Annual Financial Report

RNS Number : 9763X

Securities Trust of Scotland PLC

11 May 2016

 

Securities Trust of Scotland plc (the "company")

Annual Financial Results

Year to 31 March 2016

The financial information set out below does not constitute the company's statutory accounts for the financial year ended 31 March 2016 or financial year ended 31 March 2015 but is derived from those accounts.  Statutory accounts for 2015 have been delivered to the Registrar of Companies and those for 2016 will be delivered following the company's annual general meeting. 

The auditor's have reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

A copy of the annual report and accounts has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.Hemscott.com/nsm.do

The annual general meeting of the company will be held at 12.30pm on 27 July 2016, at Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES. The full notice of the meeting can be found on the company's website (www.securitiestrust.com).

The unedited full text of those parts of the annual report and accounts for the year ended 31 March 2016, which are required to be published are set out on the following pages.

Financial Highlights

Total returns‡ (including reinvested dividends)	Year ended 31 March 2016	Year ended 31 March 2015
Net asset value per share	0.0%	11.3%*
Share price	(2.2%)	3.1%
Benchmark§	4.4%	13.4%

Key data	As at 31 March 2016	As at 31 March 2015	% change
Net asset value per share (cum income)	145.61p	152.93p	(4.8)
Net asset value per share (ex income)	145.18p	151.25p	(4.0)
Share price	135.00p	144.25p	(6.4)
MSCI World High Dividend Yield index	728.34	725.63	0.4
Discount  / (Premium)	7.29%	5.68%
Average discount /(premium)**	6.97%	5.49%

Income	Year ended 31 March 2016	Year ended 31 March 2015	% change
Revenue return per share	4.73p	5.11p	(7.4)
Dividend per share	5.80p	4.90p	18.4

Ongoing charges^
	Year ended 31 March 2016	Year ended 31 March 2015
Ongoing charges	1.0%	1.0%

Source: Martin Currie Investment Management Limited.

^‡ The combined effect of any dividend paid, together with the rise or fall in the share price, net asset or benchmark.

* Misstatement in annual report 2015. In the annual report for the year end 31 March 2015 the NAV total return was incorrectly stated as 12.5%, the correct figure was 11.3%. The underperformance for the year end 31 March 2015 should have been shown as 2.1%, not 0.9%.

^§ MSCI World High Dividend Yield index.

** Average discount/(premium) over 12 week period to 31 March (based on capital only net asset value).

^ Ongoing charges (as a percentage of shareholders' funds) are calculated using average net assets over the year. The ongoing charges figure has been calculated in line with the AIC's recommended methodology.

Chairman's Statement

Following a challenging year for all markets, I am pleased to report to you and to announce some positive developments that will position Securities Trust of Scotland favourably for the future.

Performance in the year under review

Over the year, global markets experienced heightened volatility on the back of geo-political issues and the manager's review picks up on these points in more detail. Against this backdrop, the net asset value ('NAV') was flat and the share price was down 2.2%, both on a total return basis for the period. This compares to a 4.4% rise in the benchmark.

Discount and share buy backs

Discounts have widened considerably across the sector and this was also experienced by your company. The board continually monitors the company's discount against net asset value, both in absolute terms and also against peers and has the authority to repurchase shares at any time. In order to prevent the discount from widening excessively, the company bought back 8,025,891 shares over the year at an average discount of 7.3%. Of these, 3,666,664 were bought in the last 12 weeks of the financial year in line with our discount management strategy. At the year end, the discount was 7.4% and the average cum income discount throughout the year was 6.4%.

Growing dividend

With interest rates remaining near record lows and some government bond yields turning negative, it is difficult for investors to generate a reasonable income, and I have commented previously that your board recognises the attraction to shareholders of real yields and income predictability.

I am delighted to declare a fourth dividend of 1.45p, bringing the total annual dividend to 5.8p, a very healthy rise of 18% on the previous year. Based on the company's year-end share price, this represents a yield of 4.3%. This will be paid on 17 June 2016 to shareholders on the register at 27 May 2016. This is in line with the new progressive dividend policy announced last year and follows the decision to take advantage of the flexibility inherent in the investment trust structure to pay some of the dividend from capital, if necessary.

The revenue return per share for the year end 31 March 2016 is 4.73p, a fall of 7.4% compared to the 5.11p for the year end 31 March 2015. This is due to a number of factors, notably a shift in the portfolio to some lower yielding stocks which offer a greater degree of income security, and better growth prospects.

New portfolio manager

I am delighted to introduce Mark Whitehead who takes over as portfolio manager on 11 May 2016. Mark was recently appointed Head of Equity Income at Martin Currie and leads the new income team. Income is one of the three central pillars of Martin Currie's investment proposition and the board wholeheartedly welcomes this commitment and the formation, and subsequent strengthening, of this specialist team.

Mark is a highly respected global equity income portfolio manager with over 17 years' experience and his track record ranks him highly amongst his peers for producing real dividend growth with less volatility than the relevant benchmark. His focus will remain on investing in undervalued, high quality and growing companies to deliver the company's investment objective. Mark aims to fully utilise the investment instruments available to help improve future returns and he will introduce the use of options, in a limited and carefully controlled manner, in the new financial year. The board believes that this will enhance the total return potential for shareholders.

I would like to take this opportunity to thank Alan Porter for his careful stewardship of the portfolio through a period of tough and testing markets and am delighted that he continues his close relationship with the company as a senior member of Martin Currie's income team.

Review of investment objective and how we monitor the performance of your company

Five years ago, the board took the decision to progress from a UK equity only mandate to a global equity income mandate, and that decision has been justified by the significant outperformance of global equities, by more than 22%*, over the period. The approaching five year anniversary of that change provided a sensible juncture to review the company's current objective and benchmark to ensure that they remain appropriate. The board believes that the current objective is in line with shareholders' needs but would like the portfolio manager to be able to select stocks on a truly unconstrained basis. Consequently, the current benchmark, the MSCI World High Dividend Yield index, will be dropped, effective from end May 2016.

* Source: Martin Currie Investment Management Limited. MSCI World High Dividend Yield index as compared to the FTSE Allshare total return (1 August 2011 to 31 March 2016). 

It is important, however, that you and your board are able to evaluate the success of the manager in achieving the investment objective and consequently, the company's investment performance (on a total return basis) will be measured against the median of all relevant open and closed-ended peers (sourced from the Lipper Global Equity Income Sector and AIC Global Equity Income Sector) on a rolling three-year basis. In addition, and to ensure that our investment objective is met, the manager will aim to grow both the revenue earnings and the cum income NAV in real terms over a rolling five year period. This real growth target, in income and capital, is critical to our long term success and we will measure this objective against global developed market inflation

To achieve this end, the manager will operate a focused portfolio of 35-55 stocks which will be benchmark agnostic and unconstrained by geography, sector and market weighting. This creates a wider opportunity set and the board believes that this updated investment approach is more likely to deliver the returns that can fulfil the investment objective and satisfy shareholders who are looking for an increase in the value of their income and capital.

Borrowing

As stated above, interest rates remain low and your board intends to take advantage by modestly increasing the structural gearing of the company from £17 million to £20 million. The company currently intends to enter into a two year rolling credit facility for £5 million and a seven year fixed facility for £15 million. To improve flexibility in volatile markets, the board will increase the current gearing limit from 15% to 20% of net assets, in line with many companies in the sector.

Board

I shall be retiring from the board at the AGM on 27 July 2016 after serving as a director of the company since its inception. I am honoured to have fulfilled this role, and my commitment as a shareholder has only deepened as a result of the proposals outlined above.

Rachel Beagles will be taking over from me as chairman and Rachel's extensive knowledge of the investment industry will serve the company well. Rachel has over 25 years' experience working in investment markets, including over 10 years as a non-executive director within the investment company industry. She is a board member of the Association of Investment Companies (AIC) and a director of BlackRock Emerging Europe plc and New India Investment Trust plc. She has served on the board of your company for six years.

I am also very pleased to welcome John Evans as a director of the company. He has a wealth of experience having worked in the industry for over 30 years. Throughout his career, John has been closely involved with the management of investment companies and, in particular, those with an income objective. His strong specialist knowledge of the investment trust sector will be invaluable and complements the blend of skills and knowledge on the board. John is currently non-executive director of Investors Capital Trust plc and is the chairman of Drum Income Plus REIT.

As a result of these changes, Angus Gordon Lennox will replace Rachel as chairman of the Marketing & Communications Committee, and John will replace Angus as chairman of the Management Engagement Committee, both with immediate effect.

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I would like to thank you again for your continued support. As ever, please feel free to contact me, or Rachel following my retirement, if you have any questions regarding your company.

To learn more about your company, including the views of the new portfolio manager Mark Whitehead, I encourage you to visit the company's revitalised website at www.securitiestrust.com, which is a comprehensive source of detailed information. You can register for monthly email updates that will keep you informed and provide useful information on the company.

Neil Donaldson

11 May 2016

Manager's Review

Market review

Global equity markets experienced mixed fortunes in the 2016 fiscal year. The MSCI World High Dividend Yield index, our benchmark, was up by 4.4%. This compares with an unchanged move in the MSCI World index and a decline of 4% for the FTSE All-Share index (all returns in sterling terms). The strongest region was North America and the weakest Asia. In sector terms, consumer staples, utilities and telecoms fared the best, each up 11-13%; meanwhile, materials and energy were the worst-performing sectors, falling 10-12%. Key drivers to equity markets over the year have been the volatility of commodity prices, uncertainty over central bank policies and continuing concerns over Chinese growth. The oil price exemplifies the volatility that commodity prices have experienced over the last couple of years. The Brent Crude oil price was over US$110 a barrel in June 2014, but by mid-January 2016, was trading below US$30 a barrel. Many metal prices have experienced similarly extreme moves. For equity investors this has meant that the energy and materials sectors have had another weak year extending their underperformance to over five years. Key for the capital return of any portfolio will be at what point these sectors start recovering. Our focus remains on the sustainability of cash flows generated by companies. This is because we want to see dividend growth as well as stable long-term revenue growth.

The biggest central bank event of the year came in December when the US Federal Reserve raised short-term interest rates for the first time in nearly a decade. This brings to an end an era of near-zero interest rates that has existed since late 2008. The US economy is approaching full employment (a key criterion in the journey towards interest rate normalisation), but we have yet to see this feed through to wage inflation. Economic statistics remain mixed, so the pace of US interest rate rises is by no means clear. By contrast, many economies are pursuing monetary easing policies which have included negative interest rates - notably the European Central Bank and the Bank of Japan.

Growth in China is expected to slow in 2016 and 2017, primarily reflecting weaker levels of investment as it continues to rebalance its economy towards a consumption-based model. With the country investing close to 45% of its GDP, how it manages this transition has important implications for the rest of the world. The most obvious being the effect this will have on global demand, particularly for commodities. Another is the outflow of surplus funds and its tendency to weaken the exchange rate with implications for global competitiveness.

There is, of course, inherent uncertainty in the outcomes of such macro factors. This is precisely why we aim to create a balanced, diversified portfolio, with the risk budget focused on stock-specific, rather than exogenous factors. This does not guarantee success, but it is well suited to the volatility prevalent in the current environment.

Portfolio review

Performance

The total return of the NAV was flat for the full year, which compares with the muted returns of the MSCI World index, but is below that of our benchmark. In aggregate, our positive contributors in the stronger sectors such as staples, utilities and telecoms were not enough to positively offset the weakness of stocks owned in the materials and energy sectors.

At the stock level, WEC Energy Group, Philip Morris and UPS were among the most positive contributors. Bucking the sector trend, WEC Energy Group performed well as it completed the acquisition of its neighbouring utility Integrys, creating the leading electric and natural gas utility in the US Midwest. We believe WEC Energy is a low-risk business that is well positioned because it has a diversified (and healthy) balance sheet, attractive growth potential and an experienced management team. Philip Morris, the tobacco producer, has also fared well. Its revenues have continued to grow, costs have been kept under control and it has progressed development of reduced risk products which it believes will encourage smokers to switch to less harmful products. UPS, the small-package delivery firm, has been another notable positive, as it transforms its business model to capture the growth of online retail in the US. 

The weakest contributors included Kinder Morgan and BHP Billiton. The former, one of our top contributors of the previous year, suffered as the oil price collapsed and investors and credit markets worried about the sustainability of its business model given its high levels of debt. In response, Kinder looked to resolve some of its problems during the year by reducing its dividend to allow it to self-fund its future projects. 

Meanwhile, BHP Billiton suffered as metal prices fell, reflecting the lower overall demand. Despite being a low-cost producer with quality assets, the Anglo-Australian mining multinational has not been immune to the impact of low prices and we decided to sell our position. Since then, the firm has cut its dividend.

Activity

As mentioned in the chairman's statement there was a decline in revenue per share this year. This partly reflects a shift in the portfolio towards lower yielding stocks with faster growing and more secure dividends. Focusing more on owning companies that are exhibiting attractive growth, such as UPS mentioned below, will better enable us to meet the objective of rising income over the longer term even if that means sacrificing some yield in the short term. The board allowed the manager more flexibility here by using the company's authority to distribute some capital profit by way of dividend if so required.

Notable new stock purchases in the year included UPS and Unibail-Rodamco. UPS is the world's largest package delivery firm and is enjoying structural revenue expansion driven by online retail growth which it estimates is increasing at a multiple of US GDP. Its operating margins and capital expenditure are both stable, so returns on capital should remain at current, high levels. We expect the resultant excess cash generated to allow for generous returns to shareholders by means of sustainable, growing dividends as well as buybacks. Unibail-Rodamco is Europe's leading listed commercial property business, specialising in shopping centres in European capital cities. Unibail's current performance reflects robust rental growth of its shopping centres driven by good execution in renewals and re-lettings. The firm enjoys one of the strongest credit ratings in the sector, as well as strong financial ratios reflecting the quality of the business. We expect its dividend to continue to grow in line with its earnings.

On the other side, notable sales in the year included Kraft Foods Group and BASF. Kraft Foods Group and Heinz merged in 2015 to create the Kraft Heinz Company, the fifth-largest food and beverage producer in the world. Our investment case for Kraft was based on improved revenue growth from adding innovative new products in faster-growing segments and on improved profitability from the management focus on lowering the cost base. We felt the positive share price reaction to the deal took away the upside we could see from potential revenue and cost-synergy opportunities derived from the merger. With regard to BASF, its inclusion in the portfolio was based on its innovation-led revenue growth, as the German chemical giant moves further downstream from bulk chemicals to consumer-facing products (other reasons also included its continued emphasis on long-term value creation through maintaining cost control and a strong balance sheet). However, despite these attractive attributes, the firm's fortunes are being influenced by external factors such as the oil price, and with the general weakening of commodity prices we became concerned about the risks to the dividend and decided to sell our holding.

Outlook

The global economic backdrop remains volatile as developed market economies experience modest and uneven recoveries and many developing market economies continue to face challenging times. Management teams are generally cautious on their outlook and are hoping for a stronger US recovery, a sustained European recovery and for weakness in Asia, particularly China, to be contained. Surveys suggest that global fund managers are also cautious and are most fearful of a potential US recession, the failure of loose monetary policies and Chinese capital controls. However, on the brighter side, global equities continue to offer an attractive dividend yield relative to other asset classes.

The appointment of Mark Whitehead as portfolio manager and the creation of the new, strengthened income team represents an exciting development in the resource behind the company. Our focus will remain on investing in undervalued, high quality and growing companies to deliver on our objective of providing rising income and long term capital growth.

Alan Porter

11 May 2016

Portfolio Summary

Portfolio distribution as at 31 March 2016

By region (excluding cash)	2016 %	2015 %
North America	50	43
Developed Europe	39	47
Developed Asia Pacific ex Japan	7	4
Global emerging markets	2	3
Japan	2	3
	100	100

By sector (excluding cash)	2016 %	2015 %
Financials	20	15
Industrials	16	9
Consumer goods	14	16
Healthcare	13	15
Consumer services	9	14
Telecommunications	8	7
Oil & gas	7	11
Utilities	6	5
Basic materials	5	7
Technology	2	1
	100	100

By asset class (including cash and borrowings)	2016 %	2015 %
Equities	110	109
Less borrowings	(10)	(9)
	100	100

Largest 10 holdings
	31 March 2016 Market value £000	31 March 2016 % of total portfolio	31 March 2015 Market value £000	31 March 2015 % of total portfolio
British American Tobacco	7,887	4.4	6,774	3.4
Phillip Morris International	7,195	4.0	5,727	2.9
Chevron	7,194	4.0	8,977	4.5
Pfizer	5,605	3.1	6,458	3.3
United Parcel Service	5,452	3.0	-	-
Verizon Communications	5,417	3.0	6,768	3.4
Paychex	5,319	3.0	4,612	2.3
Anheuser-Busch Inbev	5,021	2.8	-	-
Givaudan	4,915	2.7	4,441	2.2
Bank of Montreal	4,904	2.7	4,272	2.2

Portfolio Holdings

As at 31 March 2016

	Sector		Country		Market value £		% of total portfolio
North America				89,526,448		49.76
Phillip Morris International	Consumer goods	United States		7,194,597		4.00
Chevron	Oil & gas	United States		7,194,237		4.00
Pfizer	Healthcare	United States		5,605,399		3.11
United Parcel Service	Industrials	United States		5,451,665		3.03
Verizon Communications	Telecommunications	United States		5,417,157		3.01
Paychex	Industrials	United States		5,318,990		2.96
Bank of Montreal	Financials	Canada		4,904,136		2.72
Merck & Co	Healthcare	United States		4,619,916		2.57
Crown Castle International	Financials	United States		4,502,156		2.50
Waste Management	Industrials	United States		4,456,431		2.48
Eaton	Industrials	United States		4,181,517		2.32
Caterpillar	Industrials	United States		3,828,364		2.13
Apple	Technology	United States		3,760,117		2.09
Procter & Gamble	Consumer goods	United States		3,630,734		2.02
Wec Energy Group	Utilities	United States		3,542,921		1.97
Sempra Energy	Utilities	United States		3,540,002		1.97
International Paper Company	Basic materials	United States		3,241,616		1.80
Johnson & Johnson	Healthcare	United States		2,950,160		1.64
Occidental Petroleum	Oil & gas	United States		2,718,934		1.51
Kinder Morgan	Oil & gas	United States		1,754,301		0.98
Credicorp	Financials	United States		1,713,098		0.95

Developed Europe			70,927,545	39.42
British American Tobacco	Consumer goods	UK	7,886,706	4.38
Anheuser-Busch Inbev	Consumer goods	Belgium	5,020,719	2.79
Givaudan	Basic materials	Switzerland	4,914,947	2.73
Eutelsat Communications	Consumer services	France	4,450,301	2.47
SSE	Utilities	UK	4,357,149	2.42
Roche Holdings	Healthcare	Switzerland	4,297,617	2.39
Novartis	Healthcare	Switzerland	4,053,945	2.25
SKY	Consumer services	UK	3,960,176	2.20
Unibail Rodamco	Financials	Netherlands	3,841,245	2.14
Kingfisher	Consumer services	UK	3,743,509	2.08
Sanofi	Healthcare	France	3,142,750	1.75
Inmarsat	Telecommunications	UK	3,090,572	1.72
Lloyds Banking Group	Financials	UK	3,077,552	1.71
TeliaSonera	Telecommunications	Sweden	3,030,984	1.69
Intesa Sanpaolo	Financials	Italy	3,009,376	1.67
Direct Line Insurance	Financials	UK	2,979,179	1.66
Airbus	Industrials	France	2,490,298	1.38
Prudential	Financials	UK	2,331,458	1.30
Hugo Boss	Consumer goods	Germany	1,249,062	0.69

Developed Asia Pacific ex Japan			13,256,011	7.37
ASX	Financials	Australia	4,007,978	2.23
Transurban Group	Industrials	Australia	3,692,363	2.05
United Overseas Bank	Financials	Singapore	2,801,519	1.56
Singapore Telecommunications	Telecommunications	Singapore	2,754,151	1.53

Japan			3,609,501	2.01
Lawson	Consumer services	Japan	3,609,501	2.01

Global emerging markets			2,583,236	1.44
Fibra Uno	Financials	Mexico	2,583,236	1.44

Total portfolio

179,902,741

100.00

Principal risks and uncertainties

Risk and mitigation

The company's business model is longstanding and resilient to most of the short term uncertainties that it faces, which the board believes are effectively mitigated by its internal controls and the oversight of the investment manager, as described below. The principal risks and uncertainties are therefore largely longer term and driven by the inherent uncertainties of investing in global equity markets. The board believes that it is able to respond to these longer term risks and uncertainties with effective mitigation so that both the potential impact and the likelihood of these seriously affecting shareholders' interests are materially reduced.

Risks are regularly monitored at board meetings and the board's planned mitigation measures are described below. The board maintains a risk register and also carries out a risk workshop as part of its annual strategy meeting. The board has identified the following principal risks to the company:

Loss of S1158-9 tax status - Loss of S1158-9 tax status would have serious consequences for the attractiveness of the company's shares. The board considers that, given the regular oversight of this risk carried out by the investment manager and reviewed by the board, the likelihood of this risk occurring is minimal.

Long-term investment underperformance - The board manages the risk of investment underperformance by relying on good manager stock selection skills within a framework of diversification and other investment restrictions and guidelines.

The board monitors the implementation and results of the investment process with the manager (who attends all board meetings) and reviews data that shows statistical measures of the company's risk profile.

Market, financial and interest rate risk - The company's portfolio is invested in listed equities and is therefore exposed to market risk. Adherence to investment process is intended to ensure portfolios are optimally positioned for market turbulence.

A significant proportion of the company's investment portfolio is invested in overseas securities and the balance sheet can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, from time to time, match specific overseas investment with foreign currency borrowings.

As a consequence of investing in overseas securities the statement of comprehensive income is subject to currency fluctuation arising on overseas income.

In order to retain its place in the FTSE All-Share, the company must satisfy the liquidity test criteria set by the FTSE at each annual review.

The liquidity of the company's shares is monitored by the board, the investment manager and the company's broker with a report being reviewed at every board meeting. The board regularly discusses ways to improve the liquidity position of the company.

As announced in 2015, the company intends to use its authority to distribute some capital profit by way of dividend if so required.  If the company distributes capital profit by way of dividend, the board is aware that it cannot support the payment of dividends partly out of capital on an indefinite basis in certain investment scenarios.  The board actively manages this risk with the investment manager by seeking to grow the company's income and capital in real terms over the longer term.

Statement of directors' responsibilities

The directors are responsible for preparing the annual 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 elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland'.  Under company law the directors must not approve the accounts 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; and

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

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

The financial statements are published on the www.securitiestrust.com website, which is maintained by the investment manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

-      the financial statements, prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', give a true and fair view of the assets, liabilities, financial position and profit or loss of the company;

-      the strategic report includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that it faces; and

-      the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the company's performance, business model and strategy.

This responsibility statement was approved by the board of directors on 11 May 2016.

Going concern status

The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review, strategic report and the report of the directors.

The financial position of the company as at 31 March 2016 is shown on the statement of financial position set out below. The cash flows of the company are also set out below. Note 14 sets out the company's risk management policies, including those covering market price risk, liquidity risk and credit risk.

The company has a loan facility of £17,000,000 which expires on 25 September 2016, which was fully drawn down at the year-end date (2015: fully drawn down). The purpose of the facility is to enable the manager to enhance the return for shareholders by borrowing and investing where the return is expected to exceed the cost of borrowing. The company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facility.

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal risks and uncertainties disclosed above and have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future, and at least one year from the date of this annual report. Accordingly, the directors continue to adopt the going concern basis in preparing these accounts.

Viability Statement

The company's business model is designed to achieve rising income and long-term capital growth through investment in a balanced portfolio constructed from global equities unconstrained by geography, sector, stock or market capitalisation. The business model is based on having no fixed or limited life provided global equity markets continue to operate normally. The board has assessed its viability over a three year period in accordance with provision C.2.2 of the 2014 UK Corporate Governance Code. The board considers that this reflects the minimum period which should be considered in the context of its long term objective but one which is limited by the inherent and increasing uncertainties involved in assessment over a longer period.

In making this assessment the directors have considered the following risks to its ongoing viability:

·      the principal risks and uncertainties and the mitigating actions set out above;

·      the ongoing relevance of the company's investment objective in the current environment;

·      the level of income forecast to be generated by the company and the liquidity of the company's portfolio; and

·      the level of fixed costs and debt relative to its liquid assets. The expectation is that the current portfolio could be liquidated to the extent of 100% within two trading days.

Based on the results of their analysis and the company's processes for monitoring each of the factors 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 over at least the next three years.

Neil Donaldson

Chairman

11 May 2016

Statement of Comprehensive Income

		Year to 31 March 2016			Year to 31 March 2015
	Note	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Net (losses)/gains on investments	8	-	(7,866)	(7,866)	-	14,119	14,119
Net currency gains/(losses)		21	(10	11	(10)	7	(3)
Income	3	7,306	-	7,306	8,003	-	8,003
Investment management fee		(339)	(629)	(968)	(366)	(679)	(1,045)
Other expenses	4	(634)	-	(634)	(526)	-	(526)
Net return before finance costs and taxation		6,354	(8,505)	(2,151)	7,101	13,447	20,548
Finance costs	5	(76)	(141)	(217)	(64)	(119)	(183)
Net return on ordinary activities before taxation		6,278	(8,646)	(2,368)	7,037	13,328	20,365
Taxation on ordinary activities	7	(732)	-	(732)	(784)	-	(784)
Net return attributable to ordinary redeemable shareholders		5,546	(8,646)	(3,100)	6,253	13,328	19,581
Return per ordinary redeemable share	2	4.73p	(7.37p)	(2.64p)	5.11p	10.90p	16.01p

The total columns of this statement are the income statement of the company.

The revenue and capital items are presented in accordance with The Association of Investment Companies Statement of Recommended Practice (2014).

All revenue and capital items in the above statement derive from continuing operations.

No operations were acquired or discontinued in the year.

The notes form part of these financial statements.

A statement of total recognised gains and losses is not required as all gains and losses of the company have been reflected in the statement of comprehensive income.

Statement of Financial Position

		As at 31 March 2016		As at 31 March 2015
	Note	£000	£000	£000	£000
Fixed assets
Investments at fair value through profit or loss
Listed on Exchanges in the UK			31,426		39,863
Listed on Exchanges abroad			148,477		158,846
	8		179,903		198,709
Current assets
Trade and other receivables	9	947		2,310
Cash and cash equivalents		1,267		3,762
		2,214		6,072
Current liabilities
Trade payables	10	(17,629)		(19,749)
Net current liabilities			(15,415)		(13,677)
Total assets less current liabilities			164,488		185,032
Equity
Called up ordinary share capital	11		1,223		1,223
Capital redemption reserve			78		78
Share premium account			30,040		30,040
Special distributable capital reserve*			96,795		107,448
Capital reserve*	11		34,374		43,020
Revenue reserve*			1,978		3,223
Total shareholders' funds			164,488		185,032
Net asset value per ordinary redeemable share	2		145.61p		152.93p

* These reserves are distributable.

The notes form part of these financial statements

The company is registered in Scotland, no 283272.

The aggregate amount of called up share capital as at 31 March 2016 is £1,222,991 (2015: £1,222,991).

The financial statements were approved by the board on 11 May 2016 and signed on its behalf by Neil Donaldson, Chairman

Statement of Changes in Equity

For the year ended 31 March 2016	Note	Called-up ordinary share capital £000	Capital redemption reserve £000	Share premium account £000	Special distributable reserve* £000	Capital reserve* £000	Revenue reserve* £000	Total £000
As at 31 March 2015		1,223	78	30,040	107,448	43,020	3,223	185,032
Return attributable to shareholders		-	-	-	-	(8,646)	5,546	(3,100)
Ordinary shares bought back during the year	11	-	-	-	(10,653)	-	-	(10,653)
Dividends paid	6		-	-	-	-	(6,791)	(6,791)
Balance at 31 March 2016		1,223	78	30,040	96,795	34,374	1,978	164,488
As at 31 March 2014		1,223	78	30,040	109,299	29,692	2,839	173,171
Return attributable to shareholders		-	-	-	-	13,328	6,253	19,581
Ordinary shares bought back during the year	11	-	-	-	(1,851)	-	-	(1,851)
Cost of ordinary shares issued during the period		-	-	-	-	-	-	-
Dividends paid	6	-	-	-	-	-	(5,869)	(5,869)
Balance at 31 March 2015		1,223	78	30,040	107,448	43,020	3,223	185,032

* These reserves are distributable.

The notes form part of these financial statements.

Statement of Cashflow

		Year to 31 March 2016		Year to 31 March 2015
	Note	£000	£000	£000	£000
Cash flows from operating activities			(2,368)		(20,365)
(Loss)/profit before tax
Adjustments for:
Loss/(gains) on investments		8,190		(14,072)
Finance costs		217		183
Purchases of investments*	8	(68,918)		(78,258)
Sales of investments*	8	79,534		72,668
Dividend income	3	(7,216)		(7,993)
Interest income	3	(3)		(10)
Stocklending income	3	(87)		-
Dividend received		6,540		7,134
Interest receives		3		10
Stock lending received		81		-
Decrease/(increase) in receivables		2,045		(366)
(Decrease)/increase in payables		(2,379)		9,387
Overseas withholding tax suffered		(732)		(784)
			17,275		(12,101)
Net cash flows from operating activities			14,907		8,264
Cash flows from financing activities
Repurchase of ordinary share capital		(10,397)		(1,851)
Equity dividends paid	6	(6,791)		(5,869)
Interest paid on borrowings		(214)		(183)
Net cash flows from financing activities			(17,188)		(7,720)
Net (decrease)/increase in cash and cash equivalents			(2,495)		361
Cash and cash equivalents at the start of the year			3,762		3,401
Cash and cash equivalents at the end of the year			1,267		3,762

* Receipts from the sale of, and payments to acquire, investment securities have been classified as components of cash flows from operating activities because they form part of the funds dealing operations.

Notes to the Financial Statements

Note 1. Accounting policies

(a)        For the year ended 31 March 2016, the company is applying for the first time, Financial Reporting Standard ('FRS 102') applicable in the UK and Republic of Ireland, which forms part of the revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2012 and 2013.

These financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS 102 issued by the FRC in August 2014 and the revised Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the AIC in November 2014.

The following disclosures are required in the year of transition. The last financial statements under previous UK GAAP were for the year ended 31 March 2015 and the date of transition to FRS 102 was therefore 1 April 2014.

As a result of the first time adoption of New UK GAAP and the revised SORP, comparative amounts and presentation formats have been amended where required. The net return attributable to ordinary shareholders and total shareholders' funds remain unchanged from under previous UK GAAP basis, as reported in the preceding annual and interim reports. The Statement of Cash Flows has been restated to reflect presentational changes required under FRS 102 and does not include any other material changes. There are no changes to the financial performance or position as a result of the fund adopting FRS 102.

Functional currency - the company is required to nominate a functional currency, being the currency in which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared.

(b)        Income from equity investments is determined on the date on which the investments are quoted ex-dividend, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Income from fixed interest securities is recognised on an effective yield basis. UK dividends received are accounted for at the amount receivable and are not grossed up for any tax credit. Other income includes any taxes deducted at source. Gains and losses arising from the translation of income denominated in foreign currencies are recognised in the revenue reserve. Scrip dividends are treated as unfranked investment income; any excess in value of shares received over the amount of the cash dividend is recognised in capital reserve. Income from underwriting commission and traded options is recognised as earned.

(c)        Interest receivable and payable and management expenses are treated on an accruals basis.

(d)        The management fee and interest costs are allocated 65% to capital and 35% to revenue in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. All other expenses are wholly allocated to revenue.

(e)        Gains and losses on the realisation of investments and changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms, together with exchange adjustments to overseas currencies are taken to capital reserve.

(f)         Transactions in foreign currencies are recorded in the operational currency of the company at the prevailing exchange rate on the date of the transaction and re-translated at the rates of exchange ruling on the date of the statement of financial position. Investments are recognised initially as at the trade date of a transaction. Subsequent to this, the disposal of an investment is accounted for once again as at the trade date of a transaction.

(g)        Revenue received and interest paid in foreign currencies are translated at the rates of exchange on the transaction date. Any exchange differences between the recognition and settlement both for revenue transactions are recognised as revenue in the statement of comprehensive income.

(h)        The company's investments are classified as 'financial assets at fair value through profit or loss' and are valued at fair value. For listed investments this is deemed to be bid market prices. Gains and losses arising from changes in fair value are included in the capital return for the year.

(i)         All financial assets and liabilities are recognised in the financial statements.

(j)         Deferred taxation - deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the statement of financial position date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the statement of financial position date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Timing differences are differences arising between the company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 

(k)        Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the statement of comprehensive income.

(l)         The cost of share buybacks includes the amount of consideration paid, including directly attributable and deducted from the special distributable reserve until the shares are cancelled.

(m)       The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on dividends received in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. The company does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to the fair value at each reporting date. The resulting gain or loss is recognised as revenue or capital in the statement of comprehensive income depending on the nature and motive of each derivative transaction. Derivative financial instruments with a positive fair value are recognised as financial assets and derivative financial instruments with a negative fair value are recognised as financial liabilities. A derivative is presented as a non-current asset or a noncurrent liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months.

Note 2.  Returns and net asset value

	Year to 31 March 2016	Year to 31 March 2015
Revenue return
Revenue return attributable to ordinary redeemable shareholders	£5,546,000	£6,253,000
Weighted average number of shares in issue during the year	117,264,778	122,262,535
Revenue return per ordinary redeemable share	4.73p	5.11p
Capital return
Capital return attributable to ordinary redeemable shareholders	(£8,646,000)	£13,328,000
Weighed average number of shares in issue during the year	117,264,778	122,262,535
Capital return per ordinary redeemable share	(7.37p)	10.90p
Total return
Total return per ordinary redeemable share	(2.64p)	16.01p
Net asset value per share
Net assets attributable to shareholders	£164,488,000	£185,032,000
Number of shares in issue at year end	112,965,486	120,991,377
Net asset value per share	145.61p	152.93p

Note 3.  Income

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
From listed investments:
Franked income - equities	1,474	1,883
Unfranked income - equities	5,742	6,110
	7,216	7,993
Other income
Interest on deposits	3	10
Stock Lending	87	-
	7,306	8,003

Capital dividend received

During the year ended 31 March 2016, the company received a capital dividend of £324,486 from Direct Line Insurance Group. During the year ended 31 March 2015, the company also received a capital dividend of £47,000 from Direct Line Insurance Group.

Note 4. Other expenses

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Bank charges and custody fees	22	20
Depositary fees	39	27
Directors' fees	139	139
Employers' national insurance contributions	13	13
Irrecoverable VAT	51	49
Legal fees	2	14
Printing and postage	18	30
Registrar's fees	50	49
Secretarial fee	102	101
Other	181	68
Total	617	510
Auditors' remuneration:
- audit services	17	16
- non-audit services	-	-
	634	526

Details of the contract between the company and Martin Currie for the provision of the investment management and secretarial arrangements are set out in the company's annual report.

Note 5. Finance costs

	Year to 31 March 2016			Year to 31 March 2015
	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Interest payable on bank loans and overdrafts	76	141	217	64	119	183

Note 6. Dividends

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Year ended 31 March 2014 - fourth interim dividend of 1.35p	-	1,651
Year ended 31 March 2015 - first interim dividend of 1.15p	-	1,406
Year ended 31 March 2015 - second interim dividend of 1.15p	-	1,406
Year ended 31 March 2015 - third interim dividend of 1.15p	-	1,406
Year ended 31 March 2015 - fourth interim dividend of 1.45p	1,731	-
Year ended 31 March 2016 - first interim dividend of 1.45p	1,698	-
Year ended 31 March 2016 - second interim dividend of 1.45p	1,695	-
Year ended 31 March 2016 - third interim dividend of 1.45p	1,667	-
	6,791	5,869

Set out below are the total dividends payable in respect of the period, which forms the basis on which the requirements of sections 1158-1159 of the Corporation Tax Act 2010 are considered.

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
First interim dividend of 1.45p for the year ended 31 March 2016 (2015: 1.15p)	1,698	1,406
Second interim dividend of 1.45p for the year ended 31 March 2016 (2015: 1.15p)	1,695	1,406
Third interim dividend of 1.45p for the year ended 31 March 2016 (2015: 1.15p)	1,667	1,406
Proposed fourth interim dividend of 1.45p for the year ended 31 March 2016 (2015: 1.45p)	1,638	1,754
	6,698	5,972

During the year the directors received dividends of 5.80p (2015: 4.80p) per share. Directors' shareholdings are disclosed in the company's annual report. The revenue reserves as at 31 March 2016 are £1,978,000, of this £1,638,000 will be used to fund the fourth interim dividend. At the AGM held on 16 May 2012, the board received shareholder approval to amend the articles of association of the company to enable dividends to be paid out of capital.

Note 7. Taxation on ordinary activities

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Foreign tax	732	784

In accordance with the SORP issued in 2014, the company has adopted the marginal method for allocating tax relief between income and capital. The revenue account tax charge for the year was lower than the standard rate of corporation tax in the UK for an investment trust company 20% (2015: 21%). The differences are explained below.

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Net return on ordinary activities before taxation	(2,368)	20,365
Corporation tax at standard rate of 20% (2015: 21%)	(474)	4,277
Effects of:
Gains/(losses) on investments not taxable	1,573	(2,965)
UK dividends not taxable	(292)	(396)
Overseas dividends not taxable	(1,151)	(1,283)
Overseas tax suffered	732	784
Currency losses not taxable	(2)	1
Excess management expenses not utilised	346	366
Total tax charge	732	784

As of 1 April 2015, the UK Corporation tax rate fell from 21% to 20%.

At the year end, the company has, for taxation purposes only, accumulated unrelieved management expenses and loan relationship deficits of £13,756,000 (2015: £12,372,000).  A deferred tax asset in respect of this has not been recognised and these expenses will only be utilised if the company has profits chargeable to corporation tax in the future.

Due to the company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.

During the year, as a result of the provision in the Finance Act 2015 the main rate of corporation tax reduced to 19% for the financial year 2017 and 18% for the financial year 2020.

Note 8. Investments at fair value through profit or loss

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Opening valuation	198,709	179,047
Opening investment holding gains	(26,510)	(20,650)
Opening cost	172,199	158,397
Acquisitions at cost	68,918	78,258
Disposal proceeds	(79,534)	(72,668)
Less: net (loss)/gain on disposal of investments	(966)	8,212
Disposal at cost	(80,500)	(64,456)
Closing cost	160,617	172,199
Add: investment holding gains	19,286	26,510
Closing valuation	179,903	198,709

There were no fixed interest securities as at 31 March 2016 (2015: £nil).

An analysis of the investment portfolio by sector, and a list of all the investments and their market value is detailed above.

(Losses)/gains on investments	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Net (loss)/gain on disposal of investments	(966)	8,212
Movement in investment holdings unrealised (losses)/ gains	(7,224)	5,860
Capital distributions	324	47
	(7,866)	14,119

Capital dividend received

During the year ended 31 March 2016, the company received a capital dividend of £324,486 from Direct Line Insurance Group. During the year ended 31 March 2015, the company also received a capital dividend of £47,000 from Direct Line Insurance Group.

Transaction costs

During the year, expenses were incurred in acquiring or disposing of investments classified as fair value though profit or loss.  These have been expensed through capital and are included within gains on investments in the statement of comprehensive income. The total costs were as follows:

	Year to 31 March 2016 £000	Year to 31 March 2015 £000
Acquisitions	134	151
Disposals	96	94
	230	245

Note 9.  Trade and other receivables

	As at 31 March 2016 £000	As at 31 March 2015 £000
Dividends receivable	676	859
Special dividends to capital receivable	-	47
Tax recoverable	252	222
Prepayments and other debtors	13	1,182
Stock lending income receivable	6	-
	947	2,310

Note 10. Trade payables

	As at 31 March 2016 £000	As at 31 March 2015 £000
Amounts falling within one year
Interest accrued	3	-
Due to brokers	-	1,164
Sterling bank revolving loan	17,000	17,000
Amount due for ordinary shares bought back	256	-
Other creditors	370	1,585
	17,629	19,749

The company has a £17,000,000 revolving loan facility with State Street which expires on 25 September 2016. Under this agreement £17,000,000 was drawn down at 29 March 2016 at a rate of 1.211% with a maturity date of 29 April 2016, and on 29 April 2016 £17,000,000 was drawn down at a rate of 1,209% with a maturity date of 31 May 2016.

The fair value of the sterling loan is not materially different from its carrying value. The interest rate is set at each roll-over date at LIBOR plus a margin.

Note 11.  Called up share capital

	Number of shares	As at 31 March 2016 £000	Number of shares	As at 31 March 2015 £000
Ordinary shares of 1p
Ordinary shares in issue at the beginning of the year	120,991,377	1,210	122,299,148	1,223
Ordinary shares bought back to Treasury during the year	(8,025,891)	(80)	(1,307,771)	(13)
Ordinary shares in issue at the end of the year	112,965,486	1,130	120,991,377	1,210
Treasury shares (ordinary shares 1p)
Treasury shares in issue at the beginning of the year	1,307,771	13	-	-
Ordinary shares bought back to Treasury during the year	8,025,891	80	1,307,771	13
Treasury shares in issue at end of the year	9,333,662	93	1,307,771	13
Total ordinary shares in issue and in Treasury at the end of the year	122,299,148	1,223	122,299,148	1,223

There were 8,025,891 shares bought back during the year to 31 March 2016 (2015: 1,307,771). During the year, the company issued no shares (2015: nil). The share premium represents the surplus amount over the nominal value of the issued share capital excluding costs, with any related issuance cost allocated to the special distributable capital reserve.           

The analysis of the capital reserve is as follows:

	Realised capital reserve £000	Investment holding gains £000	Total capital reserve £000
As at 31 March 2015	16,510	26,510	43,020
Losses on realisation of investments at fair value	(966)	-	(966)
Realised currency losses during the year	(10)	-	(10)
Movement in investment holdings unrealised losses	-	(7,224)	(7,224)
Capitalised expenses	(770)	-	(770)
Capital distributions	324	-	324
As at 31 March 2016	15,088	19,286	34,374

The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' 2014.

Note 12.  Analysis of net debt

	As at 31 March 2015 £000	Cash flow £000	As at 31 March 2016 £000
Cash at bank	3,762	(2,495)	1,267
Bank borrowings - sterling revolving loan	(17,000)	-	(17,000)
Net debt	(13,238)	(2,495)	(15,733)

Note 13. Related party transactions

With the exception of the management fees and secretarial fees, directors' fees and directors' shareholdings (as disclosed within the annual report and accounts), there have been no related party transactions during the year, or in the prior year.

Note 14.  Derivatives and other financial instruments

The company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income.  The company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, for the purpose of managing currency and market risks arising from the company's activities.

The main risks the company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.

The board regularly reviews and agrees policies for managing each of these risks. The investment manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term receivables and creditors.       

(i)         Market price risk

The fair value or future cash flows of a financial instrument held by the company may fluctuate because of changes in market prices.  This market risk comprises three elements - interest rate risk, currency risk and other price risk. 

Interest rate risk

Interest rate movements may affect:

·      the fair value of the investments in fixed interest rate securities;

·      the level of income receivable on cash deposits; and

·      the level of interest payable on borrowings.

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 and borrowing decisions.

The board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The company has a revolving loan with State Street Bank and Trust Company which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 15% of the total assets of the company. Details of borrowings at 31 March 2016 are shown in note 10.

Interest risk profile

The interest rate risk profile of the portfolio of financial assets (comprising cash balances only) at the balance sheet date was as follows:

As at 31  March 2016	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Fixed rate £000	Floating rate £000	Non-interest bearing £000
Assets
Sterling - undated	-	0.25	-	1,267	179,903
			-	1,267	179,903
Liabilities
Bank loan - sterling	0.1	1.21	17,000	-	-

As at 31 March 2015	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Fixed rate £000	Floating rate £000	Non-interest bearing £000
Assets
Sterling - undated	-	0.25	-	3,762	198,709
			-	3,762	198,709
Liabilities
Bank loan - sterling	0.3	1.27	17,000	-	-

The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on the bank loan is based on the interest rate payable on each tranche drawn down, which is set at each tranche drawn down, weighted by its value. The maturity date of the company's loan is shown in note 10.

The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.

The non-interest bearing assets represent the equity element of the portfolio.

Interest rate sensitivity

The sensitivity analysis below has been determined based on the exposure to interest rates at the statement of financial position date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

The following table illustrates the sensitivity of the return after taxation to an increase or decrease of 100 basis points in interest rates. This is mainly attributable to the company's exposure to the interest rate on its bank loan.

	Year to 31 March 2016		Year to 31 March 2015
	Increase in rate £000s	Decrease in rate £000	Increase in rate £000s	Decrease in rate £000
Effect on revenue return	(60)	60	(60)	60
Effect on capital return	(111)	111	(111)	111
Effect on total return and on net assets	(171)	171	(171)	171

In the opinion of the directors, the above sensitivity analysis is not representative of the year as a whole, since exposure changes as investments are made, borrowings are drawn down and repaid throughout the year.

Foreign currency risk

A significant proportion of the company's investment portfolio is invested in overseas securities and the statement of financial position can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, from time to time, match specific overseas investment with foreign currency borrowings.

The revenue account is subject to currency fluctuation arising on overseas income.

Foreign currency risk profile

Foreign currency risk exposure by currency of denomination:

	As at 31 March 2016			As at 31 March 2015
	Investments £000	Net monetary assets £000	Total currency exposure £000	Investments £000	Net monetary assets £000	Total currency exposure £000
US dollar	84,622	146	84,768	81,574	204	81,778
Euro	23,204	99	23,303	34,126	81	34,207
Swiss franc	13,267	153	13,420	16,768	141	16,909
Canadian dollar	4,904	-	4,904	4,272	-	4,272
Australian dollar	7,700	-	7,700	2,871	65	2,936
Japanese yen	3,610	42	3,652	5,923	75	5,998
Swedish krona	3,031	-	3,031	3,638	-	3,638
Hong Kong dollar	-	-	-	1,661	-	1,661
Singapore dollar	5,556	-	5,556	2,884	-	2,884
Thailand baht	-	-	-	2,266	59	2,325
Mexican peso	2,583	-	2,583	2,863	-	2,863
Total overseas investments	148,477	440	148,917	158,846	625	159,471
Pound Sterling	31,426	(15,855)	15,571	39,863	(14,302)	25,561
Total	179,903	(15,415)	164,488	198,709	(13,677)	185,032

The asset allocation between specific markets can vary from time to time based on the manager's opinion of the attractiveness of the individual markets.

Foreign currency sensitivity

At 31 March 2016, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2015.

	2016 £000	2015 £000
US dollar	4,231	4,079
Euro	1,160	1,706
Swiss franc	663	838
Canadian dollar	245	214
Australian dollar	385	144
Japanese yen	181	296
Swedish krona	152	182
Hong Kong dollar	-	83
Singapore dollar	278	144
Thailand baht	-	113
Mexican peso	129	143

Other price risk

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

It is the board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, as set out above, both act to reduce market risk. The manager actively monitors market prices throughout the year and reports to the board, which meets regularly in order to review investment strategy.  All investments held by the company are listed on the stock exchanges worldwide.

Other price risk sensitivity

The following table illustrates the sensitivity of the return after taxation and the net asset value to an increase or decrease of 15% in the fair value of the company's equities. The calculations are based on the portfolio valuations, as at the respective statement of financial position dates, and are not representative of the year as a whole.

	Year to 31 March 2016		Year to 31 March 2015
	Increase in rate £000s	Decrease in rate £000	Increase in rate £000s	Decrease in rate £000
Effect on revenue return	(57)	57	(63)	63
Effect on capital return	26,880	(26,880)	29,690	(29,690)
Effect on total return and on net assets	26,823	(26,823)	29,627	(29,627)

(ii) Liquidity risk

This is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not considered to be significant as the company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 10).

The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:

	As at 31 March 2016			As at 31 March 2015
	Three months or less £000	More than three months £000	Total £000	Three months or less £000	More than three months £000	Total £000
Trade payables: amounts falling due within one year
Interest accrued	3	-	3	-	-	-
Due to brokers	-	-	-	1,164	-	1,164
Sterling bank revolving loan	17,000	-	17,000	17,000	-	17,000
Amount due for ordinary shares bought back	256	-	256	-	-	-
Other trade payables	370	-	370	1,585	-	1,585
	17,629	-	17,629	19,749	-	19,749

(iii) Credit risk

This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the company suffering a loss.

The risk is not considered to be significant by the board, and is managed as follows:

·      investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amounts that may be due from any one broker; and

·      cash is held only with reputable banks with high quality external credit ratings.

The maximum credit risk exposure as at 31 March 2016 was £2,214,000 (2015: £6,072,000).  This was due to debtors and cash as per notes 9 and 12.

Please refer to note 17 for details of the company's stock lending and related collateral.

Fair value of financial assets and financial liabilities

All financial assets and liabilities of the company are included in the statement of financial position at fair value or the statement of financial position amount is a reasonable approximation of fair value.

Note 15.  Capital management policies and procedures

The company's capital management objectives are:

·      to ensure that the company will be able to continue as a going concern; and

·      to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt.

The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.

The board monitors and reviews the broad structure of the company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the 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.

Note 16.  Fair value hierarchy

Under FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

·      Level a: quoted prices for identical instruments in active markets;

·      Level b: prices of a recent transaction for identical instruments; and          

·      Level c: valuation techniques that use:

As at 31 March 2016 financial assets in the form of quoted equities held at fair value through profit or loss to the value of £179,903,000 were classified as Level 'a' in the fair value hierarchy (31 March 2015: quoted equities to the value of £198,709,000 classified as Level 1 - equivalent to the Level 'a' under FRS 102) with no assets classified as Level 'b', c(i) or c(ii) (31 March 2015: no assets classified as Level 2 or 3 - equivalent to Level 'b', c(i) or c(ii) under FRS 102).

The fair value of the company's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date.

Quoted equities included in Fair Value Level 'a' are actively traded on recognised stock exchanges.

Note 17. Stock lending

The company has a Securities Lending Authorisation Agreement with State Street Bank & Trust Company.

As at 31 March 2016 £42,766,000 of investments were subject to stock lending agreements and £46,164,000 was held in collateral. The collateral was held in the form of cash (in GBP, USD or EUR), government securities issued by any of the OECD countries or equity securities listed and/or traded on an exchange in the following countries: Australia, Canada, Hong Kong, Japan, New Zealand, Singapore, Switzerland and USA (2015: £nil of investments subject to stock lending, £nil held as collateral).

The gross earnings and the fees payable for the year are £115,000 (2015: £nil) and £28,000 (2015: £nil).

The maximum value of securities on loan during the year end 31 March 2016 was £67,100,000.

Note 18. Post balance sheet events

On 11 May 2016 the board declared a fourth interim dividend of 1.45p per share. As at 9 May 2016, the company had bought back a further 638,738 ordinary shares at a cost of £865,087 resulting in a further reduction of £865,087 to the special distributable reserve.

Note 19. AIFMD disclosures

In accordance with the AIFM Directive, information in relation to the company's leverage and the remuneration of the company's AIFM, Martin Currie Fund Management Limited ('MCFM'), is required to be made available to investors.  In accordance with the Directive, the AIFM's remuneration policy is available from MCFM on request (see contact details on the back cover).  The numerical remuneration disclosures in relation to the AIFMs' first relevant accounting period (year ended 31 March 2016) are available from the company secretary on request.

The company's maximum and actual leverage levels at 31 March 2016 are show below:  

Leverage Exposure	Gross Method	Commitment Method
Maximum permitted limit	150%	150%
Actual	110%	108%

The leverage limits are set by the AIFM and approved by the board and are in line with the maximum leverage levels permitted in the company's articles of association.  The AIFM is also required to comply with the gearing parameters set by the board in relation to borrowings.

Website

Securities Trust of Scotland Trust has its own dedicated website at www.securitiestrust.com.

This offers shareholders, prospective investors and their advisers a wealth of information about the company. Updated daily, it includes the following: latest prices, manager videos, performance data, portfolio information, latest monthly update, research, press releases and articles, annual and half yearly reports.

 

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