Annual Financial Report
Securities Trust of Scotland plc (the "company")
Legal Entity Identifier: 549300UZ1Y7PPQYJGE19
Annual Financial Results
Year to 31 March 2018
The financial information set out below does not constitute the company's statutory accounts for the financial year ended 31 March 2018 or financial year ended 31 March 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 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: http://www.morningstar.co.uk/uk/NSM.
The annual general meeting of the company will be held at 12.30pm on 19 September 2018, 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 2018, which are required to be published are set out on the following pages.
Financial Highlights
|
Total returns‡# (including reinvested dividends) |
Year ended 31 March 2018 % |
Year ended 31 March 2017 % |
|
Net asset value per share* |
(1.1) |
26.7 |
|
Share price |
0.2 |
27.7 |
|
Peer group† |
(1.8) |
26.1 |
|
Key data |
As at 31 March 2018 |
As at 31 March 2017 |
|
Net asset value per share (cum income) # |
170.02p |
177.83p |
|
Net asset value per share (ex income) # |
168.65p |
176.44p |
|
Share price |
160.50p |
166.00p |
|
Discount # |
5.60% |
6.65% |
|
Average discount for the 12 week period to 31 March** |
4.95% |
3.48% |
|
Net assets |
£187,784,000 |
£199,463,000 |
|
Income |
Year ended 31 March 2018 |
Year ended 31 March 2017 |
|
Revenue return per share |
5.69p |
5.74p |
|
Dividend per share |
6.10p |
5.95p |
|
Ongoing charges# |
Year ended 31 March 2018 |
Year ended 31 March 2017 |
|
Ongoing charges |
0.9% |
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 peer group.
# See Alternative Performance Measures in the company's annual report for definitions.
* Calculated using cum-income NAV with dividends reinvested.
† Please see the company's annual report for details on the company's peer group.
** Based on ex income net asset value.
Five-year record
Annual total returns with dividends reinvested over 12 month periods to 31 March
|
|
2018 |
2017 |
2016 |
2015 |
2014 |
|
Net asset value per share |
(1.1%) |
26.7% |
0.0% |
11.3% |
3.3% |
|
Share Price |
0.2% |
27.7% |
(2.2%) |
3.1% |
2.2% |
Source: Martin Currie Investment Management Limited.
Chairman's Statement
Introduction and background
The year under review has been a positive one for the global economy which strengthened throughout the year, supported by accommodative monetary policy, improved consumer confidence and benign inflation. From an equity market point of view, the financial year was one of two periods. The first, until the third week of January was very positive: equity markets responded well to the positive economic backdrop, and were encouraged further in December by a breakthrough in the first stage of the Brexit negotiations and the passing of President Trump's much heralded US tax reforms. The final ten weeks of the year however presented a much more nervous picture with concerns of more protectionist trade practises, a pick up in inflation, and less benign monetary conditions competing against a backdrop of historically high valuations in most major markets. A sharp pick up in volatility and declining markets ensued, wiping out almost all of the gains made in the earlier part of the year.
Performance and ongoing charges
The net asset value ('NAV') total return for your company over the period was -1.1%, comparing favourably with the peer group median which returned -1.8%. Since moving to an unconstrained mandate on 31 May 2016 the NAV total return has been 26.4%, against the peer group median of 23.3%.
The ongoing charges ratio fell to 0.9% (2017: 1.0%) driven by higher average net assets over the year.
Discount
The discount to NAV tightened over the 12 months to March, finishing at 5.6% (end March 2017: 6.7%). During the financial year the company bought back 1,715,576 ordinary shares into treasury, at an average price of 168.1p per share and an average discount of 6.3%. This represents 1.5% of the company's total share capital. At 31 March 2018, the company held 9.7% of its shares in treasury.
Revenue and options strategy
Revenue earnings for the year were broadly flat at 5.69p: rising markets resulted in higher management fees; in addition stock lending income and options income marginally declined. These trends were not fully offset by increases in income from the portfolio.
It's worth commenting on the income from options, as, notwithstanding the low levels of volatility experienced for most of the year and therefore lack of options writing opportunities, disciplined, tactical use of these instruments was particularly effective in the latter part of the year when volatility increased. Options income represented 11% of total income generated for the year overall (2017: 11%). This flexibility to write options gives a useful means of delivering revenue, whilst also providing the manager with the flexibility to invest in high quality companies with higher growth characteristics, but therefore often, lower yields. The manager's options writing strategy is specifically designed not to increase investment risk but to generate income in the portfolio and, at times, as a useful way of buying and selling portfolio holdings.
Dividends
The board is pleased to declare a fourth interim dividend of 1.75p which will be paid on 27 July 2018 to shareholders on the register on 6 July 2018. The total dividend for the year of 6.1p is a rise of 2.5%. This dividend increase is representative of the board's intention to deliver a progressive dividend policy, using its retained capital profits if necessary. The board believes that this policy allows the manager to focus on maximising the long run total return in the portfolio, by allowing more flexibility to hold stocks in the portfolio with greater growth characteristics, albeit with sometimes slightly lower yields. 0.27p of the fourth interim dividend was paid from capital - the first time that this policy has been put to use. Since announcing this policy in May 2015, the annual dividend has grown by an annualised 8% and the shares' yield is 3.8% at 31 March 2018*.
The company's dividends are paid quarterly. As was reported in the annual report to 31 March 2017, and as of 1 March 2018, dividends are paid in April, July, October and January. This decision was taken by the board following a review of the board meeting cycle, which resulted in the number of regular scheduled board meetings being reduced from six to five. This number of meetings is in line with many peers, and resulted in simplified administration and some cost savings to shareholders.
* Based on a dividend of 6.1p and the share price as at 31 March 2018 of 160.5p.
Management Fee
The board has agreed with the investment manager to reduce the company's annual investment management fee (referred to as the company's AIFM and company secretary fee). With effect from 1 April 2018, the company's AIFM and company secretary fee, which is calculated quarterly, is calculated at an annual rate of 0.60% of the company's net asset value up to £200 million and an annual rate of 0.40% of the company's net asset value above £200 million. This replaces the previous AIFM and company secretary fee of 0.60% of the company's net asset value. The net asset value continues to be defined as the company's net asset value adjusted by adding borrowings of the company.
Regulatory Update
Following the introduction of the Packaged Retail and Insurance-based Investment Products ("PRIIPs") regulation in January 2018, Martin Currie Fund Management, as the company's Alternative Investment Fund Manager ("AIFM") is required to produce a Key Information Document ("KID") in respect of the company, as a closed ended investment company. The regulation requires the KID to be made available to retail investors prior to them making an investment decision, and is available on the company's website. Unfortunately, the format of the KID and the methodology for calculating risks, costs, and potential returns is prescribed by the regulation. As a result, the board would like to point out to shareholders that the performance outcomes provided in the KID may not reflect anticipated returns that shareholders might experience and also that those returns are not guaranteed.
The General Data Protection Regulation ("GDPR") came into effect following the conclusion of the company's financial year. The company's agreements with third party service providers have been reviewed and updated to reflect the new obligations arising from GDPR. The company has also reviewed its processes and procedures with regards to personal information, produced a data map, and updated its privacy policy on its website to give investors full transparency as to how personal information is used by the company.
ESG (Environmental, Social, Governance) approach
Your board believes that ESG factors are an essential input into the investment management process and that positive behaviour exhibited by companies in these areas will add shareholder value over the longer term. Stewardship factors are an integral part of Martin Currie's investment philosophy and process and it has been a signatory of the Principles for Responsible Investment (PRI) since 2009. I am pleased to report that it has been awarded the highest possible rating (A+) from the PRI for each of its three top-level categories: strategy and governance, incorporation and active ownership.
Outlook
The last nine years have produced the second longest bull market in history. As the economic cycle matures, and central banks try to normalise monetary conditions following the unprecedented accommodative period of the last 10 years, it is inevitable that uncertainty over the pace of economic growth and future direction of markets is likely to increase. This provides opportunities for the unconstrained stock picker with a global opportunity set and a disciplined investment approach.
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Rachel Beagles
27 June 2018
Manager's Review
Market review
The 2018 fiscal year for the company has been an altogether more difficult operating environment than the preceding 12 months. Much like the style of businesses we invest in, strong company fundamentals have, at times, been perceived as a disadvantage by investors. High-risk, cheap leverage and accelerating growth (no matter where or how it is generated) has attracted the bulk of investment flows for much of the year. That was until the unusually long period of benign volatility ended abruptly in late January 2018. Since then, the S&P 500 in the US has posted 13 daily moves greater than 1.5%, in stark contrast to the previous 12 months (which saw only nine days where there was such a move). In the 10 months up to 23 January, the MSCI ACWI had produced a double-digit return in sterling terms, but by the end of March this had been whittled away to a mere 3% gain.
Looking back, it is very difficult to attribute the overall market outcome to one particular factor. However, it is clear that geopolitical tensions have been ratcheted up. A pressure valve erupted over the summer of 2017, when a war of words escalated between the North Korean regime and President Donald Trump. This was triggered by North Korea's tests of ballistic missiles, which drew widespread condemnation from UN members and led to the enforcement of more stringent trade sanctions. This alarmed markets at first, with risk assets selling off, but they quickly rebounded once the threat of war receded. Kim Jong-Un has since enacted a volte-face by meeting with South Korean leaders and even just recently completing denuclearisation talks with Mr Trump.
More recently, Russia has been in the spotlight, whether because of its continued support of the Syrian regime, led by President Bashar al-Assad, or its suspected involvement in the nerve-agent attack on a former Russian spy and his daughter on British soil. Russia's continued implication in violations of international humanitarian law and human rights, is sure to attract further stringent sanctions on its prominent business interests - following the unprecedented expulsion of its diplomats from countries across the European Union and US. This may put pressure on newly re-elected President Vladimir
Putin. Worryingly these tensions could have easily increased the probability of war (be it cold or otherwise), but more recently the furore has faded.
It was not just the Russians that voted over the reporting period (in March 2018). Last year's political calendar including French then German elections, held in April/May and September, respectively. The former confirmed the relatively unknown Emmanuel Macron had won enough votes to take office. Despite his relative inexperience, his political views were not seen to be particularly extreme and so the result passed without much controversy.
The German election, however, was altogether more interesting, as while Chancellor Angela Merkel won a fourth term in office, she did so with a much lower showing. The traditional political establishment, which has held sway since the second world war, sustained heavy losses, with an increase in support for the hard-right AfD party. Despite such populist discontent surrounding the elite, Ms Merkel has been able to build a fourth cabinet which was eventually sworn in on 14 March, another 'grand coalition' consisting of the Christian Democratic Union, the Christian Social Union of Bavaria and the Social Democrats (SPD). It is no doubt going to be far more difficult for this coalition to act with the same strength, in a deeply divided country, exhibiting an extremely worrying rise in right-wing nationalism.
Against this politically charged backdrop, economic growth has been strong across most major regions. A synchronised upswing in activity has been supportive to equity markets. Some call this the 'Goldilocks' macroeconomic environment, where inflation and wage growth seem to be kept in check, allowing corporate profitability to surge and global GDP forecasts to rise to 3.9% for 2018 (International Monetary Fund).
US corporate earnings have also been boosted by Mr Trump's Republican party's success in pushing through the most sweeping overhaul of the US tax system in more than three decades. As we entered the new year, earnings' forecasts by analysts for 2018 had reached fever pitch at around 15%, levels hardly seen, let alone achieved. As the likely success of this policy change became more widely accepted, US equities surged higher in late Q4, and for January 2018, produced one of the fastest rallies in recent history, and the best start to a year for the S&P 500 since 1987.
As the macroeconomic data has strengthened, the US Federal Reserve (Fed) has begun to tighten monetary policy. The cost of the protracted quantitative-easing (QE) programme to reflate the economy has been an unpalatable build up of debt, leading the Fed to initiate gradual balance-sheet normalisation, or tapering of QE. Consensus currently anticipates up to three more Fed interest rate hikes in 2018.
Whether it was this policy tightening, the bond market's anticipation of higher interest rates, or higher levels of inflation recorded for online sales over the Christmas period; individually or collectively these developments caused a sudden and aggressive spike in volatility at the end of January 2018.
The market fell almost 5%, the first meaningful correction for around 18 months. Counterintuitively, the defensive characteristics of dividend-paying equities was at first treated as a disadvantage by the market. In fact, high-quality and low volatility stocks fell aggressively, strangely acting as though they were high beta. A post mortem quickly pointed blame at low-volatility focused exchange-traded funds (ETFs), which had to supply the market with huge volumes of this style of equity, as they received unforeseen redemption pressure.
Looking back, the market leadership changed little as the sell-off took hold. Whatever the underlying reasoning, high-dividend strategies (such as Securities Trust of Scotland), struggled against this market regime. Of late, more defensive companies have begun to reassert their credentials, when further bouts of volatility have ignited throughout February and March, which has been more helpful to the portfolio.
The dispersion of sector returns over the past year has been stark, with information technology the standout winner, producing a sterling return of 16%. There has been a strong correlation between dividend yield level and performance, with the top-yielding sectors all lagging the market by some distance. Telecoms, for example, produced a sterling return of negative 11%, versus the market's 3% rise. In other words, there has been a 26 percentage-point differential between the best and worst performing sectors. Energy, utilities, consumer staples and real estate all lagged the market too, which served as a headwind for dividend strategies.
Performance
The net asset value (NAV) of the company produced a negative total return of 1.1% in (sterling) terms for the fiscal year. This put the company in the middle of the second quartile of the composite peer group, which includes over 100 comparable global equity income products using an open or closed-ended structure.
The leading sectors for the company in terms of absolute performance were information technology, materials and real estate. Our holdings in Real Estate have not only produced a high and growing income stream over the period but also strong capital growth, particularly our holding in Buwog. We held this company as we liked its structural growth profile, alongside a strategy of divesting long held residential housing assets in Austria, whilst re-investing proceeds into German property where the yields available combined with rental growth are higher. At the end of 2017, this growth profile was also recognised by Vonovia, the German listed property developer as it bought Buwog at an eighteen percent premium to the undisturbed share price. The sectors that produced negative returns included consumer discretionary, consumer staples, healthcare and telecommunications. With these higher-yielding sectors lagging more cyclically sensitive ones.
Within materials, Dutch health, nutrition and materials multinational DSM and Ibstock, a UK brick manufacturer, led the winners list. The former is benefiting from an upswing in vitamin pricing allowing improved profitability. The company also operates a performance-materials segment that produces plastic components for the autos industry among other end markets, which is also seeing a strong uplift in profitability. Ibstock continues to be an exciting opportunity to benefit from the structural imbalances of the UK housing market. According to the UK Government, there is an undersupply of new homes, caused by homebuilders poor construction rates - which are far below that of the natural demand inherent in the UK economy. Ibstock has been investing heavily in new capacity, which should ramp up to full utilisation by the end of 2019.
Information technology represents an interesting opportunity for the income investor. Although the yield level is inferior to the wider market, the potential for dividend growth (and therefore high cumulative income) over our three to five-year investment horizon is highly attractive. Companies such as Microsoft, a top performer in the portfolio, give the investor exposure to some surprisingly nascent and exciting technologies too, such as the internet of things, cloud storage, machine learning, artificial intelligence, augmented reality and even quantum computing. Taiwan Semiconductor Manufacturing also directly benefits from these structural growth trends. As we see increasing demand for data, other positives for the firm include crypto-currency mining and autonomous driving.
Consumer discretionary has been a troubled sector for the company throughout the review period. Much of the lacklustre performance can be attributed to disruption. For example, it has taken a lot of hard work to evaluate how the threat of technology could affect change to profitability of the movie-theatre chain, Cinemark. This company has seen its share price suffer, due to ubiquitous content (Netflix recently raised US$1.4 billion - surpassing Apple's US$1 billion earmarked to produce original video content) and the risk of studios pushing to shrink the movie-release window, which could lead to cinemas having less time to show movies exclusively. Other stocks in this sector which have detracted too, include Interpublic Group, the holding company of advertising agencies, and Leggett & Platt, which manufactures bed springs and car seats - which have both struggled due to disruption and an increase in competition.
After a strong performance in 2016 through to mid-2017, the holding in Philip Morris also retreated in absolute terms. Tobacco suffered as a bond proxy, due to its high dividend yield during a period of rising bond yields in the US. In addition, the relative attractiveness of its growth profile has obviously waned versus other areas of the market that are more cyclically disposed. However, we still believe this company will change the combustible-smoking market for the better. And despite the US Food and Drug Administration failing to find material clinical benefit to users of its 'heat-not-burn' technology, it has managed to sell a lot of the new devices and tobacco sticks. Just as vaping has done, this new technology seems to be gaining market share from combustibles, particularly in Japan. After all, if Philip Morris was a healthcare company, it would be snarled up in years of phased clinical trialling, something it has so far largely been able to avoid, to the benefit of profitability.
Activity
It has been another active year. We reduced exposure to the US equity market largely on valuation grounds, re-investing the proceeds into Asia, Canada and Europe. In the case of the former we felt the European economic recovery to be less mature than that of the US, leaving a longer runway for improvement. In terms of sector positioning, we increased financials, materials and information technology at the expense of industrials, telecommunications and healthcare and most of these moves proved positive ones.
New stocks of note include VF Corp, a branded lifestyle apparel company. We see the company as a key play on current consumer trends such as 'experience' and 'innovation' with its North Face, VANS and Timberland brands, and expect mid-single digit organic revenue growth. We believe the sustainability of this growth is supported by a robust balance sheet, strong environmental, social and governance (ESG) credentials and high returns. The dividend is safe and we expect it to grow at a high single-digit rate. We believe the stock is discounting close to no organic sales growth, hence the opportunity.
We also purchased Shanghai Fosun Pharmaceutical in the first quarter of 2018, a one-stop shop for Chinese healthcare exposure which has an underappreciated, yet leading, biosimilars* franchise. We believe the expansion and deepening of the Chinese populations, access to healthcare will prove to be the most attractive growth theme in global healthcare on a three to five-year view.
In June 2017, we sold a long-standing holding in Inmarsat, the global mobile satellite communications provider. For this company we had a working thesis that growth would improve, led by its maritime communications segment, but also the exciting nascent opportunity of installing WiFi on civilian commercial aircraft. We modelled an inflection in the free cash flow generated by the company and a less indebted balance sheet. All of this came into question during our stress testing and credit analysis, as we became more doubtful the growth would materialise during our investment horizon, and concerned the cost of growth (that is, capital expenditure) was rising and was likely to remain elevated. Although the holding had been troublesome, we were vindicated by the sale, as the shares have performed very poorly since, notwithstanding a recent takeover bid and the company confirmed it would cut the dividend aggressively - by over 50% - in its most recent Q1 results announcement.
Over the year we have managed to produce a significant level of options premium which can be distributed as income. This is a useful component of our toolkit and has allowed us to take a degree of pressure off the underlying portfolio, to produce the high level of portfolio yield. The low and protracted period of volatility has not been helpful to options writing, but since early February the opportunities have certainly risen to target companies we have on our buy list, at prices we deem to be attractive.
* A generic equivalent of a branded biological drug.
Outlook
As we enter the third quarter of 2018, the prolonged period of suppressed volatility is long forgotten. Perhaps the most worrying recent development, amongst populist and geopolitical tensions bubbling up once again, is the threat of an escalating trade war between the US and its main trading partners, China and Europe. This has the potential to become damaging to corporate earnings for those that depend on a high level of foreign sales, which could quickly infect investment and lower future growth.
Absent of this, the market also has to come to terms with a slowdown in relative earnings growth, after an explosive start to the year. 2018 estimated consensus earnings growth for the S&P 500 looks to be around 15%, a remarkably strong figure. However, one must take into consideration that as much as half of this heady growth number has been driven by analysts' interpretation of the boost to profitability attributed to the reduction in the US corporate tax rate. It is far from certain how corporations have been using this windfall. Some could have lowered prices of goods and products to increase sales growth at the expense of profitability. Others may have increased wages and capital investments. We have also seen companies paying down indebted balance sheets. It is likely that the reality may well be a mixture of these practices, which may not be all that good for future profitability, and markets may have already begun to discount this.
We have been surprised by the sharp slump in European leading economic indicators of late, but do not feel we are quite at the end of the economic cycle just yet. Many of the banks and industrial companies we have been speaking to recently have been highlighting confidence in the activity they are seeing in their own businesses. But we cannot ignore the fact that leading indicators such as the purchasing managers index (PMI), an indicator of the economic health of the manufacturing sector, may have peaked on a global basis. This, combined with the fact that the US Treasury yield curve is beginning to flatten, points to a worrying slowdown in activity that could be in anticipation of the onset of recession during the next year or so. Central bankers will therefore have to balance tightened monetary and fiscal policy over the coming quarters with allowing sufficient growth to continue; if they tighten too hard and fast it could choke off activity quickly.
To us, this is an excellent time to favour global equity income as an investment style. Investing in companies with robust balance sheets, exhibiting structural long-term growth, allied to sensible capital allocation and the provision of a superior dividend growth rate, presents exceptional value compared with other asset classes today.
Mark Whitehead
27 June 2018
Portfolio Summary
Portfolio distribution as at 31 March 2018
|
By region (excluding cash) |
2018 % |
2017 % |
|
North America |
48.7 |
49.6 |
|
Developed Europe |
40.8 |
38.0 |
|
Developed Asia Pacific ex Japan |
10.5 |
10.9 |
|
Japan |
- |
1.5 |
|
|
100.0 |
100.0 |
|
By sector (excluding cash) |
2018 % |
2017 % |
|
Financials |
27.5 |
26.3 |
|
Consumer goods |
17.2 |
10.5 |
|
Industrials |
16.6 |
15.2 |
|
Healthcare |
7.3 |
10.3 |
|
Technology |
7.2 |
8.0 |
|
Oil & gas |
6.9 |
7.7 |
|
Basic materials |
8.0 |
6.1 |
|
Consumer services |
4.0 |
8.3 |
|
Utilities |
3.1 |
2.8 |
|
Telecommunications |
2.2 |
4.8 |
|
|
100.0 |
100.0 |
|
By asset class (including cash and borrowings) |
2018 % |
2017 % |
|
Equities |
110.3 |
111.5 |
|
Options* |
(0.3) |
- |
|
Cash |
3.0 |
1.5 |
|
Less borrowings |
(13.0) |
(13.0) |
|
|
100.0 |
100.0 |
* Options held as at 31 March 2017: (0.03%). Further details of options held are shown in the portfolio holdings section below.
|
Largest 10 holdings |
|
|
|
|
|
|
31 March 2018 |
31 March 2018 |
31 March 2017 |
31 March 2017 |
|
Chevron |
6,446 |
3.1 |
7,262 |
3.3 |
|
Microsoft |
6,438 |
3.1 |
5,040 |
2.3 |
|
Koninklijke DSM |
5,394 |
2.6 |
4,139 |
1.9 |
|
Huntington Bancshares |
5,265 |
2.5 |
5,237 |
2.4 |
|
Schneider Electric SE |
5,159 |
2.5 |
- |
- |
|
Taiwan Semiconductor |
5,036 |
2.4 |
5,069 |
2.3 |
|
ING Groep |
5,011 |
2.4 |
5,041 |
2.3 |
|
Manulife Financial |
4,894 |
2.4 |
- |
- |
|
Merck & Co |
4,820 |
2.3 |
5,187 |
2.4 |
|
Airbus |
4,762 |
2.3 |
4,009 |
1.8 |
|
Portfolio Holdings As at 31 March 2018
|
Sector |
Country |
Market value |
% of total |
|
North America |
|
|
100,846 |
48.7 |
|
Chevron |
Oil & gas |
United States |
6,446 |
3.1 |
|
Microsoft |
Technology |
United States |
6,438 |
3.1 |
|
Huntington Bancshares |
Financials |
United States |
5,265 |
2.5 |
|
Manulife Financial |
Financials |
Canada |
4,894 |
2.4 |
|
Merck & Co |
Healthcare |
United States |
4,820 |
2.3 |
|
Crown Castle International |
Financials |
United States |
4,671 |
2.3 |
|
Eaton |
Industrials |
United States |
4,472 |
2.2 |
|
Bank of Montreal |
Financials |
Canada |
4,468 |
2.2 |
|
Credicorp |
Financials |
United States |
4,405 |
2.1 |
|
BB&T Corp |
Financials |
United States |
4,344 |
2.1 |
|
Phillip Morris International |
Consumer goods |
United States |
4,301 |
2.1 |
|
Time Warner |
Consumer services |
United States |
4,297 |
2.1 |
|
Suncor Energy |
Oil & gas |
Canada |
4,190 |
2.0 |
|
3M |
Industrials |
United States |
4,018 |
1.9 |
|
International Paper Company |
Basic materials |
United States |
3,973 |
1.9 |
|
Occidental Petroleum |
Oil & gas |
United States |
3,802 |
1.8 |
|
WEC Energy Group |
Utilities |
United States |
3,790 |
1.8 |
|
Procter & Gamble |
Consumer goods |
United States |
3,583 |
1.7 |
|
Blackstone Group |
Financials |
United States |
3,581 |
1.7 |
|
Apple |
Technology |
United States |
3,518 |
1.7 |
|
BCE |
Basic materials |
Canada |
3,501 |
1.7 |
|
Leggett & Platt |
Consumer goods |
United States |
3,266 |
1.6 |
|
VF Corp |
Consumer goods |
United States |
2,951 |
1.4 |
|
Paychex |
Industrials |
United States |
1,852 |
1.0 |
|
Developed Europe |
|
|
84,654 |
41.1 |
|
Koninklijke DSM |
Basic materials |
Netherlands |
5,394 |
2.6 |
|
Schneider Electric SE |
Industrials |
France |
5,159 |
2.5 |
|
ING Groep |
Financials |
Netherlands |
5,011 |
2.4 |
|
Airbus |
Industrials |
France |
4,762 |
2.3 |
|
Deutsche Telekom |
Telecommunications |
Germany |
4,647 |
2.2 |
|
Unilever |
Consumer goods |
Netherlands |
4,380 |
2.1 |
|
Continental AG |
Consumer goods |
Germany |
4,215 |
2.0 |
|
Banca Generali |
Financials |
Italy |
4,145 |
2.0 |
|
HSBC Holdings |
Financials |
United Kingdom |
4,088 |
2.0 |
|
Compagnie Financiére Richemont |
Consumer goods |
Switzerland |
3,977 |
1.9 |
|
Britvic |
Consumer goods |
United Kingdom |
3,970 |
1.9 |
|
Securitas AB |
Industrials |
Sweden |
3,872 |
1.9 |
|
Kingfisher |
Consumer services |
United Kingdom |
3,857 |
1.9 |
|
Sanofi |
Healthcare |
France |
3,758 |
1.8 |
|
Akzo Nobel |
Basic materials |
Netherlands |
3,720 |
1.8 |
|
DS Smith |
Industrials |
United Kingdom |
3,512 |
1.7 |
|
Civitas Social Housing |
Financials |
United Kingdom |
3,450 |
1.7 |
|
SSE |
Utilities |
United Kingdom |
2,723 |
1.4 |
|
British American Tobacco |
Consumer goods |
United Kingdom |
2,664 |
1.3 |
|
Ibstock |
Industrials |
United Kingdom |
2,662 |
1.3 |
|
Hastings Group |
Financials |
United Kingdom |
2,563 |
1.3 |
|
Greencoat UK Wind |
Financials |
United Kingdom |
2,125 |
1.1 |
|
Developed Asia Pacific ex Japan |
|
21,648 |
10.5 |
|
|
Taiwan Semiconductor |
Technology |
Taiwan |
5,036 |
2.4 |
|
Sonic Healthcare |
Healthcare |
Australia |
4,325 |
2.1 |
|
Transurban Group |
Industrials |
Australia |
4,104 |
2.0 |
|
United Overseas Bank |
Financials |
Singapore |
3,694 |
1.8 |
|
Shanghai Fosun Pharmaceutical |
Healthcare |
Hong Kong |
2,329 |
1.1 |
|
Samsung Electronics |
Consumer goods |
Korea |
2,160 |
1.1 |
|
Derivatives - written options contracts |
|
(475) |
(0.3) |
|
|
Caixabank SA |
Financials |
Spain |
(128) |
(0.1) |
|
Meggit |
Industrials |
United Kingdom |
(347) |
(0.2) |
|
Total portfolio |
|
|
206,673 |
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 in the table 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 in the table 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.
The majority 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, and currently does, 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 index, 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.
Operational Risk - The company has outsourced its entire operational infrastructure to third party providers. Contracts and service level agreements have been arranged to ensure that the service provided by each third party provider is of a sufficiently professional and technically high standard. The board receives and reviews control reports from all service providers. Periodically, the board requests representatives from third party service providers to attend board meetings to give the board the opportunity to discuss the controls that are in place directly with the third party providers. The board receives and reviews control reports from all service providers. The board carries out an annual evaluation of its service providers and gives regular feedback to the investment manager through the management engagement committee.
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 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 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 27 June 2018.
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 2018 is shown on the statement of financial position and the cash flows of the company are set out below. Note 15 below sets out the company's risk management policies, including those covering market price risk, liquidity risk and credit risk.
The company has a two year revolving credit facility for £10,000,000 and a multi-currency seven year fixed facility in three tranches of £1,500,000, €4,500,000 and US$ 12,750,000, all of which were fully drawn down at the year-end date. 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 facilities.
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 the 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 2016 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 97% within three 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.
Rachel Beagles
Chairman
27 June 2018
Statement of Comprehensive Income
|
|
|
Year to 31 March 2018 |
Year to 31 March 2017 |
||||
|
|
Note |
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
Net (losses) / gains on investments |
8 |
- |
(8,277) |
(8,277) |
- |
37,335 |
37,335 |
|
Net currency gains / (losses) |
|
(46) |
906 |
860 |
86 |
(143) |
(57) |
|
Income |
3 |
8,339 |
- |
8,339 |
8,174 |
- |
8,174 |
|
Investment management fee |
|
(428) |
(794) |
(1,222) |
(404) |
(751) |
(1,155) |
|
Other expenses |
4 |
(618) |
- |
(618) |
(603) |
- |
(603) |
|
Net return before finance costs and taxation |
|
7,247 |
(8,165) |
(918) |
7,253 |
36,441 |
43,694 |
|
Finance costs |
5 |
(187) |
(314) |
(501) |
(174) |
(295) |
(469) |
|
Net return on ordinary activities before taxation |
|
7,060 |
(8,479) |
(1,419) |
7,079 |
36,146 |
43,225 |
|
Taxation on ordinary activities |
7 |
(693) |
- |
(693) |
(639) |
- |
(639) |
|
Net return attributable to ordinary redeemable shareholders |
|
6,367 |
(8,479) |
(2,112) |
6,440 |
36,146 |
42,586 |
|
Net return per ordinary redeemable share (basic and diluted) |
2 |
5.69p |
(7.58p) |
(1.89p) |
5.74p |
32.21p |
37.95p |
The total columns of this statement are the profit and loss accounts of the company.
The revenue and capital items are presented in accordance with the Association of Investment Companies (AIC) Statement of Recommended Practice (SORP 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 below form part of these financial statements.
Statement of Financial Position
|
|
|
As at 31 March 2018 |
As at 31 March 2017 |
||
|
|
Note |
£000 |
£000 |
£000 |
£000 |
|
Fixed assets |
|
|
|
|
|
|
Investments at fair value through profit or loss |
8 |
|
206,673 |
|
219,809 |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Trade and other receivables** |
9 |
674 |
|
751 |
|
|
Cash and cash equivalents** |
|
7,092 |
|
4,950 |
|
|
|
|
7,766 |
|
5,701 |
|
|
Current liabilities |
|
|
|
|
|
|
Trade payables - amounts falling due within one year |
10 |
(10,519) |
|
(10,502) |
|
|
Dividend payable |
6 |
(1,602) |
|
|
|
|
Total current liabilities |
|
(12,121) |
|
(10,502) |
|
|
Net current liabilities |
|
|
(4,355) |
|
(4,801) |
|
Total assets less current liabilities |
|
|
202,318 |
|
215,008 |
|
Trade payables - amounts falling due after more than one year |
11 |
|
(14,534) |
|
(15,545) |
|
Net assets |
|
|
187,784 |
|
199,463 |
|
Capital and reserves |
|
|
|
|
|
|
Called up ordinary share capital |
12 |
|
1,223 |
|
1,223 |
|
Capital redemption reserve |
|
|
78 |
|
78 |
|
Share premium reserve |
|
|
30,040 |
|
30,040 |
|
Special distributable reserve* |
|
|
92,772 |
|
95,692 |
|
Capital reserve* |
12 |
|
62,041 |
|
70,520 |
|
Revenue reserve* |
|
|
1,630 |
|
1,910 |
|
Total shareholders' funds |
|
|
187,784 |
|
199,463 |
|
Net asset value per ordinary redeemable share |
2 |
|
170.02p |
|
177.83p |
* These reserves are distributable.
**Prior year balances have been restated to include UBS collateral in the cash balances for both years.
The company is registered in Scotland no.283272.
The notes form part of these financial statements
The aggregate amount of called up share capital as at 31 March 2018 is £1,222,991 (2017: £1,222,991).
The financial statements were approved by the board and signed on its behalf by Rachel Beagles, Chairman
Statement of Changes in Equity
|
For the year ended 31 March 2018 |
Note |
Called up £000 |
Capital reserve £000 |
Share Reserve £000 |
Special reserve* £000 |
reserve* £000 |
reserve* £000 |
|
|
As at 31 March 2017 |
|
1,223 |
78 |
30,040 |
95,692 |
70,520 |
1,910 |
199,463 |
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
(8,479) |
6,367 |
(2,112) |
|
Ordinary shares bought back during the year |
12 |
- |
- |
- |
(2,920) |
- |
- |
(2,920) |
|
Dividends paid |
6 |
|
- |
- |
- |
- |
(6,647) |
(6,647) |
|
Balance at 31 March 2017 |
|
1,223 |
78 |
30,040 |
92,772 |
62,041 |
1,630 |
187,784 |
|
For the year ended 31 March 2017 |
Note |
Called up £000 |
Capital reserve £000 |
Share Reserve £000 |
Special reserve* £000 |
reserve* £000 |
reserve* £000 |
|
|
As at 31 March 2016 |
|
1,223 |
78 |
30,040 |
96,795 |
34,374 |
1,978 |
164,488 |
|
Net return attributable to shareholders** |
2 |
- |
- |
- |
- |
36,146 |
6,440 |
42,586 |
|
Ordinary shares bought back during the year |
12 |
- |
- |
- |
(1,103) |
- |
- |
(1,103) |
|
Dividends paid |
6 |
|
- |
- |
- |
- |
(6,508) |
(6,508) |
|
Balance at 31 March 2017 |
|
1,223 |
78 |
30,040 |
95,692 |
70,520 |
1,910 |
199,463 |
*These reserves are distributable.
**The company does not have any other income or expenses that are not included in the 'Net return attributable to ordinary redeemable shareholders' as disclosed in the Statement of Comprehensive Income above, and therefore this is also the 'Total comprehensive income' for the year.
The notes form part of these financial statements.
|
Statement of Cashflow
|
|
Year to |
Year to |
||
|
|
Note |
£000 |
£000 |
£000 |
£000 |
|
Cash flows from operating activities |
|
|
|
|
|
|
(Losses)/gains before tax |
|
|
(1,419) |
|
43,225 |
|
Adjustments for: |
|
|
|
|
|
|
Losses/(gains) on investments |
8 |
8,277 |
|
(37,335) |
|
|
Capital distribution received* |
|
27 |
|
- |
|
|
Finance costs |
5 |
501 |
|
469 |
|
|
Purchases of investments** |
8 |
(93,620) |
|
(102,716) |
|
|
Sales of investments** |
8 |
98,452 |
|
100,145 |
|
|
Dividend income |
3 |
(7,418) |
|
(7,136) |
|
|
Interest income |
3 |
- |
|
(3) |
|
|
Stock lending income |
3 |
(35) |
|
(115) |
|
|
Premium income - written options |
3 |
(886) |
|
(920) |
|
|
Dividend received |
|
7,335 |
|
7,348 |
|
|
Interest income received |
|
- |
|
3 |
|
|
Stock lending income received |
|
100 |
|
54 |
|
|
Premium income received - written options |
3 |
886 |
|
920 |
|
|
Decrease/(increase) in receivables**** |
|
95 |
|
45 |
|
|
(Decrease)/increase in payables |
|
(30) |
|
116 |
|
|
Overseas withholding tax suffered |
7 |
(693) |
|
(639) |
|
|
|
|
|
12,991 |
|
39,764 |
|
Net cash flows from operating activities**** |
|
|
11,572 |
|
3,461 |
|
Cash flows from financing activities |
|
|
|
|
|
|
Repurchase of ordinary share capital |
|
(2,871) |
|
(1,359) |
|
|
Movement in bank borrowings - revolving loan |
|
- |
|
8,545 |
|
|
Exchange movement on bank borrowings |
13 |
(1,011) |
|
- |
|
|
Equity dividends paid*** |
6 |
(5,045) |
|
(6,508) |
|
|
Interest paid on borrowings |
|
(503) |
|
(456) |
|
|
Net cash flows from financing activities |
|
|
(9,430) |
|
222 |
|
Net increase in cash and cash equivalents**** |
|
|
2,142 |
|
3,683 |
|
Cash and cash equivalents at the start of the year |
|
|
4,950 |
|
1,267 |
|
Cash and cash equivalents at the end of the year**** |
|
|
7,092 |
|
4,950 |
* This relates to the proceeds for the capital dividend from Singapore Communications.
** 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 fund's dealing operations.
*** Excludes 3rd Interim dividend paid 23 April 2018.
****Prior year balances have been restated to include UBS collateral in the cash balances for both years.
The notes form part of these financial statements.
Notes to the Financial Statements
Note 1. Accounting policies
a) For the year ended 31 March 2018, the company is applying Financial Reporting Standard 102 ('FRS 102') applicable in the UK and Republic of Ireland, which forms part of the Generally Accepted Accounting Practice (UK GAAP) issued by the Financial Reporting Council ('FRC') in 2015.
These financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS102 issued by the FRC in September 2015 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 and updated in January 2017. They are also prepared under the historical cost convention modified to include the revaluation of investment at fair value.
Statement of estimation uncertainty - in the application of the company's accounting policies, the board is required to make judgements, estimates and assumptions about carrying values of assets and liabilities that are not always readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may vary from these estimates. There have been no significant judgements, estimates or assumptions for the year.
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. This is also the currency in which all expenses and dividends are paid in.
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 are 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) Acquisitions 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 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 at fair value, with loans/debt valued at amortised costs.
j) 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 include the amount of consideration paid, including directly attributable costs and are 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 re-measured 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.
During the year ending 31 March 2017 the company commenced the writing of options, continuing through to the year ending 31 March 2018. These derivatives are held at fair value based on the bid/offer prices of the options written to which the company is exposed. The value of the option is subsequently marked-to-market to reflect the fair value of the option based on traded prices. The primary purpose behind the writing of options is to receive the premium, thus any premium received is considered to be revenue in nature and presented under revenue in the statement of comprehensive income. When an option is closed out or exercised, the gain or loss is accounted for as a capital gain or loss.
n) Stock lending income is received net of associated costs and recognised in revenue as earned.
o) Nature of distributable reserve accounts
Capital reserve
Gains and losses on realisations of fixed asset investments, and transactions costs, together with appropriate exchange differences, are dealt with in this reserve.
Increases and decreases in the valuation of fixed asset investments are also dealt with in this reserve along with payment of capital dividend. Also taken to this reserve are management fees.
Revenue reserve
Net revenue profits and losses of the company and the fair value costs of share based payments which are revenue in nature are recorded within this reserve, together with the dividend payment made by the company.
Special distributable reserve
Records the transactions of shares which are capital in nature - shares bought back into treasury and the related stamp duty incurred.
Note 2. Returns and net asset value
|
|
Year to |
Year to |
|
Revenue return |
|
|
|
Revenue return attributable to ordinary redeemable shareholders |
£6,367,000 |
£6,440,000 |
|
Weighted average number of shares in issue during the year |
111,910,413 |
112,230,759 |
|
Revenue return per ordinary redeemable share (basic and diluted) |
5.69p |
5.74p |
|
Capital return |
|
|
|
Capital return attributable to ordinary redeemable shareholders |
(£8,479,000) |
£36,146,000 |
|
Weighted average number of shares in issue during the year |
111,910,413 |
112,230,759 |
|
Capital return per ordinary redeemable share (basic and diluted) |
(7.58p) |
32.21p |
|
Total return |
|
|
|
Total return per ordinary redeemable share (basic and diluted) |
(1.89p) |
37.95p |
|
Net asset value per share |
|
|
|
Net assets attributable to shareholders |
£187,784,000 |
£199,463,000 |
|
Number of shares in issue at year end |
110,446,792 |
112,162,368 |
|
Net asset value per share |
170.02p |
177.83p |
Total return
The total return per share for the company is the combined effect of the rise and fall in the share price or NAV together with the reinvestment of the quarterly dividends paid.
The tables below provide the NAVs and share prices of the company on the dividend reinvestment dates for the year ended 31 March 2018 and 31 March 2017.
|
2018 |
Dividend rate |
NAV |
Share price |
|
31 March 2017 |
n/a |
177.83 |
166.00 |
|
15 June 2017 |
1.60 |
181.72 |
170.13 |
|
24 August 2017 |
1.45 |
181.51 |
169.50 |
|
23 November 2017 |
1.45 |
183.58 |
171.25 |
|
29 March 2018 |
1.45 |
170.22 |
160.50 |
|
31 March 2018 |
n/a |
170.02 |
160.50 |
|
Total return |
|
(1.10%) |
0.20% |
|
|
|
|
|
|
2017 |
|
|
|
|
31 March 2016 |
n/a |
145.61 |
135.00 |
|
26 May 2016 |
1.45 |
142.00 |
132.75 |
|
25 August 2016 |
1.45 |
162.97 |
151.25 |
|
24 November 2016 |
1.45 |
164.41 |
157.50 |
|
23 February 2017 |
1.45 |
174.18 |
168.25 |
|
31 March 2017 |
n/a |
177.83 |
166.00 |
|
Total return |
|
26.70% |
27.70% |
Note 3. Revenue
|
|
Year to £000 |
Year to £000 |
|
From listed investments |
|
|
|
UK - equities |
1,347 |
815 |
|
Overseas - equities |
6,071 |
6,321 |
|
|
7,418 |
7,136 |
|
Other revenue |
|
|
|
Interest on deposits |
- |
3 |
|
Premium - written options |
886 |
920 |
|
Stock lending |
35 |
115 |
|
|
8,339 |
8,174 |
Capital dividend received
During the year ended 31 March 2018, the company received a capital dividend of £27,200 from Singapore Communications, as shown in note 8. (2017: £nil).
Note 4. Other expenses
|
|
Year to £000 |
Year to £000 |
|
Bank charges and custody fees |
24 |
22 |
|
Depositary fees |
45 |
40 |
|
Directors' fees |
120 |
135 |
|
Employers' national insurance contributions |
12 |
13 |
|
Irrecoverable VAT |
31 |
23 |
|
Legal fees |
8 |
17 |
|
Printing and postage |
13 |
17 |
|
Registrar's fees |
55 |
54 |
|
Secretarial fee |
106 |
103 |
|
Other |
184 |
158 |
|
Total |
598 |
582 |
|
Auditors' remuneration: |
|
|
|
- audit services |
18 |
17 |
|
- non-audit services |
2 |
4 |
|
|
618 |
603 |
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.
|
|
Year to 31 March 2018 |
Year to 31 March 2017 |
||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
|
Ongoing charges are calculated with reference to the following figures: |
|
|
|
|
|
|
|
Investment management fee |
(428) |
(794) |
(1,222) |
(404) |
(751) |
(1,155) |
|
Other expenses |
(618) |
- |
(618) |
(603) |
- |
(603) |
|
Total expenses |
(1,046) |
(794) |
(1,840) |
(1,007) |
(751) |
(1,758) |
|
Average net assets over the year |
|
|
202,270 |
|
|
165,917 |
|
Ongoing charges |
|
|
0.90% |
|
|
1.00% |
Note 5. Finance costs
|
|
Year to 31 March 2018 |
Year to 31 March 2017 |
||||
|
Revenue £000 |
Capital £000 |
Total £000 |
Revenue £000 |
Capital £000 |
Total £000 |
|
|
Interest on bank loans and overdrafts |
187 |
314 |
501 |
174 |
295 |
469 |
Note 6. Dividends
|
|
Year to £000 |
Year to £000 |
|
Year ended 31 March 2016 - fourth interim dividend of 1.45p |
- |
1,629 |
|
Year ended 31 March 2017 - first interim dividend of 1.45p |
- |
1,627 |
|
Year ended 31 March 2017 - second interim dividend of 1.45p |
- |
1,626 |
|
Year ended 31 March 2017 - third interim dividend of 1.45p |
- |
1,626 |
|
Year ended 31 March 2017 - fourth interim dividend of 1.60p |
1,794 |
- |
|
Year ended 31 March 2018 - first interim dividend of 1.45p |
1,626 |
- |
|
Year ended 31 March 2018 - second interim dividend of 1.45p |
1,625 |
- |
|
Year ended 31 March 2018 - third interim dividend of 1.45p |
1,602 |
- |
|
|
6,647 |
6,508 |
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 £000 |
Year to £000 |
|
First interim dividend of 1.45p for the year ended 31 March 2018 (2017: 1.45p) |
1,626 |
1,627 |
|
Second interim dividend of 1.45p for the year ended 31 March 2018 (2017: 1.45p) |
1,625 |
1,626 |
|
Third interim dividend of 1.45p for the year ended 31 March 2017 (2016: 1.45p) |
1,602 |
1,626 |
|
Proposed fourth interim dividend of 1.75p for the year ended 31 March 2018 (2017: 1.60p) |
1,933 |
1,794 |
|
|
6,786 |
6,673 |
During the year the directors received dividends of 5.95p (2017: 5.8p) per share. Directors' shareholdings are disclosed in the company's annual report. The revenue reserves as at 31 March 2018 are £1,630,000, of this £1,630,000 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 £000 |
Year to £000 |
|
Foreign tax |
693 |
639 |
The corporation tax rate was 19.0% (2017: 20.0%). The corporation tax main rate decreased from 20% to 19% from 1 April 2017 in line with tax legislation changes contained within the Finance Act 2016. The tax charge for the year differs from the charge resulting from applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below:
|
|
Year to £000 |
Year to £000 |
|
Net return on ordinary activities before taxation |
(1,419) |
43,225 |
|
Corporation tax at standard rate of 19% (2017: 20%) |
(270) |
8,645 |
|
Effects of: |
|
|
|
Losses/(gains) on investments not taxable |
1,573 |
(7,467) |
|
Non taxable UK dividend income |
(256) |
(163) |
|
Overseas dividends not taxable |
(1,040) |
(1,176) |
|
Overseas tax suffered |
693 |
639 |
|
Currency (gains)/losses not taxable |
(172) |
29 |
|
Increase in excess management and loan expenses |
174 |
144 |
|
Impact of expensed foreign tax |
(9) |
(12) |
|
Total tax charge |
693 |
639 |
As at 31 March 2018, the company had unutilised management expenses of £15,394,000 (2017: £14,477,484) carried forward. 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.
Note 8. Investments at fair value through profit or loss
|
|
Year to £000 |
Year to £000 |
|
UK listed investments held at fair value through profit or loss |
31,614 |
35,183 |
|
Overseas listed investments held at fair value through profit or loss |
175,534 |
184,683 |
|
Total value of financial asset investments |
207,148 |
219,866 |
|
Derivative financial instruments - written option contracts |
(475) |
(57) |
|
Valuation of investments and derivatives |
206,673 |
219,809 |
|
Opening valuation |
219,809 |
179,903 |
|
Opening unrealised gains |
(47,059) |
(19,286) |
|
Opening cost |
172,750 |
160,617 |
|
Acquisitions at cost |
93,620 |
102,716 |
|
Disposal proceeds |
(98,452) |
(100,145) |
|
Gains on disposal of investments and derivatives |
20,524 |
9,562 |
|
Disposals at cost |
(77,928) |
(90,583) |
|
Closing cost |
188,442 |
172,750 |
|
Add: unrealised gains |
18,231 |
47,059 |
|
Closing valuation |
206,673 |
219,809 |
There were no fixed interest securities as at 31 March 2018 (2017: 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 and derivatives |
Year to |
Year to |
|
Net gains on disposal of investments and derivatives |
20,524 |
9,562 |
|
Movement in unrealised (losses)/gains |
(28,828) |
27,773 |
|
Capital distributions |
27 |
- |
|
|
(8,277) |
(37,335) |
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/(losses) on investments in the statement of comprehensive income. The total costs were as follows:
|
|
Year to |
Year to |
|
Acquisitions |
168 |
208 |
|
Disposals |
146 |
145 |
|
|
314 |
353 |
Note 9. Trade and other receivables
|
|
As at |
As at |
|
Dividends receivable |
547 |
464 |
|
Tax recoverable |
125 |
201 |
|
Prepayments and other debtors |
- |
19 |
|
Stock lending income receivable |
2 |
67 |
|
|
574 |
751 |
*Cash held at broker disclosed as cash and cash equivalents for the year ended 31 March 2017.
None of the company's trade receivables are past due or impaired.
Note 10. Trade payables - amounts falling due within one year
|
|
As at |
As at |
|
Interest accrued |
14 |
16 |
|
Sterling bank revolving loan |
10,000 |
10,000 |
|
Amount due for ordinary shares bought back |
49 |
- |
|
Other trade payables |
456 |
486 |
|
|
10,519 |
10,502 |
Note 11. Trade payables - amounts falling due after more than one year
|
|
As at |
As at |
|
Bank loan |
14,534 |
15,545 |
On 19 September 2016 the company entered into an agreement with the Royal Bank of Scotland Plc for £1,500,000 (Facility A), €4,500,000 (Facility B) and US$12,750,000 (Facility C) term loans and £10,000,000 (Facility D) multi-currency revolving credit facility agreement.
The term loans carry an annual fixed rate interest of 2.1408%, 1.4175% and 3.1925% for Facility A, Facility B and Facility C respectively. The rate of interest for the revolving credit facility is set at each roll-over date and is made up of a fixed margin of 0.5% plus LIBOR rate. Under this agreement £10,000,000 was drawn at 22 March 2018 at a rate of 1.1515% with a maturity date of 22 June 2018.
The repayment date of the term loans is the same as their termination date which is 19 September 2023. The repayment date of the revolving facility is the last day of its interest period and the termination date is 19 September 2018.
Under the loan agreements the company is to ensure that, at each month end, the aggregate principal amount outstanding in respect of monies borrowed does not exceed an amount equal to 25% of its net tangible assets and, unless otherwise agreed with the lender, net tangible assets are not less than £100,000,000. Also the company shall not enter into any obligations except with the prior consent of the Lender and not enter into any option writing programme which the value of its transactions, at any time, exceed 15% of its net tangible assets.
As at 31 March 2018 the company had drawn down the full amount of the loan and the balances as at that date were for Facility A £1,500,000, Facility B £3,945,000 (€4,500,000), Facility C £9,089,000 (US$12,750,000) and Facility D £10,000,000.
Note 12. Called up share capital
|
|
Number of shares |
As at |
Number of shares |
As at |
|
Ordinary shares of 1p |
|
|
|
|
|
Ordinary shares in issue at the beginning of the year |
112,162,368 |
1,122 |
112,965,486 |
1,130 |
|
Ordinary shares bought back to Treasury during the year |
(1,715,576) |
(17) |
(803,118) |
(8) |
|
Ordinary shares in issue at the end of the year |
110,446,792 |
1,105 |
112,162,368 |
1,122 |
|
Treasury shares (ordinary shares 1p) |
|
|
|
|
|
Treasury shares in issue at the beginning of the year |
10,136,780 |
101 |
9,333,662 |
93 |
|
Ordinary shares bought back to Treasury during the year |
1,715,576 |
17 |
803,118 |
8 |
|
Treasury shares in issue at the end of the year |
11,852,356 |
118 |
10,136,780 |
101 |
|
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 1,715,576 shares bought back during the year to 31 March 2018 at a cost of £2,920,000 (2017: 803,118 at a cost of £1,103,000). During the year, the company issued no shares (2017: 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 £000 |
|
As at 31 March 2017 |
23,461 |
47,059 |
70,520 |
|
Gains on realisation of investments at fair value |
20,524 |
- |
20,524 |
|
Realised currency losses during the year |
906 |
- |
906 |
|
Movement in unrealised gains |
- |
(28,828) |
(28,828) |
|
Capitalised expenses |
(1,108) |
- |
(1,108) |
|
Capital distributions |
27 |
- |
27 |
|
As at 31 March 2018 |
43,810 |
18,231 |
62,041 |
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 13. Analysis of debt
|
|
As at £000 |
Cash flows £000 |
Exchange movements £000 |
As at £000 |
|
Cash at bank* |
4,950 |
2,142 |
- |
7,092 |
|
Bank borrowings |
(25,545) |
- |
1,011 |
(24,534) |
|
Net debt |
(20,595) |
2,142 |
1,011 |
(17,442) |
*Prior year balances have been restated to include UBS collateral in the cash balances for both years.
Note 14. Related party transactions
With the exception of the management fees and secretarial fees, directors' fees and directors' shareholdings (as disclosed within the company's annual report and accounts), there have been no related party transactions during the year, or in the prior year.
Note 15. 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 (a) market price risk (comprising of (i) interest rate risk, (ii) currency risk and (iii) other price risk), (b) liquidity risk and (c) credit risk.
The board regularly reviews and agrees policies for managing each of these risks. The 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, other than for currency disclosures.
(a) 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, foreign currency risk and other price risk.
(i) Market risk arising from 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 the Royal Bank of Scotland Plc which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 20 per cent of the net tangible assets of the company. Details of borrowings at 31 March 2018 are shown in note 10 above.
Interest risk profile
The interest rate risk profile of the portfolio of financial assets (comprising cash balances only) at the year end was as follows:
|
As at 31 March 2018 |
Interest rate % |
Local currency 000 |
Foreign exchange rate |
GBP sterling equivalent £000 |
|
Assets: |
|
|
|
|
|
Sterling |
0.01 |
6,175 |
1.000 |
6,175 |
|
Euro |
(0.60) |
1,018 |
1.141 |
892 |
|
US dollar |
0.28 |
(2) |
1.403 |
(1) |
|
Swedish krona |
(1.50) |
307 |
11.748 |
26 |
|
Total |
|
|
|
7,092 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling |
1.54 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.141 |
3,945 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.403 |
9,089 |
|
Total |
|
|
|
24,534 |
|
As at 31 March 2017 |
Interest rate % |
Local currency 000 |
Foreign exchange rate
|
GBP sterling equivalent £000 |
|
Assets: |
|
|
|
|
|
Sterling* |
0.01 |
4,395 |
1.000 |
4,395 |
|
Euro* |
(0.60) |
605 |
1.169 |
518 |
|
US dollar |
0.09 |
47 |
1.250 |
37 |
|
Total |
|
|
|
4,950 |
|
Liabilities: |
|
|
|
|
|
Bank loan - GBP sterling |
2.14 |
1,500 |
1.000 |
1,500 |
|
Bank loan - GBP sterling |
0.84 |
10,000 |
1.000 |
10,000 |
|
Bank loan - Euro |
1.42 |
4,500 |
1.169 |
3,849 |
|
Bank loan - US dollar |
3.19 |
12,750 |
1.250 |
10,196 |
|
Total |
|
|
|
25,545 |
*Prior year balances have been restated to include UBS collateral in the cash balances for both years.
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 50 (2017: 25) basis points in interest rates. This change in basis points represents the Bank of England Rate change from 0.25% to 0.5% on 2 November 2017. This is mainly attributable to the company's exposure to the interest rate on its bank loan.
|
|
Year to 31 March 2018 |
Year to 31 March 2017 |
||
|
|
Increase in rate |
Decrease in rate |
Increase in rate |
Decrease in rate |
|
Effect on revenue return |
(43) |
43 |
(22) |
22 |
|
Effect on capital return |
(80) |
80 |
(42) |
42 |
|
Effect on total return and on net assets |
(123) |
123 |
(64) |
64 |
In the opinion of the directors, the above sensitivity analysis may not be representative of the year as a whole, since exposure may change as investments are made, borrowings are drawn down and may be repaid throughout the year.
(ii) Market risk arising from 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 2018 |
As at 31 March 2017 |
||||
|
|
Investment exposure £000 |
Net monetary exposure £000 |
Total currency exposure £000 |
Investment exposure £000 |
Net monetary exposure £000 |
Total currency exposure £000 |
|
US dollar |
88,829 |
(9,961) |
78,868 |
104,314 |
(9,937) |
94,377 |
|
Euro |
45,064 |
(7,774) |
37,290 |
33,115 |
(2,204) |
30,911 |
|
Swiss franc |
3,977 |
80 |
4,057 |
12,121 |
157 |
12,278 |
|
Canadian dollar |
17,054 |
40 |
17,094 |
9,755 |
- |
9,755 |
|
Australian dollar |
8,428 |
53 |
8,481 |
8,738 |
- |
8,735 |
|
Japanese yen |
- |
- |
- |
3,354 |
50 |
3,404 |
|
Swedish krona |
3,872 |
- |
3,872 |
2,991 |
- |
2,991 |
|
Hong Kong dollar |
2,329 |
- |
2,329 |
- |
- |
- |
|
Singapore dollar |
3,694 |
- |
3,694 |
6,788 |
- |
6,788 |
|
Korean won |
2,160 |
29 |
2,189 |
3,450 |
58 |
3,508 |
|
Total overseas investments |
175,407 |
(17,553) |
157,874 |
184,626 |
(11,876) |
172,750 |
|
Pound sterling |
31,266 |
(1,451) |
29,815 |
35,183 |
(8,470) |
26,713 |
|
Total |
206,673 |
(18,984) |
187,689 |
219,809 |
(20,346) |
199,463 |
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 2018, if sterling had strengthened by 10% 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 10% 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.
|
|
As at 31 March 2018 £000 |
As at 31 March 2017 £000 |
|
US dollar |
7,887 |
9,438 |
|
Euro |
3,729 |
3,091 |
|
Swiss franc |
406 |
1,228 |
|
Canadian dollar |
1,709 |
976 |
|
Australian dollar |
848 |
874 |
|
Japanese yen |
- |
340 |
|
Swedish krona |
387 |
299 |
|
Hong Kong dollar |
233 |
- |
|
Singapore dollar |
369 |
679 |
|
Korean won |
219 |
351 |
(iii) Market risk arising from 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 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 date, and are not representative of the year as a whole.
|
|
Year to 31 March 2018 |
Year to 31 March 2017 |
||
|
|
Increase in fair value £000 |
Decrease in fair value |
Increase in fair rate |
Decrease in fair rate |
|
Effect on revenue return |
(65) |
65 |
(69) |
69 |
|
Effect on capital return |
30,880 |
(30,880) |
32,843 |
(32,843) |
|
Effect on total return and on net assets |
30,815 |
(30,815) |
32,774 |
(32,774) |
(b) 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 (see notes 10 and 11 for more details).
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 2018 |
As at 31 March 2017 |
||||
|
|
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: |
|
|
|
|
|
|
|
Interest accrued |
14 |
- |
14 |
16 |
- |
16 |
|
Bank loans |
10,000 |
14,534 |
24,534 |
10,000 |
15,545 |
25,545 |
|
Amount due for ordinary shares bought back |
49 |
- |
49 |
- |
- |
- |
|
Other trade payables |
456 |
- |
456 |
486 |
- |
486 |
|
|
10,519 |
14,534 |
25,053 |
10,502 |
15,545 |
26,047 |
(c) 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 2018 was £7,766,000 (2017: £5,701,000). This was due to trade receivables and cash as per notes 9 and 13 above.
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.
(d) Counterparty risk
The table below shows the counterpart risk as at the Balance Sheet date:
|
As at 31 March 2018 |
Derivative exposure £000 |
Collateral posted £000 |
Collateral received £000 |
Collateral asset class £000 |
|
Counterparty |
|
|
|
|
|
UBS |
(475) |
1,256 |
- |
Cash |
|
Total |
(475) |
589 |
- |
|
|
As at 31 March 2017 |
Derivative exposure £000 |
Collateral posted £000 |
Collateral received £000 |
Collateral asset class £000 |
|
Counterparty |
|
|
|
|
|
UBS |
(57) |
2,039 |
- |
Cash |
|
Total |
(57) |
90 |
- |
|
Note 16. 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 17. 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 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
· Level 2: other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc); or
· Level 3: significant unobservable input (including the company's own assumptions in determining the fair value of investments).
The financial assets measured at fair value through profit and loss are grouped into the fair value hierarchy as follows:
|
At 31 March 2018 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities and derivatives |
206,673 |
- |
- |
206,673 |
|
Net fair value |
206,673 |
- |
- |
206,673 |
|
At 31 March 2017 |
Level 1 £000 |
Level 2 £000 |
Level 3 £000 |
Total £000 |
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
Quoted equities and derivatives |
219,809 |
- |
- |
219,809 |
|
Net fair value |
219,809 |
- |
- |
219,809 |
Note 18. Stock lending
The company has a Securities Lending Authorisation Agreement with State Street Bank & Trust Company.
As at 31st March 2018 £13,226,000 of investments were subject to stock lending agreements and £13,836,000 was held in collateral. The collateral was held in the form of cash, government securities issued by any of the OECD countries or equity securities listed and/or traded on an exchange in the following countries (2017: £23,416,000 of investments subject to stock lending, £25,236,000 held as collateral).
Cash collateral is reinvested into State Street Global Advisors Liquidity PLC, which is an open-ended investment company with variable capital organised under the laws of Ireland as a public limited company and is authorised as an Undertaking for Collective Investment in Transferable Securities ("UCITS") pursuant to the UCITS Regulations. The Trust is exposed to all risks (including but not limited to any interest rate, credit and liquidity risk) with respect to this investment.
The maximum aggregate value or securities on loan at any time during the accounting period was £29,022,000.
The gross earnings and the fees paid for the year are £46,751 (2017: £153,000) and £11,689 (2017: £38,000)
Note 19. Post year end events
On 27 June 2018 the board declared a fourth interim dividend of 1.75p per share. As at 25 June 2018, the company bought back a further 1,896,539 ordinary shares at a total cost of £3,100,000 resulting in a further reduction of £3,100,000 to the special distributable reserve. As at 25 June 2018 the company has 13,748,895 shares held in treasury. As detailed in the chairman's statement above the management fee has been reduced with effect from 1 April 2018.
Note 20. 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 ('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 AIFM's year ended 31 March 2018 are available from the company secretary on request.
The company's maximum and actual leverage levels at 31 March 2018 are shown below:
|
Leverage Exposure |
Gross Method |
Commitment Method |
|
Maximum permitted limit |
300% |
200% |
|
Actual |
109% |
113% |
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.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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