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Perpetual Inc&Growth (PLI)

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Thursday 30 May, 2019

Perpetual Inc&Growth

Annual Financial Report

PERPETUAL INCOME AND GROWTH INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT
FOR THE YEAR ENDED 31 MARCH 2019

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FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

Total return(1)(2) (all income reinvested)

1 YEAR 3 YEARS 5 YEARS 10 YEARS
Net asset value (NAV) – debt at market value –0.8% 2.7% 13.8% 200.8%
Share price –1.8% –2.7% 4.0% 183.4%
FTSE All-Share Index(3) 6.4% 31.3% 34.5% 186.8%

   

YEAR ENDED
31 MARCH
2019
YEAR ENDED
31 MARCH
2018
Shareholders’ funds
Net assets (£’000) 881,546 923,929
NAV per ordinary share – debt at market value 363.2p 380.1p
Share price and discount
Share price(2) 323.5p 344.0p
Discount(1) to NAV – debt at market value (10.9)% (9.5)%
Gearing (debt at market value)(1)
Gross gearing 17.3% 14.9%
Net gearing 17.3% 14.9%
Return per ordinary share
Revenue 14.60p 14.68p
Capital (15.79)p (37.21)p
Total (1.19)p (22.53)p
Dividend per ordinary share
First interim 3.25p 3.15p
Second interim 3.25p 3.15p
Third interim 3.25p 3.15p
Fourth interim 4.75p 4.45p
Total interim dividends 14.50p 13.90p
Increase in total interim dividends +4.3% +4.1%
Special dividend(4) 0.80p
Total including special 14.50p 14.70p
(Decrease)/increase in dividend (including special) –1.4% +4.6%
Ongoing charges(1) 0.72% 0.70%

Note:

             (1) The term is defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 66 to 68. NAV with debt at market value is widely used by the investment company sector for the reporting of performance or premium, discount, gearing and ongoing charges.

             (2) Source: Refinitiv/Invesco.

             (3) The benchmark index of the Company.

             (4) In view of a decline in special dividends received, no special dividend has been declared for the year ended 31 March 2019.

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CHAIRMAN’S STATEMENT

Performance

The Company’s net asset value (NAV) total return for the year ended 31 March 2019 was –0.8%. This was another disappointing result and compares with the benchmark FTSE All-Share Index’s total return for the year of +6.4%. The discount of the share price to the underlying net asset value also widened further during the year, from 9.5% to 10.9%, contributing to the share price total return being –1.8%.

This was the third year in succession that the Company has underperformed its benchmark and that has further impacted longer term performance. The five year total return on net assets is now +13.8%, compared with the benchmark return of +34.5%. The ten year NAV return, at +200.8%, is still ahead of the benchmark return of +186.8%, although the return based on the share price is slightly below at +183.4%. Notwithstanding the benchmark comparative, this is not an insubstantial return.

The shortfall in the year’s return relative to the FTSE All-Share Index was once again due in part to issues affecting certain individual holdings, but the greater effect derived from the portfolio’s exposure to UK domestic stocks in a year when the market’s performance has come from stocks with international exposure. Your portfolio manager, Mark Barnett, provides further detail on the performance of the portfolio during the year and sets out his strategy and outlook for the coming year in his report on pages 8 to 11.

Your Board is concerned about the performance of the portfolio and continues to constructively challenge the portfolio manager on his strategy. Having considered the responses to this challenge, your Board continues to support Mark’s consistent investment approach, which we believe will in due course provide strong returns to shareholders as the latent value of the portfolio is realised.

Whilst we have seen a fall in the NAV of the Company, dividend income received has held up well. This has enabled the Company to raise dividends paid by 4.3%, which is more than the rate of inflation, without having to dip into reserves and the Company is now recognised as a “dividend hero” by the AIC through having increased ordinary dividends each year for the last 20 years. More details on the dividend are set out below.

Discount and Share Buybacks

The Board monitors the price at which the Company’s shares trade relative to their underlying net asset value. During the period under review the Company’s shares have continued to trade at a discount level that is wider than its historical range. The Board consulted extensively with the Manager and the Company’s corporate broker about this. We remain of the view that the discount is principally a product of the Company’s relative performance against the wider market. However, given that share buy backs at a discount enhance net asset value per share for remaining holders, we instituted a share buy back programme during the year to signal the Board’s concern and realise the discount on the shares bought back. We continue to monitor the discount level closely and remain of the belief that performance will drive demand for the shares and narrow the discount in due time.

Dividend

For the year ended 31 March 2019, three interim dividends of 3.25p each were paid to shareholders in September and December 2018, and March 2019. The Board has declared a fourth interim dividend of 4.75p per share for the year, to be paid on 28 June 2019 to shareholders on the register on 7 June 2019. This gives a total dividend for the year of 14.50p per share, representing an increase of 4.3% on the previous year, excluding special dividends paid, and a decrease of 1.4% if special dividends are included. In view of a decline in special dividends received, the Board decided not to declare a special dividend this year (2018: 0.80p per share). Notwithstanding the disappointing NAV annual performance, this extends again the Company’s record of year-on-year ordinary dividend increases since 1999.

The Board

The Board has a formal succession plan in place and regularly reviews its composition to ensure its balance of skills, knowledge, experience, diversity and independence continues to be appropriate and conducive to the effective direction of the Company.

In accordance with its succession plan and following a search assisted by Sapphire Partners, an independent consultancy, the Board announced on 5 March 2019 the appointment of Georgina Field as a Director, with effect from 1 May 2019. Ms Field has deep marketing expertise in the financial sector that will be invaluable to the Company. The Board unanimously recommends that shareholders support her election at the forthcoming AGM. A biographical summary is included on page 19.

Annual General Meeting (AGM)

Information on all resolutions to be put to a shareholder vote at the AGM can be found in the Directors’ Report on pages 31 and 32, and this year this includes notes on particular strengths that each Director brings to the Board, in accordance with the 2018 UK Corporate Governance Code.

Most of the resolutions are the same as last year, but an additional item this year is that shareholders are again being provided with an advisory vote on the dividend policy. This was last provided in 2017, when it was overwhelmingly supported by shareholders. The only change is clarification with respect to special dividends. The Directors have carefully considered all the resolutions proposed in the Notice of the AGM (as set out on pages 60 to 63) and, in their opinion, consider them all to be in the interests of shareholders as a whole. The Directors therefore recommend that shareholders vote in favour of each resolution.

I look forward to meeting with shareholders at the Company’s AGM this year, which will be held at Invesco’s West End office, 43-45 Portman Square, London W1H 6LY, at 11.00am on 16 July 2019. The Directors and the portfolio manager, Mark Barnett, will be available at the meeting to answer shareholders’ questions.

Richard Laing
Chairman

29 May 2019

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STRATEGIC REPORT
FOR THE YEAR ENDED 31 MARCH 2019

PORTFOLIO MANAGER’S REPORT

Market Review

The UK equity market provided a mid-single digit rise in the twelve months to 31 March 2019, a figure that masks periods of significant underlying volatility. The UK equity market rallied strongly in the second quarter of 2018, but, having peaked in May, the FTSE All-Share Index sold off sharply in the second half of 2018. The principal causes of this change were the outlook for US interest rates, heightened fears of a global economic slowdown and the escalation of US-Sino trade tensions. Against a backdrop of declining global equity markets, the UK equity market fell to an eighteen-month low in December 2018. However, a shift in the stance on interest rate policy from the US Federal Reserve and a cooling of the previously negative trade rhetoric between the US and China laid the foundations for a strong equity market rally during the first quarter of 2019. This resulted in a positive UK equity market return for the period under review.

Domestically, the question of the UK’s exit from the European Union continued to dominate the agenda. The extended political uncertainty saw the value of Sterling fall materially through the year, reaching a twenty-month low of US$1.23 in December, as a vote of no confidence against Theresa May was called over the terms of the negotiated EU Withdrawal Agreement.

Against this challenging backdrop, the Bank of England’s (BoE) Monetary Policy Committee voted to increase the UK’s base interest rate by 0.25% at its August 2018 meeting, but kept rates on hold for the rest of the period as the political impasse continued. In February 2019, the BoE cut its UK growth forecast from 1.7% to 1.2% for the year. Despite this, economic data proved remarkably robust in 2018. We saw a return to real wage growth, whilst the number of people in work increased by 350,000, more than three times the increase in the size of the working age population.

Portfolio Review

The Company’s net asset value, including reinvested dividends, delivered a return of –0.8% over the year under review, compared with one of +6.4% (total return) by the FTSE All-Share Index.

The portfolio’s principal themes (see table below) have remained broadly consistent over the past year. The tilt towards UK domestic value opportunities has been emphasised, as persistent negativity towards domestic sectors has created further investment opportunities. Meanwhile exposure to more internationally orientated growth stocks has been modestly reduced. Exposure to the tobacco sector remains prominent, whilst a significant portion of the portfolio is invested in non-correlated financials, which offer diversified income generation potential. Outside of these core themes, the balance of the portfolio is invested in a number of diverse stock specific opportunities.

Key portfolio themes – major positions include:

UK DOMESTIC VALUE INTERNATIONAL GROWTH OPPORTUNITIES TOBACCO NON-CORRELATED FINANCIALS
Legal & General BP British American Tobacco Hiscox
Next Royal Dutch Shell Imperial Brands Burford Capital
Derwent London Novartis Altria AJ Bell
Tesco Roche Provident Financial
NewRiver REIT HomeServe Randall & Quilter
Aviva BAE Systems Beazley
BCA Marketplace easyJet Lancashire
BT G4S Plus500
British Land BTG Amigo
Drax
34.3%* 28.4%* 11.2%* 22.9%*

3.2% is invested in other stock specific opportunities

Source: Invesco, as at 31 March 2019.

*Total weight in the portfolio for each theme includes stocks not listed above.

The portfolio’s exposure to UK domestic value opportunities provided a positive contribution to absolute performance over the period, as stock selection proved crucial across a range of sectors. Contributors included the portfolio’s holding in Drax, which outperformed the sector over the year. Its share price traded well for the majority of 2018, supported by rising wholesale power prices and performance improvements in the production of biomass electricity, and rose sharply in October on news of a deal with Iberdrola to buy the Spanish energy firm’s UK power generation plants. Full year results released in the first quarter of 2019 confirmed the completion of a £50 million share buyback programme and a 15% increase in the full-year dividend.

Other notable contributors included Next, which defied the well-publicised crises facing many high-street retailers to deliver full-year results in line with expectations. The 15% rise in online sales offset more challenging declines in in-store retail sales, emphasising that the company’s multi-channel offering allows it to see the growth of online shopping as an opportunity, not a threat. Meanwhile the 4.5% increase in the annual dividend reaffirmed the company’s focus on shareholder returns. Holdings in Tesco, Legal & General and BCA Marketplace further supported returns.

Despite these contributions, Sterling weakness and prolonged political uncertainty saw the internationally orientated companies of the FTSE All-Share Index outperform domestically orientated companies. Stock selection within the theme of international growth further contributed to the portfolio’s relative underperformance over the year. The portfolio’s zero weighting in the metals & mining sector provided a negative contribution to relative returns, as Rio Tinto and BHP Billiton performed strongly. Mining companies have historically paid dividends from current earnings, which are highly correlated to commodity prices. Given the consequential volatility underpinning earnings within the sector, alternative areas of the market are considered to be better-suited to the objectives of the portfolio.

Elsewhere, internationally orientated leisure companies faced some challenging trading conditions during the period. The portfolio’s positions in Thomas Cook and easyJet suffered as a result of rising oil prices, an unusually hot summer across Northern Europe and the Brexit impasse, which impacted demand within the sector.

However, the portfolio has a significant weighting in the oil & gas sector, namely in BP and Royal Dutch Shell, which performed well over the period. BP provided the portfolio’s second strongest contribution to absolute return, releasing better-than-expected results for 2018 in February. The sector’s outlook depends on the ability of these companies to cover their cash flow and dividends. Unlike other commodity sectors, this is reliant on capital discipline within the sector, rather than price strength in the underlying commodity.

In absolute terms, the portfolio’s performance was supported by a number of international health care stocks, as Roche, Novartis, BTG and AstraZeneca provided strong positive contributions. Roche and Novartis traded strongly over the period, whilst the share price of BTG rose sharply in November, as the company accepted an offer from US biopharmaceutical firm Boston Scientific. The decision to sell the AstraZeneca position mid-way through 2018 after strong performance proved untimely and, coupled with the non-inclusion of GlaxoSmithKline in the portfolio, affected returns relative to the Index.

Other notable contributors included HomeServe. The emergency home repairs and services provider released strong full-year results in May 2018, which included a 25% increase in the company’s dividend following a year of record profit growth. The company’s share price continued to trade positively, supported by a positive trading update in July 2018, analyst upgrades and an acquisition.

The portfolio maintains a prominent exposure to tobacco, with holdings in Altria, British American Tobacco (BAT) and Imperial Brands. Investments in the sector have delivered exceptional returns for shareholders over the long term, however performance in 2018 was broadly weak, as the market continued to weigh concerns around regulation and the outlook for next generation technologies. When the United States Food & Drug Administration (FDA) announced plans to pursue a ban on the sale of menthol products in November 2018, BAT was the most notably impacted of all the UK listed tobacco majors, due to its revenue exposure to menthol sales. However, the prospect of a total menthol ban remains doubtful, given the requirement to evidence “additional harm” versus non-menthol products. Furthermore, the real impact of a ban remains uncertain, as consumers may move to non-menthol tobacco alternatives. Meanwhile, the tobacco majors are at the forefront of new technologies, with the resources to drive successful innovation in the sector. In 2019 the sector has received some relief, buoyed by the surprise resignation of the Head of the FDA and the release of strong full-year results from BAT, which included meaningful growth in the dividend.

A further important area of investment within the portfolio is non-correlated financials. This theme remains significant and achieves the twin objectives of diversification of risk and income. A number of investments within this theme provided very significant contributions to performance over the year. The stand-out return was provided by AJ Bell, which successfully completed its initial public offering (IPO) in December, listing for the first time on the London Stock Exchange. I was extremely supportive of the IPO, which saw significant gains realised for the portfolio. The holding continued to trade well throughout the first quarter of 2019, providing further positive returns for the portfolio.

Other notable contributors included litigation finance company Burford Capital, which continued to support portfolio returns after posting very strong half and full year results for 2018. In December, the company’s share price was further supported by confirmation that it has secured an additional US$1.6 billion in new litigation investments, whilst full-year results released in March included a 14% increase in the full-year dividend, a consecutive year of double-digit growth. Marwyn Value Investors, Lancashire and Hiscox also provided a positive contribution to returns. Meanwhile the portfolio’s significant underweight position in mainstream banks was a positive decision, as the sector underperformed the overall market.

Whilst overall stock selection within non-correlated financials supported performance over the year, some holdings provided negative returns. A recently initiated position in the financial trading platform Plus500 proved volatile. The company has met with challenges in clearly explaining to the market the short-term revenue volatility that can arise in trading of contracts-for-difference (derivative instruments). Meanwhile, Amigo performed poorly following its IPO last summer, as the market became concerned about increased regulatory scrutiny of guarantor-lending. Provident Financial also traded down over the period; a result of the slower than expected pace of profit recovery under the new management team.

The portfolio’s performance was also impacted by isolated stock challenges during the year. Detractors included SciFluor, an unlisted drug discovery company that uses fluorine chemistry to develop new therapeutics. The value of this holding was written down ahead of the firm’s next fundraising round to reflect potential delays in the Phase II trial of SciFluor’s leading candidate. However, the most notable detractor was Motif Bio, a clinical stage biopharmaceutical company. Motif Bio develops new antibiotics, a sector supported by rising global resistance levels to existing antibiotics and global population growth. Motif Bio’s leading antibiotic iclaprim had been widely expected to receive approval from the FDA in the first quarter of 2019. Approval in this key market is a crucial step in monetising the company’s research, which in turn has the potential to unlock significant value in the company. However, in February the FDA declined to authorise iclaprim, citing the need for further investigation of the potential side effects. This outcome surprised the market, given the success of phase III clinical trials that were designed following consultation with the FDA, and prompted a very sharp fall in Motif Bio’s share price. The company is meeting with the FDA with results of this discussion expected in June 2019. Whilst there is a reasonable prospect for a favourable outcome, on balance, risks associated with this binary outcome remain, and the portfolio’s position has been reduced pending greater clarity.

In terms of portfolio activity during the period, new investments were made in Burford Capital, Randall & Quilter, Royal Bank of Scotland, Urban Exposure, Aquis Exchange, Cranswick, Draper Esprit, Whitbread and Amigo. The portfolio’s investments in AstraZeneca, RELX and Macau Property Opportunities were sold.

Outlook

Patience is an essential characteristic of successful long-term investing. However, over the past twelve months this quality has been severely tested, as the UK stock market’s sentiment has remained firmly rooted in momentum style investing, supporting an ever-increasing disparity between valuation and fundamentals. This trend has been exacerbated by exogenous economic and political factors – primarily the sustainability of global economic growth and the protracted Brexit negotiations. As a result of these persistent uncertainties the market has focused on supporting premium valuations for growth or highly disruptive companies, which has not suited the core investment themes of this portfolio.

The valuation support for the UK stock market is strong in an historical context; a dividend yield of 4.4% for the current year is four times higher than the 10-year gilt yield. However, valuations remain polarised between a basket of multi-national companies, which command high valuations, and a basket of UK domestic equities, which are valued significantly lower. Given this wide valuation disparity, the portfolio has retained a large exposure to sterling revenues, which are undervalued due to the persistent caution towards the UK economy as evidenced by the weakness of the exchange rate. 

The performance of the UK economy continues to confound most forecasts by recording steady growth. Over the course of 2019 the overall level of growth is expected to remain solid, supported by improvements in household cash flow and rising employment, which will benefit consumption activity and economic growth. Given that the outlook for the economy appears to be more resilient than currently implied by the currency or valuations of domestic sectors, it is anticipated that a level of clarity in domestic politics will see this material differential start to close.

The portfolio has also maintained exposure to a number of global industries, namely oil and tobacco, which despite yielding significantly higher than average dividends, remain attractively valued in a market that seeks out new disruptive business models within the context of perceived sunset industries. In many respects, the stock market’s current sentiment towards these industries resembles behaviour that was seen during the last tech bubble. It would appear that the market is happy to discount a future decline in the cash flow from these businesses that is much more rapid than appears likely.

The portfolio’s positioning has evolved over the past year, to take advantage of the best risk-adjusted opportunities at the most interesting valuations. The portfolio continues to offer a sustainable flow of diversified dividend income with strong cashflow cover and good growth. It is frustrating that the capital and income growth potential of the portfolio is not currently reflected in capital values, however it remains crucial that in such times of extreme momentum and somewhat irrational market pricing, the portfolio remains rooted in the fundamental investment process, which has worked over many stock market cycles.

Mark Barnett
Portfolio Manager

29 May 2019

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BUSINESS REVIEW

Perpetual Income and Growth Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These have been approved by shareholders and are set out below.

The business model the Company has adopted to achieve its investment objective has been to contract investment management and administration to appropriate external service providers, which are overseen by the Board. The principal service provider is Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’). Invesco Asset Management Limited, an associate company of IFML, manages the Company’s investments and acts as company secretary under delegated authority from IFML. References to the Manager in this annual financial report should consequently be considered to include both entities.

The Manager provides company secretarial, marketing and general administration services including accounting and manages the portfolio in accordance with the Board’s strategy. Mark Barnett is the portfolio manager responsible for the day-to-day management of the portfolio. His associate Martin Walker deputises in the event of Mr Barnett’s absence.

In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Link Asset Services to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.

Investment Objective

The Company’s investment objective is to provide shareholders with capital growth and real growth in dividends over the medium to longer term from a portfolio of securities listed mainly in the UK equity market.

Investment Policy

The Company invests mainly in UK equities and equity-related securities of UK-listed companies. The Manager seeks to identify and invest mainly in companies that offer a combination of good capital growth prospects with the ability to increase dividends over time. Market exposure may also be gained through the limited use of derivatives, the purpose of which would be to achieve changes to the portfolio’s economic exposure. However, the Company will not enter into derivative transactions for speculative purposes.

The Manager manages the portfolio to reflect its convictions and best ideas. The Manager does not set out to manage the risk characteristics of the portfolio relative to the FTSE All-Share Index (‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark index. If a security is not considered to be a good investment, then the Company will not own it, irrespective of its weight in the benchmark index.

The Manager controls the stock-specific risk of individual securities by ensuring that the portfolio is always appropriately diversified. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security.

The Directors believe that the use of borrowings can enhance returns to shareholders and the Company will use borrowings in pursuing its investment objective.

The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments, at the Manager’s discretion.

Investment Limits

The Board has prescribed investment limits forming part of the Investment Policy, the most significant of which follow:

–    not more than 12% of gross assets in any single investment;

–    not more than 15% of gross assets in other listed investment companies;

–    not more than 20% of gross assets in non-UK listed securities;

–    not more than 10% of gross assets in fixed interest securities;

–    not more than 4% of gross assets in unquoted securities;

–    derivatives (including warrants) may be used for investment purposes to increase the Company’s market exposure by up to 5% of gross assets. Derivatives may also be used to hedge the portfolio’s market exposure; and

–    borrowings may be used to raise exposure to securities up to a maximum of 25% of net assets where it is considered appropriate.

Each limit is measured at the time of investment or borrowing.

Borrowing

Borrowing policy is under the control of the Board. The Board has set a maximum borrowing limit of 25% of total net assets (measured at the time new borrowings are drawn). The use of borrowing for investment is not an expression of confidence in the performance of the overall UK stock market, but rather an endorsement of the potential for the securities selected for the portfolio. The Company currently has three sources for borrowing, being £60 million par value of fixed rate 15 year senior secured notes (Notes) with an interest rate of 4.37% and two facilities provided by The Bank of New York Mellon, being a £60 million uncommitted revolving credit facility and an £80 million uncommitted overdraft facility. Both the Board and the Manager are content that these arrangements offer a sufficiently flexible means of gearing. Further details are contained in notes 11 and 12 on page 52.

Performance

The Board reviews performance by reference to Key Performance Indicators (KPIs). The five main KPIs are as follows:

Asset Performance

On a total return basis, the Company’s one, three, five and ten year record for its NAV and share price compared to the benchmark index is shown on page 2. For the year to 31 March 2019, the Company’s NAV underperformed the benchmark index by 7.2%.

In reviewing the performance of the assets of the Company, the Board monitors the NAV performance in relation to the FTSE All-Share Index. However, the Manager’s aim is to achieve absolute return through a genuinely active investment management approach. It is not the investment management team’s philosophy to regard the FTSE All-Share Index as a benchmark for portfolio construction for the Company. This approach can therefore result in a portfolio that is from time to time substantially different from the FTSE All-Share Index.

Peer Group Performance

There were 23 investment trusts in the UK Equity Income sector at 31 March 2019. This sector, however, is quite diverse in its investment policies and structures. The Board monitors the performance of the Company in relation to both this sector as a whole and to those companies within it which the Board consider to be its peer group.

As at 31 March 2019, of those companies ranked within the UK Equity Income sector, the Company was ranked 20th over one year, and 23rd over three and five years by NAV performance (source: JP Morgan Cazenove).

Dividends and Dividend Policy

The Company’s dividend policy is that the Directors shall seek to provide shareholders with real growth in ordinary dividends over the medium to longer term. In the event of there being a material amount of income that is non-recurring or special in nature additional special dividends may be declared, at the discretion of the Directors. The Directors aim to distribute, by way of dividend, substantially all of the Company’s net income after expenses and taxation whilst also retaining a prudent level of reserves. Dividends are paid on a regular quarterly basis in September, December, March and June in respect of each accounting year. The timing of these regular quarterly payments means that shareholders do not have an opportunity to vote on a final dividend. Recognising the importance of shareholder engagement, and although not required by any regulation, shareholders were given an opportunity to vote on this policy at the 2017 AGM. The opportunity to vote for the policy is being provided again this year and an advisory resolution is included in the Notice of Meeting on page 60.

The Board has declared ordinary dividends of 14.50p per share in respect of the year under review, compared with 13.90p per share in respect of the prior year, an increase of 4.3%. As noted in the Chairman’s Statement, in light of a decline in special dividends received, no special dividend has been declared for the year (2018: 0.80p). The Retail Price Index increased 2.4% in the year. The individual dividends declared for the year are shown on the next page, on page 2 and in note 8 to the financial statements.

The Manager aims to maximise total return from the portfolio. The Manager subscribes to the benefits of strong earnings growth and the importance of dividends to total return. However, whilst income is an important consideration, dividend yields do not constrain investment decisions.

Discount

The Board monitors the discount at which the Company’s ordinary shares trade and how this compares to other investment trusts in the peer group. During the year the shares traded in the discount range of 8.3% to 13.8% and ended the year at a 10.9% discount. This is shown in the adjacent graph which plots the discount over the year. As at 31 March 2019, the weighted average discount of the 23 investment trusts in the UK Equity Income sector was 3.5% (2018: 3.4%) (source: JPMorgan Cazenove).

The Board and the Manager closely monitor movements in the Company’s share price and dealings in the Company’s shares. In order to address any significant imbalance in the market, the Board asks shareholders to approve resolutions each year which allow for the repurchase of ordinary shares (for cancellation or to be held as treasury shares) and also their issuance. This may also assist in the management of the discount. During the year to 31 March 2019, 1,020,000 shares were bought back at an average price of 347.7p. Since the year end, 965,000 shares have been bought back at an average price of 329.0p. No shares were issued.

The shares bought back are being held in treasury. The Board intends to sell the shares held as treasury shares in due course, on terms that are in the best interests of shareholders as a whole.

Ongoing Charges

The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure for the year was 0.72% (2018: 0.70%).

Results and Dividends

On 31 March 2019, the share price and the net asset value (debt at market value) per ordinary share were 323.5p and 363.2p respectively. The respective comparable figures at 31 March 2018 were 344.0p and 380.1p.

For the year ended 31 March 2019, three interim dividends of 3.25p each per share were paid on 28 September 2018, 28 December 2018 and 29 March 2019 respectively. A fourth interim dividend of 4.75p per share has been declared for payment on 28 June 2019 to shareholders on the register on 7 June, giving total interim dividends for the year of 14.50p (2018: 13.90p).

Financial Position and Borrowings

The Company’s balance sheet on page 44 shows the assets and liabilities at the year end. Details of the £60 million senior secured notes are shown in note 12, and details of the Company’s overdraft and revolving credit facilities are shown in note 11.

Outlook, including the Future of the Company

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report in this Strategic Report. Further details of the principal risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.

Principal Risks and Uncertainties

The Board carries out a regular review of the risk environment in which the Company operates and has carried out a robust assessment of the principal risks facing the Company. The following sets out a description of those risks and how they are being managed or mitigated.

Economic Risk

Economic risk arises from uncertainty about the future prices of the Company’s investments. The majority of the Company’s investments are listed on regulated stock exchanges and will be subject to market fluctuations, both upward and downward, arising from external factors including general economic conditions and government policies. Such factors are outside the control of the Board and the Manager and may give rise to high levels of volatility in the prices of the investments held.

Investment Risk

There can be no guarantee that the Company will meet its investment objectives. As set out in the Investment Policy on page 12 the Manager’s style may result in the portfolio being significantly overweight or underweight positions in individual stocks or sectors compared to the Company’s benchmark index. Consequently, the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios which, as a consequence of the high conviction style of investment management, may include many of the same stocks as the Company. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions.

The Board has established guidelines through which, amongst other things, it seeks to ensure that the portfolio of investments is appropriately diversified to mitigate poor performance of individual investments. The Board also challenges the Manager on strategy and monitors performance on behalf of shareholders.

Financial Risk

The financial risks faced by the Company include market price risk (including currency risk, interest rate risk and other price risk), liquidity risk and credit risk, which includes counterparty and custodial risk. Details of these risks and how they are managed are disclosed in note 16 to the financial statements on pages 54 to 57.

Gearing Risk

Whilst the use of borrowings by the Company should enhance total shareholder return when the return on the Company’s underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect when the underlying return is falling. Whilst the portfolio manager has discretion on when and how he should use borrowings to gear returns, the Board reviews regularly the level of gearing and the extent of available borrowings.

Share Discount Risk

The Company’s shares may trade at a wide discount to their underlying net asset value. The Board and the Manager maintain an active dialogue on the market rating of the Company’s shares and the Board has taken the powers, which it seeks to renew each year, for both share repurchase and issuance, which can help in its management.

Operational Risk

The Board regularly reviews the system of financial and non-financial internal controls operated by the Company, the Manager and other external service providers. These include controls designed to safeguard the Company’s assets and to ensure that proper accounting records are maintained. Details of how the Board monitors the services provided by the Manager and other suppliers are explained further in the internal controls and risk management section in the audit committee report on pages 23 and 24. The depositary also monitors the Company’s stock, cash, borrowings and investment restrictions throughout the year and issues an annual report to the Directors.

Regulatory Risk

The Company is subject to various laws and regulations by virtue of its status as a public limited company registered under Section 833 of the Companies Act 2006, its status as an investment trust, and its listing on the Official List of the UK Listing Authority.

Loss of investment trust status for tax purposes could lead to the Company being subject to tax on the realised capital profits on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the Official List, a fine or qualified audit report. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations. The Manager reviews compliance with tax and other financial regulatory requirements on a daily basis and reports to the Board on a regular basis on all regulatory aspects.

Other Risks

The risk that the portfolio manager, Mark Barnett, may become incapacitated or otherwise be unavailable is mitigated by support available from his designated deputy for this portfolio, Martin Walker, and the wider Invesco UK Equities team.

Viability Statement

The Directors’ view of the Company’s viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle designed and managed for the long term. The Company’s investment objective is to provide shareholders with capital growth and real growth in dividends over the medium to longer term. The Directors take a long term view in their stewardship of the Company, as does the portfolio manager in his management of the portfolio. The Company is required by its Articles to have a continuation vote every five years, the next instance being in 2021. The Directors have had no indication that shareholders will not vote, again, for the continuation of the Company at that time. The Company typically holds shares for at least five years, and this period is substantially less than the outstanding term of the Company’s Notes, which will require repayment in 2029. Consequently, the Directors consider that the appropriate term for the purpose of this viability statement is five years.

In their assessment of the Company’s viability, the Directors considered the principal risks to which it is exposed, as set out on pages 14 and 15, together with mitigating factors. Their assessment also considered the following: the Company’s investment objective and strategy; the investment capabilities of the portfolio manager; the business model of the Company, which has effectively been stress tested over the years through various difficult market cycles; the current outlook for the UK economy and equity markets; demand for the Company’s shares and the discount at which they trade; the Company’s borrowing structure; the liquidity of the portfolio; and the Company’s future income and annual operating costs. Consideration of the borrowing structure included the amount the NAV could fall without triggering the repayment of the Notes and/or the bank overdraft and credit facility and the amount of debt cover – which at the year end was more than seven times the aggregate of these liabilities.

The Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

Board Responsibilities

As set out in the Directors’ Report on pages 25 and 26 the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment trust the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. The Board has a responsible governance culture and has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting, reviews its relationships with other service providers at least annually and monitors compliance with the Company’s obligations to debt holders.

Board Diversity

The Board’s policy on diversity is that the Board seeks to ensure that its structure, size and composition, including the balance of skills, knowledge, diversity (including gender) and experience of Directors, is sufficient for the effective direction and control of the Company. Although the Board had not set a specific target or quota in respect of this policy, it had aspired to meet the Hampton-Alexander review target of 33% female board representation and has now done so, with the appointment of Georgina Field. Following this appointment the Board comprises six non-executive directors, two of whom are women, which constitutes 33.3% female Board representation. Summary biographical details of the Directors are set out on page 19. The Company has no employees.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to make or not to make an investment on environmental and social grounds. The Manager applies the United Nations Principles for Responsible Investment.

As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.

This Strategic Report was approved by the Board of Directors on 29 May 2019

Invesco Asset Management Limited
Company Secretary

.

INVESTMENTS IN ORDER OF VALUATION
AT 31 MARCH 2019

Ordinary shares listed in the UK unless stated otherwise



ISSUER


SECTOR
MARKET
VALUE
£’000

% OF
PORTFOLIO
British American Tobacco Tobacco 55,859 5.5
BP Oil & Gas Producers 55,773 5.5
Legal & General Life Insurance 35,993 3.5
Next General Retailers 31,657 3.1
Royal Dutch Shell – A shares Oil & Gas Producers 30,325 3.0
Imperial Brands Tobacco 29,639 2.9
Novartis – Swiss common stock Pharmaceuticals & Biotechnology 28,508 2.8
Roche – Swiss common stock Pharmaceuticals & Biotechnology 25,369 2.5
Altria – US common stock Tobacco 25,181 2.5
Derwent London Real Estate Investment Trusts 24,788 2.4
Top ten holdings 343,092 33.7
Tesco Food & Drug Retailers 24,018 2.4
Hiscox Non-life Insurance 23,518 2.3
NewRiver REIT Real Estate Investment Trusts 22,330 2.2
Burford Capital AIM Financial Services 22,180 2.2
HomeServe Support Services 22,063 2.2
BAE Systems Aerospace & Defence 21,979 2.2
Aviva Life Insurance 21,565 2.1
BCA Marketplace Support Services 20,056 2.0
BT Fixed Line Telecommunications 19,341 1.9
AJ Bell Financial Services 17,334 1.7
Top twenty holdings 557,476 54.9
British Land Real Estate Investment Trusts 17,205 1.7
Drax Electricity 16,914 1.7
Capita Support Services 15,874 1.6
Provident Financial Financial Services 15,650 1.5
easyJet Travel & Leisure 15,511 1.5
Harworth Real Estate Investment & Services 15,360 1.5
G4S Support Services 14,718 1.5
BTG Pharmaceuticals & Biotechnology 14,559 1.4
Oxford Sciences Innovation UQ Financial Services 13,875 1.4
Randall & Quilter AIM Non-life Insurance 13,333 1.3
Top thirty holdings 710,475 70.0
Beazley Non-life Insurance 13,266 1.3
Babcock International Aerospace & Defence 13,154 1.3
IP Group Financial Services 13,114 1.3
Lancashire Non-life Insurance 12,817 1.3
CLS Real Estate Investment & Services 11,934 1.2
Chesnara Life Insurance 11,608 1.1
P2P Global Investments Equity Investment Instruments 10,957 1.1
Secure Trust Bank Banks 10,848 1.1
Hadrian's Wall Secured Investments Equity Investment Instruments 10,456 1.0
KCOM Fixed Line Telecommunications 10,352 1.0
Top forty holdings 828,981 81.7
PureTech Health Pharmaceuticals & Biotechnology 10,145 1.0
Royal Bank of Scotland Banks 9,915 1.0
Rentokil Initial Support Services 9,755 1.0
Urban Exposure AIM Financial Services 9,666 1.0
Real Estate Investors AIM Real Estate Investment Trusts 9,506 0.9
Cranswick Food Producers 9,318 0.9
Secure Income REIT AIM Real Estate Investment Trusts 9,299 0.9
Aquis Exchange AIM Financial Services 9,296 0.9
Bunzl Support Services 8,986 0.9
Draper Esprit AIM Financial Services 8,985 0.9
Top fifty holdings 923,852 91.1
Horizon Discovery AIM Pharmaceuticals & Biotechnology 8,561 0.8
Plus500 Financial Services 8,535 0.8
Whitbread Travel & Leisure 8,500 0.8
Amigo Financial Services 7,439 0.7
Eddie Stobart Logistics AIM Industrial Transportation 7,409 0.7
TalkTalk Telecom Fixed Line Telecommunications 7,368 0.7
Vectura Pharmaceuticals & Biotechnology 6,519 0.6
McBride Household Goods & Home Construction 6,365 0.6
Marwyn Value Investors Equity Investment Instruments 5,261 0.5
Doric Nimrod Air Three – preference shares Equity Investment Instruments 3,965 0.4
Top sixty holdings 993,774 97.7
Doric Nimrod Air Two Equity Investment Instruments 3,935 0.4
   – preference shares
VPC Specialty Lending Investments Financial Services 3,676 0.4
Funding Circle SME Equity Investment Instruments 3,486 0.4
Thomas Cook Travel & Leisure 3,290 0.3
SciFluor Life Sciences UQ – US Series A convertible preferred Pharmaceuticals & Biotechnology 2,248 0.2
Motif Bio AIM Pharmaceuticals & Biotechnology 848
  – ADR 931 0.2
  – ADR – warrants 9 Nov 2021 51
Silence Therapeutics AIM Pharmaceuticals & Biotechnology 1,373 0.1
Diurnal AIM Pharmaceuticals & Biotechnology 1,288 0.1
Circassia Pharmaceuticals AIM Pharmaceuticals & Biotechnology 1,214 0.1
infirst Healthcare UQ Pharmaceuticals & Biotechnology
  – Mar – preferred 273
  – D shares 257 0.1
  – Jan – preferred 63
Top seventy holdings 1,016,707 100.0
The Local Shopping REIT Real Estate Investment Trusts 306
Eurovestech UQ Financial Services 121
XTL Biopharmaceuticals Pharmaceuticals & Biotechnology 33
Jaguar Health UQ – US indemnity shares Pharmaceuticals & Biotechnology 10
Lombard Medical – US common stock Health Care Equipment & Services 6
MiradaAIM Media 1
Total Investments (76) 1,017,184 100.0
AIM: Investments quoted on AIM
ADR: American Depositary Receipt
UQ: Unquoted

.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the preparation of the Annual Financial Report

The Directors are responsible for preparing the annual financial report 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 financial statements in accordance with UK Accounting Standards, 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 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 which 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.

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

The Directors of the Company each confirm to the best of their knowledge, that:

•     the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company taken as a whole; and

•     this annual financial 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.

The Directors consider that the annual financial report taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Signed on behalf of the Board of Directors

Richard Laing
Chairman

29 May 2019

.

INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH

2019 2018

NOTES
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Losses on investments held at fair value 9 (31,748) (31,748) (96,578) (96,578)
Foreign exchange losses (2) (2) (240) (240)
Income 2 39,222 577 39,799 39,420 14,126 53,546
Investment management fees 3 (1,803) (4,206) (6,009) (1,893) (4,417) (6,310)
Other expenses 4 (629) (1) (630) (699) (1) (700)
Net return before finance costs and taxation 36,790 (35,380) 1,410 36,828 (87,110) (50,282)
Finance costs 5 (1,067) (2,489) (3,556) (1,006) (2,349) (3,355)
Return on ordinary activities before taxation 35,723 (37,869) (2,146) 35,822 (89,459) (53,637)
Tax on ordinary activities 6 (697) (697) (535) (535)
Return on ordinary activities after taxation for the financial year 35,026 (37,869) (2,843) 35,287 (89,459) (54,172)
Return per ordinary share:
Basic 7 14.60p (15.79)p (1.19)p 14.68p (37.21)p (22.53)p

The total column of this statement represents the Company’s profit and loss account prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

.

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH

SHARE
CAPITAL
£’000
SHARE
PREMIUM
£’000
CAPITAL
RESERVE
£’000
REVENUE
RESERVE
£’000

TOTAL
£’000
At 31 March 2017  24,043 265,233 692,295  31,394 1,012,965
Return on ordinary activities (89,459)  35,287 (54,172)
Dividends paid – note 8 (34,864) (34,864)
At 31 March 2018  24,043 265,233 602,836  31,817 923,929
Return on ordinary activities (37,869) 35,026 (2,843)
Dividends paid – note 8 (35,968) (35,968)
Shares bought back and held in treasury (3,572) (3,572)
At 31 March 2019  24,043 265,233 561,395 30,875 881,546

The accompanying notes are an integral part of these financial statements.

.

BALANCE SHEET
AS AT 31 MARCH


NOTES
2019
£’000
2018
£’000
Fixed assets
  Investments held at fair value through profit or loss 9 1,017,184  1,048,211
Current assets
  Debtors 10  5,296  8,486
 5,296  8,486
Creditors: amounts falling due within one year
  Other payables 11 (2,661) (6,386)
  Bank overdraft 11 (33,704) (26,856)
  Bank loan 11 (45,000) (40,000)
(81,365) (73,242)
Net current liabilities (76,069) (64,756)
Total assets less current liabilities 941,115 983,455
Creditors: amounts falling due after more than one year 12 (59,569) (59,526)
Net assets  881,546  923,929
Capital and reserves
Share capital 13 24,043 24,043
Share premium 14 265,233  265,233
Capital reserve 14 561,395  602,836
Revenue reserve 14 30,875 31,817
Shareholders’ funds 881,546  923,929
Net asset value per ordinary share – basic
  – debt at par 15 368.2p 384.3p
  – debt at market value 15 363.2p 380.1p

These financial statements were approved and authorised for issue by the Board of Directors on 29 May 2019.

Richard Laing
Chairman

Signed on behalf of the Board of Directors

The accompanying notes are an integral part of these financial statements.

.

NOTES TO THE FINANCIAL STATEMENTS

1.          Principal Accounting Policies

Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year, unless otherwise stated.

(a)        Basis of Preparation

Accounting Standards applied

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as updated in February 2018. The financial statements are issued on a going concern basis.

As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity is provided.

(b)        Foreign Currency and Segmental Reporting

(i) Functional and presentational currency

The financial statements are presented in sterling, which is the Company’s functional and presentational currency and the currency in which the Company’s share capital and expenses, as well as the majority of its assets and liabilities, are denominated.

(ii)               Transactions and balances

Transactions in foreign currencies, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue reserve, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.

(iii)              Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the UK or other regulated stock exchanges.

(c)        Amounts recognised in Capital Reserves

The following are included in the income statement and recognised in capital: realised gains or losses on sales of investments; realised gains or losses on foreign currency and any forward currency contracts; management fees and finance costs allocated to capital; any other capital charges; and unrealised increases or decreases in the valuation of investments at the year end (including the related foreign exchange gains and losses).

(d)        Financial Instruments

The Company has chosen to apply the provisions of Section 11 and 12 of FRS 102 in full in respect of the financial instruments.

(i)   Recognition of financial assets and financial liabilities

The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.

 (ii) Derecognition of financial assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.

(iii) Derecognition of financial liabilities

The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired.

(iv) Trade date accounting

Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.

(v)  Classification and measurement of financial assets and financial liabilities

Financial assets

The Company’s investments are classified as held at fair value through profit or loss.

Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value based on recommendations from Invesco’s Pricing Committee, which in turn is guided by the International Private Equity and Venture Capital Association Guidelines. The unlisted investment valuations are reviewed on a quarterly basis and at specific trigger events. These are evaluated using valuation techniques such as earnings multiples, recent arm’s length transactions, net assets and milestones attained.

Financial liabilities

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

(e)        Cash and Cash Equivalents

Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.

(f)         Derivatives

Forward currency contracts may be entered into for hedging purposes and are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and included in capital.

(g)        Income

Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.

Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

(h)        Expenses and Finance Costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method on financial liabilities held at amortised cost. Investment management fees and finance costs are recognised on an accruals basis and are charged 70% to capital and 30% to revenue. This is in line with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company. All other expenses are recognised in revenue.

(i)            Taxation

The liability for corporation tax is based on net revenue for the year excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.

A deferred tax asset has not been recognised in respect of surplus management expenses and losses on loan relationships, as the Company is unlikely to have sufficient future taxable revenue to offset against these.

(j)         Dividends

Dividends are not recognised in the financial statements unless there is an obligation to pay at the balance sheet date. Dividends are recognised in the year in which they are paid to shareholders.

2.          Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

2019
£’000
2018
£’000
Income from investments
UK dividends – ordinary 29,619 30,154
– special 576 1,959
Overseas dividends – ordinary  7,568 6,134
Scrip dividends 274  43
Unfranked investment income  1,038 975
39,075 39,265
Other income
Other 147 155
Total income 39,222 39,420

Special dividends of £577,000 have been recognised in capital (2018: £14,126,000).

3.          Investment Management Fees

This note shows the fees due to the Manager which are calculated and paid quarterly.

2019 2018
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Investment management fee 1,803 4,206 6,009 1,893 4,417 6,310

Details of the Investment Management Agreement can be found on pages 28 and 29. At 31 March 2019 £1,470,000 (2018: £1,500,000) was due for payment in respect of the investment management fee.

4.          Other expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

2019 2018
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Directors’ remuneration (i) 157 157 162 162
Fees payable to the Company’s auditor for:
  – audit of the financial statements (ii) 28 28 27 27
Other expenses (iii) 444 1 445 510 1 511
629 1 630 699 1 700

(i)         Further information on Directors’ remuneration is provided in the Directors’ Remuneration Report.

(ii)        Fees payable to the Company auditor are shown excluding VAT which is included in other expenses.

(iii)       Included within other expenses is £15,000 (2018: £15,000) of employer’s National Insurance paid on Directors’ remuneration. As at 31 March 2019, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £22,000 (2018: £22,000). Other expenses charged to capital arise from custodian transaction charges.

5.          Finance costs

Finance costs arise on any borrowing the Company has, being in this case the £60 million notes, overdraft and loan facility.

2019 2018
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Interest payable on borrowings repayable as follows:
Within 1 year,
   not by instalments:
  – bank overdraft 57 133 190 148 346 494
  – loan 211 491 702 59 138 197
More than 1 year,
  not by instalments
  – Notes 799 1,865 2,664 799 1,865 2,664
1,067 2,489 3,556 1,006 2,349 3,355

Loan notes are amortised on an effective interest basis.

6.          Tax on ordinary activities

As an investment trust the Company pays no tax on capital gains. The Company also suffers no tax on income arising on UK and certain overseas dividends, mainly EU ones. As a result, the Company’s tax charge arises solely from irrecoverable tax on overseas dividends. Lastly, this note clarifies the basis for the Company having no deferred tax asset or liability.

(a)        Tax Charge

2019 2018
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
REVENUE
£’000
CAPITAL
£’000
TOTAL
£’000
Overseas taxation 697 697 535 535

(b)        Reconciliation of Tax Charge

2019
£’000
2018
£’000
Return on ordinary activities before taxation  (2,146) (53,637)
Theoretical tax at UK Corporation Tax rate of 19% (2018: 19%) (408) (10,191)
Effects of :
– non-taxable investments losses 6,032 18,350
– non-taxable foreign exchange losses 46
– non-taxable UK dividends (4,940) (7,928)
– non-taxable UK special dividends (219) (372)
– non-taxable scrip dividends (52) (8)
– non-taxable overseas dividends (1,334) (1,166)
– accrued income taxable on receipt (103) (74)
– expenses in excess of taxable income  1,024 1,343
– irrecoverable overseas tax suffered 697 535
697 535

(c)        Factors That May Affect Future Tax Changes

The Company has excess management expenses and loan relationship deficits of £183,572,000 (2018: £178,726,000) that are available to offset future taxable revenue. A deferred tax asset, measured at the prospective rate of corporation tax of 17% of £31,207,000 (2018: 17%, £30,383,000) has not been recognised in respect of these expenses since they are recoverable only to the extent that the Company has sufficient future taxable revenue.

7.          Return per Ordinary Share

Return per share is the amount of gain (or loss) generated for the financial year divided by the weighted average number of ordinary shares in issue.

2019 2018
PENCE £’000 PENCE £’000
Returns after taxation:
  – revenue 14.60 35,026 14.68 35,287
  – capital (15.79) (37,869) (37.21) (89,459)
  – total (1.19) (2,843) (22.53) (54,172)
NUMBER NUMBER
Weighted average number of ordinary shares in issue during the year: 239,909,364 240,432,350

8.          Dividends on Ordinary Shares

Dividends represent the return of income to shareholders. The Company pays four interim dividends a year.

Dividends on equity shares paid in the year:
2019 2018
PENCE £’000 PENCE £’000
Fourth interim in respect of previous year 4.45 10,698 4.35 10,459
First interim paid 3.25 7,804 3.15 7,574
Second interim paid 3.25 7,784 3.15 7,574
Third interim paid 3.25 7,781 3.15 7,574
 14.20 34,067 13.80 33,181
Special dividend paid in respect of previous year 0.80 1,924 0.70 1,683
 15.00 35,991 14.50 34,864
Return of unclaimed dividends from previous years (23)
 15.00 35,968 14.50 34,864
Dividends on equity shares payable in respect of the year:
2019 2018
PENCE £’000 PENCE £’000
First interim paid September 3.25  7,804 3.15  7,574
Second interim paid December 3.25  7,784 3.15  7,574
Third interim paid March 3.25  7,781 3.15  7,574
Fourth interim payable June 4.75 11,326 4.45 10,698
Total interim dividends 14.50 34,695 13.90 33,420
Special dividend payable June 0.80 1,924
14.50 34,695 14.70 35,344

9.          Investments at Fair Value

The portfolio comprises investments which are listed, i.e. traded on a recognised stock exchange, and some unlisted investments.

Gains and losses are either:

•           realised, usually arising when investments are sold; or

•           unrealised, being the difference from cost on those investments still held at the year end.

(a)        Investments

2019
£’000
2018
£’000
Investments listed on a recognised stock exchange 1,000,337 1,014,210
Unlisted investments 16,847 34,001
Total investments 1,017,184 1,048,211
Opening valuation 1,048,211 1,164,903
Movements in year:
  Purchases at cost 184,242 181,963
  Sales – proceeds (183,521) (202,077)
  Sales – net realised profits on sales 65,166 74,830
Movement in investment holding gains (96,914) (171,408)
Closing valuation 1,017,184 1,048,211
Closing book cost (1,034,215) (968,328)
Closing investment holding (losses)/gains (17,031) 79,883
Net realised gains based on historical cost 65,166 74,830
Movement in investment holding gains (96,914) (171,408)
Losses on investments (31,748) (96,578)

(b)        Transaction Costs

             The transaction costs included in gains on investments consisted of £489,000 (2018: £757,000) on purchases and £252,000 (2018: £204,000) on sales.

(c)        Significant holdings

             At 31 March 2019 the Company had holdings of 3% or more of the number of shares in issue of the following investments:

NAME OF UNDERTAKING COUNTRY OF INCORPORATION INSTRUMENT % HELD
Jaguar HealthUQ United States ‘B’ convertible preferred 21.7%
Jaguar HealthUQ United States Indemnity shares 17.5%
Jaguar HealthUQ United States ‘A’ convertible preferred 10.9%
Real Estate InvestorsAIM England and Wales Ordinary shares 10.0%
Nimrod Sea AssetsUQ Guernsey Ordinary shares 9.9%
Urban ExposureAIM England and Wales Ordinary shares 9.4%
SciFluor Life SciencesUQ United States ‘A’ convertible preferred shares 9.3%
DiurnalAIM England and Wales Ordinary shares 9.1%
Hadrian’s Wall Secured Investments Guernsey Ordinary shares 7.7%
Lombard Medical Cayman Islands US common stock 6.8%
Marwyn Value Investors Cayman Islands Ordinary shares 6.7%
infirst HealthcareUQ England and Wales ‘D’ shares 6.7%
Aquis ExchangeAIM England and Wales Ordinary shares 6.0%
Silence TherapeuticsAIM England and Wales Ordinary shares 4.7%
Randall & QuilterAIM Bermuda Ordinary shares 4.3%
Secure Trust Bank England and Wales Ordinary shares 4.3%
Motif BioAIM England and Wales Ordinary shares 3.8%
England and Wales American Depositary Receipt 3.8%
Horizon DiscoveryAIM England and Wales Ordinary shares 3.8%
Harworth England and Wales Ordinary shares 3.7%
McBride England and Wales Ordinary shares 3.5%
NewRiver REIT England and Wales Ordinary shares 3.1%
UQ: unquoted investment.
AIM: investments quoted on AIM.

10.        Debtors

Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.

2019
£’000
2018
£’000
Amounts due from brokers  1,174 5,525
Tax recoverable  1,550 1,093
Prepayments and accrued income  2,572 1,868
5,296 8,486

11.        Creditors: amounts falling due within one year

Creditors are amounts which must be paid by the Company and are split between those due within 12 months of the balance sheet date (as shown in this note) and those due after that time (as shown in the next note).

2019
£’000
2018
£’000
Amounts due to brokers 3,678
Accruals 2,661 2,708
Other payables 2,661 6,386
Bank overdraft 33,704 26,856
Bank loan 45,000 40,000
81,365 73,242

The Company has an uncommitted bank overdraft facility of £80 million (2018: £80 million) and an uncommitted bank loan facility of £60 million (2018: £60 million) renewable on 20 November 2019, based in aggregate on the lower of 25% of net asset value of the Company and £140 million. Both are repayable on demand.

Interest is payable on both facilities at 0.7% over the Bank of England base rate. The covenants under both facilities require total assets to not fall below £620 million (2018: £620 million).

12.        Creditors: amounts falling due after more than one year

2019
£’000
2018
£’000
4.37% senior secured notes 2029 60,000 60,000
Unamortised issue costs (431) (474)
59,569 59,526

The senior secured notes (Notes) of £60m were issued on 8 May 2014 and are secured by a floating charge over all the Company's assets and are redeemable at par on 8 May 2029.

The Notes have a fixed rate of 4.37% per annum payable biannually on 8 May and 8 November. Issue costs are amortised over the life of the Notes using the effective interest method.

The Notes are secured by a first floating charge over the Company's assets. Under the Notes Purchase Agreement, the net asset value (NAV) of the Company must not fall below £350 million and the Company must ensure that the ratio of gross borrowings (measured at par) to the NAV must not, at any time, exceed 50%.

13.        Share Capital

Share capital represents the total number of shares in issue, including treasury shares.

AT
31 MARCH
2019
AT
31 MARCH
2018
Share capital:
Ordinary shares of 10p each (£’000) 23,941 24,043
Treasury shares of 10p each (£’000) 102
24,043 24,043
Number of ordinary shares in issue:
Brought forward  240,432,350  240,432,350
Shares bought back into treasury (1,020,000)
Carried forward  239,412,350  240,432,350

During the year the Company bought back, into treasury, 1,020,000 ordinary shares at an average price of 347.7p.

A further 965,000 shares have been bought back into treasury, at an average price of 329.0p, since 31 March 2019.

The Directors’ Report on pages 30 and 31 sets out the share capital structure, restrictions and voting rights.

14.        Reserves

This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 10 pence and any applicable costs. The share premium is non-distributable.

Capital investment gains and losses are shown in note 9(a) and form part of the capital reserve. The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.

15.        Net Asset Value

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The following table shows the shareholders’ funds and net asset value (NAV) in pence per share, together with a reconciliation of the NAV with debt at par to NAV with debt at market value. The difference in the NAVs arises solely from the valuation of the 4.37% senior secured loan notes 2029 (Notes).

The number of shares in issue at the year end is shown in note 13.

2019 2018
SHAREHOLDERS
FUNDS
£’000
NAV
PER SHARE
PENCE
SHAREHOLDERS
FUNDS
£’000
NAV
PER SHARE
PENCE
NAV  – debt at par 881,546 368.2 923,929 384.3
Notes – debt at par, after amortised costs (note 12) 59,569 24.9 59,526 24.7
           – debt at market value (note 17) (71,472) (29.9) (69,572) (28.9)
NAV – debt at market value 869,643 363.2 913,883 380.1

Only the basic NAV is shown. There is no dilution in this or the previous year.

16.        Risk Management and Financial Instruments

Financial instruments comprise the Company’s investment portfolio, derivative financial instruments (if the Company had any), as well as any cash, borrowings, other receivables and other payables. This note sets out risks arising from these in terms of the Company’s exposure and sensitivity, and any mitigation that the Manager or Board can take.

The Company’s strategy for managing investment risk is determined with regard to the Company’s Investment Policy, as shown on page 12. The management of market risk is part of the investment management process. The Company’s portfolio is managed in accordance with the internal controls and risk management systems as described in the sections thereon in the Corporate Governance Statement (page 21) and in the Audit Committee Report (page 22). The overall disposition of the Company’s assets is reviewed by the Board on a regular basis.

The Company’s financial instruments comprise its investment portfolio (as shown on pages 17 and 18) cash, borrowings (including loan, overdraft and notes), debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and cash equivalents. The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The principal risks that an investment company faces in its portfolio management activities are set out below:

Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:

Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;

Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and

Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.

Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.

Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Business Review.

As an investment trust the Company invests in equities and other investments for the long term so as to meet its investment objective and policies. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the policies the Company used to manage these risks for the two years under review follow.

16.1      Market Risk

The Company’s Manager assesses the Company’s direct exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance. No other derivative or hedging instruments are utilised to manage market risk. Gearing is used to enhance returns, but this also increases the Company’s exposure to market risk and volatility.

             16.1.1         Currency risk

The majority of the Company’s assets, liabilities and income are denominated in sterling. There is some exposure to Euros, Swiss francs and US dollars.

Management of the currency risk

The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis.

Forward currency contracts can be used to reduce the Company’s exposure to anticipated future changes in exchange rates which are used also to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policies. All contracts are limited to currencies and amounts commensurate with the asset denominated in those currencies. During the year, no forward currency contracts were used by the Company (2018: none).

Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

Currency exposure

The fair values of the Company’s monetary items that have currency exposure at 31 March are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

31 MARCH 2019 31 MARCH 2018

EURO
£’000
SWISS
FRANC
£’000
US
DOLLAR
£’000

EURO
£’000
SWISS
FRANC
£’000
US
DOLLAR
£’000
Foreign currency exposure on net monetary items 145 1,405 814 56 1,037 207
Investments at fair value through profit or loss 53,877 28,460 43,222 35,887
Total net foreign currency 145 55,282 29,274 56 44,259 36,094

The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.

Currency sensitivity

The following table illustrates the sensitivity of the return after taxation for the year using exchange rates for sterling to Euros, Swiss francs and US dollars. It is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of any forward foreign exchange contracts, if used, that offset the effects of changes in currency exchange rates.

The possible change in exchange rates of ±1.4% (2018: ±2.0%) for Euros, ±2.5% (2018: ±2.6%) for Swiss francs and ±2.8% (2018: ±3.4%) for US dollars has been determined based on market volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable foreign currency against the mean.

If sterling had strengthened, this would have had the following effect:

31 MARCH 2019 31 MARCH 2018

EURO
£’000
SWISS
FRANC
£’000
US
DOLLAR
£’000

EURO
£’000
SWISS
FRANC
£’000
US
DOLLAR
£’000
Income statement – profit/(loss) after taxation
    Revenue return (7) (35) (48) (1) (34) (34)
    Capital return (1,347) (797) (1,124) (1,220)
Total return after taxation for the year (7) (1,382) (845) (1) (1,158) (1,254)

If sterling had weakened to the same extent for the currencies above, the effect would have been the exact opposite.

In the opinion of the Directors, the above sensitivity analysis is not representative of the year as a whole, since the level of exposure may change frequently as part of the currency risk management process of the Company.

             16.1.2         Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian. At the year end the Company had uncommitted bank facilities and senior secured loan notes, details of which are shown in notes 11 and 12. The Company uses the facilities when required at levels approved and monitored by the Board.

At the maximum overdraft and loan of £140 million, the effect of a ±1% in the interest rate would result in a decrease/increase to the Company’s income statement of £1.4 million (2018: £1.4 million).

             16.1.3         Other price risk

Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the Manager to manage the portfolio to achieve the best return for an acceptable level of risk.

Management of other price risk

The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies and to review investment performance.

The Company’s portfolio is the result of the Manager’s investment process and as a result is not correlated with the Company’s benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.

If the value of the portfolio rose or fell by 10% at the balance sheet date, the return after tax for the year would increase or decrease by £101.7 million (2018: £104.8 million) respectively.

16.2      Liquidity risk

Liquidity risk is minimised as the majority of the Company’s investments are readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the £140 million bank overdraft and loan facility provides for additional funding flexibility.

2019 LESS THAN
THREE
MONTHS
£’000
THREE TO
TWELVE
MONTHS
£’000

MORE THAN
ONE YEAR
£’000


TOTAL
£’000
Bank overdraft 33,704 33,704
Bank loan 45,000 45,000
Notes 60,000 60,000
Interest on Notes 1,311 1,311 24,909 27,531
Accruals (excluding amount accrued on Notes) 1,627 1,627
81,642 1,311 84,909 167,862

   

2018 LESS THAN
THREE
MONTHS
£’000
THREE TO
TWELVE
MONTHS
£’000

MORE THAN
ONE YEAR
£’000


TOTAL
£’000
Bank overdraft  26,856  26,856
Bank loan  40,000  40,000
Notes  60,000  60,000
Interest on Notes  1,311  1,311  27,531  30,153
Amount due to brokers  3,678  3,678
73,519  1,311  87,531  162,361

16.3      Credit risk

Encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered. This risk is minimised by using only approved counterparties and transactions on a delivery versus payment basis. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. However, with the support of the depositary’s restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used. This limit is at the discretion of the Board and is reviewed on a regular basis. No cash was held at the year end (2018: £nil).

The maximum credit risk exposure arises from amounts due from brokers £1,174,000 (2018: £5,525,000) shown in note 10.

17.        Fair Value

The values of the financial assets and financial liabilities are carried in the balance sheet at their fair value (investments), or the balance sheet amount is a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facilities) or at amortised cost (Notes).

Fair Value Hierarchy Disclosures

Nearly all of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102, as amended for fair value hierarchy disclosures (March 2016). The three levels set out in this follow.

•           Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

•           Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

•           Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.

The valuation techniques used by the Company are explained in the accounting policies note.

The investments in Level 3 are those shown as unquoted investments in the investment portfolio on pages 17 and 18 and are valued on the following basis as described in note 1(v):

Valuation techniques used for Level 3 investments

2019
£’000
2018
£’000
Earnings multiples 9,776
Recent arm’s length transactions 13,885 14,544
Net assets 121 159
Milestones or expected returns 2,841 9,522
16,847 34,001

   

2019 LEVEL 1
£’000
LEVEL 2
£’000
LEVEL 3
£’000
TOTAL
£’000
Financial assets designated at fair value through profit or loss:
Quoted investments – equities 1,000,337 1,000,337
Unquoted investments 16,847 16,847
Total for financial assets 1,000,337 16,847 1,017,184

   

2018 LEVEL 1
£’000
LEVEL 2
£’000
LEVEL 3
£’000
TOTAL
£’000
Financial assets designated at fair value through profit or loss:
Quoted investments – equities  1,014,173  1,014,173
Other securities  37  37
Unquoted investments  34,001  34,001
Total for financial assets  1,014,173  37  34,001  1,048,211

During the year, the one level 2 investment in Barclays Bank – Nuclear Power Notes 28 February 2019 was redeemed (2018: £37,000).

The book cost and market value (fair value) of the senior secured loan notes based on a comparable quoted debt security at the balance sheet date is as follows:

2019 2018
BOOK
VALUE
£’000
FAIR
VALUE
£’000
BOOK
VALUE
£’000
FAIR
VALUE
£’000
4.37% senior secured loan notes 2029 60,000 71,472 60,000 69,572
Discount on issue of Notes (431) (474)
59,569 71,472 59,526 69,572

18.        Capital Management

The Company’s total capital employed at 31 March 2019 was £1,019,819,000 (2018: £1,050,311,000) comprising borrowings of £138,273,000 (2018: £126,382,000) and equity share capital and other reserves of £881,546,000 (2018: £923,929,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on page 12, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, gross gearing was 17.3% (2018: 14.9%) and equalled net gearing. The Company’s policies and processes for managing capital are unchanged from the preceding year.

The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 14 to 15. These also explain that the Company is able to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.

The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments. The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by Section 1159 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the bank facilities, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Current year borrowings comprise drawings on uncommitted bank facilities and the principal outstanding on senior secured notes, details of which are given in notes 11 and 12.

19.        Contingencies, Guarantees and Financial Commitments

Any liabilities the Company is committed to honour and which are dependent on future circumstances or events occurring would be disclosed in this note if any existed.

There were no other contingencies, guarantees or financial commitments outstanding at the balance sheet date.

20.        Related Party Transactions and Transaction with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company and key management personnel (i.e. the Directors).

Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remunerations and interests have been disclosed on pages 33 to 35 with additional disclosure in note 4. No other related parties have been identified.

Under UK GAAP, the Manager is not a related party. Details of the Manager's services and fees are disclosed in the Directors' Report on pages 28 and 29 and in note 3.

21.        Post Balance Sheet Event

Any significant events that occurred after the balance sheet date but before the signing of the balance sheet will be shown here.

There are no significant post balance sheet events requiring disclosure.

.

NOTICE OF ANNUAL GENERAL MEETING

NOTICE IS GIVEN that the Annual General Meeting (AGM) of Perpetual Income and Growth Investment Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.00am on 16 July 2019 for the following purposes:

Ordinary Business

To consider and, if thought fit, to pass the following resolutions all of which will be proposed as ordinary resolutions:

1.             To receive the Annual Financial Report for the year ended 31 March 2019.

2.             To re-elect Mike Balfour as a Director of the Company.

3.             To re-elect Victoria Cochrane as a Director of the Company.

4.             To re-elect Alan Giles as a Director of the Company.

5.             To re-elect Richard Laing as a Director of the Company.

6.             To re-elect Bob Yerbury as a Director of the Company.

7.             To elect Georgina Field as a Director of the Company.

8.             To approve the Company’s dividend payment policy as set out on page 13 of this annual financial report.

9.             To approve the Annual Statement and Report on Remuneration for the year ended 31 March 2019.

10.           To re-appoint Ernst & Young LLP as auditor.

11.           To authorise the Audit Committee to determine the auditor’s remuneration.

Biographies of Directors seeking re-election are shown on page 13 of the annual financial report.

Special Business

To consider and, if thought fit, to pass the following resolutions of which resolution 12 will be proposed as an Ordinary Resolution and resolutions 13, 14 and 15 will be proposed as Special Resolutions:

12.           THAT:

      the Directors be generally and unconditionally authorised in accordance with Section 551 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (the ‘Act’) to exercise all powers of the Company to allot relevant securities (as defined in that section) up to an aggregate nominal amount (within the meaning of Sections 551(3) and (6) of the Act) of £2,384,473, this being 10% of the Company’s issued ordinary share capital excluding shares held in treasury as at 28 May 2019, such authority to expire at the conclusion of the next AGM of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier, but so that this authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry as if the authority conferred by this resolution had not expired.

13.           THAT:

      the Directors be and they are hereby empowered, in accordance with Sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (the ‘Act’) to allot equity securities for cash, either pursuant to the authority given by resolution 12 set out above or (if such allotment constitutes the sale of relevant shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, as if Section 561 of the Act did not apply to any such allotment, provided that this power shall be limited:

(a)  to the allotment of equity securities in connection with a rights issue in favour of all holders of a class of equity securities where the equity securities attributable respectively to the interests of all holders of securities of such class are either proportionate (as nearly as may be) to the respective numbers of relevant equity securities held by them or are otherwise allotted in accordance with the rights attaching to such equity securities (subject in either case to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise); and

(b)  to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £2,384,473, this being 10% of the Company’s issued ordinary share capital excluding shares held in treasury as at 28 May 2019.

      and this power shall expire at the conclusion of the next AGM of the Company or the date 15 months after the passing of this resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry as if the power conferred by this resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the Act shall bear the same meanings in this resolution.

14.           THAT:

      the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with Section 701 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (the ‘Act’) to make market purchases (within the meaning of Section 693(4) of the Act) of its issued ordinary shares of 10p each in the capital of the Company (‘Shares’)

                PROVIDED ALWAYS THAT:

(i)      the maximum number of Shares hereby authorised to be purchased shall be 14.99% of the Company’s issued ordinary shares excluding shares held in treasury on 16 July 2019, being the date of the AGM (equivalent to 35,743,257 shares at 28 May 2019);

(ii)     the minimum price which may be paid for a Share shall be 10p;

(iii)    the maximum price which may be paid for a Share must not be more than the higher of: (a) 5% above the average of the mid-market values of the Shares for the five business days before the purchase is made; and (b) the higher of the price of the last independent trade in the Shares and the highest then current independent bid for the Shares on the London Stock Exchange;

(iv)    any purchase of Shares will be made in the market for cash at prices below the prevailing net asset value per Share (as determined by the Directors);

(v)     the authority hereby conferred shall expire at the conclusion of the next AGM of the Company or, if earlier, on the expiry of 15 months from the passing of this resolution unless the authority is renewed at any other general meeting prior to such time;

(vi)    the Company may make a contract to purchase Shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiration of such authority and may make a purchase of Shares pursuant to any such contract; and

(vii)   any shares so purchased shall be cancelled or, if the Directors so determine and subject to the provisions of Sections 724 to 731 of the Act and any applicable regulations of the United Kingdom Listing Authority, be held (or otherwise dealt with in accordance with Section 727 or 729 of the Act) as treasury shares.

15.           THAT:

the period of notice required for general meetings of the Company (other than AGMs) shall be not less than 14 clear days’ notice.

The resolutions are explained further in the Directors’ Report on pages 31 and 32.

Dated this 29th May 2019

By order of the Board

Invesco Asset Management Limited
Company Secretary

.

This Annual Financial Report announcement does not constitute the Company's statutory accounts.

The statutory accounts for the financial year ended 31 March 2018 have been delivered to the Registrar of Companies. The statutory accounts for the financial year ended 31 March 2019 have been approved and audited but have not yet been filed. The statutory accounts for the year ended 31 March 2019 received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006.

The audited annual financial report will be available to shareholders, and will be delivered to the Registrar of Companies, shortly.  Copies may be obtained during normal business hours from the Company’s Registered Office, from its correspondence address, 43-45 Portman Square, London W1H 6LY, and via the Company’s web page: www.invesco.co.uk/pigit

The Annual General Meeting of the Company will be held at 43-45 Portman Square, London W1H 6LY at 11.00am on 16 July 2019.

Invesco Asset Management Limited
Company Secretary
29 May 2019


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