Annual Financial Report

RNS Number : 9727G

British Empire Trust PLC

12 November 2018

 

BRITISH EMPIRE TRUST PLC

('British Empire' or the 'Company')

LEI: 213800QUODCLWWRVI968

Annual Financial Report for the year ended 30 September 2018

A copy of the Company's Annual Report for the year ended 30 September 2018 will shortly be available to view and download from the Company's website, http://www.british-empire.co.uk. 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.

Copies of the Annual Report will be sent to shareholders shortly. Additional copies may be obtained from the Corporate Secretary, Link Company Matters Limited, on 01392 477500. 

The Annual General Meeting ('AGM') of the Company will be held on 19 December 2018 at 11:00am at 11 Cavendish Square, London, W1G 0AN.

The Directors have proposed the payment of a final dividend of 11.0p per Ordinary Share which, if approved by shareholders at the forthcoming AGM, will be payable on 4 January 2019 to shareholders whose names appear on the register at the close of business on 7 December 2018 (ex-dividend 6 December 2018).

The following text is copied from the Annual Report and Accounts (page references refer to pages in the Annual Report and Accounts):

STRATEGIC REPORT

COMPANY PERFORMANCE

Financial Highlights

- Net asset value ('NAV') per share on a total return basis increased by 10.0%

- Benchmark index increased by 5.2%

- Final dividend increased by 10.0% to 11.0p and total dividend increased by 8.3% to 13.0p

- Share price total return of 12.0%

Performance Summary

Net asset value per share (total return) for the year to 30 September 20181			10.0%
Share price total return for the year to 30 September 2018			12.0%
	30 September    2018	30 September    2017	% change
Benchmark
MSCI All Country World ex-US Index (£ adjusted total return)	474.26	450.81	5.2%
Discount
(difference between share price and net asset value)2	-8.46%	-9.92%

	Year to 30 September 2018	Year to  30 September  2017
Earnings and Dividends
Investment income	£22.64m	£17.39m
Revenue earnings per share	14.83p	10.44p
Capital earnings per share	58.72p	106.99p
Total earnings per share	73.55p	117.43p
Ordinary dividends per share	13.00p	12.00p
Ongoing Charges Ratio
Management, marketing and other expenses (as percentage of average shareholders' funds - see Glossary)	0.87%	0.87%
2018 Year's Highs/Lows	High	Low
Net asset value per share	853.78p	771.52p
Net asset value per share (debt at fair value)	845.56p	764.29p
Share price (mid market)	767.00p	683.00p

¹ As per guidelines issued by the AIC, performance is calculated using net asset values per share inclusive of accrued income and debt marked to fair value.

² As per guidelines issued by the AIC, the discount is calculated using the net asset value per share inclusive of accrued income and debt at fair value.

Buybacks

During the year, the Company purchased 4,309,052 Ordinary Shares, all of which have been placed into treasury, at a cost of £31.7m.

Alternative Performance Measures

For all Alternative Performance Measures included in this Strategic Report, please see definitions in the Glossary below.

CHAIRMAN'S STATEMENT

This report covers the period from 1 October 2017 to 30 September 2018.

Investment Performance

Our accounting year to 30 September 2018 was challenging for equity investors as volatility returned to the markets. Our Investment Manager is an active stock picker, focused on finding discounted assets rather than being driven by equity markets in general - and this has proven beneficial over the period under review. As described in the Investment Manager's Review, the portfolio management team has been particularly active this year in seeking to extract value from portfolio investments. This has borne fruit and I am happy to report that the portfolio once again delivered strong performance over the period, with a net asset value total return of 10.0%, which was 4.8 percentage points higher than the return of the benchmark, the MSCI All Country World ex-US Index. The drivers of this investment performance are set out in more detail in the Investment Manager's Review below.

Income and Dividend

Returns from your Company's investments may be achieved by increases in the value of underlying investments, a narrowing of the discount to underlying asset value, distributions or a combination of these elements. The Investment Manager does not specifically target returns in the form of dividends from investee companies and this means that your Company's revenue account may vary considerably from year to year. The Company has substantial revenue reserves and also has the power to distribute realised capital profits, should the Board believe that this is warranted. The Company has either maintained or increased its ordinary dividend for the past 30 years, and expects to continue to do so in the future.

Your Board has elected to increase the final dividend to 11.0p per share, which will result in a total dividend for the year of 13.0p per share. This year's interim and final dividends were fully covered by net revenue earned during the accounting year.

Gearing

The Investment Manager believes that there continue to be significant investment opportunities available at attractive valuations. While we are mindful of the extended rally in many equity markets since the global financial crisis, long-term debt remains available at interest rates which appear very attractive by historical standards. This is despite recent rises in interest rates around the world.

During the year under review, the Board approved a further modest increase in debt, of €20m unsecured private placement loan notes which were issued on 1 November 2017. If all of the Company's current debt had been deployed, gearing would have been 9.5% of net assets, based on the value of assets as at 30 September 2018.

Discount

The discount¹ at which the Company's shares trade has generally been in the range of 7% to 12% over the year and at the year-end was 8.5%. Your Board and Investment Manager continue to believe that it is in the best interests of shareholders to use share buybacks with the aim of limiting the volatility in the discount and this year some 4.3m shares were bought back. A direct effect of the buybacks was to increase NAV per share for remaining shareholders by 0.4% over the accounting year.

While share buybacks seek to address any oversupply of shares, it is equally important to stimulate demand. Our Investment Manager has continued to make great efforts to explain the investment philosophy both to existing shareholders and to potential investors.

Board

In this, my first annual report to you as Chairman of British Empire Trust plc, I would like again to thank my predecessor, Strone Macpherson, for his long service to the Company and for his sound guidance.

On 20 December 2017, we announced the appointment of Anja Balfour as a non-executive Director. Anja has over 20 years' experience in managing Japanese and International Equity portfolios for Stewart Ivory, Baillie Gifford and Axa Framlington. Since stepping down from full-time investment management in 2010 she has gained considerable experience as a non-executive director and is currently a director of Martin Currie Asia Unconstrained Trust plc, of Schroder Japan Growth Fund plc and of F&C Global Smaller Companies plc. Anja is an excellent addition to the Board.

Steven Bates will be retiring from the Board following the AGM. Steven has served on the Board for over 12 years and during that time the Company has consistently benefited from his wise counsel and full engagement, for which we thank him. We have started a search for his successor as a Director.

Outlook

After a long period where markets have been resilient or even complacent about the risks which abound in the global economy, it was perhaps inevitable that we would enter a period of greater uncertainty.

Equity and bond markets have experienced a bout of heightened market volatility since the end of your Company's financial year, which has been driven by, among other things, the threat of a global trade war, the effects of rising interest rates as quantitative easing is slowly removed, and uncertainty over Brexit.

The potential effect of these major issues is very difficult to predict.

However, our Investment Manager's approach is emphatically not to second-guess markets but to seek investment opportunities in individual companies where the share price does not reflect the tangible value of a holding's underlying assets and/or their prospects for growth. While we have reported another good year, there remain many opportunities for investment returns, both within the portfolio and in the broader range of potential investments which our Investment Manager constantly monitors. This focus on company fundamentals should provide both strong returns over the long term and a degree of protection against the vagaries of markets.

Annual General Meeting

I look forward to seeing shareholders at the AGM, which this year will be held on Wednesday, 19 December 2018 at 11.00am at 11 Cavendish Square, London W1G 0AN.

Susan Noble

Chairman

9 November 2018

¹ Based on the share price on the relevant day as at close of business on the London Stock Exchange.

OUR EDGE

AVI specialises in finding companies which own attractive businesses where, for one reason or another, the market does not fully recognise the value of these assets. A particular emphasis is put on identifying investments where there is a clear catalyst for narrowing the discount, which provides a boost to our portfolio's performance above and beyond any underlying growth achieved in the assets. AVI believes its strategy and investment style differentiate it from other managers in the market because of the following:

1. 33 years' experience of long-term outperformance following our distinctive investment style (12.1% average annual performance).

2. AVI actively looks for the catalyst within a company which will narrow the discount.

3. AVI promotes active involvement to improve corporate governance and to unlock potential shareholder value.

OVERVIEW OF STRATEGY

Company Purpose

The Company is an investment trust. Its investment objective is to achieve capital growth through a focused portfolio of mainly listed investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value.

Strategy

Our strategy is to seek out-of-favour companies whose assets are misunderstood by the market or under-researched, and which trade significantly below their intrinsic value and where pressure can be brought to bear to enact change to release value for shareholders.

Investment Approach

As an investment trust, the Company's most important relationship is with the Investment Manager.

The Company's assets are managed by Asset Value Investors Limited. AVI aims to deliver superior returns and specialises in investment in securities that for a number of reasons may be selling on anomalous valuations.

The Investment Manager has the flexibility to invest around the world and is not constrained by any fixed geographic or sector weightings, but does seek to maintain a concentrated yet diversified portfolio. No more than 10% of the Company's investments may be in unlisted securities. AVI's investment philosophy is described in more detail in the Annual Report and the Company's Investment Policy.

Key Performance Indicators ('KPIs')

The Company uses KPIs as an effective measurement of the development, performance or position of the Company's business, in order to set and measure performance reliably. These are Net Asset Value Total Return, Discount to Net Asset Value and Value for Money.

Total returns to 30 September 2018

Company
1 Year	10 Years (Annualised)
10.0%	10.0%
Benchmark
MSCI All Country World ex-US Index*
1 Year	10 Years (Annualised)
5.2%	9.0%
* Benchmark adopted on 1 October 2013.
Key Figures
Discount
30 September 2018	30 September 2017
8.5%	9.9%
Estimated percentage added to net asset value per share from buybacks
2018	2017
0.4%	0.8%
Ongoing Charges Ratio
2018	2017
0.87%	0.87%
Number of Investments
39 (of which 16 are held in Japanese Special Situations)
Top Ten Investments Represent
50.6%
of total assets less current liabilities

Key Performance Indicators

The Company's Board of Directors meets regularly and at each meeting reviews performance against a number of key measures.

In selecting these measures, the Directors considered the key objectives and expectations of typical investors in an investment trust such as the Company.

Net asset value total return

The Directors regard the Company's net asset value total return as being the overall measure of value delivered to shareholders over the long term. Total return reflects both the net asset value growth of the Company and also dividends paid to shareholders. The Investment Manager's investment style is such that performance is likely to deviate materially from that of any broadly based equity index. The Board considers the most important comparator to be the MSCI All Country World ex-US Index, which was adopted as the Company's benchmark from 1 October 2013.

A full description of performance and the investment portfolio is contained in the Investment Review below.

The discount at which the Company's shares trade compared with net asset value

The Board believes that an important driver of an investment trust's discount or premium over the long term is investment performance. However, there can be volatility in the discount or premium. Therefore, the Board seeks shareholder approval each year to buy back and issue shares with a view to limiting the volatility of the share price discount or premium.

During the year under review, the discount has moved generally in a range from 7% to 12%, with a high of 11.7% and a low of 6.8%, based on closing prices and, as at 30 September 2018, stood at 8.5%.

During the year under review, no new shares were issued and 4.3m shares were bought back and placed into treasury, adding an estimated 0.4% to net asset value per share to the benefit of continuing shareholders. The shares were bought back at a weighted average discount of 10.1%.

Value for money

The Board continues to be conscious of expenses and works hard to maintain a sensible balance between good service and costs.

For the year ended 30 September 2018, the ongoing charges ratio was 0.87%, which was unchanged from the previous year.

Principal Risks

When considering the total return of the investments, the Board must also take account of the risk which has been taken in order to achieve that return. There are many ways of measuring investment risk, and the Board takes the view that understanding and managing risk is much more important than setting any numerical target. The Board looks at risk from many different angles, an overview of which is set out below. It has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The objective of using these techniques is not to be prescriptive, but to understand levels of risk and how they have changed over time. The purpose of this focus is to ensure that the returns earned are commensurate with the risks assumed. The investment approach followed by the Investment Manager aims, over the long term, to achieve returns in excess of those produced by markets.

The Board has assessed the risks which the Company faces under a number of headings. A summary of the key risks and mitigating actions are set out in the table below. Shareholders should be aware that no assessment of this nature can be guaranteed to predict all possible risks; the objective is to assess the risks and determine mitigating actions.

Risk Area	Mitigating Actions
The market or the Company's portfolio could suffer a prolonged down turn in performance.	Conventional wisdom holds that the most effective way of reducing risk is to hold a diversified portfolio of assets. The Company typically now holds 25-35 core positions. This range could be considered a relatively concentrated (and therefore risky) portfolio. It is important to note that, in line with its investment objective, the Company's holdings are mostly in stocks which are themselves owners of multiple underlying businesses. Thus, the portfolio is much more diversified on a look-through basis than if it were invested in companies with a single line of business. For the same reason, the top ten portfolio positions, representing 50.6% of total assets at the year end, are in practice highly diversified on a look-through basis. This diversification is evident at country, sector and currency levels. The Investment Manager has a clear investment strategy, as set out below. There will be periods when this strategy underperforms in comparison to its benchmark and its peer group. The Board monitors performance at each Board meeting, and reviews the investment process thoroughly at least annually. The Company, through the Investment Manager's compliance function and the Administrator's independent checks, has a robust system for ensuring compliance with the investment mandate.
The use of gearing makes investment returns more volatile and exacerbates the effect of any fall in portfolio value.	There is a degree of risk associated with gearing. While gearing should enhance investment performance over the long term, it is likely to exacerbate any decline in asset value in the short term. There are covenants attached to both the Loan Notes and the Debenture, which could be breached in extreme market conditions and could require early repayment, which could be expensive. Total return results, when issued on the basis of debt being marked to estimated market value, are likely to be more volatile. The value of the Euro tranche of the Loan Notes will fluctuate with currency movements, although it should be noted that the portfolio contains a significant amount of Euro denominated assets. It is possible that the investment returns will not match the borrowing cost over time, and therefore the gearing will be dilutive. The Board manages this risk by setting its fixed gearing at a prudent level. The covenants are set at levels with substantial headroom.
The portfolio has investments in a number of countries and there is a risk that the value of local currencies may decline in value relative to Sterling.	Foreign exchange risk is an integral part of a portfolio which is invested across a range of currencies. This risk is managed by the Investment Manager mainly by way of portfolio diversification but the Investment Manager may, with Board approval, hedge currency risk. The Company did not engage in any currency hedging during the year under review. However, borrowing in foreign currencies provides a natural hedge against currency risk in situations where the Company holds investments denominated in the borrowed currency. As at 30 September 2018, the Company had €50m of borrowing, and investments denominated in Euros whose value exceeded that of this borrowing.
While the investment portfolio is made up predominantly of liquid investments, there is a possibility that individual investments may prove difficult to sell at short notice.	The Investment Manager takes account of liquidity when making investments and monitors the liquidity of holdings as part of its continuing management of the portfolio. The liquidity of holdings is monitored and reported at regular Board meetings.
Management of the Company's investment portfolio and other support functions rely on a small number of key staff.	The Board regularly reviews with key suppliers, and particularly the Investment Manager, their staff retention policies and contingency plans.
The shares of investment trusts frequently trade at a discount to their published net asset value. The value of the Company's shares will additionally be subject to the interaction of supply and demand, prevailing net asset values and the general perceptions of investors. The share price will accordingly be subject to unpredictable fluctuations and the Company cannot guarantee that the share price will appreciate in value. The Company may become unattractive to investors, leading to pressure on the share price and discount. This may be due to any of a variety of factors, including investment performance or regulatory change.	The Board seeks to manage the risk of any widening of the discount by regularly reviewing the level of discount at which the Company's shares trade, and it will, if necessary and appropriate, limit any significant widening through measured buybacks of shares. The Investment Manager, supported by the Company, has a comprehensive marketing, investor relations and public relations programme which seeks to inform both existing and potential investors of the attractions of the Company and the investment approach.
The portfolio has investments in a number of jurisdictions around the world and there is a risk of portfolio trades failing and/or of loss of assets.	The Investment Manager and Administrator have comprehensive systems in place for executing and settling transactions and for ensuring that the assets are kept safe. The Company uses a leading global custodian bank to safeguard its assets and receives regular, comprehensive reports from the Custodian. In addition, the Depositary provides further independent oversight of the protection of the Company's assets.
The portfolio has investments in a number of countries where systems for reclaiming tax are prolonged.	The Investment Manager has a process, overseen by the Audit Committee, to ensure that tax is reclaimed in an efficient and timely manner, working with the Custodian and, where appropriate, other agencies.
The Company outsources all of its key functions to third parties, in particular the Investment Manager, and any control failures or gaps in the systems and services provided by third parties could result in a financial loss or damage to the Company.	The Company reviews the relevant systems and controls, at the Investment Manager and at other third-party suppliers, including the Custodian, Depositary and Administrator. The Board assesses thoroughly the risks inherent in any change of supplier, including the internal controls of any new supplier.

The principal financial risks are examined in more detail in note 14 to the financial statements.

Environmental, Social and Governance Issues

Both the Board and AVI recognise that social, human rights, community, governance and environmental issues can have an effect on some of its investee companies.

The Board supports AVI in its belief that good corporate governance will help to deliver sustainable long-term shareholder value. AVI is an investment management firm that invests on behalf of its clients and its primary duty is to produce returns for its clients. AVI seeks to exercise the rights and responsibilities attached to owning equity securities in line with its investment strategy. A key component of AVI's investment strategy is to understand and engage with the management of public companies. AVI's Stewardship Policy recognises that shareholder value can be enhanced and sustained through the good stewardship of executives and boards. It therefore follows that in pursuing shareholder value AVI will implement its investment strategy through proxy voting and active engagement with management and boards.

The Company is an investment trust and so its own direct environmental impact is minimal. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions-producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

The Company has no employees. The Directors are satisfied that, to the best of their knowledge, the Company's principal suppliers comply with the provisions of the UK Modern Slavery Act 2015.

The Directors do not have service contracts. There are five Directors, three male and two female. Further information on the Board's policy on recruitment of new Directors is contained in the Annual Report.

Future Strategy

The Board and the Investment Manager have long believed in their focus on investment in high-quality undervalued assets and that, over time, this style of investment has been well rewarded.

The Company's overall future performance will, inter alia, be affected by: the Investment Manager's decisions; investee companies' earnings, corporate activity, dividends and asset values; and by stock market movements globally. Stock markets are themselves affected by a number of factors, including: economic conditions; central bank and other policymakers' decisions; political and regulatory issues; and currency movements.

The Company's performance relative to its peer group and benchmark will depend on the Investment Manager's ability to allocate the Company's assets effectively, and manage its liquidity or gearing appropriately. More specifically, the Company's performance will be affected by the movements in the share prices of its investee companies in comparison to their own net asset values.

The overall strategy remains unchanged.

Approval of Strategic Report

The Strategic Report has been approved by the Board and is signed on its behalf by:

Susan Noble

Chairman

9 November 2018

TEN LARGEST EQUITY INVESTMENTS

The top ten equity investments make up 50.6% of total assets less current liabilities, with underlying businesses spread across a diverse range of sectors and regions.

All discounts are estimated by AVI at 30 September 2018, based on AVI's estimate of each company's net asset value.

1.   PERSHING SQUARE HOLDINGS

Nature of business: Investment Company

Valuation: £66.6m

% of total assets less current liabilities: 6.5%

Discount: -24.4%

A Euronext- and London-listed closed-end fund investing in a highly-concentrated portfolio of listed US equities. The manager's reputation has been damaged by the steep losses experienced in its position in Valeant Pharmaceuticals, but that enabled us to make the investment at a wide discount to NAV. The shares currently trade on a 24% discount to NAV, which we believe is too wide for a portfolio of large-cap US equities run by an activist manager with a track record of outperformance (even including the Valeant losses).

2.   EXOR

Nature of business: Investment Holding Company

Valuation : £57.3m

% of total assets less current liabilities: 5.6%

Discount : -33.1%

EXOR is an Italian-listed holding company run by the Agnelli family, which traces its roots back to the formation of FIAT in 1899. It has exposure to four main assets, three of which are listed: Fiat Chrysler Automobile, Ferrari and CNH Industrial, and one unlisted: PartnerRe.

3.   FONDUL PROPRIETATEA

Nature of business: Investment Company

Valuation : £52.8m

% of total assets less current liabilities: 5.1%

Discount : -31.8%

A Bucharest- and London-listed closed-end fund originally set up to provide restitution to Romanian citizens whose property was seized by the Romanian Communist government. Fondul provides exposure to some of Romania's most attractive utility and infrastructure assets including Hidroelectrica, ENEL's Romanian distribution subsidiaries, Bucharest Airport and OMV Petrom. The fund pays a 7% dividend yield and offers the potential for several corporate events to unlock value and help narrow the 32% discount.

4.   PARGESA

Nature of business: Investment Holding Company

Valuation : £52.7m

% of total assets less current liabilities: 5.1%

Discount : -37.8%

Through Pargesa's stake in GBL it holds interests in a number of listed companies. The portfolio is concentrated on a limited number of major holdings - including well-known companies such as Adidas, Pernod-Ricard and LafargeHolcim - with the aim of creating long-term value through active ownership.

5.   JARDINE STRATEGIC

Nature of business: Investment Holding Company

Valuation: £52.5m

% of total assets less current liabilities: 5.1%

Discount: -35.2%

An Asian holding company which holds significant interests in Jardine Matheson, Hongkong Land, Jardine Cycle & Carriage, Dairy Farm and Mandarin Oriental by way of a cross shareholding between Jardine Matheson and Jardine Strategic. The group structure, which is controlled by the Keswick family, provides broad exposure to Asian businesses at an attractive discount to the value of their listed underlying holdings, while providing the base for long-term value creation through the stable stewardship of their investee companies.

6.   RIVERSTONE ENERGY

Nature of business: Investment Company

Valuation: £51.7m

% of total assets less current liabilities: 5.0%

Discount: -20.7%

A London-listed closed-end fund investing in oil & gas companies, mainly in the US and Canada with a focus on unconventional (shale) assets. Backed by a management team with a strong track record in the sector, Riverstone Energy was able to capitalise on the distress in the sector following the 2014 oil price crash to assemble an attractive portfolio concentrated in the lowest-cost basins in North America. The company trades on a 21% discount to NAV.

7.   WENDEL

Nature of business: Investment Holding Company

Valuation: £49.6m

% of total assets less current liabilities: 4.8%

Discount: -26.5%

Wendel is a French-listed holding company with exposure to a diverse range of sectors. Major business lines include certification and inspection services, consumer packaging and mobile telephone infrastructure through their investments in Bureau Veritas, Constantia Flexibles, IHS and Stahl.

8.   TETRAGON FINANCIAL

Nature of business: Investment Company

Valuation: £48.8m

% of total assets less current liabilities: 4.7%

Discount: -38.7%

A Euronext- and London-listed closed-end fund investing in a multi-asset portfolio with exposure to CLO equity, hedge funds and real estate. Tetragon wholly owns, or has substantial stakes in, the asset managers that manage its portfolio, and the ultimate IPO of this asset management business is likely to release some of the value found in the company's 39% discount to NAV.

9.   TOKYO BROADCASTING SYSTEM

Nature of business: Asset-backed Company

Valuation: £45.1m

% of total assets less current liabilities: 4.4%

Discount: -30.1%

Tokyo Broadcasting System ('TBS') is one of the top five major broadcasters in Japan. However, its broadcasting business is masked by its excessively large securities portfolio, amounting to 80% of market cap, and totalling 91% when including net cash. TBS trades on a 30% discount.

10.  THIRD POINT OFFSHORE

Nature of business: Investment Company

Valuation: £44.3m

% of total assets less current liabilities: 4.3%

Discount: -23.2%

A London-listed closed-end fund run by well-known activist Daniel Loeb. The fund invests in credit and equity and takes long and short positions in both, although it has a bias towards long positions. We first invested in Third Point Offshore in July 2017, and built a position at an average discount of 17%, which we view as unsustainably wide given Loeb's reputation as an activist investor.

INVESTMENT PORTFOLIO

AT 30 SEPTEMBER 2018

Company	Nature of business	% of investee company	IRR   (%, GBP)1	ROI   (%, GBP)2	Cost  £'0003	Valuation £'000	% of total assets less current liabilities
Pershing Square Holdings	Investment Company	1.3	2.9	3.1	64,799	66,556	6.5%
EXOR	Investment Holding Company	0.5	20.3	31.7	44,032	57,338	5.6%
Fondul Proprietatea	Investment Company	4.1	15.8	31.6	44,690	52,825	5.1%
Pargesa	Investment Holding Company	1.1	14.6	40.0	39,463	52,725	5.1%
Jardine Strategic	Investment Holding Company	0.2	3.4	4.1	52,795	52,463	5.1%
Riverstone Energy	Investment Company	4.8	14.6	35.0	38,369	51,697	5.0%
Wendel	Investment Holding Company	0.9	19.3	47.3	36,843	49,561	4.8%
Tetragon Financial	Investment Company	3.6	10.2	17.4	45,463	48,807	4.7%
Tokyo Broadcasting System	Asset-backed Company	1.6	8.1	10.3	41,445	45,060	4.4%
Third Point Offshore	Investment Company	4.8	(0.6)	(0.7)	46,618	44,276	4.3%
Top ten investments					454,517	521,308	50.6%
Swire Pacific 'B'	Investment Holding Company	1.1	6.8	11.9	41,167	43,298	4.2%
Symphony International Holdings	Investment Company	15.7	17.0	66.3	26,636	42,652	4.1%
Oakley Capital Investments	Investment Company	10.8	44.4	17.2	36,607	42,624	4.1%
JPEL Private Equity	Investment Company	17.5	28.9	81.1	20,269	41,336	4.0%
Investor AB 'A'	Investment Holding Company	0.3	14.0	106.0	10,795	32,474	3.2%
NB Private Equity Partners	Investment Company	2.9	19.3	106.5	17,391	32,435	3.1%
Cosan Ltd	Investment Holding Company	2.4	(25.1)	(21.6)	39,464	30,481	3.0%
Aker ASA	Investment Holding Company	0.5	19.1	168.1	5,536	22,902	2.2%
Fujitec*	Asset-backed Company	2.4	(14.0)4	(2.4)4	22,879	22,273	2.2%
Vietnam Phoenix Fund 'C'	Investment Company	25.1	20.2	51.8	20,065	22,011	2.1%
Top twenty investments					695,326	853,794	82.8%
Kato Sangyo*	Asset-backed Company	1.4	6.7	5.2	13,639	14,219	1.4%
Kanaden*	Asset-backed Company	4.5	(21.4)	(10.5)	12,831	11,414	1.1%
Toshiba Plant Systems*	Asset-backed Company	0.7	22.5	18.5	8,138	11,070	1.1%
Nishimatsuya Chain*	Asset-backed Company	1.9	(8.9)	(8.4)	11,608	10,435	1.0%
Daiwa Industries*	Asset-backed Company	2.5	(5.0)	(3.3)	11,139	10,400	1.0%
Teikoku Sen-I*	Asset-backed Company	1.8	116.8	42.7	7,117	10,155	1.0%
GP Investments	Investment Company	14.6	(15.7)	(35.7)	14,739	9,525	0.9%
Pasona Group*	Asset-backed Company	2.0	43.7	26.7	7,432	9,305	0.9%
Yamato Kogyo*	Asset-backed Company	0.5	16.1	18.4	7,143	8,315	0.8%
Tachi-S*	Asset-backed Company	1.7	(14.7)	(16.9)	8,622	7,088	0.7%
Top thirty investments					797,734	955,720	92.7%
Melco Holdings*	Asset-backed Company	1.1	15.4	12.7	6,108	6,797	0.7%
SK Kaken*	Asset-backed Company	0.5	(18.5)	(15.0)	6,247	5,257	0.5%
Mitsuboshi Belting*	Asset-backed Company	0.7	48.4	11.4	4,115	4,578	0.4%
Nissan Shatai*	Asset-backed Company	0.4	(13.6)	(6.9)	4,389	4,067	0.4%
Better Capital (2009)	Investment Company	2.0	26.4	50.7	1,962	3,935	0.4%
Vietnam Property	Investment Company	15.4	6.6	52.8	632	3,763	0.4%
Nakano Corporation*	Asset-backed Company	2.2	6.4	6.3	3,456	3,613	0.3%
Ashmore Global Opportunities - GBP	Investment Company	12.5	5.2	10.2	1,166	1,934	0.2%
Sekisui Jushi*	Asset-backed Company	0.1	n/a	1.3	596	601	0.1%
Total equity investments					826,405	990,265	96.1%
Total investments					826,405	990,265	96.1%
Net current assets						40,576	3.9%
Total assets less current liabilities						1,030,841	100.0%

* Constituent of Japanese Special Situations basket.

¹ Internal rate of return. Calculated from inception of British Empire's investment. Refer to Glossary below for further details.

² Return on investment. Calculated from inception of British Empire's investment. Refer to Glossary below for further details.

³ Cost. Refer to Glossary below for further details.

⁴ ROIs and IRRs for Vietnam Phoenix Class 'C' include the returns for the predecessor investment in DWS Vietnam and the now-exited spin-off investment in Vietnam Phoenix Class 'B'.

INVESTMENT REVIEW/ INVESTMENT MANAGER'S REVIEW

OVERVIEW OF AVI'S INVESTMENT PHILOSOPHY

British Empire is managed by Asset Value Investors Limited.

The aim of AVI is to deliver superior investment returns. AVI specialises in investing in securities that for a number of reasons may be selling on anomalous valuations.

AVI's investment philosophy is to:

1	IDENTIFY GOOD QUALITY UNDERLYING ASSETS WITH APPRECIATION POTENTIAL AT COMPELLING VALUATIONS. There are many companies trading at discounts to net asset value. Our aim is to identify companies that own attractive businesses where there is not only a wide discount, but also where we consider there to be a reasonable likelihood of those businesses appreciating in value.
2	INVEST IN COMPANIES TRADING AT DISCOUNTS TO NET ASSET VALUE. Our focus is to find listed companies that own assets such as listed securities, property, cash and other businesses. We then estimate the value of all of those assets. After deducting any liabilities such as debt or pension liabilities, we arrive at an estimate of net asset value for that company. We will consider investing in companies where the discount between the current share price and our estimate of the value of that business is wide.
3	LOOK FOR EVENTS TO NARROW DISCOUNTS. Once we find a good quality business on an attractive valuation, we then consider whether it is likely that the discount will narrow. Many companies trade at a discount for a reason and if that reason persists, then the discount may persist. Catalysts differ for the various types of company in which we invest. For example, in the case of a closed-end fund, where we are a large shareholder we can influence a board to pursue a strategy for discount narrowing. In the case of a family controlled company, we would rely on the family to be the activist. Our analysis would involve trying to understand the interests and objectives of the controlling shareholder, and whether our interests were aligned with theirs.
4	FOCUS ON BALANCE SHEET STRENGTH. Debt works very well when markets are appreciating. However, debt can also destroy a lot of value when markets are falling and the business environment for a particular company deteriorates. We consider very carefully the balance sheet strength of the companies in which we invest. Factors which we look at include the actual quantum of debt relative to the assets of the companies, the maturity profile of the debt and the cashflows that the businesses generate.
5	FOCUS ON BOTTOM-UP STOCK PICKING. We are not asset allocators attempting to invest a pool of money across various asset classes. We are equity investors focusing on a particular style of value investing. We do not hug benchmarks and we will not own a company just because it is in a benchmark. We seek to invest in companies that meet the criteria described above.
6	ESG INTEGRATION FOR A BROADER RISK PERSPECTIVE. Integral to our investment process is the belief that good corporate governance will help to deliver sustainable long-term returns for shareholders. In addition to financial performance, the board's oversight of operational performance, environmental and social risks and the robustness of the management structures will affect the valuation we assign to a stock. AVI expects the boards and executives of the companies in which we invest to review the quality of the internal controls, strategy and operating performance in order to produce strong returns.

Our focus on buying high-quality businesses trading at wide discounts to their net asset value has served us well over the long term. There are periods of time, however, when our style is out of favour and the types of companies in which we invest are ignored by the broader market. This requires us to be patient and to remain true to our style, so that when other investors begin to appreciate the value in those companies, we are well placed to benefit. In the short term, this means that there could be some volatility in our returns. However, we are confident that we own high-quality businesses, which are trading on cheap valuations.

Members of the investment team at AVI invest their own money in funds which they manage. As at 30 September 2018, AVI's investment team owned 236,122 shares in British Empire Trust plc.

PERFORMANCE REVIEW

Performance

For the financial year to 30 September 2018, your Company's NAV returned +10.0% on a total return basis in Sterling. This represents an outperformance of +4.8% against the benchmark - the MSCI All Country World ex-US index - which returned +5.2%, also in Sterling terms. Following this, NAV total return is now 71% over the last three years, a 14% outperformance of the benchmark.

Whilst we are very much bottom-up fundamental stock pickers, it is both interesting and important to consider your Company's performance in the context of the wider market environment. As has been the case for much of the past decade, the US was again the standout stock market performer this year. US markets appear unfazed by whatever is thrown at them, with the S&P 500 and NASDAQ Composite returning 21% and 29% respectively in the face of political scandal, fears of a full-blown trade war and further monetary policy tightening. With the US now technically in its longest-ever bull market, the question du jour concerns the sustainability of continued US outperformance. Recent setbacks have brought the issue into stark relief, with market participants either taking the view that any setback is a buying opportunity, or fretting about the end of the long bull run. As stock pickers, we focus on the prospects for our investments and try to screen out the distracting noise made by commentators and politicians.

For non-US equity markets, the going was much tougher. In Japan, the TOPIX returned 13%, whilst broad-based European equity indices rose slightly by 3% over the year. There has been considerable pain in emerging markets - most notably Turkey, Argentina, Indonesia and Brazil - which have, amongst other things, suffered from currency weakness against the US Dollar as the Fed delivered its eighth hike of the cycle, with another likely before 2018 is out. The portfolio's major exposure to this trend was in Brazil, where two holdings, Cosan Ltd and GP Investments, underperformed. These are discussed in detail below.

Portfolio Commentary

British Empire's Portfolio

When thinking about the types of companies in which your Company invests, it is important to consider both the NAV and the discount at which the share price trades to that NAV; these two factors will be the key determinants of how your portfolio performs in any given year.

With that in mind, we note that the portfolio's weighted average discount widened from 26% to 30% over the year. While roughly half of this was due to reducing holdings with tight discounts and buying or adding to positions with wider discounts, the portfolio discount movement was nonetheless a drag on returns. However, superior NAV growth more than outweighed this, leading to outperformance.

Performance was particularly strong in European holding companies. In this area of the portfolio, we seek to invest alongside prudent, long-term oriented capital allocators who will actively manage their portfolio of businesses and grow their company's net asset value over time. NAV growth amongst these companies was generally positive, although somewhat offset by discount widening in cases such as EXOR and Investor AB. In holdings such as Pargesa and Jardine Strategic (an Asian holding company), we observe discounts on listed portfolios at levels previously seen at times of heightened economic stress such as 2009 and 2011. That said, discounts did not homogenously increase: Aker, this year's largest individual stock contributor, benefited from significant discount narrowing on top of strong NAV performance. Having traded on as much as a 46% discount within the last three years, we believe Aker is one of the clearest demonstrations of how sentiment can drive wild swings in discounts and provide compelling opportunities for disciplined investors.

Closed-end funds also performed well this year. Of particular note, it was pleasing to see the validation of last year's decision to add to Pershing Square Holdings on continued weakness, leading to a swing from being one of last year's largest detractors to being this year's third most significant contributor. As discussed in more detail below, Pershing Square's NAV performance has been much stronger, although its discount of 24% remains exceptionally wide for a portfolio of liquid, US-listed large-cap equities.

When it comes to closed-end funds, we often take a more activist approach to creating value. Our investment in Aberdeen Private Equity Fund ('APEF') is a case in point, and contributed 0.43% to performance. Having completed detailed pre-investment research into the implied valuation discrepancy between APEF's portfolio in the public and private markets, we built a 25% stake in the company. From this position, our engagement steered the company toward a sale of its entire portfolio at a modest premium to NAV, with the investment generating an internal rate of return ('IRR')¹ of 22% in Sterling over a period of just under 11 months (36% in APEF's reporting currency of US Dollars, with Sterling strength acting as a headwind to returns over the holding period).

One final area of note is Japan, in which 20% of your Company's assets are invested. As a recap, in 2017 our focus on undervalued, asset-backed quality companies led us to Japan, where many companies trade at discounts to the purest asset - cash - and yet also offer value and quality. We built a basket of heavily over-capitalised small-cap Japanese equities, which are attractive businesses in their own right and which we believe are well positioned to benefit from Prime Minister Abe's corporate governance reform agenda.

This year saw our first public engagement with a Japanese company. In June, we submitted a shareholder proposal calling for an in specie distribution of 40% of Tokyo Broadcasting System's stake in Tokyo Electron. As discussed in more detail below, we put considerable effort into the campaign, which led to the launch of a dedicated website (www.improvingtbs.com) and the hosting of various information sessions in Tokyo. Through favourable and extensive press coverage - appearing in over 150 articles - we have laid the groundwork on which to engage with the other Japanese companies in your portfolio.

¹ Refer to Glossary below for further details.

Look-Through Country Exposure

	2018	2017
	%	%
United Kingdom	0.9	1.1
North America	24.3	19.9
Europe	27.8	32.0
Asia	17.9	17.4
Japan	18.6	18.0
Latin America, Africa & Emerging Europe	10.5	7.8
Other	-	3.8

Based on location of companies' underlying assets.

Equity Portfolio Value By Market Capitalisation

	2018	2017
	%	%
<£1 billion	41.8	43.8
>£1 billion - <£5 billion	39.5	23.6
>£5 billion - <£10 billion	-	13.0
>£10 billion	18.7	19.6

Portfolio Value By Sector

	2018	2017
	%	%
Investment Companies	46.6	42.5
Investment Holding Companies	34.4	43.9
Asset-backed Companies	19.0	13.6

Source: Asset Value Investors

PORTFOLIO REVIEW

Contributors

AKER

Description: Investment Holding Company

Weight¹: 2.2%

Discount: -13.5%

% of investee company: 0.5%

Total return on position FY18 (local)²: 92%

Total return on position FY18 (GBP): 91%

Contribution (GBP)³: 3.43%

ROI since date of initial purchase⁴: 168%

Aker was - just as in 2016 - the most significant driver of returns this year. Since 2008, our investment in Aker has been predicated on the attractive value and growth of its underlying businesses; the controlling family's proven M&A track record; and Aker's (at times very wide) discount to NAV. In the last year, a confluence of all of these factors - with the tailwind of a buoyant oil price - helped Aker contribute 3.43% to your Company's performance.

NAV growth at 90% was very strong. This was led by Aker BP (77% of NAV), whose share price advanced 133% during a year in which it successfully completed the acquisition of Hess's Norwegian division. The transaction, finalised in October 2017, included income-producing assets in the form of Hess Norway's 64% and 63% shares in the Valhall and Hod fields, as well as a US$1.5bn tax loss carry forward asset. Aker subscribed to 40% of the new equity raised by Aker BP, highlighting the way in which holding companies can support value-creation at their portfolio companies. This modus operandi of selectively targeted M&A with the support of Aker's balance sheet has helped Aker BP grow into one of the largest independent Exploration & Production companies in Europe following the acquisition of Marathon Oil Norge and BP Norge in 2014 and 2016. With the Johan Sverdrup field due to come on line in 2019, we remain attracted to the prospect of continued growth in NAV.

As well as NAV growth, Aker benefited from continued discount narrowing (from 29% to 14%), adding a powerful fillip to returns. Understanding the interplay of different factors that lead to discount narrowing is invariably more of an art than a science, but the 46% increase in the price of Brent crude to above US$80 per barrel, Aker's 13% dividend increase and value-accretive M&A at Aker BP provided both macro and micro stimuli supportive of tighter discount ranges.

We have held Aker since 2008, with a weighted-average discount on purchases during that period of 42%. In 2018, the position was trimmed significantly (by 70%) on much tighter discounts, with a weighted-average discount on our sales of 18%. Aker closed the year as a 2.4% position, trading on a 14% discount.

DIGITAL GARAGE

Description: Investment Holding Company

Weight¹: SOLD

Discount: n/a

% of investee company: SOLD

Total return on position FY18 (local)²: 49%

Total return on position FY18 (GBP): 48%

Contribution (GBP)³: 1.35%

ROI since date of initial purchase⁴: 65%

Despite being held for just seven months of the year, Digital Garage was the second largest contributor to performance, returning 48% and contributing 1.35%. The strong returns benefited from a combination of NAV growth (37%) and a contraction in the discount from 16% at the start of the year to the sub-10% level at which we sold the shares.

We first made an investment in Digital Garage in March 2016, noting its wide discount and the lack of recognition by the market of its two key unlisted assets: a data-driven marketing business and a financial settlement service. These assets had achieved double-digit earnings growth over the preceding five years, benefiting from increased demand for digital advertising and a shift to cashless payments. Despite this, their implied valuation, excluding the 20% stake in listed Kakaku, was negative. Our analysis concluded they were worth far more, and that Digital Garage traded at a discount in excess of 33% to its net asset value.

Over our two year holding period, the marketing and financial settlement business grew earnings by 53% and 62% respectively, which led to NAV growth of 31% and more than offset Kakaku's lacklustre -2% return. We exited the position on a 9% discount compared to an average purchase discount of 31%, recognising a 44% IRR compared to the TOPIX's 23% over the same period.

While our conviction in the quality of these assets remained, we believed the prospects for potential growth in NAV were more than offset by the downside risk of discount widening. As such, we exited our position in favour of more compelling opportunities elsewhere in the portfolio. Our concerns proved valid, with the discount widening to 23% at the end of the year.

PERSHING SQUARE HOLDINGS

Description: Investment Company

Weight¹: 6.5%

Discount: -24.4%

% of investee company: 1.3%

Total return on position FY18 (local)²: 15%

Total return on position FY18 (GBP): 18%

Contribution (GBP)³: 1.19%

ROI since date of initial purchase⁴: 3%

Pershing Square Holdings ('PSH') generated an 18% share price total return, boosting British Empire's NAV by 1.19%. The 24% discount ended the year where it started, although it swung in a wide range between 16% to 26%, and the NAV rose by 18% driven by strong performances from Automatic Data Processing (24% of NAV), Chipotle Mexican Grill (14%) and Lowe's Companies (13%).

PSH is a London- and Euronext-listed closed-end fund managed by Pershing Square Capital Management ('PSCM'), the investment firm run by high-profile activist investor Bill Ackman. We first invested in PSH in June 2017 and have since built a position amounting to a 3% effective stake in the company at an average discount of 18%.

The opportunity to invest in PSH at a discount first arose following the company's catastrophic and very public investment in Valeant, a Canadian-listed pharmaceuticals business whose share price declined 97% from peak to trough between August 2015 and April 2017. Valeant at one point accounted for 30% of PSH's NAV, and total losses from the position are estimated at US$4bn across Pershing's funds. This episode badly tarnished Bill Ackman and his firm's reputation, and the discount on PSH widened as investors became disillusioned.

While the reaction to the highly disappointing Valeant investment was understandable, it still leaves PSCM with an enviable annualised return since inception of 14% versus a 9% return on the S&P 500 over the same period. Our analysis of PSH's current portfolio suggested there is scope for considerable upside, while our research into PSCM's historic investments shows what an unusual investment Valeant was for the firm. Our conversations with management satisfied us that they understood what a departure the investment was from the style that has served them so well.

Furthermore, we believed it was untenable for Bill Ackman to preside over a vehicle trading at a wide discount to NAV given his own activist credentials.

In an attempt to narrow the discount, the company obtained a premium listing in London in May 2017, and launched a buyback programme shortly after that. In January of this year, it was announced that PSCM were launching a tender offer for US$300m of PSH shares at a discount between 16% and 24%. We were opposed to this course of action and felt that it should have been the company itself holding the tender offer given the accretion it would provide to NAV per share, and we made our views clear to the board and manager. We were satisfied with the eventual outcome that saw the company itself conduct the tender offer. Later in the year, Bill Ackman and his team added to their investments in PSH with purchases totalling over US$400m.

While our investment in PSH has been only moderately profitable to date, we continue to believe that PSH's portfolio is attractively positioned, that its current discount is unsustainable, and that a more structural solution

may be required to properly tackle the discount.

JPEL PRIVATE EQUITY

Description: Investment Company

Weight¹: 4.0%

Discount: -17.5%

% of investee company: 17.5%

Total return on position FY18 (local)²: 15%

Total return on position FY18 (GBP): 18%

Contribution (GBP)³: 0.94%

ROI since date of initial purchase⁴: 81%

JPEL Private Equity ('JPEL') was one of our largest contributors over the year to September 2018, generating a total return of 18% and contributing 0.94% to returns. The discount narrowed marginally over the period (from 20% to 18%), driven by strong share price growth (+13%) slightly ahead of NAV growth (+10%).

JPEL's year was punctuated by positive developments within its portfolio which helped to drive returns. The first, announced in October, was the partial sale of Accela (8% of the portfolio) to Berkshire Partners for US$29m. The second was the sale of Celerion Holdings (8%) to Court Square Capital for US$45m. The Celerion transaction marked the fourth exit from JPEL's direct investment programme since it began in 2014, with the average exit being achieved at an uplift of +143% over the carrying value one year prior, and representing a 3x multiple on the capital invested. These statistics are, in our opinion, very impressive and highlight the attractive portfolio that JPEL offers to investors.

These exits funded two mandatory redemptions during the year which returned US$100m (24% of NAV) to investors at a zero discount to NAV.

JPEL continues to value its investments conservatively - average EV/EBITDA multiple of 8 times - and there is the scope for further exits from the portfolio. Just before the year end, JPEL revalued Mr Bults - JPEL's largest investment, a provider of municipal waste services - upwards by +59%. We are hopeful that this revaluation may indicate an imminent sale of this asset (with the potential for further distributions of cash to shareholders).

Given the prospects for further exits and returns of capital, we continue to view JPEL as a highly attractive proposition.

JAPAN SPECIAL SITUATIONS

Description: Asset-backed Companies

Weight¹: 13.6%

Discount: -38.2%

% of investee company: 0.1%-4.5%

Total return on position FY18 (local)²: 8%

Total return on position FY18 (GBP): 10%

Contribution (GBP)³: 0.88%

ROI since date of initial purchase⁴: 20%

We have been following the Japanese market for over two decades, with its weight in the portfolio until recently never exceeding much more than 10%. It is therefore significant that we have increased our Japanese exposure to 20% of NAV. 15% of NAV is comprised of 16 companies, all of which are over-capitalised and deeply undervalued, which we denote as the "Japan Special Situations Basket". The remaining 5% Japanese allocation is to Tokyo Broadcasting System, which we discuss in more detail later in this report.

Over the financial year, the Japan Special Situations Basket contributed 0.88% to returns, the fifth-largest contributor. In aggregate, the stocks appreciated by 10%, marginally underperforming the MSCI Japan Small Cap Index, which returned 11%. Since inception of the Basket on 6 June 2017, it has returned 20%, outperforming the benchmark by 9%.

The companies within the Basket have common attributes: they are undervalued (4x EV/EBIT)⁵; over-capitalised (75% of market cap in NFV)⁶; and of high quality (5-year profit growth of +6% with excess-capital adjusted return on equity of 19%). While the undervaluation is itself compelling, it is essential to avoid "value traps". A value trap is a company that appears remarkably cheap on paper, but either lacks a catalyst for change, or whose value is eroded over time through loss-making businesses or poor capital allocation decisions. Our focus on quality operating businesses helps ensure we avoid such situations and buys us time for our engagement with investee companies to produce results.

Our engagement with the Basket companies begins with face-to-face meetings, followed by letters to set out how we feel value can be unlocked for the benefit of all shareholders. We prefer to keep our engagements private, aiming to find solutions amicably and working with, rather than against, management. As we are buying high-quality businesses and our mandate allows us to take a long-term view, we are not solely focused on actions that will boost the share price in the short term. This kind of activism - large buybacks, MBOs, huge one-off dividends - did not prove successful in the mid-2000s and we have learnt from others' mistakes.

Cynics argue that no form of activism will succeed in Japan, and that the disparity in valuation between Japanese and other developed markets is in fact warranted given the poor record of shareholder returns and corporate governance failures. However, this misses the significant (albeit slow) change in attitudes that President Abe's reform agenda has triggered, and the tangible results it has produced. A perfect storm of regulatory, societal and activist pressure means that circumstances have changed, and Japan presents a good opportunity to invest in high-quality, growing businesses at remarkably low valuations.

OAKLEY CAPITAL INVESTMENTS

Description: Investment Company

Weight¹: 4.1%

Discount: -23.9%

% of investee company: 10.8%

Total return on position FY18 (local)²: 19%

Total return on position FY18 (GBP): 19%

Contribution (GBP)³: 0.75%

ROI since date of initial purchase⁴: 17%

Despite only initiating a position in Oakley Capital Investments ('OCI') in April, it contributed 0.75% to returns over the year, making it the sixth-largest contributor to your portfolio's return. OCI invests in, and makes co-investments alongside, the private equity funds run by Oakley Capital - a private equity house set up by Peter Dubens, a well-regarded UK entrepreneur, with c€1bn under management.

A focus on acquiring businesses through their network of entrepreneurs, as well as a willingness to invest in complex carve-outs and bolt-on deals that other private equity houses avoid, has allowed OCI to assemble a portfolio of fast-growing businesses at a cost that is significantly below what peers are paying. Current investments include Time Out, Casa/atHome (an Italian and Luxembourgish property portal), North Sails (the world's premier sailmaker), Inspired (a global network of private schools) and Facile.it (an Italian price comparison website).

Oakley Capital, the fund manager, has built up an impressive track record of returns - its two previous funds have generated net IRRs of 20% and 32% respectively - but these returns have not been fully captured by OCI as a series of discounted rights issues between 2009 and 2017 diluted returns for shareholders. As a result of this, OCI's discount widened to a 30-35% range which, at the time, was a fair reflection of the potential for further dilutive share issuances. However, the board of directors of OCI publicly committed in the 2017 Interim Report not to issue shares at a discount to NAV again. Despite this declaration, and despite the declaration being repeated twice more in 2017, the market paid scant attention to the board's commitment and the shares continued to languish on a sub-30% discount.

Having performed detailed work on the portfolio, and finding comfort in the board's public statements and the manager's determination to re-burnish its tarnished image (which included, among other elements, increasing disclosure and discussing a share buyback programme), we became convinced that such a high discount to NAV was unwarranted and that investors were being overly punitive for past errors. British Empire consequently took an 11% stake in OCI in April. We are supportive of OCI's efforts to improve its governance, and have already engaged in constructive dialogue with both the board and the manager in order to provide our expertise on addressing discounts and implementing corporate governance improvements.

Since our initial investment, OCI has performed well, with the discount narrowing by 6% (from 30% to 24%), driven by share price growth (+16%) in excess of NAV growth (+6%).

FONDUL PROPRIETATEA

Description: Investment Company

Weight¹: 5.1%

Discount: -31.8%

% of investee company: 4.1%

Total return on position FY18 (local)²: 10%

Total return on position FY18 (GBP): 13%

Contribution (GBP)³: 0.72%

ROI since date of initial purchase⁴: 32%

Fondul Proprietatea ('FP'), the Franklin Templeton-managed closed-end fund, contributed 0.72% to returns over the year despite a widening of the discount from 27% to 32%. The holding delivered a total return of 13% (including a dividend of US$0.86 per share, equating to a yield of 7.4% on the current share price), which was behind the NAV total return over the year of 17%.

Fondul Proprietatea, literally meaning "Property Fund" in Romanian, was listed in Romania in 2011, having been established several years previously as a restitution fund to compensate those Romanian citizens whose property had been confiscated under the Romanian Communist government. The majority of shares held by citizens have been sold and are today held by institutional investors. FP's holdings have been reduced from 83 at IPO in 2011 to 35 today - composed of eight listed and 27 unlisted companies - and key assets include OMV Petrom (21% of NAV), an integrated oil and gas player; Hidroelectrica (36% of NAV), which generates and supplies hydroelectric energy in Romania; the Romanian subsidiaries of ENEL, the Italian energy company (14%); and Bucharest Airport (8%).

FP has had an eventful year, with the sale of stakes in its Electrica subsidiaries back to the parent company, special dividends from Hidroelectrica and Bucharest Airports, a 36% increase in the annual dividend, a tender offer for 14% of the outstanding shares that added 4% to the NAV per share, and a continuation of the buyback policy in the marketplace.

Despite the large number of events over the past year, FP's portfolio remains replete with opportunity. Hidroelectrica is a likely candidate for an IPO at some point, although delays to the timetable have repeatedly pushed back the expected date; there is potential for further sales of the ENEL subsidiaries as the parent company attempts to fully consolidate its subsidiaries (the subsidiaries are cash-rich, and so it is quite possible they will pay out special dividends as part of a sales process); and the investment in OMV Petrom continues to trade at a very cheap valuation with considerable upside from development of their huge Black Sea joint-venture with ExxonMobil.

TOKYO BROADCASTING SYSTEM

Description: Investment Company

Weight¹: 4.4%

Discount: -30.1%

% of investee company: 1.6%

Total return on position FY18 (local)²: 10%

Total return on position FY18 (GBP): 13%

Contribution (GBP)³: 0.68%

ROI since date of initial purchase⁴: 10%

Tokyo Broadcasting System ('TBS') contributed 0.68% to returns over the year, driven almost entirely by discount contraction. The share price rose 15%, with a narrowing of the discount from 37% to 30%, as well as 3% NAV growth. This compares favourably to the TOPIX, which rose 11% (in Yen).

This year marked a significant milestone for us, with our first public activist campaign. At TBS' end-June AGM we submitted a shareholder proposal to distribute, in specie, 40% of TBS' stake in Tokyo Electron (equivalent to a 14% yield on the share price at the time). While slightly more complicated than a simple cash dividend, the proposition struck at the heart of Corporate Japan's problems, directed specifically at cross-shareholdings. We believe that this may have been the first proposal of its kind in Japan.

We put considerable effort into a campaign surrounding the proposal. We launched a dedicated website, www.improvingtbs.com; received endorsement for our proposal from ISS; held two press conferences; hosted an information session attended by 70 domestic representatives from banks, insurance companies, asset managers and corporations; met with regulators; and had over 150 press articles mentioning the campaign.

Ultimately, and as expected, the proposal was defeated, with approval from only 11% of those voting. While unsuccessful this year, we view the proposal as the start of the process rather than the end.

TBS remains one of the most over capitalised companies in Japan. Its "strategic" shareholdings continue to impair corporate value, as reflected in the 30% discount to peers; reduce the accountability and discipline of management; and conflict with the principles of the Corporate Governance Code. We believe TBS' current stance will come under increasing pressure and, as shareholders focus on long-term value creation, we will continue to work with the company on ways to improve corporate value.

In the meantime our allocation to TBS gives us exposure to a portfolio of high-quality listed companies (54% of TBS' NAV), prime Tokyo real estate (25%) and a top-five broadcasting business (14%), all the while receiving a 6% FCF yield⁵.

NB PRIVATE EQUITY PARTNERS

Description: Investment Company

Weight¹: 3.1%

Discount: -16.2%

% of investee company: 2.9%

Total return on position FY18 (local)²: 15%

Total return on position FY18 (GBP): 15%

Contribution (GBP)³: 0.58%

ROI since date of initial purchase⁴: 107%

Compared to last year, when NB Private Equity Partners ('NBPE') introduced a raft of corporate governance changes - including a full enfranchisement of shareholders and a switch to a London listing from Amsterdam - the fund has had a relatively quiet 2018.

Nonetheless, performance has been solid, with a total return of 15%, which added 0.58% to your portfolio's returns for the year. The discount narrowed from 20% to 16%, and the NAV total return was 12%.

Following the corporate governance improvements achieved last year, we continued to engage with the board of NBPE in order to push for further changes. The seeds of this effort bore fruit in early September this year, when the fund announced that it would introduce another slate of improvements.

Among these changes were: (1) a refinement of the dividend policy, which fixed the dividend at 3% of NAV and resulted in an immediate 12% increase in the dividend level; (2) an agreement that one of the manager's two board representatives would step down, and that two new independent directors will join the board; (3) the chairman, who has been in his role since the company's IPO in 2007, will also resign within the next year; and (4) half of NBPE's legacy funds, which have dragged on growth in recent years, will be sold in the secondary market.

While these new measures may not extend quite as far as we would like them to - for instance, we would have liked to see a fully independent board, a commitment to buybacks, and a full sale of the legacy portfolio with the proceeds used to fund an accretive tender offer - we are cognisant that these changes are nonetheless a material improvement.

NBPE continues to offer scope for both NAV growth and discount contraction, and we continue to believe that its differentiated investment proposition and low fee structure remain under-appreciated by the market.

EXOR

Description: Investment Holding Company

Weight¹: 5.6%

Discount: -33.1%

% of investee company: 0.5%

Total return on position FY18 (local)²: 8%

Total return on position FY18 (GBP): 9%

Contribution (GBP)³: 0.53%

ROI since date of initial purchase⁴: 32%

EXOR, the holding company of the Agnelli family, started and ended the year as the second largest position in the portfolio, predicated on our conviction in Fiat Chrysler Automobiles ('FCA'), and the capital allocation prowess of EXOR CEO, John Elkann (who is himself a member of the Agnelli family). For the second year, EXOR has featured as a top ten contributor, being the sixth largest last year and the tenth this year. Over our almost-two-year holding period, our position in EXOR has appreciated by 29% in EUR, vs 10% for our benchmark.

EXOR contributed 0.53% to returns this year. Although it suffered from discount widening (29% to 33%), NAV growth of 14% more than compensated, driven by strong performance from Ferrari and PartnerRe. While it was encouraging to benefit from value creation outside of FCA, FCA's flat performance over the year was deeply disappointing. As EXOR's largest position, accounting for 33% of NAV, it proved a significant drag on returns.

FCA, under the leadership of Sergio Marchionne, has been transformed from a struggling, debt-ridden mass-market auto manufacturer, to one that has net cash (as at 30 June 2018), commands a portfolio of high-quality brands, and is hugely cash generative. It was with great sadness that we learnt of Marchionne's death in late July. While he had committed to retirement in early 2019, his sudden passing came as a shock, and we believe he will be remembered as one of the all-time great CEOs, given his visionary leadership and the 17% annualised total shareholder return he generated over his 14-year tenure at FCA. A succession plan was in place and Mike Manley, previously head of Jeep and Ram, took the mantle as FCA's CEO.

Before Marchionne died, he presented a four-year plan in a similar manner to one he presented in 2014. He outlined the strategy for each of FCA's brands and guided that 2020 operating profits would be 20% higher than 2018, and that 2022 operating profits would be 77% higher. Furthermore, FCA guided that over the coming four years it will produce free cash flow equivalent to 68% of the current market cap and pay 26% of the current market cap in dividends. For investors concerned about extended US auto sales, FCA outlined that by 2020 they would still be free cash-flow breakeven should US auto sales fall to 10m (as they did in 2009, a 39% drop).

It amazes us that, despite FCA most likely achieving their 2018 targets outlined in 2014, the market still gives no credibility to FCA's guidance for later years. The company trades on a 2018 EV/EBIT of 4x, 2020 EV/EBIT of 2x and a remarkable 2022 EV/EBIT of 1x. With buybacks, a high dividend yield, the potential formation of a US financing company (contribution not included in guidance), and the upcoming spin-out or sale of auto parts business Magneti Marelli, FCA offers the prospect for an extraordinary return.

A question that naturally follows when we have high conviction in an underlying company is why not own it directly? Through investing in EXOR, we invest in FCA at a 33% discount (which at times has been as little as 10%); we invest in a high-quality, cyclically robust private reinsurance business accessible only through EXOR (PartnerRe, 32% of NAV); and we have our interests perfectly aligned with John Elkann and his family.

Detractors

GP INVESTMENTS

Description: Investment Company

Weight¹: 0.9%

Discount: -56.4%

% of investee company: 14.6%

Total return on position FY18 (local)²: -22%

Total return on position FY18 (GBP): -36%

Contribution (GBP)³: -0.62%

ROI since date of initial purchase⁴: -36%

GP Investments ('GP') - the Brazilian-listed private equity investment company - suffered from discount widening and foreign exchange weakness to the extent that it was the third-largest detractor from NAV (reducing returns by 0.62%), despite being one of our smaller positions. GP's share price declined 22% in its traded currency of Brazilian Real, with the pain exacerbated for British Empire by the Real's 19% slide versus Sterling.

Given that GP's NAV fell by only 4% in Real terms, the company's discount expanded even wider, increasing to 56% (from 46% at the start of the year). We attribute the widening discount to a combination of Brazil's macro and political concerns negatively impacting sentiment towards stocks listed in the country, and the illiquidity of GP's shares. We note that 43% of GP's NAV is in international assets, meaning that the fund is in fact protected somewhat from difficulties in Brazil.

GP has continued to use cash to pay down its expensive debt. Net debt was 14% of NAV at the end of September 2017 and 3% of NAV at the end of June 2018, highlighting the fund's success in deleveraging. Centauro Holdings (12% of NAV) filed for IPO in October 2017 although, given political uncertainty in Brazil, it is likely that it will wait until after the Brazilian elections to complete this process. Centauro is a successful omni-channel sports retailer which we estimate is held at 9x EV/EBITDA in GP's NAV. Listed peers trade at materially richer multiples, and our base case for Centauro's valuation upon listing suggests considerable upside. Furthermore, a successful IPO of Centauro would result in an even larger proportion of GP's market cap being covered by listed securities which would serve to shine further light on what is already a laughably cheap valuation. Although the investment has been a difficult one for your portfolio - 0.6x return on invested capital to date - we continue to believe that there is significant value in the portfolio which, combined with a tightening of the discount to more reasonable levels, holds out the prospect of strong returns from here.

JARDINE STRATEGIC HOLDINGS

Description: Investment Holding Company

Weight¹: 5.1%

Discount: -35.2%

% of investee company: 0.2%

Total return on position FY18 (local)²: -12%

Total return on position FY18 (GBP): -10%

Contribution (GBP)³: -0.62%

ROI since date of initial purchase⁴: 4%

British Empire has invested in the Keswick family-controlled Jardine group for well over a decade, attracted to high-growth Asian exposure and the long-term track record of wealth preservation and creation.

Whilst a long-term shareholder, our deep and detailed understanding of the underlying companies allows us to move between different levels of the Jardine structure as and when the discounts in the different group vehicles become particularly compelling or anomalous. As noted in last year's annual report, in 2016 we sold your Company's position in Jardine Matheson ('JMH') and built a position in Jardine Strategic Holdings ('JSH'), which performed well in 2017. This year, however, JSH was one of British Empire's weakest performers, detracting 0.62% from performance. With the NAV being more or less flat over the year, the main culprit here was discount widening - the discount moved from 24% to 35% as the share price declined 16%.

Dairy Farm (30% of NAV) performed well, up 20% over the year, as new CEO, Ian McLeod, appointed in 2017, improved performance. Food retail in China and Hong Kong and Health and Beauty across Southeast Asia, continued to be the strong performers, whilst management took active steps to address Southeast Asian food performance. For example, in the Philippines, Dairy Farm partnered with Robinsons Retail Holdings ('RRHI'), exchanging their interest in wholly owned Rustans Supercentre chain for an 18% stake in RRHI, moving an unlisted investment into a larger listed vehicle, and improving Dairy Farm's competitive positioning.

However, this was offset by Jardine Cycle & Carriage (21% of NAV) and Hongkong Land (24% of NAV) which declined 16% and 5%, respectively. At Cycle & Carriage - which itself is a holding company - investor scepticism over holding company-level leverage and the possibility of a future capital raise, following the acquisition of a stake in Vinamilk (9% of NAV), weighed on the price. Astra International, Cycle & Carriage's largest holding at 84% of NAV, declined 5% on the back of continued weakness at their Autos division, as well as suffering from a souring of sentiment towards Indonesia.

Turning to Hongkong Land ('HKL'), demand for prime office space in Hong Kong's Central district (c64% of HKL's NAV) from Mainland Chinese occupiers and investors has pushed rents higher and acquisition yields lower, meaning valuations and thus NAVs edge ever higher. However, the prospect of interest rate hikes has unnerved investors. While we are cognisant of the impact on property valuations of higher interest rates, we feel our NAV calculations are conservative, and believe the value of HKL's property portfolio is largely unappreciated by the wider market, with the discount 12% wider than its historical average (40% vs 28%).

While the NAV underperformance over the year has been disappointing, we remain sanguine. Whilst the NAV performance was unexciting, we see little rationality in such excessive discount widening, to levels well beyond JSH's three-year historic average of 32%. As such, we increased the position in JSH by 38% over the year, at an average discount of 35%. It would appear that the family agrees, with JMH also adding to its stake in Jardine Strategic, now owning over 84%.

COSAN LTD

Description: Investment Holding Company

Weight¹: 3.0%

Discount: -33.0%

% of investee company: 2.4%

Total return on position FY18 (local)²: -23.0%

Total return on position FY18 (GBP): -21.0%

Contribution (GBP)³: -1.00%

ROI since date of initial purchase⁴: -22%

Cosan Ltd ('CZZ') was the largest detractor over the year, reducing returns by 1.00%. While CZZ's share price fell only 17% over the year, we added to our position at higher prices during the year - at discounts that we deemed to be highly attractive - which meant we experienced a deeper 26% fall. For the financial year, Brazilian Real weakness accounted for 19% of the 26% share price decline - in other words, the macro climate was the driver of weak performance, rather than the fundamental investment case.

Our original thesis remains intact: we are gaining exposure to high-quality businesses, at an extraordinarily wide discount, with a real likelihood of benefiting from significant discount narrowing. Over the year, management continued to execute their business plans excellently: consolidating independent fuel stations, acquiring sugar producers and building out their rail capacity. Cosan's financial strength and family ownership allow it to take a long-term view, which means that it is able to stay rational in an irrational market and be patient amidst widespread panic. Its allocation of capital towards buybacks is an excellent example of this.

Over the course of the year, CZZ bought back 8% of its outstanding shares, and 4% of the outstanding shares at Cosan SA (the holding company beneath CZZ which accounts for 75% of CZZ's NAV). At a look-through discount of 54%, such buybacks are hugely accretive, and we estimate for each 5% buyback at CZZ, 3% is added to its NAV. The recognition of the accretion to NAV from buybacks is testament to CZZ's capital allocation acumen, and we are happy to align your capital with theirs.

When we account for Cosan SA's 32% discount, CZZ trades on a 54% look-through discount; a simplification of the group structure and an ultimate discount of 22% (based on relevant peers) would yield a return, purely from discount contraction, of 70%. Coupled with quality management, the micro characteristics of Cosan's investment case make the company one of the most compelling investments in the portfolio, but the case is tempered by macro uncertainty. So far, our recognition of the macro risks, borne out in our modest position (3%), has proved wise and, were it not for these risks, the position would be a more substantial size.

The long-term nature of our investments means we can tolerate volatility in pursuit of large upside. While we have experienced a loss of 23% on our average purchase price (in USD), we remain convinced by the merits of our investment and look forward to continued buybacks, NAV growth and the ultimate prize - the simplification of the group structure.

¹ % of total assets less current liabilities.

² Weighted returns adjusted for buys and sells over the year.

³ Figure is an estimate by the managers and sum of contributions will not equal quoted total return over the financial year.

⁴ Figure quoted in GBP terms. Refer to Glossary for further details

⁵ Refer to Glossary for further details

⁶ Refer to Glossary for further details

TOP 20 LOOK-THROUGH HOLDINGS

British Empire invests in holding companies and closed-end funds that in turn invest in listed and unlisted companies. We show below the top 20 holdings on a "look-through basis", i.e. the underlying companies to which we have exposure. For example, British Empire owns a stake in Swire Pacific, a Hong Kong-listed family-controlled holding company, that accounts for 4.4% of British Empire's portfolio (4.6% of its NAV). Swire Pacific's largest holding is Swire Properties, a Hong Kong property developer, which accounts for c79% of its own NAV. This translates to an effective exposure of British Empire Trust to Swire Properties of 3.6% of British Empire's NAV. The table below is an indication of the degree of diversification of the portfolio.

Look-through holding	Parent company	Underlying look-through weight	Look-through holding sector
Swire Properties	Swire Pacific Ltd 'B'	3.6%	Real Estate Operating Companies
Minor International	Symphony	2.7%	Hotels, Resorts and Cruise Lines
Bureau Veritas	Wendel SA*	2.6%	Research and Consulting Services
Fiat Chrysler Autos	EXOR	2.0%	Automobile Manufacturers
Hidroelectrica SA	Fondul Proprietatea	2.0%	Electric Utilities
Aker BP	Aker	1.9%	Oil and Gas Exploration and Production
Partner RE	EXOR	1.9%	Reinsurance
Automatic Data Processing	Pershing Square Holdings	1.7%	Data Processing and Outsourced Services
Fujitec Operating Business	Fujitec	1.7%	Industrial Machinery
Dairy Farm	Jardine Strategic	1.6%	Food Retail
Hammerhead	Riverstone Energy	1.6%	Oil and Gas Exploration and Production
Ferrari	EXOR	1.5%	Automobile Manufacturers
Hongkong Land	Jardine Strategic	1.3%	Real Estate Operating Companies
Restaurant Brands International	Pershing Square Holdings	1.3%	Restaurants
TFG Asset Management	Tetragon Financial	1.2%	Asset Management and Custody Banks
Jardine Cycle & Carriage	Jardine Strategic	1.2%	Distributors
OMV Petrom	Fondul Proprietatea	1.2%	Integrated Oil and Gas
CNH Industrial	EXOR	1.1%	Agricultural and Farm Machinery
Raizen Combustiveis	Cosan Ltd	1.0%	Fuel Distribution
Cosan Logistica	Cosan Ltd	1.0%	Railroads

* Wendel SA: how the look-through analysis works

Wendel SA is a French holding company in which British Empire's portfolio has an investment. Although Wendel is just one company, it provides your portfolio with exposure to many different geographies and sectors by virtue of the fact that Wendel itself holds a diversified portfolio of companies

Company name	% of Wendel's portfolio	Geography	Sector
Bureau Veritas	44%	Europe	Research and Consulting Services
Stahl	16%	Europe	Specialty Chemicals
Constantia Flexibles	12%	Europe	Paper Packaging
I.H.S.	9%	Africa	Telecom Towers
AlliedUniversal	7%	United States	Security and Alarm Services
Saint Gobain	6%	Europe	Building Products
Cromology (Materis Paints)	3%	Europe	Specialty Chemicals
Tsebo	2%	South Africa	Diversified Support Services
Other companies	1%	Africa/Japan	Retail REITs / Oil and Gas Equipment and Services
Total portfolio	100%

Outlook

Following the end of the financial year, market volatility has increased markedly, causing declines in most major equity markets at the time of writing. Although the exact origins of market declines are always hard to pinpoint, the proximate causes in this case appear to be interest rate tightening by the Federal Reserve and a rise in long-dated US government debt above 3%, the first such move in almost five years.

To the extent that all of your portfolio's holdings have some correlation with the overall market, there has been a decline in the net asset value of British Empire in response to this market uncertainty. However, it is worth noting that we have eschewed exposure to the most richly valued companies and markets - technology stocks (in particular, Asian and US technology stocks) and US equity markets - which helps to insulate your portfolio from market volatility.

In addition, the portfolio contains attractive companies, the values of which we expect to continue growing over the long term. Valuations remain attractive, with a weighted average portfolio discount of 30%. The prospect of corporate events at the portfolio company level remains strong, driven in some cases by our own activism which will provide catalysts for discounts to narrow.

Joe Bauernfreund

Chief Executive Officer

Asset Value Investors Limited

9 November 2018

DIRECTORS

Susan Noble - Independent Non-Executive Chairman

Steven Bates - Senior Independent Non-Executive Director

Calum Thomson FCA - Independent Non-Executive Director. Chairman of the Audit Committee

Nigel Rich CBE, FCA - Independent Non-Executive Director

Anja Balfour - Independent Non-Executive Director

All Directors are non-executive and independent of the Investment Manager.

EXTRACTS FROM THE REPORT OF THE DIRECTORS

Investment Objective, Policy and Restrictions

The objective of the Company is to achieve capital growth through a focused portfolio of investments, particularly in companies whose shares stand at a discount to estimated underlying net asset value.

Investments are principally in companies listed on recognised stock exchanges in the UK and/or overseas, which may include investment holding companies, investment trusts and other companies, the share prices of which are assessed to be below their estimated net asset value or intrinsic worth.

Although listed assets make up the bulk of the portfolio, the Company may also invest in unlisted assets with the prior approval of the Board.

The Company generally invests on a long-only basis but may hedge exposures through the use of derivative instruments and may also hedge its foreign currency exposures.

There are no geographic limits on exposure, as the Company invests wherever it considers that there are opportunities for capital growth. Risk is spread by investing in a number of holdings, many of which themselves are diversified companies.

The Company will not invest in any holding that would represent more than 15% of the value of its total investments at the time of investment.

Potential investments falling within the scope of the Company's investment objective will differ over the course of market cycles. The number of holdings in the portfolio will vary depending upon circumstances and opportunities within equity markets at any particular time.

The Company may gear its assets through borrowings which may vary substantially over time according to market conditions but which will not exceed twice the nominal capital and reserves of the Company.

Gearing Levels

The Company's Investment Policy, as disclosed above, permits a significant level of gearing, as do the Company's Articles of Association and the limits set under AIFMD (see the Company's website www.british-empire.co.uk/.

Under normal market conditions, it is expected that the portfolio will be fully invested, although net gearing levels may fluctuate depending on the value of the Company's assets and short-term movements in liquidity.

The Company's debt as a percentage of equity as at 30 September 2018 was 9.5%. Long-term debt comprised £15m of Debenture Stock and three tranches of Loan Notes, of £30m, €30m and €20m.

Results and Dividends

Company profit for the year was £83,981,000, which included a profit of £16,933,000 attributable to revenue (2017: profit of £141,699,000, which included a profit of £12,603,000 attributable to revenue). The profit for the year attributable to revenue has been applied as follows:

	£'000
Current year revenue available for dividends	16,933
Interim dividend of 2.00p per Ordinary Share paid on 29 June 2018	2,260
Recommended final dividend payable on 4 January 2019 to shareholders on the Register as at 7 December 2018 (ex dividend 6 December 2018):
- Final dividend of 11.00p per Ordinary Share	12,259*
	14,519

* Based on shares in circulation on 7 November 2018.

Management Arrangements

AVI is the Company's appointed AIFM, and is engaged under the terms of an Investment Management Agreement ('IMA') dated 17 July 2014. The IMA is terminable by one year's notice from either party, other than for "cause".

The Investment Manager is entitled to a management fee of 0.70% of the net assets of the Company, calculated quarterly by reference to the net assets at the preceding quarter end and paid monthly.

J.P. Morgan Europe Limited was appointed as Depositary under an agreement with the Company and AVI dated 2 July 2014, and is paid a fee on a sliding scale between 0.5 basis points and 4 basis points based on the assets of the Company. The Depositary Agreement is terminable on 90 calendar days' notice from either party.

JPMorgan Chase Bank, National Association, London Branch, has been appointed as the Company's Custodian under an agreement dated 2 July 2014. The agreement will continue for so long as the Depositary Agreement is in effect and will terminate automatically upon termination of the Depositary Agreement, unless the parties agree otherwise.

Link Company Matters Limited was appointed as corporate Company Secretary on 1 April 2014. The current annual fee is £67,535, which is subject to an annual RPI increase. The Agreement may be terminated by either party on six months' written notice.

With the Board's consent, AVI has sub-contracted certain fund administration services to Link Asset Services. The cost of these sub-contracted services is borne by AVI from its own resources and not by the Company.

Going Concern

The Directors have carefully reviewed the current financial resources and the projected expenses of the Company for the next 12 months. On the basis of that review and as the majority of net assets are securities which are traded on recognised stock exchanges, the Directors are satisfied that the Company's resources are adequate for continuing in business for the foreseeable future and that it is appropriate to prepare the financial statements on a going concern basis.

Viability

The Directors consider viability as part of their continuing programme of monitoring risk. The Directors believe five years to be a reasonable time horizon to consider the continuing viability of the Company, reflecting a balance between a longer-term investment horizon and the inherent shorter-term uncertainties within equity markets, although they do have due regard to viability over the longer term and particularly to key points outside this time frame, such as the due dates for the repayment of long-term debt. The Company is an investment trust whose portfolio is invested in readily realisable listed securities and with some short-term cash deposits. The following facts support the Directors' view of the viability of the Company:

·      In the year under review, expenses (including finance costs and taxation) were adequately covered by investment income.

·      The Company has a liquid investment portfolio.

·      The Company has long-term debt of £15m which falls due for repayment in 2023, £30m and €30m which both fall due for repayment in 2036 and €20m which falls due for repayment in 2037. This debt was covered over 11 times as at the end of September 2018 by the Company's total assets. The Directors are of the view that, subject to unforeseen circumstances, the Company will have sufficient resources to meet the costs of annual interest and eventual repayment of principal on this debt.

·      The Company has a large margin of safety over the covenants on its debt.

The Company's viability depends on the global economy and markets continuing to function. The Directors also consider the possibility of a wide ranging collapse in corporate earnings and/or the market value of listed securities. To the latter point, it should be borne in mind that a significant proportion of the Company's expenses are in ad valorem investment management fees, which would reduce if the market value of the Company's assets were to fall.

In order to maintain viability, the Company has a robust risk control framework which, following guidelines from the FRC, has the objectives of reducing the likelihood and impact of: poor judgement in decision-making; risk-taking that exceeds the levels agreed by the Board; human error; or control processes being deliberately circumvented.

Taking the above into account, and the potential impact of the principal risks as set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of five years from the date of approval of this Annual Report.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable United Kingdom law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare financial statements in accordance with International Financial Reporting Standards as adopted by the EU ('IFRS').

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

In preparing the financial statements the Directors are required to:

·      select suitable accounting policies and apply them consistently;

·      make judgements and estimates which are reasonable and prudent;

·      state whether the financial statements have been prepared in compliance with IFRS, subject to any material departures disclosed and explained therein;

·      provide additional disclosures where compliance with the specific requirements of IFRS are considered to be insufficient to enable users to understand the impact of particular transactions, events and conditions on the financial position and performance;

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

·      prepare financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for such internal controls as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with relevant laws and regulations, and for ensuring that the Annual Report includes information required by the Disclosure Rules of the UK Listing Authority.

The financial statements of the Company are published on the Company's website at www.british-empire.co.uk. The Directors are responsible for ensuring the maintenance and integrity of the information relating to the Company published on this website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Declaration

The Directors listed above, being the persons responsible, hereby confirm to the best of their knowledge:

·      that the financial statements have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

·      the Strategic Report and the Investment Manager's Review include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces

In the opinion of the Board, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy.

By Order of the Board

Link Company Matters Limited

Corporate Secretary

9 November 2018

CAPITAL STRUCTURE AS AT 30 SEPTEMBER 2018

The Company's capital structure comprises Ordinary Shares, Debenture Stock and Loan Notes.

Ordinary Shares

At 30 September 2018, there were 129,526,165 (2017: 129,526,165) Ordinary Shares of 10p each in issue, of which 17,681,674 (2017: 13,372,622) were held in treasury and therefore the total voting rights attaching to Ordinary Shares in issue were 111,844,491.

Income entitlement

The profits of the Company (including accumulated revenue reserves) available for distribution and resolved to be distributed shall be distributed by way of interim, final and (where applicable) special dividends among the holders of Ordinary Shares, subject to the payment of interest to the holders of Debenture Stock and Loan Notes.

Capital entitlement

After meeting the liabilities of the Company and the amounts due to Debenture Stock and Loan Note holders on a winding-up, the surplus assets shall be paid to the holders of Ordinary Shares and distributed among such holders rateably according to the amounts paid up or credited as paid up on their shares.

Voting entitlement

Each Ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote for every Ordinary Share held.

The Notice of Meeting and Form of Proxy stipulate the deadlines for the valid exercise of voting rights and, other than with regard to Directors not being permitted to vote their shares on matters in which they have an interest, there are no restrictions on the voting rights of Ordinary Shares.

Transfers

There are no restrictions on the transfer of the Company's shares other than a) transfers by Directors and Persons Discharging Managerial Responsibilities and their connected persons during closed periods under the Market Abuse Regulation or which may constitute insider dealing, b) transfers to more than four joint transferees and c) transfers of shares which are not fully paid up or on which the Company has a lien provided that such would not prohibit dealings taking place on an open and proper basis.

The Company is not aware of any agreements between shareholders or any agreements or arrangements with shareholders which would change in the event of a change of control of the Company.

Debenture Stock

At 30 September 2018, there was in issue £15,000,000 (2017: £15,000,000) 8⅛% Debenture Stock 2023, repayable on 2 July 2023.

Income entitlement

Holders of the Debenture Stock are entitled to interest paid half-yearly at the rate of 8⅛% per annum.

Capital entitlement

The Debenture Stock holders are entitled to repayment of principal and outstanding interest on the redemption date or, if earlier, on the occurrence of an event of default. The Debenture Stock is secured by a floating charge on all of the assets of the Company. If the Company is liquidated the Debenture Stock is redeemable by the Company at a price which is the higher of par and the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference UK government bond, together with interest accrued up to and including the date of redemption. Had the Company been liquidated on 30 September 2018, the redemption premium would have amounted to £0.8m over and above the mid-market price.

The mid-market price of the Debenture Stock as at 30 September 2018 was 126.50p (2017: 130.25p).

Voting entitlement

The holders of Debenture Stock have no right to attend or to vote at general meetings of the Company.

Loan Notes

At 30 September 2018, there were in issue fixed rate 20 year unsecured private placement notes (the 'Loan Notes'). The Loan Notes were issued in the following tranches:

-      on 15 January 2016: 4.184% Series A Sterling Unsecured Loan Notes 2036

-      on 15 January 2016: 3.249% Series B Euro Unsecured Loan Notes 2036

-      on 1 November 2017: 2.93% Euro Senior Unsecured Loan Notes 2037

Income entitlement

Interest is payable half-yearly in each case at rates of 4.184% per annum on the Sterling Loan Notes, 3.249% per annum on the €30m Euro Loan Notes and 2.93% per annum on the €20m Euro Senior Loan Notes.

Capital entitlement

The Loan Note holders are entitled to repayment of principal and outstanding interest on the redemption date or, if earlier, on the occurrence of an event of default. The redemption dates are:-

-     15 January 2036 for the 4.184% Series A Sterling Unsecured Loan Notes 2036

-     15 January 2036 for the 3.249% Series B Euro Unsecured Loan Notes 2036

-     1 November 2037 for the 2.93% Euro Senior Unsecured Loan Notes 2037

The Loan Notes are unsecured. If the Company is liquidated the Loan Notes are redeemable by the Company at a price which is the higher of par and:

-     for the 4.184% Series A Sterling Unsecured Loan Notes 2036, the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference UK government bond

-     for the 3.249% Series B Euro Unsecured Loan Notes 2036 and for the 2.93% Euro Senior Unsecured Loan Notes 2037, the price at which the Gross Redemption Yield on the date of redemption is equivalent to the yield on a reference German government bond,

in each case together with interest accrued up to and including the date of redemption.

Had the Company been liquidated on 30 September 2018, the redemption premium would have amounted to £16.5m over and above the market values.

The estimated market values of the Loan Notes as at 30 September 2018 were Series A: £32.5m and Series B: £28.0m and Euro Senior: £17.9m, being £2.6m, £1.4m and £0.2m respectively above the amortised values excluding interest.

Voting entitlement

The holders of the Loan Notes have no right to attend or to vote at general meetings of the Company. 

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the year ended 30 September 2018 but is derived from those accounts. Statutory accounts for the year ended 30 September 2018 will be delivered to the Registrar of Companies in due course. The Auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditors' report can be found in the Company's full Annual Report and Accounts on the Company's website at www.british-empire.co.uk.

STATEMENT OF COMPREHENSIVE INCOME

for the year ended 30 September 2018

		2018  Revenue  return	2018   Capital   return	2018   Total	2017 Revenue return	2017  Capital  return	2017   Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Income
Investment income	2	22,638	-	22,638	17,393	-	17,393
Gains on investments held at fair value	8	-	75,456	75,456	-	137,833	137,833
Exchange losses on currency balances		-	(632)	(632)	-	(1,579)	(1,579)
		22,638	74,824	97,462	17,393	136,254	153,647
Expenses
Investment management fee	3	(1,930)	(4,504)	(6,434)	(1,856)	(4,332)	(6,188)
Other expenses (including irrecoverable VAT)	3	(1,666)	-	(1,666)	(1,628)	-	(1,628)
Profit before finance costs and tax		19,042	70,320	89,362	13,909	131,922	145,831
Finance costs	4	(1,145)	(2,697)	(3,842)	(997)	(2,346)	(3,343)
Exchange losses on unsecured loan	4	-	(575)	(575)	-	(480)	(480)
Profit before taxation		17,897	67,048	84,945	12,912	129,096	142,008
Taxation	5	(964)	-	(964)	(309)	-	(309)
Profit for the year		16,933	67,048	83,981	12,603	129,096	141,699
Earnings per Ordinary Share	7	14.83p	58.72p	73.55p	10.44p	106.99p	117.43p

The total column of this statement is the Income Statement of the Company prepared in accordance with IFRS, as adopted by the European Union. The supplementary revenue and capital columns are presented in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies ('AIC SORP').

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

There is no other comprehensive income, and therefore the profit for the year after tax is also the total comprehensive income.

The accompanying notes are an integral part of these financial statements.

STATEMENT OF CHANGES IN EQUITY

for the year ended 30 September 2018

	Ordinary  share  capital	Capital redemption reserve	Share premium	Capital  reserve*	Merger reserve	Revenue   reserve**	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the year ended 30 September 2018
Balance as at 30 September 2017	12,953	5,982	28,078	781,555	41,406	33,255	903,229
Ordinary Shares bought back and held in treasury (see note 12)	-	-	-	(31,713)	-	-	(31,713)
Total comprehensive income for the year	-	-	-	67,048	-	16,933	83,981
Ordinary dividends paid (see note 6)	-	-	-	-	-	(13,817)	(13,817)
Balance as at 30 September 2018	12,953	5,982	28,078	816,890	41,406	36,371	941,680
For the year ended 30 September 2017
Balance as at 30 September 2016	16,001	2,934	28,078	717,051	41,406	38,503	843,973
Ordinary Shares bought back and held in treasury (see note 12)	-	-	-	(64,592)	-	-	(64,592)
Ordinary Shares held in treasury cancelled (see note 12)	(3,048)	3,048	-	-	-	-	-
Total comprehensive income for the year	-	-	-	129,096	-	12,603	141,699
Ordinary dividends paid (see note 6)	-	-	-	-	-	(17,851)	(17,851)
Balance as at 30 September 2017	12,953	5,982	28,078	781,555	41,406	33,255	903,229

* Within the balance of the capital reserve, £657,077,000 relates to realised gains (2017: £609,436,000) and, since 20 December 2017, when the Articles of Association were changed at the AGM, is distributable by way of dividend. The remaining £159,813,000 relates to unrealised gains and losses on financial instruments (2017: £172,119,000) and is non-distributable.

** Revenue reserve is fully distributable by way of dividend.

The Company, subsequent to the approval by the Shareholders at the December 2017 AGM, has the ability to distribute unrestricted available capital reserves.

The accompanying notes are an integral part of these financial statements.

BALANCE SHEET

as at 30 September 2018

		2018	2017
	Notes	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss	8	990,265	950,511
		990,265	950,511
Current assets
Other receivables	9	6,550	4,850
Cash and cash equivalents		36,251	25,496
		42,801	30,346
Total assets		1,033,066	980,857
Current liabilities
Other payables	10	(2,225)	(6,452)
		(2,225)	(6,452)
Total assets less current liabilities		1,030,841	974,405
Non-current liabilities
8⅛% Debenture Stock 2023	11	(14,964)	(14,957)
4.184% Series A Sterling Unsecured Loan Notes 2036	11	(29,885)	(29,878)
3.249% Series B Euro Unsecured Loan Notes 2036	11	(26,633)	(26,341)
2.93% Euro Senior Unsecured Loan Notes 2037	11	(17,679)	-
		(89,161)	(71,176)
Net assets		941,680	903,229
Equity attributable to equity Shareholders
Ordinary share capital	12	12,953	12,953
Capital redemption reserve		5,982	5,982
Share premium		28,078	28,078
Capital reserve		816,890	781,555
Merger reserve		41,406	41,406
Revenue reserve		36,371	33,255
Total equity		941,680	903,229
Net asset value per Ordinary Share - basic	13	841.95p	777.26p
Number of shares in issue excluding Treasury Shares		111,844,491	116,153,543

The financial statements were approved and authorised for issue by the Board of British Empire Trust plc on 9 November 2018 and were signed on its behalf by:

Susan Noble

Chairman

The accompanying notes are an integral part of these financial statements.

Registered in England & Wales No. 28203

STATEMENT OF CASH FLOWS

for the year ended 30 September 2018

	Notes	2018  £'000	2017  £'000
Reconciliation of profit before taxation to net cash inflow from operating activities
Profit before taxation		84,945	142,008
Gains on investments held at fair value through profit or loss		(75,456)	(137,833)
Increase in other receivables		(1,114)	(313)
Increase/(decrease) in creditors		240	(458)
Taxation paid		(1,649)	(314)
Amortisation of Debenture issue expenses		26	19
Net cash inflow from operating activities		6,992	3,109
Investing activities
Purchases of investments		(349,572)	(502,357)
Sales of investments		381,615	594,865
Net cash inflow from investing activities		32,043	92,508
Financing activities
Dividends paid	6	(13,817)	(17,851)
Issue of loans net of costs		17,384	-
Payments for Ordinary Shares bought back and held in treasury		(32,427)	(66,536)
Exchange loss on Loan Notes		575	480
Cash outflow from financing activities		(28,285)	(83,907)
Increase in cash and cash equivalents		10,750	11,710
Reconciliation of net cash flow movement in funds:
Cash and cash equivalents at beginning of year		25,496	13,799
Exchange rate movements		5	(13)
Increase in cash and cash equivalents		10,750	11,710
Increase in net cash		10,755	11,697
Cash and cash equivalents at end of year		36,251	25,496

The accompanying notes are an integral part of these financial statements.

NOTES TO THE FINANCIAL STATEMENTS

1.   General information and accounting policies

British Empire Trust plc is a company incorporated and registered in England and Wales. The principal activity of the Company is that of an investment trust company within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010 and its investment approach is detailed in the Strategic Report.

The financial statements of the Company have been prepared in accordance with IFRS as adopted by the European Union, which comprise standards and interpretations approved by the International Accounting Standards Board ('IASB'), and as applied in accordance with the provisions of the Companies Act 2006. The annual financial statements have also been prepared in accordance with the AIC SORP for the financial statements of investment trust companies and venture capital trusts, except to any extent where it is not consistent with the requirements of IFRS.

Basis of preparation

The functional currency of the Company is Pounds Sterling because this is the currency of the primary economic environment in which the Company operates. The financial statements are also presented in Pounds Sterling rounded to the nearest thousand, except where otherwise indicated.

Going concern

The financial statements have been prepared on a going concern basis and on the basis that approval as an investment trust company will continue to be met.

The Directors have made an assessment of the Company's ability to continue as a going concern and are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future (being a period of 12 months from the date these financial statements were approved). Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Company's ability to continue as a going concern, having taken into account the liquidity of the Company's investment portfolio and the Company's financial position in respect of its cash flows, debt and investment commitments (of which there are none of significance). Therefore, the financial statements have been prepared on the going concern basis.

Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company primarily invests in companies listed in the UK and other recognised international exchanges.

Accounting developments

In the current year, the Company has applied a number of amendments to IFRS issued by the IASB mandatorily effective for an accounting period that begins on or after 1 January 2017. These include annual improvements to IFRS, changes in the IAS 7 Statement of Cash Flows and legislative and regulatory amendments to changes in disclosure and presentation requirements. Their adoption has not had any material impact on these financial statements.

The Company has not early adopted new and revised IFRS that were in issue at the year end but will not be in effect until after this financial year end. The Directors have considered the impact of the changes upon the financial statements. At the date of authorising these financial statements, the following standards and interpretations which had not been applied in these financial statements were in issue and have now become effective. The impact of IFRS 9 in future periods may increase disclosure requirements and may change the presentation of investments and current assets. This may require the consideration of the business model and future expected cash flows in holding financial assets. IFRS 15 specifies how and when revenue is recognised and enhances disclosures. Given the nature of the Company's revenue streams from financial instruments, the provisions of this standard are not expected to have a material impact.

It is not envisaged that the other standards listed below effective in later financial periods will have a material effect on the financial statements.

International Financial Reporting Standards	Effective date
IFRS 2 Share-based Payments (amendments)	1 January 2018
IFRS 9 Financial Instruments (IFRS 7 Disclosures)	1 January 2018
IFRS 9 Financial Instruments	1 January 2018
IFRS 15 Revenue from Contracts with Customers	1 January 2018
IFRS 16 Leases	1 January 2019

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts in the Balance Sheet, the Statement of Comprehensive Income and the disclosure of contingent assets and liabilities at the date of the financial statements. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future period if the revision affects both current and future periods. There are no significant judgements or estimates in these financial statements.

Investments

The Company's business is investing in financial assets with a view to capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis in accordance with the documented investment strategy and information is provided internally on that basis to the Company's Board of Directors.

The investments held by the Company are designated 'at fair value through profit or loss'. All gains and losses are allocated to the capital return within the Statement of Comprehensive Income as 'Gains or losses on investments held at fair value through profit or loss'. Also included within this heading are transaction costs in relation to the purchase or sale of investments. When a purchase or sale is made under a contract, the terms of which require delivery within the timeframe of the relevant market, the investments concerned are recognised or derecognised on the trade date.

All investments are designated upon initial recognition as held at fair value through profit or loss, and are measured at subsequent reporting dates at fair value, which is either the bid price or closing price for Stock Exchange Electronic Trading Service - quotes and crosses ('SETSqx'). The Company derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been accumulated is recognised in profit or loss.

Fair values for unquoted investments, or for investments for which the market is inactive, are established by using various valuation techniques in accordance with the International Private Equity and Venture Capital (the 'IPEV') guidelines. These may include recent arm's length market transactions, the current fair value of another instrument that is substantially the same, discounted cash flow analysis, option pricing models and reference to similar quoted companies. Where there is a valuation technique commonly used by market participants to price the instrument and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, that technique is utilised. Where no reliable fair value can be estimated for such instruments, they are carried at cost, subject to any provision for impairment. These are constantly monitored for value and impairment. The values and impairment, if any, are approved by the Board.

All investments for which a fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy levels in note 14. A transfer between levels may result from the date of an event or a change in circumstances.

Foreign currency

Transactions denominated in currencies other than Pounds Sterling are recorded at the rates of exchange prevailing on the date of the transaction. Items which are denominated in foreign currencies are translated at the rates prevailing on the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is capital or revenue in nature.

Cash and cash equivalents

Cash comprises cash in hand and demand deposits. Cash equivalents are short-term, highly liquid investments and money market funds, that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts when applicable.

Other receivables and payables

Trade receivables, trade payables and short-term borrowings are measured at amortised cost and balances revalued for exchange rate movements.

Income

Dividends receivable on quoted equity shares are taken to revenue on an ex-dividend basis. Dividends receivable on equity shares where no ex-dividend date is quoted are brought into account when the Company's right to receive payment is established.  Fixed returns on non-equity shares are recognised on a time-apportioned basis. Dividends from overseas companies are shown gross of any withholding taxes which are disclosed separately in the Statement of Comprehensive Income.

Special dividends are taken to the revenue or capital account depending on their nature. In deciding whether a dividend should be regarded as a capital or revenue receipt, the Board reviews all relevant information as to the reasons for the sources of the dividend on a case-by-case basis.

When the Company has elected to receive scrip dividends in the form of additional shares rather than in cash, the amount of the cash dividend forgone is recognised as income. Any excess in the value of the cash dividend is recognised in the capital column.

All other income is accounted on a time-apportioned accruals basis and is recognised in the Statement of Comprehensive Income.

Expenses and finance costs

All expenses are accounted on an accruals basis. On the basis of the Board's expected long-term split of total returns in the form of capital and revenue returns of 70% and 30% respectively, the Company charges 70% of its management fee and finance costs to capital.

Expenses incurred directly in relation to arranging debt finance are amortised over the term of the finance.

Expenses incurred in buybacks of shares to be held in treasury are charged to the capital reserve through the Statement of Changes in Equity.

Taxation

The charge for taxation is based on the net revenue for the year and takes into account taxation deferred or accelerated because of temporary differences between the treatment of certain items for accounting and taxation purposes.

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes at the reporting date. Deferred tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of timing differences can be deducted. In line with the recommendations of the SORP, the allocation method used to calculate the tax relief on expenses charged to capital is the 'marginal' basis. Under this basis, if taxable income is capable of being offset entirely by expenses charged through the revenue account, then no tax relief is transferred to the capital account.

Dividends payable to shareholders

Dividends to shareholders are recognised as a liability in the period in which they are paid or approved in general meetings and are taken to the Statement of Changes in Equity. Dividends declared and approved by the Company after the Balance Sheet date have not been recognised as a liability of the Company at the Balance Sheet date.

Non-current liabilities: Debenture and Loan Notes

The non-current liabilities are valued at amortised cost. Costs in relation to arranging the debt finance have been capitalised and are amortised over the term of the finance. Hence, amortised cost is the par value less the amortised costs of issue.

The Euro Loan Note is shown at amortised cost with the exchange difference on the principal amounts to be repaid reflected. Any gain or loss arising from changes in the exchange rate between Euro and Sterling is included in the capital reserves and shown in the capital column of the Statement of Comprehensive Income.

Further details of the non-current liabilities are set out in notes 11 and 14.

Capital redemption reserve

The capital redemption reserve represents non-distributable reserves that arise from the purchase and cancellation of shares.

Share premium

The share premium account represents the accumulated premium paid for shares issued in previous periods above their nominal value less issue expenses. This is a reserve forming part of the non-distributable reserves. The following items are taken to this reserve:

·      costs associated with the issue of equity; and

·      premium on the issue of shares.

Capital reserve

The following are taken to the capital reserve through the capital column in the Statement of Comprehensive Income:

Capital reserve - other, forming part of the distribution reserves:

·      gains and losses on the disposal of investments;

·      amortisation of issue expenses;

·      costs of share buybacks;

·      exchange differences of a capital nature; and

·      expenses, together with the related taxation effect, allocated to this reserve in accordance with the above policies.

Capital reserve - investment holding gains, not distributable:

·      increase and decrease in the valuation of investments held at the year end.

Merger reserve

The merger reserve represents the share premium on shares issued on the acquisition of Selective Assets Trust plc on 13 October 1995 and is not distributable.

Revenue reserve

The revenue reserve represents the surplus of accumulated profits and is distributable by way of dividends.

2. Income

	2018   £'000	2017 £'000
Income from investments
UK dividends	-	293
Overseas dividends	22,296	17,194
Deposit and fixed interest	127	16
Interest on recovery of withholding tax	54	29
Exchange gains/(losses) on receipt of income*	161	(139)
Total income	22,638	17,393

* Exchange movements arise from ex-dividend date to payment date.

3. Investment management fee and other expenses

	2018	2018		2017	2017
	Revenue	Capital	2018	Revenue	Capital	2017
	return	return	Total	return	return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	1,930	4,504	6,434	1,856	4,332	6,188
Other expenses:
Directors' emoluments - fees	146	-	146	144	-	144
Auditor's remuneration - audit	25	-	25	25	-	25
Auditor's remuneration - interim review and debenture review services	8	-	8	8	-	8
Marketing	421	-	421	400	-	400
Research costs*	93	-	93	-	-	-
Savings scheme costs	-	-	-	8	-	8
Printing and postage costs	15	-	15	66	-	66
Registrar fees	88	-	88	86	-	86
Custodian fees	138	-	138	159	-	159
Depositary fees	144	-	144	145	-	145
Advisory and professional fees	298	-	298	318	-	318
Costs associated with dividend receipts	83	-	83	-	-	-
Irrecoverable VAT	107	-	107	172	-	172
Regulatory fees	65	-	65	58	-	58
Directors' insurances and other expenses	35	-	35	39	-	39
	1,666	-	1,666	1,628	-	1,628

* Contribution to Investment Manager's research budget.

For the year ended 30 September 2018, the fee calculated in accordance with the IMA amounted to 0.7% (2017: 0.7%) of the net asset value calculated on a quarterly basis.

Details of the IMA and fees paid to the Investment Manager are set out in the Report of the Directors.

4. Finance costs

	2018	2018		2017	2017
	Revenue	Capital	2018	Revenue	Capital	2017
	return	return	Total	return	return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Loan and debenture interest
8⅛% Debenture Stock 2023	366	854	1,220	366	854	1,220
4.184% Series A Sterling Unsecured Loan Notes 2036	376	879	1,255	376	879	1,255
3.249% Series B Euro Unsecured Loan Notes 2036	259	604	863	255	594	849
2.93% Euro Senior Unsecured Loan Notes 2037	144	334	478	-	-	-
	1,145	2,671	3,816	997	2,327	3,324
Amortisation
8⅛% Debenture Stock 2023	-	7	7	-	7	7
4.184% Series A Sterling Unsecured Loan Notes 2036	-	7	7	-	7	7
3.249% Series B Euro Unsecured Loan Notes 2036	-	5	5	-	5	5
2.93% Euro Senior Unsecured Loan Notes 2037	-	7	7	-	-	-
	-	26	26	-	19	19
Total	1,145	2,697	3,842	997	2,346	3,343
Exchange loss on Loan Notes*	-	575	575	-	480	480

* Revaluation of Euro Loan Notes.

5. Taxation

	Year ended 30 September 2018			Year ended 30 September 2017
	Revenue  return	Capital return	Total	Revenue  return	Capital return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Analysis of charge for the year
Overseas tax not recoverable*	964	-	964	849	-	849
Overseas tax recovered - previously expensed**	-	-	-	(540)	-	(540)
Tax cost/(recovery) for the year	964	-	964	309	-	309

* Tax deducted on payment of overseas dividends by local tax authorities.

** Receipts from the recovery of French and Canadian withholding tax from prior years.

The tax assessed for the year differs from the standard rate of corporation tax in the United Kingdom of 19%. The differences are explained below:

	Year ended 30 September 2018			Year ended 30 September 2017
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Return on ordinary activities after interest payable but before appropriations	17,897	67,048	84,945	12,912	129,096	142,008
Theoretical tax at UK corporation tax rate of 19% (2017: 19.5%)	3,400	12,739	16,139	2,518	25,174	27,692
Effects of the non-taxable items:
- UK franked investment income	-	-	-	(57)	-	(57)
- Tax-exempt overseas investment income	(4,267)	-	(4,267)	(3,353)	-	(3,353)
- Other non-taxable income	-	-	-	27	-	27
- (Losses)/gains on investments, exchange gains on capital items and movement on fair value of derivative financial instruments	-	(14,107)	(14,107)	-	(26,476)	(26,476)
- Excess management expenses carried forward	551	1,368	1,919	865	1,302	2,167
- Corporate interest restriction	316	-	316	-	-	-
- Overseas tax not recoverable	964	-	964	849	-	849
- Overseas tax recovered previously expensed	-	-	-	(540)	-	(540)
- Overseas tax expensed as double tax relief	-	-	-	-	-	-
- Accrued income taxable on receipt	-	-	-	-	-	-
Tax credit for the year	964	-	964	309	-	309

At 30 September 2018, the Company had unrelieved management expenses of £68,933,000 (30 September 2017: £58,892,000) that are available to offset future taxable revenue. A deferred tax asset of £11,729,000 has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.

Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company.

6. Dividends

	2018	2017
	£'000	£'000
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 30 September 2017 of 10.00p (2016: 9.70p) per Ordinary Share	11,557	12,006
Special dividend for the year ended 30 September 2017 of nil (2016: 2.80p	-	3,465
Interim dividend for the year ended 30 September 2018 of 2.00p (2017: 2.00p) per Ordinary Share	2,260	2,380
	13,817	17,851

Set out below are the interim and final dividends paid or proposed on Ordinary Shares in respect of the financial year, which is the basis on which the requirements of Section 1159 of the Corporation Tax Act 2010 are considered.

	2018	2017
	£'000	£'000
Interim dividend for the year ended 30 September 2018 of 2.00p (2017: 2.00p) per Ordinary Share	2,260	2,380
Proposed final dividend for the year ended 30 September 2018 of 11.00p (2017: 10.00p) per Ordinary Share	12,259*	11,557*
	14,519	13,937

* Based on shares in circulation on 7 November 2018.

7. Earnings per Ordinary Share

The earnings per Ordinary Share is based on Company net profit after tax of £83,981,000 (2017: £141,699,000) and on 114,182,431 (2017: 120,666,358) Ordinary Shares, being the weighted average number of Ordinary Shares in issue (excluding shares in treasury) during the year.

The earnings per Ordinary Share detailed above can be further analysed between revenue and capital as follows:

	2018			2017
Basic and diluted	Revenue	Capital	Total	Revenue	Capital	Total
Net profit (£'000)	16,933	67,048	83,981	12,603	129,096	141,699
Weighted average number of Ordinary Shares			114,182,431			120,666,358
Earnings per Ordinary Share	14.83p	58.72p	73.55p	10.44p	106.99p	117.43p

There are no dilutive instruments issued by the Company (2017: none).

8. Investments held at fair value through profit or loss

	30 September	30 September
	2018	2017
	£'000	£'000
Securities
Opening book cost	774,915	718,435
Opening investment holding gains	175,596	167,934
Opening fair value	950,511	886,369
Movement in the year:
Purchases at cost:
Equities	345,819	465,243
Bonds	-	37,995
Sales - proceeds:
Equities	(381,521)	(538,947)
Bonds	-	(37,982)
- realised gains on sales	87,192	130,171
(Decrease)/increase in investment holding gains	(11,736)	7,662
Closing fair value	990,265	950,511
Closing book cost	826,405	774,915
Closing investment holding gains	163,860	175,596
Closing fair value	990,265	950,511

	Year ended	Year ended
	30 September	30 September
	2018	2017
	£'000	£'000
Transaction costs
Costs on acquisition	571	918
Costs on disposals	384	840
	955	1,758

Analysis of capital gains
Gains on sales of securities based on historical cost	87,192	130,171
Movement in investment holding gains for the year	(11,736)	7,662
Net gains on investments	75,456	137,833

9. Other receivables

	2018	2017
	£'000	£'000
Amounts due from brokers	401	500
Overseas tax recoverable	3,486	2,801
Prepayments and accrued income	2,647	1,541
VAT recoverable	16	8
	6,550	4,850

Overseas tax recoverable relates to withholding tax in a number of countries, some of which is past due, but is in the process of being reclaimed by the Custodian through local tax authorities and which the Company expects to receive in due course.

No other receivables are past due or impaired.

10. Other payables

	2018	2017
	£'000	£'000
Purchases for future settlement	462	4,215
Amounts owed for share buybacks	400	1,116
Other creditors	1,363	1,121
	2,225	6,452

11. Non-current liabilities

	2018	2017
	£'000	£'000
8⅛% Debenture Stock 2023	14,964	14,957
4.184% Series A Sterling Unsecured Loan Notes 2036	29,885	29,878
3.249% Series B Euro Unsecured Loan Notes 2036	26,633	26,341
2.93% Euro Senior Unsecured Loan Notes 2037	17,679	-
Total	89,161	71,176

The amortised costs of issue expenses are set out in note 4.

The market values of the Debenture Stock and the Loan Notes are set out in note 14.

The Debenture Stock is secured by a floating charge over all of the assets of the Company. Under the terms of the Debenture Stock, total borrowings are not to exceed 100% of adjusted capital and reserves.

The Company issued two Loan Notes on 15 January 2016:

£30,000,000      4.184% Series A Sterling Unsecured Loan Notes due 15 January 2036

€30,000,000      3.249% Series B Euro Unsecured Loan Notes due 15 January 2036

The Company issued further Loan Notes on 1 November 2017:

€20,000,000      2.93% Euro Senior Unsecured Loan Notes due 1 November 2037

Under the terms of the Loan Notes, the net assets of the Company shall not be less than £300,000,000 and total indebtedness shall not exceed 40% of net assets.

Further information on the Debenture Stock and Loan Notes is set out above.

12. Called-up share capital

	Ordinary Shares of 10p each
	Number of    shares	Nominal value £'000
Allotted, called up and fully paid:	129,526,165	12,953
Treasury Shares:
Balance at beginning of year	13,372,622
Buyback of Ordinary Shares into treasury	4,309,052
Balance at end of year	17,681,674
Total Ordinary Share capital excluding Treasury Shares	111,844,491

During the year, 4,309,052 (2017: 9,715,122) Ordinary Shares with a nominal value of £431,000 (2017: £972,000) and representing 3.33% of the issued share capital, were bought back and placed in treasury for an aggregate consideration of £31,713,000 (2017: £64,592,000). No Ordinary Shares were bought back for cancellation (2017: nil). No Ordinary Shares were cancelled from treasury during the year (2017: 30,487,924).

The allotted, called up and fully paid shares at 30 September 2018 consisted of 129,526,165 Ordinary Shares.

13. Net asset value

The net asset value per share and the net asset value attributable to the Ordinary Shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were as follows:

	Net asset value per share attributable
	2018	2017
Ordinary Shares (basic)	841.95p	777.62p
	Net asset value attributable
	2018	2017
	£'000	£'000
Ordinary Shares (basic)	941,680	903,229

Basic net asset value per Ordinary Share is based on net assets and on 111,844,491 Ordinary Shares (2017: 116,153,543), being the number of Ordinary Shares in issue excluding Treasury Shares at the year end.

At the year end, the net asset value per Ordinary Share adjusted to include the Debenture Stock and Loan Notes at fair value was 834.58p (2017: 769.91p).

14.  Financial instruments and capital disclosures

Investment objective and policy

The investment objective of the Company is to achieve capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value.

The Company's investment objective and policy are detailed on above.

The Company's financial instruments comprise equity and fixed-interest investments, cash balances, receivables, payables and borrowings. The Company makes use of borrowings to achieve improved performance in rising markets. The risk of borrowings may be reduced by raising the level of cash balances or fixed-interest investments held.

Risks

The risks identified arising from the financial instruments are market risk (which comprises market price risk, interest rate risk and foreign currency risk), liquidity risk and credit and counterparty risk. The Company may also enter into derivative transactions to manage risk.

The Board and Investment Manager consider and review the risks inherent in managing the Company's assets which are detailed below.

Market risk

Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss which the Company might suffer through holding market positions by way of price movements, interest rate movements and exchange rate movements. The Investment Manager assesses the exposure to market risk when making each investment decision and these risks are monitored by the Investment Manager on a regular basis and the Board at quarterly meetings with the Investment Manager.

Market price risk

Market price risk (i.e. changes in market prices other than those arising from currency risk or interest rate risk) may affect the value of investments.

The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with the objective of maximising overall returns to shareholders. If the fair value of the Company's investments at the year end increased or decreased by 10%, then it would have had an impact on the Company's capital return and equity of £99,027,000 (2017: £95,051,000).

Foreign currency

The value of the Company's assets and the total return earned by the Company's shareholders can be significantly affected by foreign exchange rate movements as most of the Company's assets are denominated in currencies other than Pounds Sterling, the currency in which the Company's financial statements are prepared. Income denominated in foreign currencies is converted to Pounds Sterling upon receipt.

A 5% rise or decline of Sterling against foreign currency denominated (i.e. non Pounds Sterling) assets and liabilities held at the year end would have increased/decreased the net asset value by £40,918,000 (2017: £39,898,000).

The currency exposure is as follows:

Currency risk
	GBP	Euro	USD	SEK	JPY	NOK	Other	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2018
Other receivables	651	701	145	-	1,517	2,138	1,398	6,550
Cash and cash equivalents	36,251	-	-	-	-	-	-	36,251
Other payables	(1,360)	(403)	-	-	(462)	-	-	(2,225)
8⅛% Debenture Stock 2023	(14,964)	-	-	-	-	-	-	(14,964)
4.184% Series A Sterling Unsecured Loan Notes 2036	(29,885)	-	-	-	-	-	-	(29,885)
3.249% Series B Euro Unsecured Loan Notes 2036	-	(26,633)	-	-	-	-	-	(26,633)
2.93% Euro Senior Unsecured Loan Notes 2037	-	(17,679)	-	-	-	-	-	(17,679)
Currency exposure on net monetary items	(9,307)	(44,014)	145	-	1,055	2,138	1,398	(48,585)
Investments held at fair value through profit or loss - equities	132,625	106,899	405,170	32,474	184,647	22,902	105,548	990,265
Total net currency exposure	123,318	62,885	405,315	32,474	185,702	25,040	106,946	941,680

This exposure is representative at the Balance Sheet date and may not be representative of the year as a whole. The balances are shown in the reporting currencies of the investee companies and may not represent the underlying exposures of the investee companies.

	GBP	Euro	USD	SEK	JPY	NOK	Other	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 30 September 2017
Other receivables	62	580	109	-	1,505	1,903	691	4,850
Cash and cash equivalents	25,496	-	-	-	-	-	-	25,496
Other payables	(2,058)	(179)	(2,651)	-	(1,564)	-	-	(6,452)
8⅛% Debenture Stock 2023	(14,957)	-	-	-	-	-	-	(14,957)
4.184% Series A Sterling Unsecured Loan Notes 2036	(29,878)	-	-	-	-	-	-	(29,878)
3.249% Series B Euro Unsecured Loan Notes 2036	-	(26,341)	-	-	-	-	-	(26,341)
Currency exposure on net monetary items	(21,335)	(25,940)	(2,542)	-	(59)	1,903	691	(47,282)
Investments held at fair value through profit or loss - equities	126,599	138,001	317,609	61,124	176,214	33,934	97,030	950,511
Total net currency exposure	105,264	112,061	315,067	61,124	176,155	35,837	97,721	903,229

Interest rate risk

Interest rate movements may affect:

• the fair value of investments in fixed-interest rate securities;

• the level of income receivable on cash deposits;

• the interest payable on variable rate borrowings; and

• the fair value of the Company's long-term debt.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions. The Company, generally, does not hold significant cash balances.

The Debenture Stock and Loan Notes issued by the Company pay a fixed rate of interest and are carried in the Company's Balance Sheet at amortised cost rather than at fair value. Hence, movements in interest rates will not affect net asset values, as reported under the Company's accounting policies, but may have an impact on the Company's share price and discount/premium. The fair value of the debt and its effect on the Company's assets is set out below.

The exposure at 30 September of financial assets and financial liabilities to interest rate risk is shown by reference to floating interest rates.

	At 30 September 2018 £'000	At 30 September 2017 £'000
Exposure to floating interest rates: Cash and cash equivalents	36,251	25,496

If the above level of cash was maintained for a year, a 1% increase in interest rates would increase the revenue return and net assets by £363,000 (2017: £255,000). Management proactively manages cash balances. If there was a fall by 1% in interest rates, it would potentially impact the Company by turning positive interest to negative interest. The total effect would be a cost increase/revenue reduction of £363,000.

	At 30 September 2018		At 30 September 2017
	Book cost £'000	Fair value '000	Book cost £'000	Fair value £'000
8⅛% Debenture Stock 2023	14,964	18,975	14,957	19,538
4.184% Series A Sterling Unsecured Loan Notes 2036	29,885	32,493	29,878	33,070
3.249% Series B Euro Unsecured Loan Notes 2036	26,633	28,021	26,341	27,518
2.93% Euro Senior Unsecured Loan Notes 2037	17,679	17,920	-	-
Total	89,161	97,409	71,176	80,126

The impact of holding the Debenture Stock and Loan Notes at fair value would be to reduce the Company's net assets by £8,248,000.

The fair value of the Company's Debenture Stock and Loan Notes at the year end was £97,409,000 (2017: £80,126,000). The interest rates of the non-current liabilities (Debenture Stock and Loan Notes) are fixed. A 1% increase in market interest rates would be expected to decrease the fair value of the non-current liabilities by approximately £10.3m (2017: £8.4m), all other factors being equal. A 1% decrease would increase the fair values by £12.1m (2017: £9.8m).

Liquidity risk

The Company's assets mainly comprise readily realisable securities which can be easily sold to meet funding commitments, if necessary. Unlisted investments, if any, in the portfolio are subject to liquidity risk. The risk is taken into account by the Directors when arriving at their valuation of these items.

The remaining contractual payments on the Company's financial liabilities at 30 September, based on the earliest date at which payment can be required and current exchange rates at the Balance Sheet date, were as follows:

	In 1 year  or less	In more than 1  year but not  more than  2 years	In more than 2  years but not  more than  3 years	In more than 3   years but not   more than    10 years	Total
	£'000	£'000	£'000	£'000	£'000
At 30 September 2018
8⅛% Debenture Stock 2023	(1,219)	(1,219)	(1,219)	(17,133)*	(20,790)
4.184% Series A Sterling Unsecured Loan Notes 2036	(1,255)	(1,255)	(1,255)	(8,786)	(12,551)
3.249% Series B Euro Unsecured Loan Notes 2036	(868)	(868)	(868)	(6,076)	(8,680)
2.93% Euro Senior Unsecured Loan Notes 2037	(522)	(522)	(522)	(3,654)	(5,220)
Other payables	(2,225)	-	-	-	(2,225)
	(6,089)	(3,864)	(3,864)	(35,649)	(49,466)

	In 1 year  or less	In more than 1  year but not  more than   2 years	In more than 2  years but not  more than  3 years	In more than 3   years but not   more than    10 years	Total
	£'000	£'000	£'000	£'000	£'000
At 30 September 2017
8⅛% Debenture Stock 2023	(1,219)	(1,219)	(1,219)	(18,352)*	(22,009)
4.184% Series A Sterling Unsecured Loan Notes 2036	(1,255)	(1,255)	(1,255)	(8,786)	(12,551)
3.249% Series B Euro Unsecured Loan Notes 2036	(859)	(859)	(859)	(6,013)	(8,590)
Other payables	(6,452)	-	-	-	(6,452)
	(9,785)	(3,333)	(3,333)	(33,151)	(49,602)

* Comprises the remaining interest payments to 2023, together with the principal to be repaid in 2023.

Credit risk

Credit risk is mitigated by diversifying the counterparties through which the Investment Manager conducts investment transactions. The credit standing of all counterparties is reviewed periodically, with limits set on amounts due from any one counterparty.

The total credit exposure represents the carrying value of fixed-income investments, cash and receivable balances and totals £42,801,000 (2017: £30,346,000).

Fair values of financial assets and financial liabilities

Valuation of financial instruments

The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. 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 assets as follows:

·      Level 1 - valued using quoted prices unadjusted in active markets for identical assets or liabilities.

·      Level 2 - valued by reference to valuation techniques using observable inputs for the asset or liability other than quoted prices included within Level 1.

·      Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data for the asset or liability.

The tables below set out fair value measurements of financial instruments as at the year end, by the level in the fair value hierarchy into which the fair value measurement is categorised.

Financial assets at fair value through profit or loss at 30 September 2018

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Equity investments	964,491	25,774	-	990,265

Financial assets at fair value through profit or loss at 30 September 2017

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Equity investments	920,866	29,645	-	950,511

The valuation of Level 2 financial assets is determined using the average of independent broker traded prices available in the market. The valuation techniques used by the Company are explained in the accounting policies note.

During the previous year, a Level 2 listed company completed a capital reorganisation, splitting capital between continuation and realisation funds. This was transferred to Level 3 at market value and realised during the year, as set out in the table below.

Level 3 financial assets at fair value through profit or loss at 30 September

	2018	2017
	£'000	£'000
Opening fair value	-	-
Transfer from Level 2 to Level 3	-	40,636
Sales - proceeds	-	(33,549)
Total losses included in gains on investments in the Statement of Comprehensive Income on sold assets	-	(7,087)
Closing fair value	-	-

Financial liabilities

The Company's 8⅛% Debenture Stock 2023 and Loan Notes are carried at amortised cost (see note 1). The other financial assets and financial liabilities of the Company are carried in the Balance Sheet at an approximation to their fair value. The fair value is the amount at which the asset could be sold or the liability transferred in an orderly transaction between market participants, at the measurement date, other than a forced or liquidation sale.

	At 30 September 2018		At 30 September 2017
	Amortised cost	Fair value	Amortised cost	Fair value
	£'000	£'000	£'000	£'000
8⅛% Debenture Stock 2023	(14,964)	(18,975)	(14,957)	(19,538)
4.184% Series A Sterling Unsecured Loan Notes 2036	(29,885)	(32,493)	(29,878)	(33,070)
3.249% Series B Euro Unsecured Loan Notes 2036	(26,633)	(28,021)	(26,341)	(27,518)
2.93% Euro Senior Unsecured Loan Notes 2037	(17,679)	(17,920)	-	-
Total	(89,161)	(97,409)	(71,176)	(80,126)

Quoted market prices have been used to determine the fair value of the Company's Debenture Stock and therefore it would be categorised as Level 1 under the fair value hierarchy. As there is no publicly available price for the Company's Loan Notes, their fair market value has been derived by calculating the relative premium (or discount) of the loan versus the publicly available market price of the reference market instrument and exchange rates. As this price is derived by model, using observable inputs, it would be categorised as Level 2 under the fair value hierarchy.

The financial liabilities in the table below are shown at fair value, being the amount at which the liability may be transferred in an orderly transaction between market participants. The costs of early redemption of the Debenture Stock and Loan Notes are set out above. The Debenture Stock is valued by reference to the price prevailing on an active market, so is determined as Level 1. The market values of the Loan Notes are determined by the calculation above using observable inputs, and they are considered as Level 2.

Financial liabilities at fair value through profit or loss at 30 September 2018

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Debenture Stock	(18,975)	-	-	(18,975)
Loan Notes	-	(78,434)	-	(78,434)
	(18,975)	(78,434)	-	(97,409)

Financial liabilities at fair value through profit or loss at 30 September 2017

	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Debenture Stock	(19,538)	-	-	(19,538)
Loan Notes	-	(60,588)	-	(60,588)
	(19,538)	(60,588)	-	(80,126)

Capital management policies and procedures

The structure of the Company's capital is described in note 1 and details of the Company's reserves are shown in the Statement of Changes in Equity.

The Company's capital management objectives are:

·      to ensure that it will be able to continue as a going concern;

·      to achieve capital growth through a focused portfolio of investments, particularly in companies whose share prices stand at a discount to estimated underlying net asset value, through an appropriate balance of equity capital and debt; and

·      to maximise the return to shareholders while maintaining a capital base to allow the Company to operate effectively and meet obligations as they fall due.

The Board, with the assistance of the Investment Manager, regularly monitors and reviews the broad structure of the Company's capital on an ongoing basis. These reviews include:

·      the level of gearing, which takes account of the Company's position and the Investment Manager's views on the market; and

·      the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company's objectives, policies and processes for managing capital are unchanged from last year.

The Company is subject to externally imposed capital requirements:

a)   as a public company, the Company is required to have a minimum share capital of £50,000; and

b)   in accordance with the provisions of Sections 832 and 833 of the Companies Act 2006, the Company, as an investment company:

i)    is only able to make a dividend distribution to the extent that the assets of the Company are equal to at least one and a half times its liabilities after the dividend payment has been made; and

ii)    is required to make a dividend distribution each year such that it does not retain more than 15% of the income that it derives from shares and securities.

These requirements are unchanged since last year and the Company has complied with them at all times.

15. Contingencies, guarantees and financial commitments

At 30 September 2018, the Company had £nil financial commitments (2017: £nil).

At 30 September 2018, the Company had £nil contingent liability in respect of any investments carrying an obligation for future subscription or underwriting commitments (2017: £nil).

16. Related party disclosures

The related party transaction pursuant to the IMA with AVI is set out in the Report of the Directors. Management fees for the year amounted to £6,434,000 (2017: £6,188,000).

As at the year end, the following amounts were outstanding in respect of management fees: £nil (2017: £nil).

Fees paid to the Company's Directors are disclosed in the Report on Remuneration Implementation in the full Annual Report. At the year end, £nil was outstanding due to Directors (2017: £nil).

17. Post balance sheet events

Since the year end, the Company has bought back 402,206 Ordinary Shares with a nominal value of £40,221 at a total cost of £2,939,000 and placed in treasury.

GLOSSARY

Alternative Performance Measure ('APM')

An APM is a numerical measure of the Company's current, historical or future financial performance, financial position or cash flows, other than a financial measure defined or specified in the applicable financial framework. In selecting these Alternative Performance Measures, the Directors considered the key objectives and expectations of typical investors in an investment trust such as the Company.

Comparator Benchmark

The Company's Comparator Benchmark is the MSCI All Country World ex-US Total Return Index, expressed in Sterling terms. The benchmark is an index which measures the performance of global equity markets, both developed and emerging. The weighting of index constituents is based on their market capitalisation.

Dividends paid by index constituents are assumed to be reinvested in the relevant securities at the prevailing market price. The Investment Manager's investment decisions are not influenced by whether a particular company's shares are, or are not, included in the benchmark. The benchmark is used only as a yard stick to compare investment performance.

Cost

The book cost of each investment is the total acquisition value, including transaction costs, less the value of any disposals or capitalised distributions allocated on a weighted average cost basis.

Discount/Premium

If the share price is lower than the NAV per share it is said to be trading at a discount. The size of the Company's discount is calculated by subtracting the share price of 764.00p from the NAV per share (with debt at fair value) of 834.58p and is usually expressed as a percentage of the NAV per share (8.46%). If the share price is higher than the NAV per share, this situation is called a premium.

Earnings before Interest and Tax ('EBIT')

A standard measure of operating profits and, therefore, the profits that are available to be distributed to both debt and equity investors. It is often compared with Enterprise Value in the 'EV / EBIT Ratio', similar to the price-to-earnings ratio.

Earnings before Interest, Tax, Depreciation and Amortisation ('EBITDA')

A proxy for the cash flow generated by a business - it is most commonly used for businesses that do not (yet) generate operating or shareholder profits.

Enterprise Value ('EV')

Enterprise value is the sum of a company's market value plus debt less cash.

Free Cash Flow Yield ('FCF')

Free cash flow is the amount of cash profits that a business generates, adjusted for the minimum level of capital expenditure required to maintain the company in a steady-state. It measures how much a business could pay out to equity investors without impairing the core business. When free cash flow is divided by the market value, we obtain the free cash flow yield.

Gearing

Gearing refers to the level of the Company's debt to its equity capital. The Company may borrow money to invest in additional investments for its portfolio. If the Company's assets grow, the shareholders' assets grow proportionately more because the debt remains the same. But if the value of the Company's assets falls, the situation is reversed. Gearing can therefore enhance performance in rising markets but can adversely impact performance in falling markets.

The gearing of 9.5% represents borrowings of £89,161,000 expressed as a percentage of shareholders' funds of £941,680,000.

The current values of the Debenture Stock and Loan Notes consist of the following:

	Debenture  £'000	2036  GBP Loan  £'000	2036  EUR Loan  £'000	2037  EUR Loan  £'000	Total  £'000
Value of issue	15,000	30,000	22,962	17,526	85,488
Unamortised issue costs	(36)	(115)	(88)	(135)	(374)
Exchange movement	-	-	3,759	288	4,047
Amortised book cost	14,964	29,885	26,633	17,679	89,161
Market value	18,975	32,493	28,021	17,920	97,409
Redemption Value	19,812	40,432	32,974	21,506	114,724

The values of the Loan Notes are calculated using net present values of future cash flows and the yields, taking account of the market spread and exchange rates. The redemption value includes the penalty payable on early redemption. The Debenture Stock is valued from the current listing on the London Stock Exchange and redemption value according to the Trust Deed.

Internal Rate of Return ('IRR')

The IRR is the annualised rate of return earned by an investment, adjusted for dividends, purchases and sales, since the holding was first purchased.

Net Asset Value ('NAV')

The NAV is shareholders' funds expressed as an amount per individual share. Shareholders' funds are the total value of all the Company's assets, at a current market value, having deducted all liabilities and prior charges at their par value (or at their asset value). The total NAV per share is calculated by dividing shareholders' funds of £941,680,000 by the number of Ordinary Shares in issue excluding Treasury Shares of 111,844,491 at the year end.

Net Financial Value ('NFV')

The NFV is cash plus investment securities plus treasury shares less total debt less net pension liabilities. It measures the amount of net surplus cash and securities that a company carries on its balance sheet.

Ongoing Charges Ratio

As recommended by the AIC in its guidance, the Company's ongoing charges are its annualised expenses (excluding finance costs and certain non-recurring items) of £8,100,000 (being investment management fees of £6,434,000 and other expenses of £1,666,000 (see note 3)) expressed as a percentage of the average month-end net assets of £934,893,000 during the year, as disclosed to the London Stock Exchange.

Return on Investment ('ROI')

The ROI is the total profits earned to date on an investment divided by the total cost of the investment.

Shares Bought Back and Held in Treasury

The Company may repurchase its own shares and these are then held in treasury, reducing the freely traded shares ranking for dividends and enhancing returns and earnings per Ordinary Share to the remaining shareholders. When the Company repurchases its shares, it does so at a total cost below the prevailing NAV per share.

The estimated percentage added to NAV per share from buybacks of 0.4% is derived from the repurchase of shares in the market at a discount to the prevailing NAV at the point of repurchase. The shares were bought back at a weighted average discount of 10.1%.

Total Assets

Total assets include investments, cash, current assets and all other assets. An asset is an economic resource, being anything tangible or intangible that can be owned or controlled to produce positive economic value. The total assets less all liabilities will be equivalent to total shareholders' funds.

Total Return

Total return statistics enable the investor to make performance comparisons between investment trusts with different dividend policies. The total return measures the combined effect of any dividends paid, together with the rise or fall in the share price or NAV. This is calculated by the movement in the NAV or share price plus dividend income reinvested by the Company at the prevailing NAV or share price.

NAV Total Return

NAV total return is calculated by assuming that dividends paid out are re-invested into the NAV on the ex-dividend date. This is accounted for in the "benefits from re-investing dividends" line. The NAV used here includes debt marked to fair value and is inclusive of accumulated income.

	Page	30 September 2018	30 September 2017
Closing NAV per share (p)	64	834.58	769.91	a
Dividends paid out (p)	61	12.00	14.50	b
Benefits from re-investing dividends (p)		0.68	2.15	c
Adjusted NAV per share (p)		847.26	786.56	d=a+b+c
Opening NAV per share	64	769.91	661.81	e
NAV total return (%)		10.0%	18.8%	=(d/e)-1

Share Price Total Return

Share price total return is calculated by assuming that dividends paid out are re-invested into new shares on the ex-dividend date. This is accounted for in the "benefits from re-investing dividends" line.

	Page	30 September 2018	30 September 2017
Closing price per share (p)		764.00	693.50	a
Dividends paid out (p)	61	12.00	14.50	b
Benefit from re-investing dividends (p)		0.89	1.90	c
Adjusted price per share (p)		776.89	709.90	d=a+b+c
Opening price per share (p)		693.50	598.00	e
Share price total return (%)		12.0%	18.7%	=(d/e)-1

Underlying discount

Underlying discount is the product of (a) the share price discount to British Empire Trust's net asset value (8.5%); and (b) the weighted-average discount at which the portfolio trades (30.4%).

NATIONAL STORAGE MECHANISM

A copy of the Annual Report and Accounts will be submitted shortly to the National Storage Mechanism ('NSM') and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/nsm 

 

END

 

 

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