Annual Financial Report

RNS Number : 7541P

Schroder Income Growth Fund PLC

21 November 2016

 

21 November 2016

ANNUAL REPORT AND ACCOUNTS

Schroder Income Growth Fund plc (the "Company") hereby submits its annual financial report for the year ended 31 August 2016 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 2016 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpage http://www.schroderincomegrowthfund.com. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/7541P_-2016-11-21.pdf 

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

Enquiries:

Louise Richard

Schroder Investment Management Limited                 Tel: [phone]

Chairman's Statement

Revenue, dividends and performance

The Board declared total dividends of 10.60 pence per share for the financial year ended 31 August 2016, an increase of 2.9% over the previous financial year, making this the 21st consecutive year of rising dividends achieved by the Company. This increase compares favourably to the lesser rise of 0.6% in the Consumer Prices Index over the same period and continues to build on one of the Company's primary objectives: to provide real growth of income, being growth of income in excess of the rate of inflation.

In fact, during the year the revenue return had grown by a larger 6.9%, to 12.08 pence per share, substantially reflecting a higher than usual level of special dividends received by the Company. Given their inherent unpredictability, the Board chose not to pass on all of this increase by way of dividends, but instead added £1.0 million to the Company's revenue reserve, thereby increasing it to £5.3 million (7.70 pence per share) after allowing for payment of the year's fourth interim dividend. This continued building of the revenue reserve will provide a valuable buffer for the Company to draw upon in less favourable times.

During the year under review a total return of 8.4% for the Company's net asset value compared unfavourably to a total return of 11.7% for the FTSE All-Share Index, breaking the trend of Index outperformance achieved over recent years.

Detailed commentary on the performance of your Company's assets may be found in the Manager's Review on pages 6 to 10 of the 2016 Annual Report.

Share price discount and buy-backs

The share price produced a negative total return for the year of 0.8%, reflecting a widening in the Company's share price discount to net asset value during the year from 1.5% to 10.2% (average discount over the year: 7.1%). The deteriorating discount continues the trend discussed in my Half Year Statement and reflects a position shared across many UK-centric investment trusts, partly due to the implications of the referendum on the UK's membership of the EU. The Board continues to closely monitor the position relative to the peer group and to consider whether it would be appropriate to buy back shares, while taking into account prevailing market conditions.

While no shares were bought back or issued during the year under review, the Board nevertheless believes that retaining the ability to do so remains a valuable potential tool - both to enhance shareholder value and to reduce the volatility of the share price relative to net asset value - and will therefore be seeking to renew the existing authority through the resolutions set out in the Notice of the Annual General Meeting.

Gearing

During the year, the Company renewed its revolving £10 million credit facility with Scotiabank Europe Plc, which is in addition to the existing £20 million three-year term loan with the same lender, which expires in July 2017.

Gearing stood at 9.5% at the beginning of the year and had decreased to 8.4% at 31 August 2016.

Board composition and succession planning

Your Board continues to review its composition, balance and diversity and, in line with previous disclosures regarding succession plans, one of the longer-serving Directors, Peter Readman, will retire at the Annual General Meeting and will not seek re-election. A process is underway, led by the Nomination Committee, to recruit an additional Director.

It remains the Board's intention for a further longer-serving Director to retire at the Annual General Meeting to be held in 2017, with a view to appointing a further new Director thereafter so as to continue the progressive refreshment of the Board.

I would like to take this opportunity, on behalf of the Board, to thank Mr Readman for his invaluable contribution to the deliberations of the Directors during his 17 years in office.

Annual General Meeting

The Company's Annual General Meeting will be held on Tuesday, 20 December 2016 at 2.30 p.m. As in previous years, the meeting will include a presentation by the Manager on the Company's investment strategy and market prospects.

Outlook

Whatever the longer-term impact of the referendum, it has had an immediately positive impact - via the fall in sterling - on the stock market and the short-term outlook for dividends. What it has also done, however, is add a new uncertainty in investors' minds, and one unlikely to be resolved for a long time, as the negotiations on the UK's exit from Europe commence. The Board's ongoing challenge is to demonstrate that a company such as yours, with an unbroken 21 years of dividend increases and a share yielding over 4%, continues to merit a place in investors' portfolios.

Ian Barby

Chairman

21 November 2016

Manager's Review

The Company's net asset value total return in the 12 months to 31 August 2016 was 8.4%, compared to 8.3% from the AIC UK Equity Income peer group average (source: Morningstar; excludes ZDP and capital shares) and 11.7% for the FTSE All-Share Index over the same period. The share price total return was -0.8% as the discount to the Company's NAV widened in a general fall in market appetite for UK equity investment trusts.

Investment income continued to grow faster than inflation, rising 5.8% during the year under review. A range of companies in the portfolio have seen strong returns from core activities and have distributed surplus capital, such as ITV, Legal & General, Prudential and Bellway. Additionally, we have taken the opportunity to increase the positions in higher-yielding shares such as Royal Dutch Shell and BP.

These changes have offset dividend decreases from Centrica and Rio Tinto, as well as the reduced dividend resulting from the merger between Aviva and Friends Life, with Aviva shares paying out less than Friends Life paid as an independent company. Special dividends from a wide range of holdings (e.g. ITV, Taylor Wimpey, Direct Line, GlaxoSmithKline, Lloyds Banking and John Laing) have risen considerably and in aggregate contributed to the highest proportion of total income in the Company's history. Lastly, the pound's weakness has provided a boost for those companies that have material overseas earnings and where dividends declared in euros and US dollars are translated into sterling.

Market background

The UK stock market started the period on a firm footing, rebounding from a sell-off in the summer of 2015, supported largely by central bank easing measures. A sharp downturn occurred at the start of 2016 as the market became worried over weaker growth in China, US rate hikes and dollar strength, softer commodity prices and the possibility of currency wars. Markets rallied from mid-February, supported by a more resilient oil price. The UK's unexpected outcome of the UK's referendum on membership of the EU at the end of June caused another sharp fall in the market, with more domestically-focused companies suffering the worst. Equities then rebounded as the Bank of England cut interest rates to 0.25% and re-started quantitative easing. Furthermore, initial fears of an immediate economic deterioration proved unfounded.

Large cap companies, for which the FTSE 100 Index acts as a proxy, and that account for 80% of the FTSE All-Share Index, returned 13.0%, considerably more than the small and mid cap indices' returns of 9.8% and 6.4% respectively. All three indices performed similarly over the months leading up to the UK's referendum on membership of the EU but diverged after the decision to leave the EU. Shares in more internationally-exposed large cap companies fared considerably better than the more domestically-focused mid caps, in part because of the fall in the value of sterling. Since then there has been a reassessment of some of the knee-jerk forecasts from economists and some of the price movements in the market.

Portfolio performance

The portfolio's gearing throughout the year added to performance, but this was offset by a negative contribution from stock selection.

Stock selection within the media sector was the main disappointment, from the holdings in Pearson, ITV and Daily Mail & General Trust, although the shares of publisher RELX continued to rise. Despite learning company Pearson benefiting from selling its FT and Economist businesses for excellent prices, and more recently from sterling weakness, it has suffered from weak US college enrolments, falling textbook sales and the threat from digital educational sources. Meanwhile, the domestic companies in the sector (ITV and Daily Mail & General Trust) have also been weak due to concerns over slowing advertising revenues.

The insurance holdings, notably Legal & General and Aviva, were impacted negatively by concerns over credit exposures, potential regulatory change to the pension market and changes to the sector's capital regime. We remain comfortable with the positions as we believe that none are overexposed to commodity credit issues (a key area of concern) and each is well-capitalised under the EU's new Solvency II regime. With attractive and sustainable yields and potential for future dividend growth we maintain our conviction despite short-term headwinds.

The holding in Halfords detracted from performance as the company was negatively impacted by poor weather hitting cycling demand, its highly regarded CEO moving to Tesco, and from sterling's weakness as it is dependent on imported goods. However, we continue to hold Halfords as it benefits from a strong balance sheet, good cash generation underpinning the dividend, and the shares are on a low valuation.

On the positive side, the Company benefited from the exposure to, and stock selection within, the software services sector. The holding in Micro Focus, which runs legacy software, has benefited from buying and subsequently improving the operational performance of similar businesses. The Company also holds Sage Group, which develops accounting and payroll software, and has performed well as the market has a better appreciation of its strong cash generative attributes and healthy balance sheet.

The portfolio also benefited from being overweight the tobacco companies Imperial Brands and British American Tobacco, which both performed well due to their recent acquisitions of US businesses, strong profit growth and attractive levels of dividend growth.

Lastly, within the banking sector, our decision not to include any holding of Barclays, which has seen particularly weak share price performance, proved to be positive. Weak economic activity has provided a difficult trading environment for banks, as they face the prospect of reduced interest margins, if interest rates remain lower for longer.

Portfolio activity

One benefit of the market volatility over the past year has been the opportunity to continue to pursue the strategy of blending higher-yielding shares, providing steady income, with lower-yielding shares that offer the potential for faster-growing dividends.

The big shift in the portfolio over the year has been selling out of the higher yielding European bank holdings (Societe Generale, Swedbank). The proceeds were partly reinvested in Lloyds Bank, but mainly in higher-yielding oil majors (BP, Royal Dutch Shell, ENI, Galp) at a time of low oil prices and fears over the maintenance of dividends. Our view was that significant cuts to capex in the industry were likely to lead to a balance of supply and demand and an improvement in the oil price.

We bought shares in Swiss pharmaceuticals company Roche, which has a greater potential for growth in dividends given the lower proportion of profits paid to shareholders relative to AstraZeneca and GlaxoSmithKline. Reductions in the latter two holdings part-funded the purchase. The key potential is in the drug pipeline where the next 12-18 months are crucial for approvals of a haemophilia treatment and innovative combination therapy cancer treatments.

We also bought leading healthcare real estate investment trust Assura, which owns around 300 GP surgeries. The company develops new centres on behalf of GPs and is looking to acquire more centres. Rents are underwritten by the NHS, and the leases are typically long-term. Vacancy is low, and rent reviews should support double-digit growth over the next 3-4 years. The c.4% yield is attractive as is its ability to maintain dividend growth of 5-8% per annum.

As another example of shares with the potential for faster-growing dividends, we added luxury goods company Burberry to the portfolio. The shares had de-rated to attractive valuation levels as the market focused on near-term trading and pricing issues, together with the slowdown in key emerging markets. We see potential for management to reduce costs and, with the support of its strong balance sheet, to achieve a positive return for shareholders.

Additionally, we sold out of Synthomer, the speciality chemicals company, where we believe margins have peaked and the shares have re-rated to high levels. We added paper and packaging company Smurfit Kappa, which is set to benefit from self-help measures and a peak in capital expenditure which underpins cash generation and dividend growth. We believe the shares trade on an unwarranted discount to peers.

Outlook

Surprisingly positive UK equity market returns

Given continuing global growth concerns and the shock Brexit decision, the UK stock market has perhaps

recovered surprisingly well from the lows following the EU referendum.

This can be explained in part by central banks' market-friendly actions: in the US by not raising interest rates - and in the UK by increasing quantitative easing and the cutting of interest rates, as well as the potential for future fiscal policy action.

Sterling weakness after the referendum has provided a significant tailwind to the translation of overseas profits, particularly for FTSE 100 companies, which typically have a higher level of income derived from overseas. Additionally, markets were supported by the lack of any immediate economic impact following the Brexit vote and the filling of the political vacuum with Theresa May's early appointment as Prime Minister.

There has been a re-evaluation of some of the premature forecasts and price swings that followed on from the Brexit vote. The impact on UK economic activity is probably only moderately negative this year, but risks remain for 2017 depending on progress in Brexit talks with the EU and the political backdrop in the UK and in Europe. With this uncertainty, it would not be surprising if business investment is the area most affected. If it remains weak, this could eventually feed through into higher unemployment and reduced consumer spending.

Risks remain - home and away

As ever, there are other risks, both economic and political.

In the US the impact of the Presidential election remains to be assessed, though there is the clear potential for interest rate increases given the President-elect's spending plans. In Europe there is the ECB's QE programme and growing support for populist parties. Such matters are magnified in the UK with Brexit negotiations yet to begin. It is also important to consider the limitations of UK monetary policy, given that interest rates stand at 0.25%. This leaves the Bank of England with very little ammunition, particularly when it has said it is not willing to pursue negative rates. The government could therefore turn to expansionary fiscal policy, meaning tax cuts and/or infrastructure spending.

The new Chancellor has stepped back from eliminating the deficit by 2020 but the Autumn Statement may reveal more - in particular the likelihood of a modest stimulus in order to offset some of the potential future drag to domestic growth arising from Brexit, given the lags to growth from spending on infrastructure. Equally, the government may wish to keep some powder dry for next year, if economic activity worsens.

Full valuations

Overall, UK equity valuations look full when measured in absolute terms and in a historic context. This reflects the impact of quantitative easing in supressing yields on other assets. Valuation differentials remain wide, with high valuations on growth stocks and defensive shares (eg, beverages, consumer staples), whilst low valuations remain for companies whose prospects are less certain, such as house builders and banks. Future growth is likely to remain muted, given the potential risks mentioned above.

However, the fall in sterling together with the rise in oil and commodity prices is leading to a turn in the profits cycle - from downgrades to upgrades - particularly in the more international FTSE 100 companies. This may in turn lead to a narrowing of valuation differentials.

We also expect to see a continued pick-up in merger and acquisition activity with the continuing availability of cheap financing, weaker sterling and companies struggling to grow organically.

Dividend outlook

Total income was up 5.7% year-on-year. While the Company's ordinary dividend income grew at a more modest 2.0%, this has yet to reflect the full impact of sterling's post referendum devaluation. The contribution to total income from special dividends has also risen significantly to 8.6%, the highest level ever for the Company and a marked increase on its 5.1% contribution in 2015.

Given sterling's continued depreciation after the Company's year end, there will be a further boost to income from dividends declared in US dollars or euros this year if sterling stays at current levels.

On a more cautionary note, whilst dividend pay-out ratios remain high, the economic impact of Brexit is not likely to be fully felt until 2018 or later, and so the longer-term outlook for income growth is somewhat more uncertain.

Lastly, given the Company's aim to provide real growth of income it is important to consider UK inflation. Whilst the Consumer Prices Index rose by 0.6% in the year to August 2016, we expect inflation to increase over the next year or two, fuelled by a combination of sterling weakness and a pick-up in oil and commodity prices. We would, however, expect the Bank of England to look through this increase in inflation and to retain loose monetary policy to help support the economy through its exit from the EU.

Investment policy

We remain disciplined investors using a long-term fundamental approach and benefiting from the team's long investment experience. We are very conscious of the need to balance the risks relative to the potential reward from opportunities that can be thrown up in such unpredictable markets. However, our investment process focuses on building a diversified portfolio within a risk-controlled framework, which aims to deliver attractive levels of income, that grow in real terms for the Company's investors.

At the same time, we seek to identify mispriced opportunities within our investment universe while working closely with our in-house analysts - who provide proprietary fundamental research to help identify attractive investment candidates and also to assess the validity of the investment case for current holdings. In the current environment we continue to prioritise Companies with balance sheet strength and sustainable dividend yields.

Schroder Investment Management Limited

21 November 2016

The securities shown above are for illustrative purposes only and are not to be considered recommendations to buy or sell.

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving its strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in October 2016.

Although the Board believes that it has a robust framework of internal control in place, this can provide only reasonable, and not absolute, assurance against material financial misstatement or loss and is designed to manage, not eliminate, risk.

A summary of the principal risks and uncertainties faced by the Company, which have remained unchanged throughout the year, and actions taken by the Board and, where appropriate, its Committees, to manage and mitigate these risks and uncertainties, is set out below.

Risk	Mitigation and management
Strategic risk
The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying net asset value.	Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives is monitored. Share price relative to net asset value monitored and use of buy back authorities considered on a regular basis. Marketing and distribution activity is actively reviewed.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	Ongoing competitiveness of all service provider fees subject to periodic benchmarking against competitors. Annual consideration of management fee levels.
Investment management risk
The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of the Manager's compliance with the agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager.
Financial and currency risk
The Company is exposed to the effect of market fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments.	Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager.
Custody risk
Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.	Depositary reports on safe custody of the Company's assets, including cash and portfolio holdings, are independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. Annual report from the Depositary on its activities, including matters arising from custody operations.

Gearing and leverage risk
The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing is monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of shareholders' funds.
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. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, are subject to stringent review processes. Procedures have been established to safeguard against disclosure of inside information.
Service provider risk
The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, Depositary and Registrar. Failure of controls and poor performance of any service provider could lead to disruption, reputational damage or loss.	Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting by key service providers and monitoring of the quality of services provided. Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements.

Risk assessment and internal controls

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the Audit Committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition. No significant control failings or weaknesses were identified from the Audit Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 20 on pages 45 to 49 of the 2016 Annual Report.

Viability statement

The Directors have assessed the prospects of the Company over the three year period to 31 August 2019 which it considers to be an appropriate timeframe over which to judge the viability of an investment company, taking into account the factors outlined below.

In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 15 and 16 and in particular the impact of a significant fall in the UK equity market on the value of the Company's investment portfolio. The Directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

Based on the Company's processes for monitoring operating costs, the share price discount, the Manager's compliance with the investment objective, asset allocation, the portfolio risk profile, gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period to 31 August 2019.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the Financial Reporting Council ("FRC") in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' responsibilities

The Directors are responsible for preparing the Annual Report, Strategic Report, the Report of the Directors, the Corporate Governance Statement, the Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements 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 return 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 judgments 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; and

•        prepare the 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 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.

The Manager is responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed on pages 18 and 19 of the 2016 Annual Report, confirm that to the best of their 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;

•        the Strategic Report contained in the Report and Accounts 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; and

•        the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Income Statement    

for the year ended 31 August 2016

		2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value through profit or loss	-	7,866	7,866	-	(1,426)	(1,426)
Net foreign currency gains/(losses)	-	91	91	-	(16)	(16)
Income from investments	9,746	175	9,921	9,214	909	10,123
Other interest receivable and similar income	6	-	6	10	-	10
Gross return/(loss)	9,752	8,132	17,884	9,224	(533)	8,691
Investment management fee	(757)	(757)	(1,514)	(789)	(789)	(1,578)
Administrative expenses	(343)	-	(343)	(356)	-	(356)
Net return/(loss) before finance costs and taxation	8,652	7,375	16,027	8,079	(1,322)	6,757
Finance costs	(273)	(273)	(546)	(272)	(272)	(544)
Net return/(loss) on ordinary activities before taxation	8,379	7,102	15,481	7,807	(1,594)	6,213
Taxation on ordinary activities	(80)	-	(80)	(46)	-	(46)
Net return/(loss) on ordinary activities after taxation	8,299	7,102	15,401	7,761	(1,594)	6,167
Return/(loss) per share	12.08p	10.34p	22.42p	11.30p	(2.32)p	8.98p

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 Company has no recognised gains and losses other than those included in the Income Statement and Statement of Changes in Equity.

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

Statement of Changes in Equity

for the year ended 31 August 2016

	Called-up		Capital	Warrant	Share
	share	Share	redemption	exercise	purchase	Capital	Revenue
	capital	premium	reserve	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 August 2014	6,869	7,404	2,011	1,596	34,936	129,716	6,404	188,936
Net (loss)/return on ordinary activities	-	-	-	-	-	(1,594)	7,761	6,167
Dividends paid in the year	-	-	-	-	-	-	(6,938)	(6,938)
At 31 August 2015	6,869	7,404	2,011	1,596	34,936	128,122	7,227	188,165
Net return on ordinary activities	-	-	-	-	-	7,102	8,299	15,401
Dividends paid in the year	-	-	-	-	-	-	(7,076)	(7,076)
At 31 August 2016	6,869	7,404	2,011	1,596	34,936	135,224	8,450	196,490

Statement of Financial Position

at 31 August 2016

	2016	2015
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	211,730	204,829
Current assets
Debtors	1,862	1,709
Cash at bank and in hand	3,557	2,184
	5,419	3,893
Current liabilities
Creditors: amounts falling due within one year	(20,659)	(557)
Net current assets	(15,240)	3,336
Total assets less current liabilities	196,490	208,165
Creditors: amounts falling due after more than one year	-	(20,000)
Net assets	196,490	188,165
Capital and reserves
Called-up share capital	6,869	6,869
Share premium	7,404	7,404
Capital redemption reserve	2,011	2,011
Warrant exercise reserve	1,596	1,596
Share purchase reserve	34,936	34,936
Capital reserves	135,224	128,122
Revenue reserve	8,450	7,227
Total equity shareholders' funds	196,490	188,165
Net asset value per share	286.06p	273.94p

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 November 2014 and which superseded the SORP issued 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 through profit or loss.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The Company has adopted Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and the amended SORP, both of which became effective for periods beginning on or after 1 January 2015. FRS 102 replaces all extant standards applicable to the Company's accounts. As a result there are some presentational changes to the accounts but no change in the way numbers are measured. The adoption of FRS102 has not affected the reported financial position or financial performance of the Company.

The changes to these accounts required by FRS 102 and the amended SORP may be summarised briefly as follows:

•        the reconciliation of movements in shareholders' funds has been renamed "Statement of Changes in Equity";

•        the balance sheet has been renamed "Statement of Financial Position";

•        the Company no longer presents a Statement of Cash Flows or the two related notes, as it is no longer required for an investment company which meets certain specified conditions; and

•        footnotes have been added to note 15 on page 44 of the 2016 Annual Report, indicating which of the Company's reserves are regarded as distributable.

Other than these changes, the accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 August 2015.

The Company has early adopted an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016 regarding the categorisation of financial instruments into the fair value hierarchy in note 19 on page 45 of the 2016 Annual Report. As a result of this amendment, the criteria used to allocate financial instruments into the three levels remain unchanged from prior years.

2.         Taxation on ordinary activities

	2016	2015
	£'000	£'000
(a) Analysis of charge in the year:
Irrecoverable overseas tax	80	46
Current tax charge for the year	80	46

(b) Factors affecting tax charge for the year

The tax assessed for the year is lower (2015: lower) than the Company's applicable rate of corporation tax for the year of 20.00% (2015: 20.58%).

The factors affecting the current tax charge for the year are as follows:

		2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net return/(loss) on ordinary activities before taxation	8,379	7,102	15,481	7,807	(1,594)	6,213
Net return/(loss) on ordinary activities before taxation multiplied by the Company's applicable rate of corporation tax for the year of 20.00% (2015: 20.58%)	1,676	1,420	3,096	1,607	(328)	1,279
Effects of:
Capital (return)/loss on investments	-	(1,591)	(1,591)	-	297	297
Income not chargeable to corporation tax	(1,942)	(35)	(1,977)	(1,896)	(187)	(2,083)
Unrelieved expenses	266	206	472	289	218	507
Irrecoverable overseas tax	80	-	80	46	-	46
Current tax charge for the year	80	-	80	46	-	46

(c) Deferred taxation

The Company has an unrecognised deferred tax asset of £4,266,000 (2015: £4,267,000) based on a prospective corporation tax rate of 18% (2015: 20%). The reduction in the standard rate of corporation tax was substantively enacted in October 2015 and is effective from 1 April 2020.

The deferred tax asset has arisen due to the cumulative excess of deductible expenses over taxable income. Given the composition of the Company's portfolio, it is not likely that this asset will be utilised in the foreseeable future and therefore no asset has been recognised in the accounts.

Given the Company's intention to continue to meet the conditions required to retain its status as an Investment Trust Company, no provision has been made for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.

3.         Dividends

	2016 £'000	2015 £'000
(a) Dividends paid and declared
2015 fourth interim dividend of 4.3p (2014: 4.1p)	2,954	2,816
First interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Second interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Third interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Total dividends paid in the year	7,076	6,938

	2016 £'000	2015 £'000
Fourth interim dividend declared of 4.6p (2015: 4.3p)	3,160	2,954

All dividends paid and declared to date have been paid, or will be paid, out of revenue profits.

(b)        Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ("Section 1158")

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £8,299,000 (2015: £7,761,000).

	2016 £'000	2015 £'000
First interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Second interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Third interim dividend of 2.0p (2015: 2.0p)	1,374	1,374
Fourth interim dividend of 4.6p (2015: 4.3p)	3,160	2,954
Total dividends of 10.6p (2015: 10.3p) per share	7,282	7,076

4.         Return/(loss) per share

	2016 £'000	2015 £'000
Revenue return	8,299	7,761
Capital return/(loss)	7,102	(1,594)
Total return	15,401	6,167
Weighted average number of ordinary shares in issue during the year	68,688,343	68,688,343
Revenue return per share	12.08p	11.30p
Capital return/(loss) per share	10.34p	(2.32)p
Total return per share	22.42p	8.98p

5.         Called-up share capital

	2016	2015
	£'000	£'000
Ordinary shares allotted, called-up and fully paid:
68,688,343 (2015: 68,688,343) shares of 10p each	6,869	6,869

6.         Net asset value per share

	2016	2016
Net assets attributable to the Ordinary shareholders (£'000)	196,490	188,165
Shares in issue at the year end	68,688,343	68,688,343
Net asset value per share	286.06p	273.94p

7.         Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value comprise its investment portfolio.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below. Note that the criteria used to categorise investments include an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016, and which the Company has early adopted.

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

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the valuation techniques used by the Company are given in note 1(b) on page 38 of the 2016 Annual Report.

At 31 August 2016, all investments in the Company's portfolio are categorised as Level 1 (2015: same).

8.         Status of announcement

2015 Financial Information

The figures and financial information for 2015 are extracted from the published Annual Report and Accounts for the year ended 31 August 2015 and do not constitute the statutory accounts for that year. The 2015 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2016 Financial Information

The figures and financial information for 2016 are extracted from the Annual Report and Accounts for the year ended 31 August 2016 and do not constitute the statutory accounts for the year. The 2016 Annual Report and Accounts include the Report of the Independent Auditor 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 webpage (or any other website) is incorporated into, or forms part of, this announcement.

 

END

 

 

ACSAKDDDOBDDFDB