Annual Financial Report

RNS Number : 2025T

Schroder Income Growth Fund PLC

15 November 2013

 



15 November 2013

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 31 August 2013 as required by the UK Listing Authority's Disclosure and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 August 2013 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website http://www.schroderincomegrowthfund.com.  Please click on the following link to view the document:

The Company has submitted its Annual Report and Accounts to the National Storage Mechanism and it will shortly be available for inspection at www.hemscott.com/nsm.do.

Enquiries:

Louise Richard

Schroder Investment Management Limited                Tel: [phone]

Schroder Income Growth Fund plc

Chairman's Statement

I am pleased to present my first Statement since succeeding Sir Paul Judge as Chairman on 31 August 2013.

Investment Performance

During the year under review, your Company produced a net asset value total return of 25.2%¹, comparing favourably to the FTSE All-Share Index, whose return was 18.9%², thereby building on its longer-term Index out-performance. In addition, the increased attractiveness of income strategies to investors over the period resulted in a re-rating of the share price and a share price total return for the year of 31.4%.

This improvement in the Company's share price relative to underlying net asset value during the year translated into your Company's shares trading at a premium of 0.6% on 31 August 2013 - as compared to a discount of 4.1% at the start of the year. The average share price discount for the year as a whole was 0.8%.

Detailed comment on the performance of your Company's assets may be found in the Investment Manager's Review on page 6 of the 2013 Annual Report.

Results for the Year and Dividends

During the year under review, the Company's revenue return increased to 10.20 pence per share, representing a rise of 1.8% compared to the 10.02 pence per share recorded for the previous year.

The Board has declared total dividends of 9.80 pence per share for the year ended 31 August 2013, representing a historic yield of 3.9%. This amounted to an increase of 3.2% over the 9.50 pence per share declared in respect of the year ended 31 August 2012 and was in line with the rise in the Retail Prices Index of 3.3% over the year. At the same time, the revenue reserve was increased by £271,000, to £3,098,000, which amounts to 4.51 pence per share.

Share Issuance and Buy-Back Authorities

While the Board continued to monitor the share price relative to net asset value during the year, no shares were bought-back or issued during the period. The Board will continue to seek opportunities to issue shares to meet demand should the share price premium continue in the year ahead.

The Board will be seeking to renew the existing authorities to issue and buy-back shares in the Company and appropriate resolutions are included in the Notice of the Annual General Meeting. The Board believes that these authorities are valuable tools that may be used to enhance shareholder value and to reduce the volatility of the share price relative to net asset value where circumstances are appropriate.

Gearing       

During the year under review, the Company renewed the revolving £15 million credit facility with Scotiabank Europe PLC. Gearing stood at 3.8% at the beginning of the year and had decreased to 3.3% at 31 August 2013. The level of gearing continues to be monitored regularly by the Board. Since the year end, the gearing has increased to 5.7% as at 11 November 2013.

Chairman

As previously announced, Sir Paul Judge retired as a Director and Chairman of the Company with effect from 31 August 2013. I succeeded Sir Paul as Chairman with effect from the same date.

Sir Paul served as a non-executive Director of the Company since its launch in 1995 and as Chairman since December 2005. On behalf of the Board I would like to thank Sir Paul for his invaluable contribution to the Board's deliberations and the success of the Company over his 18 year tenure.

Annual General Meeting

The Company's Annual General Meeting will be held at 2.30 p.m. on Thursday, 19 December 2013. As in previous years, the meeting will include a presentation by the Investment Manager on the Company's investment strategy and market prospects.

Outlook

While it is pleasing to be able again to distribute dividends covered by earnings that have increased in line with inflation, your Board hopes to be able to return to a policy of increasing dividends above inflation. While this ultimately depends on the health of the UK corporate sector, the Board takes comfort from the diversified nature of the portfolio. The economic and political challenges across the investment world remain large, but your Company's holdings currently pay dividends that produce a yield on its shares that is well above that available from cash or UK government bonds and which continues to underpin its relative attractiveness to investors.

Mr Ian Barby

Chairman

15 November 2013

1 Source: Morningstar

2 Source: Thomson Financial Datastream

Investment Manager's Review

The Company's net asset value total return for the 12 months to 31 August 2013 was 25.2%¹, compared to 18.9%² for the FTSE All-Share Index.

Review of the Year

It has been another good year for the Company, with its net asset value reaching an all-time high. The underlying feature has been the continued strength of the UK corporate sector, which can be said to have recovered from the 2008-2010 recession. The broader UK economy continues to show little growth, but listed companies have benefited from being diversified geographically and from cost savings. Profitability is close to its historic peaks, and corporate dividends - an important measure for the opportunities available for this Company - are in aggregate about 14% higher than in 2008, when the problems started.

This corporate health has been reflected in a gradual improvement in stock market sentiment, with many investors' confidence noticeably higher than three years ago. In the last 12 months this was challenged mainly by uncertainty in the summer over US monetary policy, and in particular whether the Federal Reserve was going to slow its quantitative easing and so end the low levels of interest rates. Markets worldwide have since recovered some of their earlier enthusiasm, and in the UK there remains a belief that interest rates will stay low for a while longer.

We mentioned in last year's Review that 2012 income was boosted by special dividends at a level that was unlikely to be repeated. Despite a reduction in special dividend income during 2013, the Company's overall income rose by 2.6% during the year under review.

Performance

One other implication of the stock market's belief that the world may be emerging from the global financial crisis was outperformance by cyclical stocks last year, helping the net asset value outperform the broader market. The largest positive contributions came from holdings that have been added to the portfolio over the last two years (eg easyJet, ITV and Halfords) in anticipation of this shift in sentiment, while there was also a good contribution from non-bank financials (eg ICAP and Resolution). The counterpart of this was underperformance by defensive stocks such as tobacco, which had done well in earlier years, and from the portfolio being underweight in the banking sector.

The stock market's strength has had one disappointing impact: it has made call options less available as a source of income. The relatively low volatility of share prices kept premiums low, and the rise in prices made it harder to write calls without giving up capital appreciation. Option income this year was less than half that of 2012.

Policy Changes

The changes to the portfolio have been primarily driven by profit-taking in holdings where the share prices moved beyond our perception of their fair value. These included Compass and BskyB, and large-cap defensive stocks like Unilever, BAT and Vodafone.  The proceeds were invested in attractively-valued cyclical stocks like ITV and Pearson (media), Inchcape (international car retailer and distributor), and Melrose, Invensys and Rolls Royce in the capital goods sectors.

We also trimmed some cyclical holdings where performance had been strong and where future prospects are more fairly reflected in the share valuations, such as easyJet, Halfords, IMI, Daily Mail, and Smiths Group. Within financials we trimmed the positions in Legal & General and Aviva, using the proceeds to add to the existing positions in HSBC, ICAP, and Resolution, and establishing a new position in Direct Line.

Outlook

Until June 2013 the stock market had seen 12 consecutive months of positive gains, so it was unsurprising that there was weakness as investors reassessed changes in US financial policy. Data is pointing towards an economic recovery gaining traction in developed markets, which should offset some of the weakness coming from emerging markets.

Whilst market volatility could continue, we are encouraged that share valuations do not yet look expensive in absolute terms or relative to other assets. Monetary policy is likely to continue to remain loose for some time. However, for significant further progress there needs to be support from improved earnings.

The portfolio's policy continues to be one of investing in attractively-valued companies with strong balance sheets. It continues to be overweight cyclical companies and, as always, we are looking for stock-specific investment opportunities. The portfolio is balanced between higher-yielding stocks where we believe the dividend is secure but where growth will be modest, and companies capable of growing their dividend through rising earnings or increased pay-outs. We continue to look to non-UK holdings, a limited amount of covered call options, and gearing to boost and diversify the Company's income.

Schroder Investment Management Limited             

15 November 2013

1 Source: Morningstar

2 Source: Thomson Financial Datastream

Principal Risks and Uncertainties

The Board has adopted a matrix of key risks which affect its business and a robust framework of internal controls which is designed to monitor those risks to enable the Directors to mitigate them as far as possible and which assists in determining the nature and extent of the significant risks the Board is willing to take in achieving its strategic objectives. A full analysis of the Directors' system of internal control and its monitoring system is set out in the Corporate Governance Statement on page 22 of the 2013 Annual Report. The principal risks to the business are considered to be as follows:

Financial Risk

The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in the UK stock market would have an adverse impact on the market value of the Company's underlying investments. The Board considers the risk profile of the portfolio at each Board meeting and discusses with the Manager appropriate strategies to mitigate any negative impact arising from substantial changes in markets.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 35 to 38 of the 2013 Annual Report.

The Company utilises a credit facility, currently with a limit of £15 million, which increases the funds available for investment through borrowing ("gearing"). Therefore, in falling markets, any reduction in the net asset value and, by implication, the consequent share price movement is amplified by the gearing. The Directors keep the Company's gearing under review and impose restrictions on borrowings to mitigate this risk.

Strategic Risk

Over time, investment vehicles and asset classes can become out of favour with investors, or may fail to meet their investment objectives. This may result in a wide discount of the share price to underlying net asset value. The Company's share price is compared to its underlying net asset value. The discount/premium of the share price to net asset value of peer group companies is also monitored. The Board considers the use of the Company's buy-back authority on a regular basis and has adopted guidelines under which it is prepared to consider buying back shares.

The Board periodically reviews whether the Company's investment remit remains appropriate and continually monitors the success of the Company in meeting its stated objectives.

Accounting, Legal and Regulatory Risk

In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Should the Company not comply with these requirements, it might lose investment trust status and capital gains within the Company's portfolio could, as a result, be subject to UK Capital Gains Tax.

Breaches of the UK Listing Rules, the Companies Act or other laws or regulations with which the Company is required to comply, could lead to a number of detrimental outcomes and damage the Company's reputation. Breaches of controls by service providers, including the Manager, could also lead to reputational damage or loss.

The Board's system of internal control seeks to mitigate the potential impact of these risks. The Board also relies on its advisers to assist it in ensuring continued compliance with relevant laws and regulations.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Report of the Directors, the Remuneration Report and the accounts in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and accounting estimates that are reasonable and prudent;

·      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

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

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

The Directors are responsible for the maintenance and integrity of the Company's website, www.schroderincomegrowthfund.com. Legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are set out on the inside front cover of this Report, confirms that, to the best of his/her knowledge:

·      the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

·      the Report of the Directors includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

Going Concern

The Directors believe that, having considered the Company's investment objectives (see inside front cover), risk management policies (see note 20 to the accounts on pages 35 to 38 of the 2013 Annual Report), capital management policies and procedures (see note 21 to the accounts on page 38 of the 2013 Annual Report), expenditure projections and the fact that the Company's assets comprise readily realisable securities which can be sold to meet funding requirements if necessary, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future. For these reasons, they consider that there is reasonable evidence to continue to adopt the going concern basis in preparing the financial statements.

Income Statement    

for the year ended 31 August 2013

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through  profit or loss	-	28,834	28,834	-	9,359	9,359
Losses on derivative contracts	-	(380)	(380)	-	-	-
Net foreign currency (losses)/gains	-	(3)	(3)	-	2	2
Income from investments	7,955	432	8,387	7,627	26	7,653
Other interest receivable and similar income	108	-	108	232	-	232
Gross return	8,063	28,883	36,946	7,859	9,387	17,246
Investment management fee	(644)	(644)	(1,288)	(589)	(589)	(1,178)
Performance fee	-	(148)	(148)	-	(127)	(127)
Administrative expenses	(324)	-	(324)	(303)	-	(303)
Net return before finance costs and taxation	7,095	28,091	35,186	6,967	8,671	15,638
Finance costs	(52)	(52)	(104)	(31)	(31)	(62)
Net return on ordinary activities before taxation	7,043	28,039	35,082	6,936	8,640	15,576
Taxation on ordinary activities	(40)	-	(40)	(50)	-	(50)
Net return on ordinary activities after taxation	7,003	28,039	35,042	6,886	8,640	15,526
Return per share	10.20p	40.82p	51.02p	10.02p	12.58p	22.60p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by the Association of Investment Companies. The Total column includes all the information that is required to be disclosed in a Statement of Total Recognised Gains and Losses ("STRGL"). For this reason a STRGL has not been presented.

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

Reconciliation of Movements in Shareholders' Funds

for the year ended 31 August 2013

	Called-up		Capital	Share	Warrant
	share	Share	redemption	purchase	exercise	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2011	6,869	7,404	2,011	34,936	1,596	76,413	5,558	134,787
Net return on ordinary activities	-	-	-	-	-	8,640	6,886	15,526
Dividends paid in the year	-	-	-	-	-	-	(7,213)	(7,213)
At 31 August 2012	6,869	7,404	2,011	34,936	1,596	85,053	5,231	143,100
Net return on ordinary activities	-	-	-	-	-	28,039	7,003	35,042
Dividends paid in the year	-	-	-	-	-	-	(6,526)	(6,526)
At 31 August 2013	6,869	7,404	2,011	34,936	1,596	113,092	5,708	171,616

Balance Sheet

at 31 August 2013

	2013	2012
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	176,421	145,852
Current assets
Debtors	1,329	3,122
Cash and short term deposits	1,073	1,316
	2,402	4,438
Current liabilities
Creditors: amounts falling due within one year	(7,207)	(7,190)
Net current liabilities	(4,805)	(2,752)
Total assets less current liabilities	171,616	143,100
Net assets	171,616	143,100
Capital and reserves
Called-up share capital	6,869	6,869
Share premium	7,404	7,404
Capital redemption reserve	2,011	2,011
Share purchase reserve	34,936	34,936
Warrant exercise reserve	1,596	1,596
Capital reserves	113,092	85,053
Revenue reserve	5,708	5,231
Total equity shareholders' funds	171,616	143,100
Net asset value per share	249.85p	208.33p

Cash Flow Statement

for the year ended 31 August 2013

	2013	2012
	£'000	£'000
Net cash inflow from operating activities	6,130	6,149
Servicing of finance
Interest paid	(110)	(48)
Net cash outflow from servicing of finance	(110)	(48)
Taxation
Overseas taxation paid	(52)	(68)
Investment activities
Purchases of investments	(28,010)	(38,023)
Sales of investments	28,276	32,477
Expiry of option contracts	(380)	-
Special dividend received allocated to capital	432	26
Net cash inflow/(outflow) from investment activities	318	(5,520)
Dividends paid	(6,526)	(7,213)
Net cash outflow before financing	(240)	(6,700)
Financing
Loan drawn down	-	6,700
Net cash inflow from financing	-	6,700
Net cash outflow in the year	(240)	-

Notes to the Accounts

1.         Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" ("the SORP") issued by the Association of Investment Companies in January 2009. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments at fair value.

The policies applied in these accounts are consistent with those applied in the preceding year.

2.         Income

	2013	2012
	£'000	£'000
Income from investments:
UK dividends	6,966	6,912
Overseas dividends	954	715
Scrip dividends	35	-
	7,955	7,627
Other interest receivable and similar income:
Premiums receivable from written options	105	227
Deposit interest	3	5
	108	232
Total income	8,063	7,859
Capital:
Special dividends allocated to capital	432	26

3.         Investment Management fee

		2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Management fee	644	644	1,288	589	589	1,178
Performance fee	-	148	148	-	127	127
	644	792	1,436	589	716	1,305

The basis for calculating the investment management fee is set out in the Report of the Directors on page 13 of the 2013 Annual Report.

4.         Return per share

	2013 £'000	2012 £'000
Revenue return	7,003	6,886
Capital return	28,039	8,640
Total return	35,042	15,526
Weighted average number of Ordinary shares in issue during the year	68,688,343	68,688,343
Revenue return per share	10.20p	10.02p
Capital return per share	40.82p	12.58p
Total return per share	51.02p	22.60p

5.         Net asset value per share

	2013	2012
Net assets attributable to the Ordinary shareholders (£'000)	171,616	143,100
Shares in issue at the year end	68,688,343	68,688,343
Net asset value per share	249.85p	208.33p

6.         Transactions with the Manager

The Company has appointed Schroder Investment Management Limited ("the Manager"), a wholly owned subsidiary of Schroders plc, to provide investment management, accounting and company secretarial services. If the Company invests in funds managed or advised by the Manager or any of its associated companies, those funds are excluded from the assets used for the purposes of the management fee calculation and therefore attract no fee. There is also a performance fee agreement in place. Details of the Investment Management Agreement are given in the Report of the Directors on pages 12 and 13 of the 2013 Annual Report.

The management fee payable in respect of the year ended 31 August 2013 amounted to £1,288,000 (2012: £1,178,000) of which £288,000 (2012: £279,000) was outstanding at the year end. A performance fee amounting to £148,000 (2012: £127,000) is also payable for the year and the whole of this amount (2012: same) was outstanding at the year end.

No Director of the Company served as a director of Schroder Investment Management Limited, or any member of the Schroder Group, at any time during the year.

2012 Financial Information

The figures and financial information for 2012 are extracted from the published Annual Report and Accounts for the year ended 31 August 2012 and do not constitute the statutory accounts for that year. The 2012 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2013 Financial Information

The figures and financial information for 2013 are extracted from the Annual Report and Accounts for the year ended 31 August 2013 and do not constitute the statutory accounts for the year. The 2013 Annual Report and Accounts include the Report of the Independent Auditors which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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.

 

END

 

 

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