portfolio Manager’s success or failure to protect and increase the Company’s value against the above background is core to the Company’s continued success. The investment philosophy of stock-picking and investing in attractively valued companies should outperform the Benchmark over time.

The risk from the likely effects of unforeseen economic and market events is somewhat mitigated by the Company’s investment trust structure which means no forced sales need to take place to deal with any redemptions. Therefore, investments can be held over a longer time horizon.

The Board reviews market, economic and political risks and legislative changes at each Board meeting.

Risks to which the Company is exposed to in the market risk category are included in Note 17 to the Financial Statements below together with summaries of the policies for managing these risks.

Investment Performance Risk (including the use of derivatives and gearing)

The Board relies on the Portfolio Manager’s skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company’s Benchmark and its competitors and also considers the outlook for the market with the Portfolio Manager at each Board meeting. The emphasis is on long-term investment performance as there is a risk for the Company of volatility of performance in the shorter-term.

Derivative instruments are used to protect and enhance investment returns. There is a risk that the use of derivatives may lead to higher volatility in the NAV and the share price than might otherwise be the case. The Board has put in place policies and limits to control the Company’s use of derivatives and exposures. These are monitored on a daily basis by the Manager’s Compliance team and regular reports are provided to the Board. Further detail on derivative instruments risk is included in Note 17 to the Financial Statements below.

The Company gears through the use of long CFDs which provide greater flexibility and are generally cheaper than bank loans as a form of financing. The principal risk is that the Portfolio Manager fails to use gearing effectively, resulting in a failure to outperform in a rising market or increasing underperformance in a falling market. The Board regularly considers the level of gearing and gearing risk and sets limits within which the Manager must operate.

Cybercrime and Information Security Risks

The operational risk from cybercrime is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The Manager’s technology team has developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever-increasing threat. The risk is frequently re-assessed by Fidelity’s information security teams and has resulted in the implementation of new tools and processes, including improvements to existing ones. Fidelity has a dedicated cybersecurity team which provides regular awareness updates and best practice guidance.

Risks are increased due to the Russia/Ukraine conflict and the trend to more working from home following the pandemic. These primarily relate to phishing, remote access threats, extortion and denial of services attacks. The Manager has dedicated detect and respond resources specifically to monitor the cyber threats associated within the workplace and increased cyber activity following Russia’s invasion of Ukraine. There are a number of mitigating actions in place including, control strengthening, geo-blocking and phishing mitigants, combined with enhanced resilience and recovery options.

The Company’s third-party service providers also provide assurances and have similar control measures in place to detect and respond to cuber threats and activity.

Environmental, Social and Governance (“ESG”) Risk

There is a risk that the value of the assets of the Company are negatively impacted by ESG related risks, including climate change risk. ESG risks include investor expectations and how the Company is positioned from a marketing perspective and whether it is compliant with its ESG disclosure requirements. Fidelity has embedded ESG factors in its investment decision-making process. ESG integration is carried out at the fundamental research analyst level within its investment teams, primarily through Fidelity’s Proprietary Sustainability Rating which is designed to generate a forward-looking and holistic assessment of a company’s ESG risks and opportunities based on sector-specific key performance indicators across 127 individual and unique sub-sectors. The Portfolio Manager is also active in analysing the effects of ESG when making investment decisions. The Board continues to monitor developments in this area and the positioning of the Company’s portfolio considering ESG factors.

Further detail on ESG considerations in the investment process and sustainable investing is in the Annual Report. ESG ratings of the companies within the Company’s portfolio compared to MSCI ratings are provided in the Annual Report.

Competition Risk

Threats facing the Company are loss of Shareholders if the demand for investment trusts declines, and the demand for passive funds and active ETFs (Exchange-Traded Funds) continue to increase. ESG funds offered by competitors may pose competition threats with funds or companies that may offer higher ESG credentials, especially for younger investors. The Board reviews the strategic direction of the Company on an ongoing basis to ensure that it offers a relevant product to Shareholders. It also regularly reviews the Shareholder profile of the Company with the Company’s Broker. ESG factors are embedded into the Portfolio Manager’s investment decision process.

Business Continuity Risk

There continues to be increased focus from financial services regulators around the world on the contingency plans of regulated financial firms. The top risks globally are cybersecurity, geopolitical events and natural disasters. There are also ongoing risks from the Russia/Ukraine war, specifically regarding the potential loss of power and/or broadband services. Variants of COVID continue to evolve and some risks remain.

The Manager continues to take all reasonable steps to meet its regulatory obligations, assess its ability to continue operating and the steps it needs to take to support its clients, including the Board and has an appropriate control environment in place. The Manager has provided the Board with assurance that the Company has appropriate business continuity plans and the provision of services has continued to be supplied without interruption.

Specific risks posed by the pandemic continue to ease with increasing levels of staff returning to routine office-based working, albeit under hybrid working arrangements which allows greater flexibility on remote working as part of the new operating model.

The Company relies on a number of third-party service providers, principally the Registrar, Custodian and Depositary. They are all subject to a risk-based programme of internal audits by the Manager and their own internal controls reports are received by the Board on an annual basis and any concerns are investigated. The third-party service providers have also confirmed the implementation of appropriate measures to ensure no business disruption.

Risks associated with these services are generally rated as low, but the financial consequences could be serious, including reputational damage to the Company.

Key Person and Operational Support Risks

The loss of the Portfolio Manager or key individuals could lead to potential performance, operational or regulatory issues. The Manager identifies key dependencies which are then addressed through succession plans, particularly for portfolio managers.

The Portfolio Manager, Alex Wright, has a differentiated style in relation to his peers. This style is intrinsically linked with the Company’s investment philosophy and strategy and, therefore, the Company has a key person dependency on him. Fidelity has succession plans in place for its portfolio managers which have been discussed with the Board and provides some assurance in this regard. There is a Co-Portfolio Manager who works alongside the Portfolio Manager and has extensive experience in the markets and companies, and shares a common investment approach and complementary investment experience with the Portfolio Manager. There is also a risk that the Manager has inadequate succession plans for other key operational individuals.

Discount Control Risk

Due to the nature of investment companies, the price of the Company’s shares and its discount to NAV are factors which are not totally within the Company’s control. The Board has a discount management policy in place and some short-term influence over the discount may be exercised by the use of share repurchases at acceptable prices and within the parameters set by the Board. The demand for shares can be influenced through good performance and an active investor relations program.

The Company’s share price, NAV and discount volatility are monitored daily by the Manager with the Company’s Broker and considered by the Board on a regular basis.

Regulatory Risk

The Company may be impacted by changes in legislation, taxation, regulation or other external influence that require changes to the business. These are monitored regularly by the Board and managed through active engagement with regulators and trade bodies by the Manager.

 

Continuation Vote
A continuation vote takes place every three years. There is a risk that Shareholders do not vote in favour of continuation during periods when performance of the Company’s NAV and share price is poor. At the AGM held on 14 December 2022, 99.89% of Shareholders voted in favour of the continuation of the Company. The next continuation vote will take place at the AGM in 2025.

Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long-term capital growth. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment of the viability of the Company, the Board has considered the following:

· The ongoing relevance of the investment objective in prevailing market conditions;

· The Company’s level of gearing;

· The Company’s NAV and share price performance compared to its Benchmark;

· The principal and emerging risks and uncertainties facing the Company and their potential impact, as set out above;

· The likely future demand for the Company’s shares;

· The Company’s share price discount to the NAV;

· The liquidity of the Company’s portfolio;

· The level of income generated by the Company; and

· Future income and expenditure forecasts.

The Company’s performance for the five year reporting period to 31 August 2023 was a NAV total return of +22.6% and a share price total return of +10.3% compared to the Benchmark total return of +18.4%. The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:

· The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;

· The fact that the portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary;

· The Board’s discount management policy; and

· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.

In preparing the Financial Statements, the Directors have considered the impact of climate change as detailed above. The Board has also considered the impact of regulatory changes, unforeseen market events and the ongoing implications of the Russia and Ukraine war and developing conflicts in the Middle East and how this may affect the Company.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement below.

GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and continue in operational existence for the foreseeable future. The Board has, therefore, concluded that the Company has adequate resources to continue to adopt the going concern basis for the period to 30 November 2024 which is at least twelve months from the date of approval of the Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks from the war in Ukraine and significant market events.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

 

PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company’s suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.

As an externally managed Investment Trust, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodial, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential Shareholders, the external appointed Manager (FIL Investment Services (UK) Limited) and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.

The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this at an annual strategy day which is separate from the regular cycle of board meetings. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.

The Board places great importance on communication with Shareholders. The Annual General Meeting (“AGM”) provides the key forum for the Board and the Portfolio Manager to present to the Shareholders on the Company’s performance and future plans and the Board encourages all Shareholders to attend in person or virtually and raise any questions or concerns. The Chairman and other Board members are available to meet Shareholders as appropriate. Shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary in writing at the same address or by email at investmenttrusts@fil.com. The Portfolio Manager meets with major Shareholders, potential investors, stock market analysts, journalists and other commentators throughout the year. These communication opportunities help inform the Board in considering how best to promote the success of the company over the long-term.

The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring Shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.

Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of Environmental, Social and Governance (“ESG”) issues aligns with the investment objective to deliver long-term capital growth, and the Board’s review of the Manager includes an assessment of their ESG approach, which is set out in the Annual Report.

In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of approval of this report, have included:

· As part of the Board’s succession plan, the appointment of Dean Buckley as Chairman of the Board when Andy Irvine stepped down from the Board at the last AGM. As a result of the change in Mr Buckley’s role, the decision to appoint Nigel Foster as Senior Independent Director, both appointments with effect from 14 December 2022;

· The decision to carry out an external Board evaluation using the services of Lintstock Ltd. in accordance with the UK Corporate Governance Code;

· The decision to pay an interim dividend of 2.53 pence per share and to recommend the payment of a final dividend of 6.27 pence per share (a total of 8.80 pence per share), to maintain the 14 year track record of increasing dividends, while retaining funds for reinvestment, consistent with the objective of long-term capital growth; and

· The decision to once again hold a hybrid AGM in 2023 in order to make it more accessible to those investors who are unable to or prefer not to attend in person.

Statement of Directors’ Responsibilities

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 period. Under that law, the Directors have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). 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 for the reporting period.

In preparing these Financial Statements the Directors are required to:

· Select suitable accounting policies in accordance with Section 10 of FRS 102 and then apply them consistently;

· Make judgements and estimates that are reasonable and prudent;

· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· State whether applicable UK Accounting Standards, including FRS 102, 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 to enable them to ensure that the Company and 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.

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

The Directors have delegated the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelity.co.uk/specialvalues to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their jurisdictions.

The Directors confirm that to the best of their knowledge:

· The Financial Statements, prepared in accordance with UK Generally Accepted Accounting Practice, including FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company;

· The Annual Report, including 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 it faces; and

· The Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company’s performance, business model and strategy.

The Statement of Directors’ Responsibility was approved by the Board on 6 November 2023 and signed on its behalf by:

DEAN BUCKLEY
Chairman

Income Statement for the year ended 31 August 2023

 

 

Year ended 31 August 2023

Year ended 31 August 2022


 


Notes 

Revenue 
£’000 

Capital 
£’000 

Total 
£’000 

Revenue 
£’000 

Capital 
£’000 

Total 
£’000 

Losses on investments

10 

 

(12,021)

(12,021)

 

(64,441)

(64,441)

Gains/(losses) on long CFDs

11 

 

35,770 

35,770 

 

(14,992)

(14,992)

Investment and derivative income

3 

43,717 

 

43,717 

37,135 

 

37,135 

Other interest

3 

2,971 

 

2,971 

877 

 

877 

Investment management fees

4 

(5,698)

 

(5,698)

(5,607)

 

(5,607)

Other expenses

5 

(948)

 

(948)

(838)

 

(838)

Foreign exchange (losses)/gains

 

 

(4,032)

(4,032)

 

5,874 

5,874 

 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

Net return/(loss) on ordinary activities before finance costs and taxation

 

40,042 

19,717 

59,759 

31,567 

(73,559)

(41,992)

Finance costs

6 

(4,774)

 

(4,774)

(1,243)

 

(1,243)

 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

Net return/(loss) on ordinary activities before taxation

 

35,268 

19,717 

54,985 

30,324 

(73,559)

(43,235)

Taxation on return/(loss) on ordinary activities

7 

(672)

 

(672)

(196)

 

(196)

 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

Net return/(loss) on ordinary activities after taxation for the year

 

34,596 

19,717 

54,313 

30,128 

(73,559)

(43,431)

 

 

========= 

========= 

========= 

========= 

========= 

========= 

Return/(loss) per ordinary share

8 

10.67p 

6.08p 

16.75p 

9.42p 

(23.00p)

(13.58p)

 

 

========= 

========= 

========= 

========= 

========= 

========= 

The Company does not have any other comprehensive income. Accordingly, the net return/(loss) on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes below form an integral part of these Financial Statements.

Balance Sheet as at 31 August 2023 Company number 2972628


 


Notes 

2023 
£’000 

2022 
£’000 

Fixed assets

 

 

 

Investments

10 

882,692 

835,672 

 

 

--------------- 

--------------- 

Current assets

 

 

 

Derivative instruments

11 

1,769 

28 

Debtors

12 

8,937 

10,940 

Amounts held at futures clearing houses and brokers

 

 

8,190 

Cash and cash equivalents

 

59,460 

80,450 

 

 

--------------- 

--------------- 

 

 

70,166 

99,608 

 

 

========= 

========= 

Current liabilities

 

 

 

Derivative instruments

11 

(949)

(9,200)

Other creditors

13 

(860)

(3,481)

 

 

--------------- 

--------------- 

 

 

(1,809)

(12,681)

 

 

========= 

========= 

Net current assets

 

68,357 

86,927 

 

 

========= 

========= 

Net assets

 

951,049 

922,599 

 

 

========= 

========= 

Capital and reserves

 

 

 

Share capital

14 

16,205 

16,205 

Share premium account

15 

238,442 

238,442 

Capital redemption reserve

15 

3,256 

3,256 

Other non-distributable reserve

15 

5,152 

5,152 

Capital reserve

15 

648,795 

629,078 

Revenue reserve

15 

39,199 

30,466 

 

 

--------------- 

--------------- 

Total Shareholders’ funds

 

951,049 

922,599 

 

 

========= 

========= 

Net asset value per ordinary share

16 

293.44p 

284.67p 

 

 

========= 

========= 

The Financial Statements above and below were approved by the Board of Directors on 6 November 2023 and were signed on its behalf by:

DEAN BUCKLEY
Chairman

The Notes below form an integral part of these Financial Statements.

Statement of Changes in Equity for the year ended 31 August 2023





 





Notes 



Share 
capital 
£’000 


Share 
premium 
account 
£’000 


Capital 
redemption 
reserve 
£’000 

Other 
non– 
distributable 
reserve 
£’000 



Capital 
reserve 
£’000 



Revenue 
reserve 
£’000 

Total 
Share– 
holders’ 
funds 
£’000 

Total Shareholders’ funds at 31 August 2022

 

16,205 

238,442 

3,256 

5,152 

629,078 

30,466 

922,599 

Net return on ordinary activities after taxation for the year

 

 

 

 

 

19,717 

34,596 

54,313 

Dividends paid to Shareholders

9 

 

 

 

 

 

(25,863)

(25,863)

 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

Total Shareholders’ funds at 31 August 2023

 

16,205 

238,442 

3,256 

5,152 

648,795 

39,199 

951,049 

 

 

========= 

========= 

========= 

========= 

========= 

========= 

========= 

Total Shareholders’ funds at 31 August 2021

 

15,651 

205,466 

3,256 

5,152 

702,637 

21,928 

954,090 

New ordinary shares issued

14 

554 

33,118 

 

 

 

 

33,672 

Costs associated with the issue of new ordinary shares

 

 

(142)

 

 

 

 

(142)

Net (loss)/return on ordinary activities after taxation for the year

 

 

 

 

 

(73,559)

30,128 

(43,431)

Dividends paid to Shareholders

9 

 

 

 

 

 

(21,590)

(21,590)

 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

Total Shareholders’ funds at 31 August 2022

 

16,205 

238,442 

3,256 

5,152 

629,078 

30,466 

922,599 

 

 

========= 

========= 

========= 

========= 

========= 

========= 

========= 

The Notes below form an integral part of these Financial Statements.

Cash Flow Statement for the year ended 31 August 2023



 



Notes 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Operating activities

 

 

 

Investment income received

 

39,436 

25,034 

Net derivative income

 

5,934 

9,133 

Interest received

 

2,971 

493 

Investment management fees paid

 

(5,699)

(5,597)

Directors’ fees paid

 

(173)

(157)

Other cash payments

 

(777)

(618)

 

 

--------------- 

--------------- 

Net cash inflow from operating activities before finance costs and taxation

20 

41,692 

28,288 

 

 

========= 

========= 

Finance costs paid

 

(4,622)

(1,186)

Overseas taxation suffered

 

(1,119)

(783)

 

 

--------------- 

--------------- 

Net cash inflow from operating activities

 

35,951 

26,319 

 

 

========= 

========= 

Investing activities

 

 

 

Purchases of investments

 

(429,178)

(359,829)

Sales of investments

 

368,171 

347,076 

Receipts on long CFDs

 

70,856 

73,743 

Payments on long CFDs

 

(45,085)

(80,763)

Movement on amounts held at futures clearing houses and brokers

 

8,190 

(8,150)

 

 

--------------- 

--------------- 

Net cash outflow from investing activities

 

(27,046)

(27,923)

 

 

========= 

========= 

Net cash inflow/(outflow) before financing activities

 

8,905 

(1,604)

 

 

========= 

========= 

Financing activities

 

 

 

Dividends paid

9 

(25,863)

(21,590)

Net proceeds from issue of shares

 

 

34,132 

Costs associated with the issue of new ordinary shares

 

 

(142)

 

 

--------------- 

--------------- 

Net cash (outflow)/inflow from financing activities

 

(25,863)

12,400 

 

 

========= 

========= 

Net (decrease)/increase in cash and cash equivalents

 

(16,958)

10,796 

Cash and cash equivalents at the beginning of the year

 

80,450 

63,780 

Effect of movement in foreign exchange

 

(4,032)

5,874 

Cash and cash equivalents at the end of the year

 

59,460 

80,450 

 

 

--------------- 

--------------- 

Represented by:

 

 

 

Cash at bank

 

2,028 

2,014 

Amount held in Fidelity Institutional Liquidity Fund

 

57,432 

78,436 

 

 

--------------- 

--------------- 

 

 

59,460 

80,450 

 

 

========= 

========= 

The Notes below form an integral part of these Financial Statements.

Notes to the Financial Statements

1 Principal Activity
Fidelity Special Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2972628, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 Accounting Policies
The Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”), in July 2022.

a) Basis of accounting – The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence up to 30 November 2024 which is at least twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed income and expense projections, reviewed the liquidity of the investment portfolio and considered the Company’s ability to meet liabilities as they fall due. This conclusion also takes into account the Director’s assessment of the risks faced by the Company as detailed in the Going Concern Statement above.

In preparing these Financial Statements the Directors have considered the impact of climate change risk as an emerging and a principal risk as set out above, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with FRS 102, investments are valued at fair value, which in active markets are quoted bid prices at the balance sheet date. Investments which are unlisted are priced using market-based valuation approaches. All investments therefore reflect the market participants view of climate change risk on the investments held by the Company.

The Company’s Going Concern Statement above takes account of all events and conditions up to 30 November 2024 which is at least twelve months from the date of approval of these Financial Statements.

b) Significant accounting estimates and judgements – The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The judgements required in order to determine the appropriate valuation methodology of level 3 financial instruments have a risk of causing an adjustment to the carrying amounts of assets. These judgements include making assessments of the possible valuations in the event of a listing or other marketability related risks.

c) Segmental reporting – The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income Statement – In order to reflect better the activities of an investment 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 prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) Income – Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case. Interest for securities is accounted for on an accruals basis and is credited to the revenue column of the Income Statement.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

Interest received on CFDs, bank deposits, collateral and money market funds is accounted for on an accruals basis and credited to the revenue column of the Income Statement. Interest received on CFDs represents the finance costs calculated by reference to the notional value of the CFDs.

f) Investment management fees and other expenses – Investment management fees and other expenses are accounted for on an accruals basis and are charged as follows:

· Investment management fees are allocated in full to revenue; and

· All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital events.

g) Functional currency and foreign exchange – The functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

h) Finance costs – Finance costs comprise interest on bank overdrafts and collateral and finance costs paid on CFDs, which are accounted for on an accruals basis. Finance costs are charged in full to the revenue column of the Income Statement.

i) Taxation – The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

j) Dividend paid – Dividends payable to equity Shareholders are recognised when the Company’s obligation to make payment is established.

k) Investments – The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

· Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed; and

· Unlisted investments are not quoted, or are not frequently traded, and are stated at the best estimate of fair value. The Manager’s Fair Value Committee (‘FVC’), which is independent of the Portfolio Manager’s team, meets quarterly to determine the fair value of unlisted investments.

The FVC provide a recommendation of fair values to the Board using market-based approaches such as multiples, industry valuation benchmarks and available market prices. Consideration is given to the cost of the investment, recent arm’s length transactions in the same or similar investments and the financial performance of the investment since purchase. This pricing methodology is subject to a detailed review and appropriate challenge by the Directors.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within losses on investments in the capital column of the Income Statement and has disclosed these costs in Note 10 below.

l) Derivative instruments – When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short CFDs, futures, options and warrants. Derivatives are classified as other financial instruments and are initially accounted for and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

· Long CFDs – the difference between the strike price and the value of the underlying shares in the contract;

· Futures – the difference between the contract price and the quoted trade price; and

· Options – value based on similar instruments or the quoted trade price for the contract.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in net income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included: for long CFDs, as gains or losses on long CFDs, and for short CFDs, futures and options as gains or losses on short CFDs, futures and options in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within current assets or current liabilities.

m) Debtors – Debtors include securities sold for future settlement, amounts receivable on settlement of derivatives, accrued income, taxation recoverable and other debtors and prepayments incurred 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. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

n) Amounts held at futures clearing houses and brokers – These are amounts held in segregated accounts as collateral on behalf of brokers and are carried at amortised cost.

o) Cash and cash equivalents – Cash and cash equivalents may comprise cash at bank and money market funds which are short-term, highly liquid and are readily convertible to a known amount of cash. These are subject to an insignificant risk of changes in value.

p) Other creditors – Other creditors include securities purchased for future settlement, finance costs payable, investment management fees and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

q) Capital reserve – The following are accounted for in the capital reserve:

· Gains and losses on the disposal of investments and derivative instruments;

· Changes in the fair value of investments and derivative instruments held at the year end;

· Foreign exchange gains and losses of a capital nature;

· Dividends receivable which are capital in nature; and

· Costs of repurchasing or issuing ordinary shares.

Technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, states that changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of investments listed on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash, with the exception of the level 3 investments which had unrealised investment holding losses of £9,684,000 (2022: losses of £9,389,000).

 

3 Income



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Investment income

 

 

UK dividends

29,189 

20,437 

UK scrip dividends

 

85 

Interest on securities

805 

 

Overseas dividends

10,543 

6,684 

Overseas scrip dividends

 

23 

 

--------------- 

--------------- 

 

40,537 

27,229 

 

========= 

========= 

Derivative income

 

 

Dividends received on long CFDs

3,180 

9,906 

 

--------------- 

--------------- 

Investment and derivative income

43,717 

37,135 

 

========= 

========= 

Other interest

 

 

Interest received on bank deposits, collateral and money market funds

2,965 

493 

Interest received on tax reclaims

6 

 

Interest received on long CFDs*

 

384 

 

--------------- 

--------------- 

 

2,971 

877 

 

========= 

========= 

Total income

46,688 

38,012 

 

========= 

========= 

Special dividends of £1,904,000 (2022: £372,000) have been recognised in capital during the year.

* Due to negative interest rates in the prior year, the Company received interest on some of its long CFDs.

 

4 Investment Management Fees



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Investment management fees

5,698 

5,607 

 

========= 

========= 

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

FII charges investment management fees at an annual rate of 0.60% of net assets. Fees are accrued on a daily basis and payable monthly.

 

5 Other Expenses



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

AIC fees

21 

21 

Custody fees

35 

42 

Depositary fees

57 

71 

Directors’ expenses

17 

6 

Directors’ fees1

172 

159 

Legal and professional fees

82 

95 

Marketing expenses

303 

191 

Printing and publication expenses

116 

115 

Registrars’ fees

68 

70 

Fees payable to the Company’s Independent Auditor for the audit of the Financial Statements2

50 

46 

Sundry other expenses

27 

22 

 

--------------- 

--------------- 

Other expenses

948 

838 

 

========= 

========= 

1 Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

2 The VAT payable on audit fees is included in sundry other expenses.

 

6 Finance Costs



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Interest paid on long CFDs

4,761 

1,231 

Interest on bank overdrafts and collateral

13 

12 

 

--------------- 

--------------- 

 

4,774 

1,243 

 

========= 

========= 

 

7 Taxation on Return/(Loss) on Ordinary Activities



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

a) Analysis of the taxation charge for the year

 

 

Overseas taxation

672 

196 

 

--------------- 

--------------- 

Taxation charge for the year (see Note 7b)

672 

196 

 

========= 

========= 

 

b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 25.00% (2022: 19.00%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Net return/(loss) on ordinary activities before taxation

54,985 

(43,235)

 

--------------- 

--------------- 

Net return/(loss) on ordinary activities before taxation multiplied by the blended rate of UK corporation tax of 21.52% (2022: 19.00%)

11,833 

(8,215)

Effects of:

 

 

Capital (gains)/losses not taxable*

(4,243)

13,976 

Income not taxable

(8,550)

(5,173)

Excess management expenses

960 

(588)

Overseas taxation

672 

196 

 

--------------- 

--------------- 

Total taxation charge for the year (see Note 7a)

672 

196 

 

========= 

========= 

* The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxation
A deferred tax asset of £17,235,000 (2022: £16,119,000), in respect of excess expenses of £68,940,000 (2022: £64,476,000) available to be set off against future taxable profits has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023. The rate of 25.00% has been applied to calculate the unrecognised deferred tax asset for the current year (2022: 25.00%).

 

8 Return/(Loss) per Ordinary Share


 

Year ended 
31.08.23 

Year ended 
31.08.22 

Revenue return per ordinary share

10.67p 

9.42p 

Capital return/(loss) per ordinary share

6.08p 

(23.00p)

 

--------------- 

--------------- 

Total return/(loss) per ordinary share

16.75p 

(13.58p)

 

========= 

========= 

 

The return/(loss) per ordinary share is based on the net return/(loss) on ordinary activities after taxation for the year divided by the weighted average number of ordinary shares held outside of Treasury during the year, as shown below:

 

£’000 

£’000 

Net revenue return on ordinary activities after taxation

34,596 

30,128 

Net capital return/(loss) on ordinary activities after taxation

19,717 

(73,559)

 

--------------- 

--------------- 

Net total return/(loss) on ordinary activities after taxation

54,313 

(43,431)

 

========= 

========= 

 

 

Number 

Number 

Weighted average number of ordinary shares held outside of Treasury

324,098,920 

319,869,879 

 

========= 

========= 

 

9 Dividends Paid to Shareholders



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Dividends paid

 

 

Interim dividend of 2.53 pence per ordinary share paid for the year ended 31 August 2023

8,200 

 

Final dividend of 5.45 pence per ordinary share paid for the year ended 31 August 2022

17,663 

 

Interim dividend of 2.30 pence per ordinary share paid for the year ended 31 August 2022

 

7,454 

Final dividend of 4.50 pence per ordinary share paid for the year ended 31 August 2021

 

14,136 

 

--------------- 

--------------- 

 

25,863 

21,590 

 

========= 

========= 

Dividends proposed

 

 

Final dividend proposed of 6.27 pence per ordinary share for the year ended 31 August 2023

20,321 

 

Final dividend proposed of 5.45 pence per ordinary share for the year ended 31 August 2022

 

17,663 

 

--------------- 

--------------- 

 

20,321 

17,663 

 

========= 

========= 

 

The Directors have proposed the payment of a final dividend of 6.27 pence per ordinary share for the year ended 31 August 2023 which is subject to approval by Shareholders at the Annual General Meeting on 14 December 2023 and has not been included as a liability in these Financial Statements. The dividend will be paid on 10 January 2024 to Shareholders on the register at the close of business on 1 December 2023 (ex-dividend date 30 November 2023).

 

10 Investments


 

2023 
£’000 

2022 
£’000 

Listed investments

880,839 

835,398 

Unlisted investments

1,853 

274 

 

--------------- 

--------------- 

Total investments at fair value

882,692 

835,672 

 

========= 

========= 

Opening book cost

813,135 

726,247 

Opening investment holding gains

22,537 

160,463 

 

--------------- 

--------------- 

Opening fair value

835,672 

886,710 

 

========= 

========= 

Movements in the year

 

 

Purchases at cost

426,404 

361,407 

Sales – proceeds

(367,363)

(348,004)

Losses on investments

(12,021)

(64,441)

 

--------------- 

--------------- 

Closing fair value

882,692 

835,672 

 

========= 

========= 

Closing book cost

914,377 

813,135 

Closing investment holding (losses)/gains

(31,685)

22,537 

 

--------------- 

--------------- 

Closing fair value

882,692 

835,672 

 

========= 

========= 

 

The Company received £367,363,000 (2022: £348,004,000) from investments sold in the year. The book cost of these investments when they were purchased was £325,162,000 (2022: £274,519,000). These investments have been revalued over time and until they were sold any unrealised gains/(losses) were included in the fair value of the investments.

Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments, which are included in the losses on investments above, were as follows:



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Purchases transaction costs

1,688 

1,544 

Sales transaction costs

167 

195 

 

--------------- 

--------------- 

 

1,855 

1,739 

 

========= 

========= 

 

The portfolio turnover rate for the year was 44.2% (2022: 42.8%).

 

11 Derivative Instruments



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Gains/(losses) on long CFD positions closed

25,778 

(7,013)

Movement in investment holding gains/(losses) on long CFDs

9,992 

(7,979)

 

--------------- 

--------------- 

 

35,770 

(14,992)

 

========= 

========= 

 



 

2023 
Fair value 
£’000 

2022 
Fair value 
£’000 

Derivative instruments recognised on the Balance Sheet

 

 

Derivative instrument assets

1,769 

28 

Derivative instrument liabilities

(949)

(9,200)

 

--------------- 

--------------- 

 

820 

(9,172)

 

========= 

========= 

 



 



Fair value 
£’000 

2023 
Asset 
exposure 
£’000 



Fair value 
£’000 

2022 
Asset 
exposure 
£’000 

At the year end the Company held the following derivative instruments

 

 

 

 

Long CFDs

820 

130,073 

(9,172)

178,898 

 

========= 

========= 

========= 

========= 

 

12 Debtors


 

2023 
£’000 

2022 
£’000 

Securities sold for future settlement

117 

924 

Amounts receivable on settlement of derivatives

14 

7 

Accrued income

7,058 

8,711 

Overseas taxation recoverable

1,720 

1,273 

Other debtors and prepayments

28 

25 

 

--------------- 

--------------- 

 

8,937 

10,940 

 

========= 

========= 

 

13 Other Creditors


 

2023 
£’000 

2022 
£’000 

Securities purchased for future settlement

 

2,774 

Finance costs payable

209 

57 

Creditors and accruals

651 

650 

 

--------------- 

--------------- 

 

860 

3,481 

 

========= 

========= 

 

14 Share Capital

 

2023 

2022 


 

Number of 
shares 


£’000 

Number of 
shares 


£’000 

Issued, allotted and fully paid ordinary shares of 5 pence each

 

 

 

 

Total share capital – Beginning of the year

324,098,920 

16,205 

313,028,920 

15,651 

New ordinary shares issued

 

 

11,070,000 

554 

 

--------------- 

--------------- 

--------------- 

--------------- 

Total share capital – End of the year

324,098,920 

16,205 

324,098,920 

16,205 

 

========= 

========= 

========= 

========= 

 

During the year, no new ordinary shares were issued (2022: 11,070,000 shares). The premium received on the issue of new ordinary shares for the prior year ended 31 August 2022 was £33,118,000 and was credited to the share premium account. At 31 August 2023, no shares were held in Treasury.

 

15 Capital and Reserves





 



Share 
capital 
£’000 


Share 
premium 
account 
£’000 


Capital 
redemption 
reserve 
£’000 

Other 
non– 
distributable 
reserve 
£’000 



Capital 
reserve 
£’000 



Revenue 
reserve 
£’000 

Total 
Share– 
holders’ 
funds 
£’000 

At 1 September 2022

16,205 

238,442 

3,256 

5,152 

629,078 

30,466 

922,599 

Losses on investments (see Note 10)

 

 

 

 

(12,021)

 

(12,021)

Gains on long CFDs (see Note 11)

 

 

 

 

35,770 

 

35,770 

Foreign exchange losses

 

 

 

 

(4,032)

 

(4,032)

Revenue return on ordinary activities after taxation for the year

 

 

 

 

 

34,596 

34,596 

Dividends paid to Shareholders (see Note 9)

 

 

 

 

 

(25,863)

(25,863)

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

At 31 August 2023

16,205 

238,442 

3,256 

5,152 

648,795 

39,199 

951,049 

 

========= 

========= 

========= 

========= 

========= 

========= 

========= 

 





 



Share 
capital 
£’000 


Share 
premium 
account 
£’000 


Capital 
redemption 
reserve 
£’000 

Other 
non– 
distributable 
reserve 
£’000 



Capital 
reserve 
£’000 



Revenue 
reserve 
£’000 

Total 
Share– 
holders’ 
funds 
£’000 

At 1 September 2021

15,651 

205,466 

3,256 

5,152 

702,637 

21,928 

954,090 

Losses on investments (see Note 10)

 

 

 

 

(64,441)

 

(64,441)

Losses on long CFDs (see Note 11)

 

 

 

 

(14,992)

 

(14,992)

Costs associated with the issue of new ordinary shares

 

(142)

 

 

 

 

(142)

Foreign exchange gains

 

 

 

 

5,874 

 

5,874 

New ordinary shares issued

554 

33,118 

 

 

 

 

33,672 

Revenue return on ordinary activities after taxation for the year

 

 

 

 

 

30,128 

30,128 

Dividends paid to Shareholders (see Note 9)

 

 

 

 

 

(21,590)

(21,590)

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

At 31 August 2022

16,205 

238,442 

3,256 

5,152 

629,078 

30,466 

922,599 

 

========= 

========= 

========= 

========= 

========= 

========= 

========= 

 

The capital reserve balance at 31 August 2023 includes investment holding losses of £31,685,000 (2022: gains of £22,537,000) as detailed in Note 10 above. The revenue and capital reserves are distributable by way of dividend. See Note 2 (q) above for further details.

 

16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the total Shareholders’ funds divided by the number of ordinary shares held outside of Treasury.

 

2023 

2022 

Total Shareholders’ funds

£951,049,000 

£922,599,000 

Ordinary shares held outside of Treasury at year end

324,098,920 

324,098,920 

Net asset value per ordinary share

293.44p 

284.67p 

 

========= 

========= 

 

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

 

17 FINANCIAL INSTRUMENTS
Management of risk
The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, economic and political, investment performance (including the use of derivatives and gearing), cybercrime and information security, environmental, social and governance (“ESG”), competition, business continuity, key person and operational support, discount control and regulatory. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown above.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

· Equity shares (listed and unlisted) and bonds held in accordance with the Company’s investment objective and policies;

· Derivative instruments which comprise CFDs, futures and options on listed stocks and equity indices; and

· Cash, liquid resources and short-term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:


 

2023 
£’000 

2022 
£’000 

Exposure to financial instruments that bear interest

 

 

Long CFDs – exposure less fair value

129,253 

188,070 

 

--------------- 

--------------- 

Exposure to financial instruments that earn interest

 

 

Amounts held at futures clearing houses and brokers

 

8,190 

Cash and cash equivalents

59,460 

80,450 

 

--------------- 

--------------- 

 

59,460 

88,640 

 

========= 

========= 

Net exposure to financial instruments that bear interest

69,793 

99,430 

 

========= 

========= 

 

Due to negative interest rates in the prior year, the Company received interest on some of its long CFD positions.

Foreign currency risk
The Company does not carry out currency speculation. The Company’s net return/(loss) on ordinary activities after taxation for the year and its net assets can be affected by foreign exchange movements because the Company has income and assets which are denominated in currencies other than the Company’s functional currency which is UK sterling. The Company can also be subject to short-term exposure to exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs.

Three principal areas have been identified where foreign currency risk could impact the Company:

· Movements in currency exchange rates affecting the value of investments and derivative instruments;

· Movements in currency exchange rates affecting short-term timing differences; and

· Movements in currency exchange rates affecting income received.

The portfolio management team monitor foreign currency risk but it is not the Company’s policy to hedge against currency risk.

Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown below:

 

 

 

 

 

2023





Currency


Investments 
held at fair 
value 
£’000 

Long 
exposure to 
derivative 
instruments1 
£’000 




Debtors 
£’000 


Cash 
and cash 
equivalents2 
£’000 




Total 
£’000 

Euro

67,412 

77,457 

823 

 

145,692 

US dollar

31,515 

 

722 

36,855 

69,092 

Swiss franc

36,842 

 

224 

 

37,066 

Swedish krona

14,175 

 

 

 

14,175 

Australian dollar

7,782 

 

49 

 

7,831 

Norwegian krone

4,841 

 

 

 

4,841 

South African rand

2,468 

 

 

 

2,468 

Canadian dollar

1,703 

 

 

29 

1,732 

UK sterling

715,954 

52,616 

7,119 

22,576 

798,265 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

 

882,692 

130,073 

8,937 

59,460 

1,081,162 

 

========= 

========= 

========= 

========= 

========= 

1 The exposure to the market of long CFDs.

2 Cash and cash equivalents are made up of £2,028,000 cash at bank and £57,432,000 held in Fidelity Institutional Liquidity Fund.

 

 

 

 

 

2022





Currency


Investments 
held at fair 
value 
£’000 

Long 
exposure to 
derivative 
instruments1 
£’000 




Debtors2 
£’000 


Cash 
and cash 
equivalents3 
£’000 




Total 
£’000 

Euro

69,765 

71,606 

316 

 

141,687 

US dollar

6,665 

 

117 

39,679 

46,461 

Swiss franc

20,631 

 

376 

 

21,007 

Swedish krona

16,309 

 

 

 

16,309 

Australian dollar

12,179 

 

 

 

12,179 

Norwegian krone

6,377 

 

 

 

6,377 

Emirati dirham

4,780 

 

 

 

4,780 

South African rand

2,711 

142 

 

 

2,853 

Danish krone

 

 

71 

 

71 

Canadian dollar

 

 

 

33 

33 

UK sterling

696,255 

107,150 

18,250 

40,738 

862,393 

 

--------------- 

--------------- 

--------------- 

--------------- 

--------------- 

 

835,672 

178,898 

19,130 

80,450 

1,114,150 

 

========= 

========= 

========= 

========= 

========= 

1 The exposure to the market of long CFDs.

2 Debtors include amounts held at futures clearing houses and brokers.

3 Cash and cash equivalents are made up of £2,014,000 cash at bank and £78,436,000 held in Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise other creditors. The currency profile of these financial liabilities is shown below:

 

 




Currency

2023

Other

Creditors

£’000

2022 
Other 
creditors 
£’000 

Euro

-

6 

Swiss franc

135

2,141 

UK sterling

725

1,334 

 

--------------- 

--------------- 

 

860 

3,481 

 

========= 

========= 

 

Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from derivative positions, mainly due to the underlying exposures, are estimated using Value at Risk and Stress Tests as set out in the Company’s internal Risk Management Process Document.

Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short-term flexibility is achieved by the use of a bank overdraft, if required.

Liquidity risk exposure
At 31 August 2023, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £949,000 (2022: £9,200,000) and other creditors of £860,000 (2022: £3,481,000).

Counterparty risk
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over the Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

For derivative transactions, collateral is used to reduce the risk of both parties to the contract. All collateral amounts are held in UK sterling and are managed on a daily basis for all relevant transactions. At 31 August 2023, £580,000 (2022: £nil) was held by the brokers in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company. This collateral comprised: J.P. Morgan Securities plc £220,000 (2022: £nil) and HSBC Bank plc £360,000 (2022: £nil). At 31 August 2023, there were no amounts held by the Company at futures clearing houses and brokers, in a segregated collateral account, on behalf of the brokers, to reduce the credit risk exposure of the brokers (2022: £8,190,000). In the year to 31 August 2022, this collateral comprised: J.P. Morgan Securities plc £5,140,000 in cash and HSBC Bank plc £3,050,000 in cash.

Credit risk
Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions and derivative instrument contracts and cash at bank.

Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in a documented Derivative Risk Measurement and Management Document. Derivative instruments are used by the Manager for the following purposes:

· To gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial flow of capital;

· To hedge equity market risk using derivatives with the intention of at least partially mitigating losses in the exposures of the Company’s portfolio as a result of falls in the equity market; and

· To position short exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Manager believes to be over-valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 August 2023, an increase of 1.00% in interest rates throughout the year, with all other variables held constant, would have decreased the Company’s net gain on ordinary activities after taxation for the year and decreased the net assets of the Company by £698,000 (2022: increased the net loss and decreased the net assets by £994,000). A decrease of 1.00% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31 August 2023, a 10% strengthening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have decreased the Company’s net gain on ordinary activities after taxation for the year and decreased the net assets of the Company by £25,706,000 (2022: increased the net loss and decreased the net assets by £22,692,000). A 10% weakening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have increased the Company’s net gain on ordinary activities after taxation for the year and increased the net assets of the Company by £31,418,000 (2022: decreased the net loss and increased the net assets by £27,734,000).

Other price risk – exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 August 2023, an increase of 10% in share prices, with all other variables held constant, would have increased the Company’s net return on ordinary activities after taxation for the year and increased the net assets of the Company by £88,084,000 (2022: decreased the net loss and increased the net assets by £83,540,000). A decrease of 10% in share prices would have had an equal and opposite effect.

An increase of 10% in the valuation of unlisted investments held at 31 August 2023, would have increased the Company’s net gain on ordinary activities after taxation for the year and increased the net assets of the Company by £185,300 (2022: decreased the net loss after taxation and increased the net assets by £27,000). A decrease of 10% in the valuation would have had an equal and opposite effect.

Other price risk – net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 August 2023, an increase of 10% in the share prices underlying the derivative instruments, with all other variables held constant, would have increased the Company’s net gain on ordinary activities after taxation for the year and increased the net assets of the Company by £13,007,000 (2022: decreased the net loss and increased the net assets by £17,890,000). A decrease of 10% in share prices would have had an equal and opposite effect.

Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Notes 2 (k) and (l) above, investments and derivative instruments are shown at fair value.

Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Classification

Input

Level 1

Valued using quoted prices in active markets for identical assets

Level 2

Valued by reference to inputs other than quoted prices included in level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly

Level 3

Valued by reference to valuation techniques using inputs that are not based on observable market data

 

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Notes 2 (l) and (m) above. The table below sets out the Company’s fair value hierarchy:



Financial assets at fair value through profit or loss


Level 1 
£’000 


Level 2 
£’000 


Level 3 
£’000 

2023 
Total 
£’000 

Investments

857,351 

23,246 

2,095 

882,692 

Derivative instrument assets

 

1,769 

 

1,769 

 

----------------- 

----------------- 

----------------- 

----------------- 

 

857,351 

25,015 

2,095 

884,461 

 

========== 

========== 

========== 

========== 

Financial liabilities at fair value through profit or loss

 

 

 

 

Derivative instrument liabilities

 

(949)

 

(949)

 

========== 

========== 

========== 

========== 

 



Financial assets at fair value through profit or loss


Level 1 
£’000 


Level 2 
£’000 


Level 3 
£’000 

2022 
Total 
£’000 

Investments

835,224 

 

448 

835,672 

Derivative instrument assets

 

28 

28 

 

----------------- 

----------------- 

----------------- 

----------------- 

 

835,224 

28 

448 

835,700 

 

========== 

========== 

========== 

========== 

Financial liabilities at fair value through profit or loss

 

 

 

 

Derivative instrument liabilities

 

(9,200)

 

(9,200)

 

========== 

========== 

========== 

========== 

 

The table below sets out the movements in level 3 financial instruments during the year:



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Beginning of the year

448 

957 

Sales – proceeds

 

(716)

Sales – gains

 

278 

Transfer into level 3 at cost - Prax Exploration & Production and Unbound Group*

1,942 

9,499 

Movement in investment holding losses

(295)

(9,570)

 

----------------- 

----------------- 

End of the year

2,095 

448

 

========== 

========== 

* Financial instruments are transferred into level 3 on the date they are suspended, delisted or when they have not traded for thirty days.

Marwyn Value Investors
Marwyn Value Investors is a closed-ended fund incorporated in the United Kingdom. The fund is highly illiquid and the valuation at 31st August 2023 is based on the indicative bid price in the absence of a last trade price. As at 31 August 2023, its fair value was £242,000 (2022: £174,000).

TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in Ireland. The valuation at 31 August 2023 is based on the NAV from the 2022 audited company’s financial report. As at 31 August 2023, its fair value was £254,000 (2022: £274,000).

Studio Retail Group
Studio Retail Group operated as a multi-channel retail company. On 14 February 2022, the company was suspended from trading on the London Stock Exchange. The company is now delisted and in administration. As at 31 August 2023, its fair value was £nil (2022: £nil).

McColl’s Retail Group
McColl’s Retail Group owns and operates convenience and newsagent stores. The company was suspended from trading on 6 May 2022 after appointing administrators. As at 31 August 2023, its fair value was £nil (2022: £nil).

Prax Exploration & Production
Hurricane Energy plc, an oil and gas exploration company, delisted from the London Stock Exchange in June 2023, after it was acquired by Prax Exploration & Production plc. The valuation at 31 August 2023 of Prax Exploration & Production plc is based on the last trade of Hurricane Energy less the cash payment received from the acquisition. As at 31 August 2023, its fair value was £1,599,000 (2022: £nil).

Unbound Group
Unbound Group plc is a UK based company engaged in selling a range of brands focused on the over 55 age demographics. On 17 July 2023, the company stopped trading and has subsequently gone into administration. As at 31 August 2023, its fair value was £nil (2022: £nil).

18 Capital Resources and Gearing
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital and reserves, as disclosed in the Balance Sheet above and any gearing, which is managed by the use of derivative instruments. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed above and in Note 17 above.

The Company’s gearing at the year end is set out below:


 

2023
Asset exposure

2022
Asset exposure

 

£’000 

%1 

£’000 

%1 

Investments

882,692 

92.8 

835,672 

90.6 

Long CFDs

130,073 

13.7 

178,898 

19.4 

 

----------------- 

----------------- 

----------------- 

----------------- 

Total asset exposures

1,012,765 

106.5 

1,014,570 

110.0 

 

========== 

========== 

========== 

========== 

Shareholders’ funds

951,049 

 

922,599 

 

Gearing2

 

6.5% 

 

10.0% 

 

 

========== 

 

========== 

1 Asset exposure to the market expressed as a percentage of Shareholders’ funds.

2 Gearing is the amount by which Asset Exposure exceeds Shareholders’ funds expressed as a percentage of Shareholders’ funds.

19 Transactions with the Manager and Related Parties
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies.

Details of the current fee arrangements are given in the Directors’ Report in the Annual Report and in Note 4 above. During the year, fees payable to FII for portfolio management services were £5,698,000 (2022: £5,607,000). At the Balance Sheet date, fees for portfolio management services of £483,000 (2022: £484,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £303,000 (2022: £191,000). At the Balance Sheet date, marketing services of £nil (2022: £13,000) were accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Director’s fees and taxable expenses relating to reasonable travel expenses payable to the Directors are given in the Directors’ Remuneration Report in the Annual Report. In addition to the fees and taxable expenses disclosed in the Directors’ Remuneration Report, £18,000 (2022: £17,000) of Employers’ National Insurance contributions were paid by the Company. At the Balance Sheet date, Directors’ fees of £14,000 (2022: £15,000) were accrued and payable.

20 Reconciliation of Net Return/(Loss) on Ordinary Activities before Finance Costs and Taxation to Net Cash Inflow from Operating Activities before Finance Costs and Taxation



 

Year ended 
31.08.23 
£’000 

Year ended 
31.08.22 
£’000 

Net total return/(loss) on ordinary activities before finance costs and taxation

59,759 

(41,992)

Net capital (return)/loss on ordinary activities before finance costs and taxation

(19,717)

73,559 

 

----------------- 

----------------- 

Net revenue return on ordinary activities before finance costs and taxation

40,042 

31,567 

 

========== 

========== 

Scrip dividends

 

(108)

Decrease/(increase) in debtors

1,650 

(3,208)

Increase in other creditors

 

37 

Net cash inflow from operating activities before finance costs and taxation

41,692 

28,288 

 

========== 

========== 

Alternative Performance Measures

Discount/Premium
The discount/premium is considered to be an Alternative Performance Measure. It is the difference between the NAV per ordinary share of the Company and the ordinary share price and is expressed as a percentage of the NAV per ordinary share. Details of the Company’s discount/premium are on the Financial Highlights page in the Annual Report and are both defined in the Glossary of Terms in the Annual Report.

Gearing
Gearing is considered to be an Alternative Performance Measure. See Note 18 above for details of the Company’s gearing.

Net Asset Value (“NAV”) per Ordinary Share
The NAV per ordinary share is considered to be an Alternative Performance Measure. See the Balance Sheet and Note 16 above for further details.

Ongoing Charges Ratio
Ongoing charges ratio are considered to be an Alternative Performance Measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of management fees and other expenses expressed as a percentage of the average net assets throughout the year.

 

2023 

2022 

Investment management fees (£’000)

5,698 

5,607 

Other expenses (£’000)

948 

838 

Ongoing charges (£’000)

6,646 

6,445 

Average net assets (£’000)

949,787 

934,785 

Ongoing charges ratio

0.70% 

0.69% 

 

========== 

========== 

Revenue, Capital and Total Returns per Share
Revenue, capital and total returns per share are considered to be Alternative Performance Measures. See the Income Statement and Note 8 above for further details.

Total Return Performance
Total return performance is considered to be an Alternative Performance Measure. The NAV per ordinary share total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. The ordinary share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.

The tables below provide information relating to the NAV per ordinary share and the ordinary share price of the Company, the impact of the dividend reinvestments and the total returns for the years ended 31 August 2023 and 31 August 2022.




2023

Net asset 
value per 
ordinary 
share 



Share 
price 

31 August 2022

284.67p 

260.50p 

31 August 2023

293.44p 

267.50p 

Change in year

+3.1% 

+2.7% 

Impact of dividend reinvestment

+2.8%

+2.9% 

 

----------------- 

----------------- 

Total return for the year

+5.9% 

+5.6% 

 

========== 

========== 

 




2022

Net asset 
value per 
ordinary 
share 



Share 
price 

31 August 2021

304.79p 

308.50p 

31 August 2022

284.67p 

260.50p 

Change in year

-6.6% 

-15.6% 

Impact of dividend reinvestment

+2.2% 

+2.1% 

 

----------------- 

----------------- 

Total return for the year

-4.4% 

-13.5% 

 

========== 

========== 

 

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 August 2023 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2022 and 2023 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2022 is derived from the statutory accounts for 2022 which have been delivered to the Registrar of Companies. The 2023 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to Shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website: www.fidelity.co.uk/specialvalues where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

ENDS




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