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Schroder Orientl Inc (SOI)

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Friday 13 November, 2020

Schroder Orientl Inc

Annual Financial Report

RNS Number : 1988F
Schroder Oriental Income Fund Ltd
13 November 2020
 

13 November 2020

 

 

ANNUAL REPORT AND ACCOUNTS

 

Schroder Oriental Income Fund Limited (the "Company") hereby submits its annual report for the year ended 31 August 2020 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1. 

 

The Company's annual report and accounts for the year ended 31 August 2020 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's webpages www.schroders.co.uk/orientalincome .  Please click on the following link to view the document:

 

http://www.rns-pdf.londonstockexchange.com/rns/1988F_2-2020-11-12.pdf

 

The Company has submitted its annual report and accounts to the National Storage Mechanism and it will shortly be available for inspection at www.morningstar.co.uk/uk/NSM.

 

Enquiries:

 

Matthew Riley

Schroder Investment Management Limited 

Tel: 020 7658 6596

 

 

Chairman's Statement

 

Dear Shareholder

 

Revenue, dividends and performance

 

In truly unprecedented times, your Company has again increased its dividend, drawing modestly on its revenue reserve to cover the 7% fall in revenue earnings per share during the year. Asian economies have shown  remarkable resilience to date and the reduction in income has been much more modest than that of the United Kingdom, demonstrating the Company's value as a diversifier away from UK income. Dividends declared by the Company over the year totalled 10.30 pence. Remaining revenue reserves are equivalent to nearly eight months of the dividend at current levels..

 

The share price produced a total return of -3.9% over the year to 31 August 2020. The NAV total return for the financial year to 31 August 2020 was -0.9%. In an environment where the rise in regional markets was driven by lower yielding growth stocks, which do not produce the income the Company is targeting, we believe this is a good result. We are also reassured by the subsequent recovery in NAV (which has risen by 6% since the year end1), and the Company's strong performance over the longer term.

 

Share price discount, issuance and buybacks

 

During the first nine months of the financial year, demand for the Company's shares remained strong and a total of  8.5 million shares were issued at a premium to NAV. However, since the summer, demand has been more volatile and the Company's share price ended the year at a small discount to NAV. In accordance with the Company's discount control policy, the board has been active in the market to buy back shares and a total of 965,000 shares were repurchased to be held in treasury in the last quarter of the financial year. A further 625,000 have been purchased since then as the directors remain active in applying their discount control authorities.

 

Gearing

 

During the year, gearing was decreased slightly from 5.3% to 4%. The Company continues to have access to a £100 million multi-currency facility to provide flexibility to the Manager to gear the portfolio within strict limits imposed by the board.

 

Board composition and succession planning

 

Your board has seen significant change over the last four years, welcoming four new directors. I believe a developed succession planning process has enabled this to happen smoothly, without hampering the board's ability to address key strategic issues or losing 'corporate memory'. As the next step in this process, I shall be retiring as a director of the Company at the next AGM and Paul Meader will take on the role of chairman following a selection process overseen by the nomination committee and led by Alexa Coates. In accordance with the board's policy on tenure, Paul will act as Chairman for a period of five years. I wish Paul every success in this role and have no doubt that his experience of both the Company and as a chairman leaves the Company in good hands.

 

Change of portfolio manager

 

After a long and distinguished career in the fund management industry, the Company's portfolio manager Matthew Dobbs, will be retiring in early 2021. Matthew was instrumental in the launch of the Company in 2005 and has been the fund manager of the portfolio since then. He has been responsible for much of the success of the Company since then and I should like to record the board's gratitude to Matthew and to send him our very best wishes for his retirement.

 

Richard Sennitt, a close colleague of Matthew's over the last 13 years, will be taking over as portfolio manager of the Company. Richard joined Schroders in 1993 and has become well known to the board over an extended period. Having engaged extensively with Schroders about this transition process we are confident that Richard will be an excellent successor to Matthew. The board looks forward to working with him as he takes on the role of portfolio manager from 31 December 2020.

 

Change of tax domicile

 

As I wrote in the half year report, following extensive discussion, and advice taken from the Company's specialist advisers, after 15 years as a Guernsey tax exempt company, your board proposed to shareholders that the Company's tax domicile be changed from Guernsey to the United Kingdom. Following a general meeting where this was approved by shareholders, the Company became tax resident in the United Kingdom on 1 September 2020 and became an investment trust on the same date. This will result in greater flexibility, increased engagement with service providers, and operational savings due to a reduction in irrecoverable withholding taxes, as a result of the United Kingdom's double taxation treaties with certain Asian countries.

 

Annual general meeting

 

The AGM will be held at 10.30 am on Friday, 11 December 2020. Due to the continuing restrictions relating to meetings due to the COVID-19 pandemic, shareholders are asked to cast their votes by proxy. To ensure the safety and security of our shareholders, service providers, officers and guests, shareholders will not be able to attend the meeting in person.

 

The portfolio manager will be presenting at a webinar on Friday, 11 December 2020 at 10.45 am, and all shareholders are encouraged to sign up via the Company's web pages (www.schroders.co.uk/orientalincome), to hear the fund manager's view, and to ask questions.

 

In addition, the board would like shareholders to get in touch via the Company Secretary with any questions or comments, so that the board can answer them in advance of the AGM. The board will be providing answers to commonly asked questions on the Company's webpages, as well as the answers to questions from shareholders before the AGM. To email, please use: [email protected] or write to us care of the Company Secretary (Company Secretary, Schroder Oriental Income Fund Limited, 1 London Wall Place, London EC2Y 5AU).

 

Outlook

 

Having served on your board since the Company's launch in 2005, I have seen the share price and the dividend more than double, the dividend increase every year, and demand for the Company become such that the number of its shares has increased by four-fifths. As I hand over the Chairman's role to Paul I wonder how repeatable this will be in the next 15 years.

 

I am tempted to say that it will be hard: long term shareholders have had tailwinds helping the past success, and not all of these will recur. It is also difficult to abstract from the challenges of the last year - the pandemic, new tension between China and the US, volatile markets, etc. However, it is precisely the last year that keeps me optimistic about the Company. For all of the unprecedented disruption and the concern about how it would impact corporate dividends, our investment income this year almost matched 2019 and proved more than sufficient to justify a higher dividend, given the level of reserves accumulated from prior years.

 

The performance numbers make clear that in absolute terms, it has not been an ideal year - the NAV is slightly down, for example. Nevertheless, 2020 is a microcosm of what we want the Company to do: to provide shareholders with an above-average and rising income while participating in Asia's growth, and to do it even in difficult times. This year it has achieved this at a time when many other sources of income for UK shareholders, like UK dividends and interest rates, have fallen, in some cases significantly.

 

I am therefore confident that I am not only leaving the Company with an experienced Chairman and a diverse and talented board but also in a good position to repeat its past success. The world is still full of risks, and recent events have added to them, but it has been satisfying over the last 15 years to have seen how valid Asia has become as a source of income for many UK investors. I wish shareholders and the board continuing success in the years to come.

 

Peter Rigg

Chairman

12 November 2020

 

1 from 1 September 2020 to 10 November 2020

 

Manager's Review

 

The net asset value per share recorded a total return of -0.9% over the twelve months to end August 2020. Four interim dividends have been declared totalling 10.30 pence (10.10 pence last year).

 

Despite the global disruption of the COVID-19 pandemic, widely-followed Asian equity benchmarks recorded positive returns for the twelve months under review. This has been thanks to a robust recovery following sharp falls in the first quarter of 2020 as the potential implications of the virus sunk in.

 

While some of the rapid recovery was due to the effectiveness with which a number of regional authorities handled the crisis, the global monetary and fiscal response was also of material impact. Looser credit, led by the US Federal Reserve but mirrored by all the major monetary authorities, resulted in a rapid reversal in the spike in credit spreads. With widespread direct support for both consumers and companies (in Asia primarily focused upon Small/Medium-sized Enterprises or SMEs), equities recovered strongly over the summer, also supported by the weakness in the US dollar.

 

Although China has been at the epicentre of the pandemic, and has also faced mounting pressure from the United States across a range of contentious issues, its economic performance has been particularly notable. Despite relatively mild stimulus measures by global standards (but pretty comprehensive, if ruthless, lockdowns) China has led the regional recovery as supply disruptions were speedily resolved, and end demand recovered the bulk of the previous collapse. However, reflecting the global picture, areas such as long-distance travel, entertainment and tourism have proved slower to revive.

 

The overall regional index performance disguised a wide dispersion in performance between both countries and sectors. As can be seen above, three markets were up over 20% in sterling terms, balanced by four down over 20%. The latter were all in ASEAN, and while there were easily identifiable negatives (collapse of tourism and political tension in Thailand, understandable lack of COVID-19 preparedness in Indonesia), much of the disparity can be put down to sectoral exposures. Heavy weightings towards banks, property, telecommunications and resources have hampered South East Asia, while higher exposure to technology and the "new economy" of e-commerce, online gaming, digital payments, social media, electronic vehicles and health care have supported China, Korea and Taiwan.

 

It is unsurprising in the circumstances that we have seen a number of dividend cuts around the region. However, on the whole we would say that management have been sensible and have had due regard to the fact that many companies in the region remain profitable and boast relatively strong balance sheets. More systemic areas of weakness were banks (particularly in Australia and Singapore where the regulatory authorities have counselled prudence), and the Singapore REITs where lockdown and government relief measures curbed pay-outs. However, given that there have not been the same direct payments to support companies seen in the United Kingdom, we have not seen the same moral pressure to limit dividends.

 

Positioning and Performance

 

Over the life of the Company, actively-managed Asian income stocks have been able not only to keep pace, but outperform the reference benchmark. There have been two notable recent periods when this has not been the case; calendar year 2017, and the last twelve months. In both cases, markets have been narrowly focused on a relatively small number of large-cap growth stocks (particularly in China) which offer little in the way of dividend return. Indeed, over the review period, two thirds of the performance shortfall can be ascribed to not owning just two stocks - Tencent and Alibaba. The balance is largely accounted for by the Company's exposure to real estate which has been out of favour given concern over the long term potential for disruption from changed work habits and the challenge to off-line retail.

 

There have been some bright spots. Stock selection in Taiwan, Australia and Korea has been strong (partly reflecting exposure to information technology), and the correct underweighting in financials which have suffered due to lower interest rates and fears over credit quality.

 

The geographic exposures in the Company's portfolio have remained well spread between Hong Kong, Australia, China, Singapore, Taiwan and Korea. It is notable that over the last few years, more income opportunities have emerged in China although we remain relatively underweight. The major move during the period has been to reduce the bank exposure in favour of information technology (particularly in Taiwan) and insurance which remains relatively under-penetrated in the region. Real estate remains an important exposure, but we have taken a very selective approach both in terms of the nature of the underlying asset and also balance sheet strength.

 

Investment Outlook

 

The rate of earnings downgrades across the region has slowed recently, but there is still a lack of visibility on the timing of an end to global lockdowns and travel restrictions, and the likely path of the subsequent recovery in activity. This is especially the case now given secondary spikes in infections in several countries. It is, therefore, no surprise that companies are providing limited guidance on their shorter-term outlooks and continue to plan conservatively. In our interaction with management teams, our focus has been on understanding what measures they are taking to deal with the crisis and how well placed they are to ride out the downturn - operationally and financially. For many companies, this year's earnings are likely to be something of a write-off, so it is important to focus on the longer-term prospects for our investee companies. As performance in the past few months has demonstrated, markets by and large are willing to look beyond this crisis, as long as there is scope for a healthy recovery next year to a more 'normalised' level of profitability.

 

Consequently, aggregate valuations for the region have risen to slightly above historic average levels. This is clearly already pricing in a measure of the recovery in earnings expected into 2021 and the upside for the 'lockdown winners'. There is scope for disappointment, but the ultra-low level of interest rates and bond yields around the world provides support to valuations. It also makes the dividend streams from those companies able to sustain pay-outs particularly attractive.

 

Behind the aggregate valuation measures, there is a very wide spread of multiples. This means that valuations in some of the sectors with strong momentum this year - notably selected healthcare, e-commerce, online gaming, 5G equipment, electric vehicle-related and other popular China A-listed shares - are much more stretched. We are also seeing some signs of 'froth' emerging in the very strong flows and performance of new initial public offerings in Hong Kong and South Korea. This froth is also evident in the high levels of retail participation in these deals and in market trading more generally. Although not yet at worrying levels, this sort of optimism does leave markets more vulnerable to disappointment.

 

The obverse of this is that many companies with solid dividend prospects are offering great value. Clearly, we must be very selective as some industries are facing severe disruption. Consequently, the Company's portfolio has relatively little exposure to hydro-carbon energy and autos, and taking a very selective approach in banks and real estate; but across all sectors we are sensitive to the long-term sustainability of company business models, working closely with our local analysts and the Environmental, Social and Governance (ESG) team.

 

When the Company was launched fifteen years ago, we contended that actively-managed higher yield Asian equities could provide attractive long-term returns, and enable income sensitive clients to access an exciting and high growth region. However, we also warned that dividend yield is both an opportunity and a constraint; there may be attractive areas of the market that we are constrained from accessing due to lack of adequate yields. We have experienced just such a period in recent years, but on a longer term time horizon the Company has generated attractive and competitive returns. This writer signs off with great conviction that the longer-term pattern will be restored over the coming years under the capable stewardship of Richard Sennitt and the team at Schroders.

 

Matthew Dobbs

Schroder Investment Management Limited

12 November 2020

 

Principal risks and uncertainties

 

The board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the audit and risk committee on an ongoing basis. This system assists the board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in November 2020.

 

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

 

Actions taken by the board and, where appropriate, its committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below. The arrows in the Change column indicate if the board thinks the risk has increased, decreased or stayed the same during the year.

 

Emerging risks and uncertainties

 

During the year, the board also discussed and monitored a number of risks that could potentially impact the Company's ability to meet its strategic objectives. These were climate change risk and COVID-19-related risks. The board has determined that these risks are worthy of close monitoring.

 

Climate change risk includes how climate change could affect the Company's investments, and potentially shareholder returns. The board notes the Manager has integrated ESG considerations, including climate change, into the investment process. The board will continue to monitor this as an emerging risk.

 

The board also reviewed the risks arising from the COVID-19 pandemic and considers it to be a major event with an ongoing impact on the likelihood and severity of the Company's principal risks. COVID-19 will continue to affect the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic is forecast to have a significant impact on prospects for global growth as measured by GDP. As a result, the pandemic has triggered increased volatillity in global stock markets and created uncertainty around future dividend income.

 

The board notes the Manager's investment process is unaffected by the COVID-19 pandemic. The Manager continues to focus on long-term company fundamentals and detailed analysis of current and future investments. COVID-19 also affected the operational resilience of the Company's service providers, who have implemented business continuity plans and are working almost entirely remotely. The board continues to receive regular reporting on operations from the Company's major service providers and does not anticipate a fall in the level of service and will continue to monitor this as an emerging risk.

 

*The "Change" column on the right highlights at a glance the board's assessment of any increases or decreases in risk during the year after mitigation and management. The arrows show the risks as increased or decreased, and dashes show risks as stable.

 

Risk

Mitigation and management

Change (post mitigation and management)*

Investment management

 

The Manager's investment strategy and levels of resourcing, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.

 

 

Review of the Manager's compliance with agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and whether appropriate strategies are employed to mitigate any negative impact of substantial changes in markets. The Manager also reported on the impact of COVID-19 on the Company's portfolio, and the market generally.

 

Annual review of the ongoing suitability of the Manager, including resources and key personnel risk.

 

é

Strategic

 

The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.

 

 

The appropriateness of the Company's investment mandate and the long-term investment strategy is periodically reviewed and the success of the Company in meeting its stated objectives is monitored.

 

Share price relative to NAV per share is monitored by the board as a key performance indicator and is reviewed against the Company's peers on a regular basis. The use of buy back authorities is considered on a regular basis. The Manager and Corporate Broker monitor market feedback and the board considers this at each quarterly meeting.

 

Marketing and distribution activity is actively reviewed.

 

Proactive engagement with shareholders.

 

-

The Company's cost base could become uncompetitive against its peer group and against open-ended alternatives

The board reviews income forecast at each meeting.

 

The board approves significant non-routine expenses.

 

The Management Engagement Committee reviews fees paid to the Manager at least annually.

 

Ongoing monitoring of fees charged by other service providers takes place alongside an annual review of the Company's Ongoing Charges figure*.

 

é

Political

 

Political developments globally might materially affect the ability of the Company to achieve its investment objective.

 

 

The board monitored key political developments, including the potential impact of Brexit and noted that the portfolio's investments in the Asia Pacific region limited the direct impact from Brexit other than through shareholders' exposure principally to exchange rate fluctuations against sterling.

 

The board also monitored key political developments in the Asia Pacific region including US/China tension, and the political situation in Hong Kong, Taiwan and Singapore.

 

The board and the portfolio manager periodically meet with the Manager's economists to gauge the likelihood and impact of certain political changes.

 

-

Financial and currency

 

The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in equity markets could have an adverse impact on the market value of the Company's underlying investments and, as the Company invests predominantly in assets which are denominated in a range of currencies, its exposure to changes in the exchange rate between sterling and other currencies has the potential to have a significant impact on returns and the sterling value of dividend income from underlying investments.

 

 

 

The risk profile of the portfolio is considered and appropriate strategies to mitigate any negative impact of substantial changes in markets or currency are discussed with the Manager.

 

The Company has no formal policy of hedging currency risk but may use foreign currency borrowings or forward foreign currency contracts to limit exposure.

é

Gearing and leverage

 

The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.

 

 

 

Gearing is monitored and strict restrictions on borrowings are imposed: gearing continues to operate within pre-agreed limits so as not to exceed 25% of the Company's net assets.

-

Service provider

 

The Company has no employees and has delegated certain functions to a number of service providers. Failure of controls, including as a result of fraud, and poor performance of any service provider, could lead to disruption, reputational damage or loss.

 

Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations.

 

Regular reports are provided by key service providers and the quality of their services is monitored, including an annual presentation to the audit committee chair and other directors from key risk and internal controls personnel at the Company's main service providers.

 

Review of annual audited internal controls reports from key service providers, including confirmation of business continuity arrangements and IT controls, is undertaken.

 

-

Cyber

 

The Company's service providers are all exposed to the risk of cyber attacks. Cyber attacks could lead to loss of personal or confidential information, unauthorised payments or inability to carry out operations in a timely manner.

 

 

Service providers report on cyber risk mitigation and management at least annually, which includes confirmation of business continuity capability in the event of a cyber attack.

 

In addition, the board received presentations from the Manager and the safekeeping agent and custodian on cyber risk, and the additional steps those companies were taking during the COVID-19 pandemic and the need for employees to work from home.

-

 

Risk assessment and internal controls review by the board

 

Risk assessment includes consideration of the scope and quality of the systems of internal control operating within key service providers, and ensures regular communication of the results of monitoring by such providers to the audit and risk committee, including the incidence of significant control failings or weaknesses that have been identified at any time and the extent to which they have resulted in unforeseen outcomes or contingencies that may have a material impact on the Company's performance or condition.

 

No significant control failings or weaknesses were identified from the audit and risk committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this report. The board is satisfied that it has undertaken a detailed review of the risks facing the Company.

 

A full analysis of the financial risks facing the Company is set out in note 20 to the accounts on pages 53 to 58 of the 2020 Annual Report.

 

Viability statement

 

The directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 August 2020 and the potential impact of the principal risks and uncertainties it faces for the review period. They have also reviewed the impact of the COVID-19 pandemic on the Company as further detailed in the Chairman's Statement, Portfolio Manager's Review and Emerging Risks and Uncertainties sections of this report. The directors have assessed the Company's operational resilience and they are satisfied that the Company's outsourced service providers will continue to operate effectively, following the implementation of their business continuity plans as required by COVID-19.

 

The board believes that a period of five years reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding. In its assessment of the viability of the Company, the directors have considered each of the Company's principal risks and uncertainties detailed on pages 18 to 20 of the 2020 Annual Report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio. The directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

 

The directors have also considered a stress test which represents a severe but plausible scenario along with movement in foreign exchange rates. This scenario assumes a severe stock market collapse and/or exchange rate movements at the beginning of the five year period, resulting in a 50% fall in the value of the Company's investments and investment income and no subsequent recovery in either prices or income in the following five years. It is assumed that the Company continues to pay an annual dividend in line with current levels and that the borrowing facility remains available and remains drawn, subject to the gearing limit.

 

The Company's investments comprise highly liquid, large, listed companies and so its assets are readily realisable securities and could be sold to meet funding requirements or the repayment of the gearing facility should the need arise. There is no expectation that the nature of the investments held within the portfolio will be materially different in the future.

 

The operating costs of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position. Furthermore, the Company has no employees and consequently no redundancy or other employment related liabilities.

 

The board reviews the performance of the Company's service providers regularly, including the Manager, along with internal controls reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. The board also considers the business continuity arrangements of the Company's key service providers.

 

The board monitors the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls at its quarterly meetings.

 

Although there continue to be regulatory changes which could increase costs or impact revenue, the directors do not believe that this would be sufficient to affect its viability.

 

The board has assumed that the business model of a closed ended investment company, as well as the Company's investment objective, will continue to be attractive to investors.

 

Based on the above the directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

 

Going concern

 

Having assessed the principal risks, the impact of the COVID-19 pandemic, the operational resilience of its service providers and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the directors consider it appropriate to adopt the going concern basis in preparing the accounts.

 

By order of the board

 

Schroder Investment Management Limited

 

Company Secretary

 

12 November 2020

 

Statement of Directors' Responsibilities

in respect of the Annual Report and Accounts

 

The directors are responsible for preparing the financial statements in accordance with applicable Guernsey law and generally accepted accounting principles.

 

Guernsey company law requires the directors to prepare financial statements for each financial year which 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 should:

 

-  select suitable accounting policies, and apply them consistently;

 

-  present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

 

-  provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards ("IFRS") is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance;

 

-  state that the Company has complied with IFRS, subject to any material departures disclosed and explained in the financial statements;

 

-  prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and

 

-  make judgements and estimates that are reasonable and prudent.

 

The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with The Companies (Guernsey) Law, 2008 (as amended). 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.

 

Each of the directors, whose names and functions are listed on pages 22 and 23 of the 2020 Annual Report, confirms that, to the best of their knowledge:

 

-  the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union and with The Companies (Guernsey) Law, 2008 (as amended) and in accordance with the requirements set out above, and give a true and fair view of the assets, liabilities, financial position and the net return of the Company;

 

-  the Strategic Review includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

 

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

 

So far as each of the directors are aware, there is no relevant audit information of which the Company's auditor is unaware, and each director has taken all the steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

 

By order of the board

 

Peter Rigg

Chairman

12 November 2020

 

Statement of Comprehensive Income

 

for the year ended 31 August 2020

 

 

2020

2019

 

Revenue

Capital

Total

Revenue

Capital

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

(Losses)/gains on investments at fair value through profit or loss

-

(33,379)

(33,379)

-

1,538

1,538

Net foreign currency gains/(losses)

-

3,536

3,536

-

(2,414)

(2,414)

Income from investments

31,421

164

31,585

32,294

1,076

33,370

Other income

12

-

12

64

-

64

Total income/(loss)

31,433

(29,679)

1,754

32,358

200

32,558

Management fee

(1,355)

(3,163)

(4,518)

(1,352)

(3,155)

(4,507)

Other administrative expenses

(1,051)

(4)

(1,055)

(950)

(6)

(956)

Profit/(loss) before finance costs and taxation

29,027

(32,846)

(3,819)

30,056

(2,961)

27,095

Finance costs

(235)

(528)

(763)

(332)

(768)

(1,100)

Profit/(loss) before taxation

28,792

(33,374)

(4,582)

29,724

(3,729)

25,995

Taxation

(2,255)

-

(2,255)

(2,348)

-

(2,348)

Net profit/(loss) and total comprehensive income

26,537

(33,374)

(6,837)

27,376

(3,729)

23,647

Earnings/(losses) per share

9.86p

(12.40)p

(2.54)p

10.60p

(1.44)p

9.16p

 

The "Total" column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The "Revenue and Capital" columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

 

The Company does not have any income or expense that is not included in net profit for the year. Accordingly the "Net profit" for the year is also the "Total comprehensive income" for the year.

 

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

 

 

 

Statement of Changes in Equity

 

for the year ended 31 August 2020

 

 

 

Treasury

Capital

 

 

 

 

 

Share

share

redemption

Special

Capital

Revenue

 

 

capital

reserve

reserve

reserve

reserves

reserve

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

At 31 August 2018

191,538

-

39

150,374

270,959

29,801

642,711

Issue of ordinary shares

21,248

-

-

-

-

-

21,248

Net (loss)/profit

-

-

-

-

(3,729)

27,376

23,647

Dividends paid in the year

-

-

-

-

-

(25,802)

(25,802)

At 31 August 2019

212,786

-

39

150,374

267,230

31,375

661,804

Issue of ordinary shares

21,561

-

-

-

-

-

21,561

Repurchase of ordinary shares into treasury

-

(2,155)

-

-

-

-

(2,155)

Net (loss)/profit

-

-

-

-

(33,374)

26,537

(6,837)

Dividends paid in the year

-

-

-

-

-

(27,674)

(27,674)

At 31 August 2020

234,347

(2,155)

39

150,374

233,856

30,238

646,699

 

 

Balance Sheet

 

at 31 August 2020

 

 

2020

2019

 

£'000

£'000

Non current assets

 

 

Investments at fair value through profit or loss

672,184

694,569

Current assets

 

 

Receivables

5,234

2,553

Cash and cash equivalents

17,028

5,043

Derivative financial instruments held at fair value through profit or loss

-

836

 

22,262

8,432

Total assets

694,446

703,001

Current liabilities

 

 

Payables

(47,747)

(41,197)

Net assets

646,699

661,804

Equity attributable to equity holders

 

 

Share capital

234,347

212,786

Treasury share reserve

(2,155)

-

Capital redemption reserve

39

39

Special reserve

150,374

150,374

Capital reserves

233,856

267,230

Revenue reserve

30,238

31,375

Total equity shareholders' funds

646,699

661,804

Net asset value per share

239.28p

251.94p

 

Cash Flow Statement

 

for the year ended 31 August 2020

 

 

2020

2019

 

£'000

£'000

Operating activities

 

 

(Loss)/profit before finance costs and taxation

(3,819)

27,095

Add back net foreign currency gains/losses

(3,536)

2,414

Losses/(gains) on investments at fair value through profit or loss

33,379

(1,538)

Net purchases of investments at fair value through profit or loss

(9,030)

(22,755)

Increase in receivables

(194)

(1,002)

Increase in payables

70

2

Overseas taxation paid

(2,143)

(2,232)

Net cash inflow from operating activities before interest

14,727

1,984

Interest paid

(767)

(1,104)

Net cash inflow from operating activities

13,960

880

Financing activities

 

 

Bank loans drawn down

87,067

11,460

Bank loans repaid

(80,351)

(44,063)

Issue of ordinary shares

21,561

21,248

Repurchase of ordinary shares into treasury

(2,155)

-

Dividends paid

(27,674)

(25,802)

Net cash outflow from financing activities

(1,552)

(37,157)

Increase/(decrease) in cash and cash equivalents

12,408

(36,277)

Cash and cash equivalents at the start of the year

5,043

39,165

Effect of foreign exchange rates on cash and cash equivalents

(423)

2,155

Cash and cash equivalents at the end of the year

17,028

5,043

 

Included under operating activities are dividends received during the year amounting to £30,561,00 (2019: £33,184,000) and deposit interest receipts amounting to £14,000 (2019: £68,000).

 

 

 

Notes to the Accounts

 

1.   Accounting Policies

 

Basis of accounting

 

The accounts have been prepared in accordance with the Companies (Guernsey) Law, 2008 and International Financial Reporting Standards ("IFRS"), which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee ("IASC"), that remain in effect and to the extent that they have been adopted by the European Union.

 

Where consistent with the requirements of IFRS, the directors have sought to prepare the accounts on a basis compliant with presentational guidance set out in the statement of recommended practice for investment trust companies (the "SORP") issued by the Association of Investment Companies in October 2019.

 

The policies applied in these accounts are consistent with those applied in the preceding year.

 

 

2.  Taxation

 

 

2020

2019

 

Revenue

Capital

Total

Revenue

Capital

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Irrecoverable overseas tax

2,255

-

2,255

2,348

-

2,348

 

The Company has been granted an exemption from Guernsey taxation, under the Income Tax (Exempt Bodies) Guernsey Ordinance 1989, for which it is charged an annual exemption fee of £1,200 (2019: £1,200).

 

3.  Dividends

 

Dividends paid and declared

 

 

2020

2019

 

£'000

£'000

2019 fourth interim dividend of 4.60p (2018: 4.50p)

12,274

11,505

First interim dividend of 1.90p (2019: 1.80p)

5,127

4,653

Second interim dividend of 1.90p (2019: 1.80p)

5,138

4,672

Third interim dividend of 1.90p (2019: 1.90p)

5,135

4,972

Total dividends paid in the year

27,674

25,802

 

 

 

 

2020

2019

 

£'000

£'000

Fourth interim dividend declared of 4.60p (2019: 4.60p)

12,432

12,083

 

Under the Companies (Guernsey) Law 2008, the Company may pay dividends out of both capital and revenue reserves, subject to passing a solvency test. However all dividends paid and declared to date have been paid, out of revenue profits. The Company has passed the solvency test for all dividends paid to date.

 

The fourth interim dividend declared in respect of the year ended 31 August 2019 differs from the amount actually paid due to shares issued after the balance sheet date but prior to the share register record date.

 

4.  Earnings/(losses) per share

 

 

2020

2019

 

£'000

£'000

Net revenue profit

26,537

27,376

Net capital loss

(33,374)

(3,729)

Net total (loss)/profit

(6,837)

23,647

Weighted average number of Ordinary shares in issue during the year

269,200,852

258,190,873

Revenue earnings per share

9.86p

10.60p

Capital loss per share

(12.40)p

(1.44)p

Total (loss)/earning per share

(2.54)p

9.16p

 

5.  Share capital

 

 

2020

2019

 

£'000

£'000

Ordinary shares of 1p each, allotted, called-up and fully paid:

 

 

Opening balance of 262,683,024 (2019: 254,098,024) shares

212,786

191,538

Issue of 8,550,000 (2019: 8,585,000) shares

21,561

21,248

Repurchase of 965,000 (2019: nil) shares into treasury

(2,155)

-

Subtotal of 270,268,024 (2019: 262,683,024) shares, excluding shares held in treasury

232,192

212,786

965,000 shares (2019: nil) shares held in treasury

2,155

-

Closing balance of 271,233,024 (2019: 262,683,024) shares

234,347

212,786

 

The ordinary shares rank pari passu, and each share carries one vote in the event of a poll at a general meeting. The Company has authority to issue an unlimited number of ordinary shares.

 

During the year a total of 8,550,000 shares, nominal value £85,500 were issued to the market to satisfy demand, at an average price of 252.18p per share, for a total consideration received of £21,561,000.

 

During the year, the Company purchased 965,000 of its own shares, nominal value £9,650 to hold in treasury for a total consideration of £2,155,000 representing 0.4% of the shares outstanding at the beginning of the year. The reason for these share purchases was to seek to manage the volatility of the share price discount to net asset value per share.

 

 

6.  Net asset value per share

 

 

2020

2019

Net assets attributable to shareholders (£'000)

646,699

661,804

Shares in issue at the year end

270,268,024

262,683,024

Net asset value per share

239.28p

251.94p

 

7.   Disclosures regarding financial instruments measured at fair value

 

The Company's portfolio of investments, which may comprise investments in equities, equity linked securities, government bonds and derivatives, are carried in the balance sheet at fair value. Other financial instruments held by the Company may comprise amounts due to or from brokers, dividends and interest receivable, accruals, cash at bank and drawings on the credit facility.

 

For these instruments, the balance sheet amount is a reasonable approximation of fair value.

 

The investments are categorised into a hierarchy comprising the following three levels:

 

Level 1 - valued using quoted prices in active markets.

 

Level 2 - valued by reference to valuation techniques using observable inputs other than quoted market prices included within Level 1.

 

Level 3 - valued by reference to valuation techniques using inputs that are not based on observable market data.

 

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

 

Details of the valuation techniques used by the Company are given in note 1(c) on page 45 of the 2020 Annual Report, and note 1(j) on page 46 of the 2020 Annual Report.

 

At 31 August 2020, the Company's investment portfolio was categorised as follows:

 

 

2020

 

Level 1

Level 2

Level 3

Total

 

£'000

£'000

£'000

£'000

Investments in equities and equity linked securities

672,184

-

-

672,184

Total

672,184

-

-

672,184

 

 

 

 

 

 

2019

 

Level 1

Level 2

Level 3

Total

 

£'000

£'000

£'000

£'000

Investments in equities and equity linked securities

694,569

-

-

694,569

Derivative financial instrument - forward currency contract

-

836

-

836

Total

694,569

836

-

695,405

 

There have been no transfers between Levels 1, 2 or 3 during the year (2019: nil).

 

8.   Subsequent events

 

On 1 September 2020, the Company became tax resident in the United Kingdom. and since then it has been approved by HM Revenue & Customs as an investment trust in accordance with section 1158 of the Corporation Tax Act 2010, by way of a one-off application. It is intended that the Company will continue to conduct its affairs in a manner which will enable it to retain this status. The Company is not a "close" company for taxation purposes.

 

625,000 shares have been bought back between 1 September and 12 November 2020.

 

9.   Status of announcement

 

2019 Financial Information

 

The figures and financial information for 2019 are extracted from the published annual report and accounts for the year ended 31 August 2019 and do not constitute the statutory accounts for that year. The 2019 annual report and accounts included the Report of the Independent Auditors which was unqualified.

 

2020 Financial Information

 

The figures and financial information for 2020 are extracted from the annual report and accounts for the year ended 31 August 2020 and do not constitute the statutory accounts for the year. The 2020 annual report and accounts include the Report of the Independent Auditors which is unqualified.

 

Neither the contents of the Company's webpages nor the contents of any website accessible from hyperlinks on the Company's webpages (or any other website) is incorporated into, or forms part of, this announcement.

 

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