Final Results

RNS Number : 3190H

Securities Trust of Scotland PLC

06 June 2017

 

Securities Trust of Scotland plc (the "company")

Annual Financial Results

Year to 31 March 2017

The financial information set out below does not constitute the company's statutory accounts for the financial year ended 31 March 2017 or financial year ended 31 March 2016 but is derived from those accounts.  Statutory accounts for 2016 have been delivered to the Registrar of Companies and those for 2017 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 21 July 2017, 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 2017, which are required to be published are set out on the following pages.

Financial Highlights

Total returns‡ (including reinvested dividends)	Year ended 31 March 2017	Year ended 31 March 2016
Net asset value per share*	26.7%	0.0%
Share price	27.7%	(2.2%)
Peer group†	26.1%	-

Key data	As at 31 March 2017	As at 31 March 2016	% Change
Net asset value per share (cum income)	177.83p	145.61p	22.1%
Net asset value per share (ex income)	176.44p	145.18p	21.5%
Share price	166.00p	135.00p	23.0%
Discount	6.65%	7.29%
Average discount**	3.48%	6.97%
Net assets	£199,463,000	£164,488,000	21.3%

Income	Year ended 31 March 2017	Year ended 31 March 2016	% change
Revenue return per share	5.74p	4.73p	21.4
Dividend per share	5.95p	5.80p	2.6%

Ongoing charges^
	Year ended 31 March 2017	Year ended 31 March 2016
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.

* The net asset value ('NAV') per share total return is calculated using cum-income NAV with dividends reinvested.

^† From 1 June 2016 the company's investment performance (on a total return basis) is measured against the median of all relevant open and closed-end peers (sourced from the Lipper Global Equity Income sector and AIC Global Equity Income sector). Prior to this date, the company's benchmark was MSCI High Dividend Yield Index. Please see the annual report for further details on performance including data prior to 1 June against MSCI High Dividend Yield Index.

** Average discount over 12 week period to 31 March (based on ex income 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.

Five-year record

Annual total returns with dividends reinvested over 12 month periods to 31 March

	2017	2016	2015	2014	2013
Net asset value per share	26.7%	0.0%	11.3%	3.3%	23.8%
Share Price	27.7%	(2.2%)	3.1%	2.2%	24.4%

Source: Martin Currie Investment Management Limited.

Chairman's Statement

Introduction

The past twelve months have been an extraordinary period politically with surprise outcomes to both the Brexit referendum in the UK and the election of Donald Trump as US president. It has nonetheless been a strong period for the equity investor and indeed your company, as investors responded to an upswing in growth expectations globally, and increased expectations of inflation re-emerging. This was driven by higher resources prices, and a supportive switch in emphasis by governments from monetary to fiscal support for economic growth. For the sterling investor, returns were even higher as the post-Brexit devaluation of sterling benefitted those investing in overseas assets.

Company developments over the year

Following the conclusion of a strategic review by the board the company moved to an investment mandate unconstrained by geography or benchmark in May 2016, and Mark Whitehead, head of Martin Currie's newly resourced income team, was appointed as portfolio manager.

Since taking over as portfolio manager, Mark has repositioned the portfolio with a greater focus on companies that exhibit growth and have a strong degree of security in their dividend payouts. It has been encouraging to see the manager using the wider opportunity set offered by the more flexible investment mandate with some exposure to alternative asset classes and smaller capitalisation stocks introduced.

The board also decided to take advantage of prevailing low interest rates and, in September 2016, agreed a seven year £15m multi currency fixed rate facility* alongside a £10m revolving credit facility to replace the £17m sterling revolving credit facility which expired at that time. The gearing at the year end remained a conservative 12.7% and, in aggregate, average borrowing costs are currently just 1.94%.

The majority of the gearing has been used to invest in global equities, with the remaining proceeds available to fund a carefully executed and controlled options writing strategy of which I write more below.

Performance

The performance of the company reflected the positive investment backdrop. The share price and NAV rose by 27.7% and 26.7% respectively on a total return basis over the period under review. This was marginally ahead of the Lipper peer group** median, which rose by 26.1% on the same basis.

The discount over the course of the year responded well to both company developments and the positive market backdrop: whilst there was a modest improvement to the year end discount of 6.7% (previous year end 7.3%), there was much less use of the company's liquidity to keep the discount within acceptable levels. The company bought back 803,118 shares at an average cum income discount of 7.6%, in comparison with the previous years' out turn with 8,025,891 shares being bought back at an average discount of 7.3%. The average cum income discount over the course of the year was 5.7% (2016: 6.4%).

Revenue earnings and growth in dividend

The revenue return per share for the year was 5.74p, an increase of 21.4% on the previous year. This is a good out turn against the backdrop of the portfolio repositioning described above, as a greater exposure to stocks with growth characteristics has meant a reduction in the yield on the portfolio. This was more than offset by the introduction of a limited and carefully executed options writing strategy. It has been particularly pleasing to see this factor contribute positively to income for the first time, as well as to total return: income from options contributed 11.3% of the income generated by the portfolio.

As a result, the board is delighted to declare a fourth dividend of 1.6p, bringing the total dividend for the year to 5.95p, a rise of 2.6%. This represents a yield of 3.6% (as at 31 March 2017) and follows the dividend increase of the previous financial year of 18.4%.

The majority of this dividend is funded from the revenue earnings with just 0.21p per share from retained revenue reserves. The portfolio manager is focussed on growing the income from the portfolio over the longer term with the medium term objective of generating sufficient income to cover the current level of dividend payment. In the meantime, the board will continue to use the remaining revenue reserves and the flexibility inherent in the investment trust structure to fund a portion of the dividend payment from capital reserves, if necessary.

The payment date will be 30 June 2017 for shareholders on the register on 16 June 2017.

Board

Andrew Irvine will be retiring from the board at the annual general meeting ('AGM') on 21 July 2017, after serving as a director since the company's inception. On behalf of the board and shareholders, I would like to thank Andrew for his dedication and service over the past 12 years during which your company has evolved significantly and delivered strong returns for shareholders. Angus Gordon Lennox will take over the role of Senior Independent Director and I will chair the Nominations Committee following the conclusion of the AGM.

The board is satisfied that following Andrew's retirement, it has a sufficient spread of skills and experience to allow us not to replace Andrew, although this will remain under review as required by the UK Corporate Governance Code. In an environment of substantial competition from passive savings products, your board is sensitive to the need to minimise on-going charges and the number of directors on the board will, therefore, reduce from 5 to 4.

Outlook

After a disappointing 2016, the world economy is gaining momentum and there are expectations of stronger demand and increased inflationary pressures. This improved economic outlook has been driven by a partial recovery in commodity prices, the benefits of policy support in China, and improved consumer and business confidence in the US. There are potential risks to this more optimistic outlook from a number of fronts, including a faster-than-expected pace of interest rate hikes in the US, lack of progress in some of President Trump's more business friendly policies, fall out from mounting vulnerabilities in China's financial system, and a number of political threats, including the Brexit negotiations and elections in Germany and now the UK.

Valuations in the US look to be discounting much of the good news, leaving downside surprises if the risks emerge. But there is better value to be found elsewhere, particularly in Europe. The opportunities for the global stock picker, unconstrained by geography or benchmark, remain.

Don't miss our updates

The company's website at www.securitiestrust.com is a comprehensive source of information and includes regular portfolio manager updates and outlook videos, monthly performance factsheets, interactive market analyses and independent research reports.

I recommend that you subscribe for regular email updates that will keep you abreast of the key information. I thank you for your continued support.

Rachel Beagles

6 June 2017

* See note 11 for more details of the multi currency facility.

** From 1 June 2016, the company's investment performance (on a total return basis) is 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. Prior to this period the company was benchmarked against the MSCI High Dividend Yield Index.

Manager's Review

Market review

The past year will be remembered for two momentous political events: the UK's vote to leave the EU and Mr Trump's election success in the US. The first initially caused UK domestic stocks to fall sharply on the threat of recession, but have since regained some of this loss. It also led to the FTSE 100 moving higher as a large proportion of the constituent companies earn and report US dollar earnings which, when translated into weaker sterling, rose strongly. Mr Trump's win caused unexpected euphoria in the markets as they soared on the back of his acceptance speeches which offered promises of de-regulation, infrastructure spend, Affordable Care Act reform and lower corporate taxes.

Overall, the twelve months under review can be characterised as a stellar period for the equity investor. Markets rose strongly, shrugged off negativity with disdain, and volatility remained unusually benign. As a UK sterling-based investor, equity returns from a global portfolio have been fantastic. However, it's easy to forget where we have come from; one only has to cast one's mind back to the same point in 2016 when market sentiment looked markedly more gloomy compared with today. Steadily, throughout 2016 we have begun to get confirmation of improving macro economic activity in the US which has filtered out into Europe and across to the developing world such as China.

Recent economic data is now pointing toward a much healthier global economy. In many countries, business and consumer confidence is hitting multi-year highs, unemployment figures are at their lowest levels since the global financial crisis and manufacturing is also strengthening. We have seen a significant rally in commodities which had suffered huge falls in recent years to reach their nadir in early 2016. All this is causing economists to raise guidance on GDP growth for 2017 and for the Federal Reserve to be confident enough to recommence tightening policy through an interest rate hike in March.

Equity market lustre over the period masked some seismic shifts in leadership underlying the headline absolute performance numbers. 'Value' stocks (perceived to be the cheapest in the market, with sensitivity to economic activity) responded to better economic data, but also greater political overtures for 'Keynesian' big budget deficit fiscal spending plans to kick-start economies. Commodities and their related equities took up the running first as the Chinese authorities instituted some production curbs for steel production which led to the commodity price rebounding strongly. Financials and, in particular, banks, began to perk up half way through the year as investors extrapolated less regulation, lower corporate taxes and central bankers hawkish comments, into higher lending growth, better lending margins and profitability. Towards the end of the year it was the turn of the energy sector to lead markets higher as the oil price began to revive with the help of the OPEC decision to curb production for the first half of 2017.

A consequence of this rise in animal spirits was that those equity sectors with less cyclical drivers struggled to keep up. Areas which receive significant focus from equity income strategies such as ours lagged somewhat. Real estate, telecommunications, utilities and consumer discretionary sectors, all of which offer the highest sector yields in the global market place, underperformed the wider market. But gearing helped close this gap, which we increased effectively in September.

In recent months the S&P 500 has broken its 108-day run of not moving more than 1% in either direction, and Mr Trump's credibility balloon has begun to leak air with his failure to repeal the Affordable Care Act (Obamacare). Geopolitical tensions are also rising worryingly too, with Mr Trump angering Russia with a missile strike on a Syrian airbase allegedly linked to the deadly gas attack. US warships have separately been ordered to sail to the North Korean peninsula, an act of defiance against the regime's long-range weapons testing.

The past year has witnessed not only significant change to the economic and political backdrop, but to the strategy of the company as well. At the beginning of the period the board undertook a strategic review. This culminated with a number of changes in May 2016. The removal of the benchmark was confirmed with a move toward a benchmark-agnostic approach, allowing the managers to roam the globe to find the best income ideas without the restriction of a large, market capitalisation concentrated stock index to follow. We have also begun to use options to generate income and as we finish the fiscal year we have generated 11% of the year's total income using them. In September, we increased the strategic gearing of the company to 14% of NAV from 9%, by introducing a £15 million seven-year fixed facility combined with a £10 million, two-year rolling credit facility. All of these changes should give the company greater flexibility to pursue its objective of producing rising income and capital growth for shareholders from today's rapidly evolving investment

backdrop.

Portfolio review

The NAV of the company produced a strong total return of 26.7% over the past 12 months. The leading sectors for the fund were those where we held the largest absolute weightings, including financials, healthcare and industrials. The sectors that produced lacklustre returns included real estate, consumer discretionary, telecoms and utilities.

At the stock level Chevron, Philip Morris and British American Tobacco produced the strongest absolute returns. It is really interesting to see two tobacco firms in the top three performers of the portfolio, against a more cyclical backdrop. This is as a result of the market becoming excited about the tobacco industry's ability to stem the continual decline of volumes through the launch of next-generation products that reduce the health risks from smoking. Philip Morris's heat-not-burn tobacco product 'iQOS' is beginning to improve the company's growth profile after strong consumer take up. It should enable the company to generate high returns on invested capital on a sustainable basis which is beginning to be priced in.

Apple, which we purchased in early 2016, was among the top five performers. The company has come through a softer demand patch, weathering currency headwinds. And after success with recent iPhone shipments, we believe it is set up well for the launch of the next generation product later this year.

The weakest contributors included EutelSat Communications, Fibra Uno Administracion and Inmarsat. Although they sit in different sectors, the two satellite communications businesses are not dissimilar. Both have suffered from concerns over future profitability and, more recently, have been rebounding. We sold EutelSat to reduce exposure but Inmarsat remains in the portfolio. The latter's business has two main segments, marine & aerospace communications. The market potential of these segments has been continually revised lower by analysts over the past year, but the company is confident that the growth is still available for them - it has just been pushed out a year or so.

Fibra Uno, a small Mexican Real Estate position was sold after protracted underperformance culminating in uncertainty surrounding the possibility of trade barriers either physical or tax based being erected by Mr Trump's administration. Currency weakness also continues to weigh heavily on the stock.

Activity

Over the course of the past twelve months we have been revisiting the investment case on every stock held in the portfolio which has resulted in a number of sales and new stocks identified and purchased after extensive research. We broadened our research system, building in methods such as credit analysis and scenario testing to better understand the risks inherent in the business models proposed for investment. This led us to sell companies such as Direct Line, the UK insurance company that has been returning large special dividends to shareholders through large reserve releases, a practice we believe is ultimately not sustainable as the business model lacks organic growth. We also sold Novartis the healthcare company, a favourite of many global income funds, as we have concerns over its lack of growth over the coming years, and the likelihood it will undertake more acquisitions which could well be costly and bring execution risk. We ran scenarios which culminated in the sale of Caterpillar which after a very strong year as a top-ten performer finds itself now discounting a rebound in earnings that might prove difficult to deliver.

Of the more notable purchases we have made are the likes of Civitas Social Housing, a new listing small cap which came to the market in November 2016 raising £350 million. Civitas is buying social and assisted housing for the elderly from housing authorities as a 'sale and lease back' arrangement. Civitas can then benefit from an inflation protected income stream to pay to investors once they have

become fully invested. The beauty of the business model is that the income stream is effectively guaranteed, as most tenants are paid housing benefit from the government and there is a structural undersupply of this type of housing which Civitas hopes to relieve as housing authorities will be able to re-capitalise their balance sheets before developing further new projects.

More recently, we have started a position in ING, the Dutch universal bank offering services to retail and wholesale clients. We believe ING has a targeted and disciplined growth plan combined with stringent cost management. The retail bank is challenging incumbents by offering an uncluttered digital product that is efficient and easy to use, leading to it to take market share. As a leader in fintech, we are excited about the prospects for this bank.

In general terms, we have been looking to ensure all of the companies in the portfolio exhibit growth in a low-growth environment. Structural trends driving revenue growth that can be converted through efficient operating execution into profitability and cash flows are of paramount importance to enable dividend growth and to allow us to deliver on our objective over time.

Outlook

US equity markets are likely discounting more than the improving economic backdrop. Recent strength is unlikely to be repeated this year, particularly as much of the exuberance has been driven by President Trump's intended fiscal stimulus plan, which (with the Obamacare repeal hitting a wall of dissenting voices) now perhaps looks as it if it was too hopeful. Corporate tax rate reform is also likely to be hotly debated, but politicians will be eager to understand how it will be funded as the country continues to be burdened with record (and growing) levels of indebtedness. The Fed will also have to tread a careful path to ensure it does not tighten policy and choke off demand too quickly.

In Europe, economic indicators have also recovered, with economic confidence near a six-year high. The European Central Bank is now talking about the future path of policy, which could see a tapering of current quantitative easing and the first steps to normalising interest rates. This view seems, in part, to be predicated on building inflationary pressure; while currently on the upswing, this may well roll over later in the year as the effects of the recent oil price and commodities rally pass through.

In the absence of any further political shocks or hard Brexit scenario, the key to how equity markets act now may be as simple as whether or not this late-cycle surge in economic activity is about to stall. It is difficult to know whether or not the upswing has been a result of temporary stimulus, with inventory building but not final demand growth. This has certainly been the case in China where huge fiscal stimulus initiated in 2014 is now being reversed through tighter monetary policy and lower liquidity provision, through a higher reserve ratio for banks. This could have implications for the hugely indebted property market and the recent explosive performance of commodity prices and related equities.

What is certain is that, on a variety of measures, US equities look more expensive than European. One such measure is enterprise value (EV)/sales ratio (ex-financials), where the US market's ratio is currently 60% higher than its European equivalent. Some of this has been due to stronger earnings, particularly from the technology sector and the 'FANG' (Facebook, Amazon, Netflix and Google) stocks. But such a lofty valuation could be overstating US companies' capability to grow sales, margins and profits further compared with their European peers. As a result, we are finding the European equity market attractive in terms of valuation. Should earnings improve and in the absence of a political shock, it could outperform other equity markets this year.

However, we are watching this space carefully. Now that the UK has formally begun negotiations to leave the European Union, we can expect a period of uncertainty for UK and Europe's economies. It is too early to tell whether companies have materially withheld UK investment since the referendum vote last year, but we suspect that this is the case and the UK economy will experience some future weakness. We are therefore inherently more cautious currently on those sectors that have greater economic sensitivity.

Now, more than ever, our investment 'system' is essential in unearthing high-quality companies with the ability to consistently produce sales and cash flow growth. Our intrinsic valuation work is an integral part of this, as across regions and sectors we find many divergent fundamentals. The portfolio remains focused on achieving strong earnings and dividend growth combined with lower forecast volatility. In these uncertain times, we believe this an ideal combination.

Mark Whitehead

6 June 2017

Portfolio Summary

Portfolio distribution as at 31 March 2017

By region (excluding cash)	2017 %	2016 %
North America	49.6	49.8
Developed Europe	38.0	39.4
Developed Asia Pacific ex Japan	10.9	7.4
Japan	1.5	2.0
Global Emerging Markets	-	1.4
	100.0	100.0

By sector (excluding cash)	2017 %	2016 %
Financials	26.3	19.9
Industrials	15.2	16.3
Consumer goods	10.5	13.9
Healthcare	10.3	13.7
Consumer services	8.3	8.8
Technology	8.0	2.1
Oil & gas	7.7	6.5
Basic materials	6.1	4.5
Telecommunications	4.8	7.9
Utilities	2.8	6.4
	100.0	100.0

By asset class (including cash and borrowings)	2017 %	2016 %
Equities	111.5	110.4
Options*	-	-
Cash	1.5	-
Less borrowings	(13.0)	(10.4)
	100.0	100

* Further details can be found on portfolio holdings below.

Largest 10 holdings
	31 March 2017 Market value £000	31 March 2017 % of total portfolio	31 March 2016 Market value £000	31 March 2016 % of total portfolio
Apple	7,503	3.4	3,760	2.1
Chevron	7,262	3.3	7,194	4.0
Phillip Morris International	7,142	3.2	7,195	4.0
Roche Holdings	6,951	3.2	4,298	2.4
Waste Management	6,333	2.9	4,456	2.5
Time Warner	6,275	2.9	-	-
Eaton	5,699	2.6	4,182	2.3
Cinemark Holdings	5,340	2.4	-	-
Huntington Bancshares	5,237	2.4	-	-
Merck & Co	5,187	2.4	4,620	2.6

Portfolio Holdings

As at 31 March 2017

	Sector	Country	Market value £000	% of total portfolio
North America			109,000	49.6
Apple	Technology	United States	7,503	3.4
Chevron	Oil & gas	United States	7,262	3.3
Phillip Morris International	Consumer goods	United States	7,142	3.2
Waste Management	Industrials	United States	6,333	2.9
Time Warner	Consumer services	United States	6,275	2.9
Eaton	Industrials	United States	5,699	2.6
Cinemark Holdings	Consumer services	United States	5,340	2.4
Huntington Bancshares	Financials	United States	5,237	2.4
Merck & Co	Healthcare	United States	5,187	2.4
Microsoft	Technology	United States	5,040	2.3
Bank of Montreal	Financials	Canada	4,950	2.3
Occidental Petroleum	Oil & gas	United States	4,869	2.2
Suncor Energy	Oil & gas	Canada	4,805	2.2
Procter & Gamble	Consumer goods	United States	4,556	2.1
Paychex	Industrials	United States	4,535	2.1
Crown Castle International	Financials	United States	4,517	2.0
Credicorp	Financials	United States	4,428	2.0
International Paper Company	Basic materials	United States	4,235	1.9
Anthem	Healthcare	United States	4,232	1.9
WEC Energy Group	Utilities	United States	4,112	1.9
Pfizer	Healthcare	United States	2,743	1.2

Developed Europe			83,467	38.0
Roche Holdings	Healthcare	Switzerland	6,951	3.2
Givaudan	Basic materials	Switzerland	5,170	2.3
ING Groep	Financials	Netherlands	5,041	2.3
Civitas Social Housing	Financials	United Kingdom	4,891	2.2
British American Tobacco	Consumer goods	United Kingdom	4,800	2.2
Buwog	Financials	Austria	4,595	2.1
Koninklijke DSM	Basic materials	Netherlands	4,139	1.9
Unibail Rodamco	Financials	Netherlands	4,106	1.9
Banca Generali	Financials	Italy	4,019	1.8
Airbus	Industrials	France	4,009	1.8
Deutsche Telekom	Telecommunications	Germany	3,762	1.7
Hastings Group	Financials	United Kingdom	3,545	1.6
Sanofi	Healthcare	France	3,501	1.6
Britvic	Consumer goods	United Kingdom	3,260	1.5
Kingfisher	Consumer services	United Kingdom	3,242	1.5
DS Smith	Industrials	United Kingdom	3,239	1.5
Inmarsat	Telecommunications	United Kingdom	3,155	1.4
Apax Global Alpha	Financials	Guernsey	3,082	1.4
Securitas AB	Industrials	Sweden	2,991	1.4
Greencoat UK Wind	Financials	United Kingdom	2,070	0.9
Ibstock	Industrials	United Kingdom	1,961	0.9
SSE	Utilities	United Kingdom	1,938	0.9

Developed Asia Pacific ex Japan			24,045	10.9
Taiwan Semiconductor	Technology	Taiwan	5,069	2.3
ASX	Financials	Australia	4,403	2.0
Transurban Group	Industrials	Australia	4,335	2.0
Singapore Telecommunications	Telecommunications	Singapore	3,661	1.7
Coway	Consumer goods	South Korea	3,450	1.5
United Overseas Bank	Financials	Singapore	3,127	1.4

Japan			3,354	1.5
Lawson	Consumer services	Japan	3,354	1.5

Derivatives - written open contracts			(57)	(0.0)
Intesa Sanpaolo	Financials	Italy	(2)	(0.0)
Continental AG	Consumer goods	Germany	(55)	(0.0)

Total portfolio

219,809

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.

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.

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 6 June 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 2017 is shown on the statement of financial position set out below. The cash flows of the company are also 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 (2016: £17,000,000). 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 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 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 95% 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

6 June 2017

Statement of Comprehensive Income

		Year to 31 March 2017			Year to 31 March 2016
	Note	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Net gains / (losses) on investments	8	-	37,335	37,335	-	(7,866)	(7,866)
Net currency (losses) / gains		86	(143)	(57)	21	(10)	11
Income	3	8,174	-	8,174	7,306	-	7,306
Investment management fee		(404)	(751)	(1,155)	(339)	(629)	(968)
Other expenses	4	(603)	-	(603)	(634)	-	(634)
Net return before finance costs and taxation		7,253	36,441	43,694	6,354	(8,505)	(2,151)
Finance costs	5	(174)	(295)	(469)	(76)	(141)	(217)
Net return on ordinary activities before taxation		7,079	36,146	43,225	6,278	(8,646)	(2,368)
Taxation on ordinary activities	7	(639)	-	(639)	(732)	-	(732)
Net return attributable to ordinary redeemable shareholders		6,440	36,146	42,586	5,546	(8,646)	(3,100)
Return per ordinary redeemable share	2	5.74p	32.21p	37.95p	4.73p	(7.37p)	(2.64p)

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 (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.

Statement of Financial Position

		As at 31 March 2017		As at 31 March 2016
	Note	£000	£000	£000	£000
Fixed assets
Investments at fair value through profit or loss	8		219,809		179,903
Current assets
Trade and other receivables	9	2,790		947
Cash and cash equivalents		2,911		1,267
		5,701		2,214
Current liabilities
Trade payables - amounts falling due within one year	10	(10,502)		(17,629)
Net current liabilities			(4,801)		(15,415)
Total assets less current liabilities			215,008		164,488
Trade payables - amounts falling due after more than one year	11		(15,545)		-
Net assets			199,463		164,488
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*			95,692		96,795
Capital reserve*	12		70,520		34,374
Revenue reserve*			1,910		1,978
Total shareholders' funds			199,463		164,488
Net asset value per ordinary redeemable share	2		177.83p		145.61p

* These reserves are distributable.

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 2017 is £1,222,991 (2016: £1,222,991).

The financial statements were approved by the board on 6 June 2016 and signed on its behalf by Rachel Beagles, Chairman

Statement of Changes in Equity

For the year ended 31 March 2017	Note	Called up ordinary share capital £000	Capital redemption reserve £000	Share premium Reserve £000	Special distributable reserve* £000	Capital reserve* £000	Revenue reserve* £000	Total £000
As at 31 March 2016		1,223	78	30,040	96,795	34,374	1,978	164,488
Net return attributable to shareholders**		-	-	-	-	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
As at 31 March 2016		1,223	78	30,040	107,448	43,020	3,223	185,032
Net return attributable to shareholders**		-	-	-	-	(8,646)	5,546	(3,100)
Ordinary shares bought back during the year	12	-	-	-	(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

* 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 31 March 2017		Year to 31 March 2016
	Note	£000	£000	£000	£000
Cash flows from operating activities
Profit/(loss) before tax			43,225		(2,368)
Adjustments for:
(Gains)/losses on investments	8	(37,335)		8,190
Finance costs	5	469		217
Purchases of investments*	8	(102,716)		(68,918)
Sales of investments*	8	100,145		79,534
Dividend income	3	(7,136)		(7,216)
Interest income	3	(3)		(3)
Stock lending income	3	(115)		(87)
Premium income - written options	3	(920)		-
Dividend received		7,348		6,540
Interest income received		3		3
Stock lending received		54		81
Premium income received - written options	3	920		-
(Increase)/decrease in receivables		(1,994)		2,045
(Increase)/decrease in payables		116		(2,379)
Overseas withholding tax suffered	7	(639)		(732)
			(41,803)		17,275
Net cash flows from operating activities			1,422		14,907
Cash flows from financing activities
Repurchase of ordinary share capital		(1,359)		(10,397)
Equity dividends paid	6	(6,508)		(6,791)
Movement in bank borrowings - revolving loan	13	8,545		-
Interest paid on borrowings		(456)		(214)
Net cash flows from financing activities			222		(17,402)
Net increase/(decrease) in cash and cash equivalents			1,644		(2,495)
Cash and cash equivalents at the start of the year			1,267		3,762
Cash and cash equivalents at the end of the year			2,911		1,267

*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.

The notes form part of these financial statements.

Notes to the Financial Statements

Note 1. Accounting policies

(a)        For the year ended 31 March 2017, 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 2015 and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' ('SORP') issued by the AIC in November 2014.

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.

(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)         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 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. 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.

Note 2.  Returns and net asset value

	Year to 31 March 2017	Year to 31 March 2016
Revenue return
Revenue return attributable to ordinary redeemable shareholders	£6,440,000	£5,546,000
Weighted average number of shares in issue during the year	112,230,759	117,264,778
Revenue return per ordinary redeemable share	5.74p	4.73p
Capital return
Capital return attributable to ordinary redeemable shareholders	£36,146,000	(£8,646,000)
Weighted average number of shares in issue during the year	112,230,759	117,264,778
Capital return per ordinary redeemable share	32.21p	(7.37p)
Total return
Total return per ordinary redeemable share	37.95p	(2.64p)
Net asset value per share
Net assets attributable to shareholders	£199,463,000	£164,488,000
Number of shares in issue at year end	112,162,368	112,965,486
Net asset value per share	177.83p	145.61p

Note 3.  Revenue

	Year to 31 March 2017 £000	Year to 31 March 2016 £000
From listed investments:
UK - equities	815	1,474
Overseas - equities	6,321	5,742
	7,136	7,216
Other revenue
Interest on deposits	3	3
Premium - written options	920	-
Stock lending	115	87
	8,174	7,306

Capital dividend received

The company did not receive any capital dividends during the year ended 31 March 2017 (31 March 2016: the company received a capital dividend of £324,486 from Direct Line Insurance Group).

Note 4. Other expenses

	Year to 31 March 2017 £000	Year to 31 March 2016 £000
Bank charges and custody fees	22	22
Depositary fees	40	39
Directors' fees	135	139
Employers' national insurance contributions	13	13
Irrecoverable VAT	23	51
Legal fees	17	2
Printing and postage	17	18
Registrar's fees	54	50
Secretarial fee	103	102
Other	158	181
Total	582	617
Auditors' remuneration:
- audit services	17	17
- non-audit services	4	-
	603	634

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 2017			Year to 31 March 2016
	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Interest on bank loans and overdrafts	174	295	469	76	141	217

Note 6. Dividends

	Year to 31 March 2017 £000	Year to 31 March 2016 £000
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
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	-
	6,508	6,791

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 2017 £000	Year to 31 March 2016 £000
First interim dividend of 1.45p for the year ended 31 March 2017 (2065: 1.45p)	1,627	1,698
Second interim dividend of 1.45p for the year ended 31 March 2017 (2016: 1.45p)	1,626	1,695
Third interim dividend of 1.45p for the year ended 31 March 2017 (2016: 1.45p)	1,626	1,667
Proposed fourth interim dividend of 1.6p for the year ended 31 March 2017 (2016: 1.45p)	1,794	1,638
	6,673	6,698

During the year the directors (as shareholders) received dividends of 5.8p (2016: 5.8p) per share. Directors' shareholdings are disclosed in the company's annual report.  The revenue reserves as at 31 March 2017 are £1,910,000, of this £1,794,000 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 2017 £000	Year to 31 March 2016 £000
Foreign tax	639	732

The effective corporation tax rate was 20.0% (2016: 20.0%). 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 31 March 2017 £000	Year to 31 March 2016 £000
Net return on ordinary activities before taxation	43,225	(2,368)
Corporation tax at standard rate of 20% (2016: 20%)	8,645	(474)
Effects of:
(Gains)/losses on investments not taxable	(7,467)	1,573
Non taxable UK dividend income	(163)	(292)
Overseas dividends not taxable	(1,176)	(1,151)
Overseas tax suffered	639	732
Currency losses/(gains) not taxable	29	(2)
Increase in excess management and loan expenses	144	346
Impact of expensed foreign tax	(12)	-
Total tax charge	639	732

As at 31 March 2017, the company had unutilised management expenses of £14,477,484 (2016: £13,756,000) 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 31 March 2017 £000	Year to 31 March 2016 £000
UK listed investments held at fair value through profit or loss	35,183	31,426
Overseas listed investments held at fair value through profit or loss	184,683	148,477
Total value of financial asset investments	219,866	179,903
Derivative financial instruments - written option contracts	(57)	-
Valuation of investments and derivatives	219,809	179,903
Opening valuation	179,903	198,709
Opening unrealised gains	(19,286)	(26,510)
Opening cost	160,617	172,199
Acquisitions at cost	102,176	68,918
Disposal proceeds	(100,145)	(79,534)
Gains/(losses) on disposal of investments and derivatives	9,562	(966)
Disposal at cost	(90,583)	(80,500)
Closing cost	172,750	160,617
Add: unrealised gains	47,059	19,286
Closing valuation	219,809	179,903

There were no fixed interest securities as at 31 March 2017 (2016: nil).

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

Gains /(losses) on investments and derivatives	Year to 31 March 2017 £000	Year to 31 March 2016 £000
Net gains/(losses) on disposal of investments and derivatives	9,562	(966)
Movement in unrealised gains/(losses)	27,773	(7,224)
Capital distributions	-	324
	37,335	(7,866)

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 31 March 2017 £000	Year to 31 March 2016 £000
Acquisitions	208	134
Disposals	145	96
	353	230

Note 9.  Trade and other receivables

	As at 31 March 2017 £000	As at 31 March 2016 £000
Dividends receivable	464	676
Cash collateral held at broker for derivatives	2,039	-
Tax recoverable	201	252
Prepayments and other debtors	19	13
Stock lending income receivable	67	6
	2,790	947

None of the company's trade receivables are past due or impaired.

Note 10. Trade payables - amounts falling due within one year

	As at 31 March 2017 £000	As at 31 March 2016 £000
Interest accrued	16	3
Sterling bank revolving loan	10,000	17,000
Amount due on ordinary shares bought back	-	256
Other trade payables	486	370
	10,502	17,629

Note 11. Trade payables - amounts falling due after more than one year

	As at 31 March 2017 £000	As at 31 March 2016 £000
Bank loan	15,545	-

The company had a £17,000,000 revolving loan facility with State Street Bank and Trust Company which expired on the 25 September 2016. Under this agreement £17,000,000 was drawn at 30 August 2016 at a rate of 0.97563% with a maturity date of 25 September 2016. The loan was repaid in full on 23 September 2016.

On 19 September 2016 the company entered into a new 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 2017 at a rate of 0.842880% with a maturity date of 22 June 2017.

The repayment date of the term loans is the same as their termination date which is the 19 September 2023. The repayment date of the revolving facility is the last day of its interest period and the termination date is the 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 2017 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 £3,849,000 (€4,500,000), Facility C £10,196,000 (US$12,750,000) and Facility D £10,000,000.

The fair value of the bank loan is £15,487,000 as at 31 March 2017.

Note 12.  Called up share capital

	Number of shares	As at 31 March 2017 £000	Number of shares	As at 31 March 2016 £000
Ordinary shares of 1p
Ordinary shares in issue at the beginning of the year	112,965,486	1,130	120,991,377	1,210
Ordinary shares bought back to Treasury during the year	(803,118)	(8)	(8,025,891)	(80)
Ordinary shares in issue at the end of the year	112,162,368	1,122	112,965,486	1,130
Treasury shares (ordinary shares 1p)
Treasury shares in issue at the beginning of the year	9,333,662	93	1,307,771	13
Ordinary shares bought back to Treasury during the year	803,118	8	8,025,891	80
Treasury shares in issue at the end of the year	10,136,780	101	9,333,662	93
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 803,118 shares bought back during the year to 31 March 2017 at a cost of £1,103,000 (2016: 8,025,891 at a cost of £10,653,000). During the year, the company issued no shares (2016: 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 2016	15,088	19,286	34,374
Gains on realisation of investments at fair value	9,562	-	9,562
Realised currency losses during the year	(143)	-	(143)
Movement in unrealised gains	-	27,773	27,773
Capitalised expenses	(1,046)	-	(1,046)
As at 31 March 2017	23,461	47,059	70,520

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 31 March 2016 £000	Cash flows £000	As at 31 March 2017 £000
Cash at bank	1,267	1,644	2,911
Bank borrowings	(17,000)	(8,545)	(25,545)
Net debt	(15,733)	(6,901)	(22,634)

Note 14. 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 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 assets of the company. Details of borrowings at 31 March 2017 are shown in notes 10 and 11 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 2017	Interest rate %	Local currency 000	Foreign exchange rate	GBP sterling equivalent £000
Assets:
Sterling	0.01	2,712	1.000	2,712
Euro	(0.60)	190	1.169	162
US dollar	0.09	47	1.250	37
Total				2,911
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

As at 31 March 2016	Interest rate %	Local currency 000	Foreign exchange rate	GBP sterling equivalent £000
Assets:
Sterling	0.25	1,163	1.000	1,163
Euro	(0.40)	91	1.261	72
US dollar	0.01	46	1.437	32
Total				1,267
Liabilities:
Bank loan - GBP sterling	1.21	17,000	1.000	17,000
Total				17,000

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 25 (2016: 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 2017		Year to 31 March 2016
	Increase in rate £000s	Decrease in rate £000	Increase in rate £000s	Decrease in rate £000
Effect on revenue return	(22)	22	(60)	60
Effect on capital return	(42)	42	(111)	111
Effect on total return and on net assets	(64)	64	(171)	171

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 2017			As at 31 March 2016
	Investment exposure £000	Net monetary exposure £000	Total currency exposure £000	Investment exposure £000	Net monetary exposure £000	Total currency exposure £000
US dollar	104,314	(9,937)	94,377	84,622	146	84,768
Euro	33,115	(2,204)	30,911	23,204	99	23,303
Swiss franc	12,121	157	12,278	13,267	153	13,420
Canadian dollar	9,755	-	9,755	4,904	-	4,904
Australian dollar	8,738	-	8,738	7,700	-	7,700
Japanese yen	3,354	50	3,404	3,610	42	3,652
Swedish krona	2,991	-	2,991	3,031	-	3,031
Singapore dollar	6,788	-	6,788	5,556	-	5,556
Korean won	3,450	58	3,508	-	-	-
Mexican peso	-	-	-	2,583	-	2,583
Total overseas investments	184,626	(11,876)	172,750	148,477	440	148,917
Pound sterling	35,183	(8,470)	26,713	31,426	(15,855)	15,571
Total	219,809	(20,346)	199,463	179,903	(15,415)	164,488

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 2017, 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. The analysis was performed on a 5% and investment exposure only basis for 2016.

	As at 31 March 2017 £000	As at 31 March 2016 £000
US dollar	9,438	4,231
Euro	3,091	1,160
Swiss franc	1,228	663
Canadian dollar	976	245
Australian dollar	874	385
Japanese yen	340	181
Swedish krona	299	152
Singapore dollar	679	278
Korean won	351	-
Mexican peso	-	129

(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 2017		Year to 31 March 2016
	Increase in fair value £000	Decrease in fair value £000	Increase in fair rate £000	Decrease in fair rate £000
Effect on revenue return	(69)	69	(57)	57
Effect on capital return	32,843	(32,843)	26,880	(26,880)
Effect on total return and on net assets	32,774	(32,774)	26,823	(26,823)

(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 (notes 10 and 11).

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 2017			As at 31 March 2016
	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	16	-	16	3	-	3
Bank loans	10,000	15,545	25,545	17,000	-	17,000
Amount due for ordinary shares bought back	-	-	-	256	-	256
Other trade payables	486	-	486	370	-	370
	10,502	15,545	26,047	17,629	-	17,629

(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 2017 was £5,701,000 (2016: £2,214,000). 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.

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

The company has early adopted the amendments to FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland', where 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 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
At 31 March 2016	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Financial assets at fair value through profit or loss
Quoted equities and derivatives	179,903	-	-	179,903
Net fair value	179,903	-	-	179,903

Note 18. Stock lending

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

As at 31 March 2017 £23,416,000 of investments were subject to stock lending agreements and £25,236,000 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 various countries (2016: £42,766,000 of investments subject to stock lending, £46,164,000 held as collateral). Further details are provided in the company's annual report.

The gross earnings and the fees paid for the year are £153,000 (2016: £115,000) and £38,000 (2016: £28,000).

Note 19. Post year end events

On 6 June 2017 the board declared a fourth interim dividend of 1.6p per share. As at 2 June 2017, the had company bought back a further 18,450 ordinary shares at an average price of 166.0p per share resulting in a further reduction of £31,000 to the special distributable reserve.

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 of the company's annual report). The numerical remuneration disclosures in relation to the AIFM's year ended 31 March 2017 are available from the company secretary on request.

The company's maximum and actual leverage levels at 31 March 2017 are shown below:

Leverage Exposure	Gross Method	Commitment Method
Maximum permitted limit	300%	200%
Actual	110%	111%

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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