THE EDINBURGH INVESTMENT TRUST PLC
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
For the Year Ended 31 March 2015
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Performance Statistics
The Company's Benchmark is the FTSE All-Share Index
FOR THE YEAR TO 31 MARCH 2015 2014
% %
CHANGE CHANGE
Total Return (capital growth with income reinvested)
Net asset value (NAV) total return(1):
- debt at par +16.5 +12.3
- debt at market value +16.2 +14.3
Share price total return(1) +15.7 +8.0
FTSE All-Share Index total return(1) +6.6 +8.8
AT AT
31 March 31 March %
2015 2014 CHANGE
Capital Return
NAV:
- debt at par 704.23p 628.18p +12.1
- debt at market value 686.07p 613.25p +11.9
Share price(1) 662.0p 594.0p +11.4
FTSE All-Share Index(1) 3663.58 3555.59 +3.0
Discount/(premium):
- debt at par 6.0% 5.4%
- debt at market value 3.5% 3.1%
Gearing (at par):
- gross gearing 10.9% 16.3%
- net gearing 10.9% 15.7%
%
FOR THE YEAR TO 31 MARCH 2015 2014 CHANGE
Revenue Return
Revenue return per share 24.8p 23.2p +6.9
Dividends:
- first interim 5.00p 5.00p
- second interim 5.10p 5.00p
- third interim 5.15p 5.00p
- final proposed 8.60p 8.50p
- total dividends 23.85p 23.50p +1.5
Retail Price Index(1) 0.9% 2.5%
Ongoing Charges Ratio:
Excluding performance fee 0.61 0.67
Performance fee(2) n/a 0.42
(1) Source: Thomson Reuters Datastream
(2) As of 1 April 2014 a performance fee is no longer payable.
.
CHAIRMAN'S STATEMENT
Dear Shareholder
The performance of the UK equity market picked up in the second half of the
year to 31 March 2015, but remained relatively subdued in comparison to the
strong growth previously seen in the two years to 31 March 2014. However,
against this backdrop, and in Mark Barnett's first full year as portfolio
manager, I am pleased to be able to report strong investment performance
against both the Company's benchmark and peer group, outperforming the former
by nearly 10%.
The income generation of the portfolio remains good and the Board is proposing
a final dividend of 8.6p per share for the year which would result in a full
year dividend of 23.85p per share, an increase of 1.5% year-on-year.
UK Equity Market
The recovery in the UK market continued into 2015 with the oil price decline
helping both the reduction in CPI inflation, to an official level of zero, and
an increase in consumer spending power - the equivalent of a tax cut. However,
most economists consider the recovery still to be vulnerable to set backs both
domestically and globally, especially from within the Eurozone, thus postponing
further any rise in interest rates.
There has been a marked divergence in the monetary stance of central banks in
the US and UK on the one hand, and Japan and the Eurozone on the other. As
expected, volatility in the currency, fixed interest and equity markets has
increased and is likely to continue throughout 2015.
The weakness in wage growth amongst middle and lower income workers which is
due to unexpected slow growth in productivity in the UK, as well as part of a
world-wide trend, suggests there is no likelihood of a surge in credit or GDP
growth or of any signs of inflation; none of these is likely to pick up until
personal balance sheets are repaired after the financial crisis and consumers
feel sufficiently confident to go out and "consume".
A review of the market and the Company's portfolio can be found in the
Portfolio Manager's Report below.
Investment Strategy
The hunt for yield by investors knows no bounds; the portfolio manager is well
aware of the desire by the Company's shareholders to see growth in capital and
dividends and, in his own words, "vigilance and patience remain two of my key
watchwords". Given the challenges in the economy and stock market, the
portfolio manager remains focused on investing in companies that can be
resilient across many different macro-economic outcomes, regardless of global
currency fluctuations, moves in commodity prices or interest rate rises.
There is a good balance in the portfolio across the market cap spectrum.
Although weighted towards the top end of the FTSE100, the amount invested in
mid-cap stocks, where potential for growth is arguably greater, has increased
and is presently 24%. Ownership of overseas stocks continues to be a theme
(subject to the Company's investment restriction of 20%) in order to extend
holdings in the favoured pharmaceutical and tobacco sectors, in which there are
a limited number of major UK-listed companies. The portfolio manager favours
companies in the market which offer visibility of revenues, profits and cash
flows in this low-growth world and which are managed for the primary purpose of
delivering shareholder value in the form of a sustainable and growing dividend.
Performance for the Year
My Chairman's Statement last year set out the review undertaken by the Board of
the management of the Company, and the decision we made to remain with Invesco
Perpetual as Manager with Mark Barnett as our new portfolio manager, together
with the reduction in management costs.
It therefore gives me pleasure to report the Company's excellent performance
for the year, producing on a total returns basis a net asset value (NAV) with
debt at par of 16.5% versus the return of 6.6% for the FTSE All-Share Index
(the `Index'), the Company's benchmark. For the same period the NAV with debt
at market returned 16.2% and the share price total return (with dividends
reinvested) was 15.7%.
The portfolio continues to be concentrated in a relatively small number of
stocks (52 at the year end) as well as sectors, and its overweight or
underweight positions in various sectors continue to be material drivers of the
Company's relative investment performance.
The Company's share price ended the year at 662p, an increase of 11.4% from the
previous year end of 594.0p. The discount of the shares to NAV with debt at par
widened slightly from 5.4% at the start to 6.0% at the year end. With debt at
market value, the discount moved out from 3.1% to 3.5%. This slight widening of
discount was better than the trend of the peer group, the average discount of
which widened from 0.5% to 2.5%, (debt at market value) over the same period.
At 18 May 2015, the latest practical date to signing this report, the NAV and
share price were respectively 730.28p and 687.5p, and the resultant discount
was 5.9% (debt at par) and 3.5% (debt at market value).
Borrowings and Gearing
As I reported in the interim report, the Company repaid the £100 million 11½%
debenture that matured in June 2014 and this has resulted in considerable cost
savings. The Company now has a better mix of fixed and floating rate borrowings
in place, with its £100 million 7¾% debenture 2022 and the new £100 million
bank credit facility at LIBOR+0.7%. The portfolio manager has used this new
flexibility and actively managed the gearing of the portfolio during the year,
based on his assessment of risks versus rewards of the extra market exposure
arising from the gearing, including the effect of uncertainty around the UK
election. As a result, borrowings have ranged from the full £200 million at the
start of the year, down to £150 million at the year end - equivalent to gearing
of 10.9%, and had been reduced to £132 million (9.6%) on the general election
date.
Dividend
Income from the portfolio during the year was £56.0 million (2014: £55.4
million). Of this £7.0 million, which is equal to 3.6p per share (2014: £3.75
million; 1.9p), was from special dividends. Theoretically special dividends are
non-recurring, however, the Company has received a good flow of these dividends
over the past couple of years and company results announced to date indicate
that there will be more special dividends receivable for the year to 31 March
2016. The Board remains alert to the income requirement of the Company, and
during the year reviewed the situation on a regular basis with the portfolio
manager.
The Board is recommending a final dividend of 8.6p per share which, if approved
at the AGM, will be paid on 31st July 2015 to shareholders on the Company's
register on 12th June 2015. This increases the total dividend to 23.85p for the
year, an increase of 1.5% on last year's total dividend of 23.5p. The annual
increase in the Retail Prices Index was 0.9% and demonstrates the Company's
commitment to its long term objective of providing income growth which exceeds
the rate of inflation.
The Board understands the importance of a consistent stream of dividend income
to shareholders, and as a result has raised slightly the second and third
interim dividends to 5.1p and 5.15p respectively. It is the intention of the
Board to move to a more even distribution of dividends during the coming years,
but highlights that this will take time to achieve if a reduction in a future
final dividend is to be avoided.
Outlook
The Company continues to attract the type of shareholder for whom investment
trusts were originally intended, namely private investors, either directly or
through the discretionary management of wealth managers. As mentioned in
previous years, unadvised investors, who have decided to use the services of
the many trading platforms that exist to execute their deals simply and
cheaply, continue to be attracted by the Company's clear strategy, long-term
performance record and dividend growth.
As highlighted in the Portfolio Manager's Report below there are a number of
challenges and potential headwinds facing financial markets. The unexpected UK
election result returning a Conservative Government to office has initially
been welcomed by financial markets, but history tells us that small majority
governments can be problematic and there are a number of challenging
constitutional matters that the Board will keep under review. However, it is
important to stress, as in previous Chairman's Statements, the portfolio
manager's unchanged investment approach which, with its emphasis on value
driven stock selection, should provide resilience in periods of market weakness
whilst still providing the opportunity for creating growth in shareholder value
over the longer term.
Jim Pettigrew
Chairman
20 May 2015
.
STRATEGIC REPORT
FOR THE YEAR ENDED 31 MARCH 2015
BUSINESS REVIEW
The Edinburgh 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 are also set out
below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective
has been to contract the services of Invesco Fund Managers Limited (the
`Manager') to manage the portfolio in accordance with the Board's strategy and
under its oversight. The portfolio manager with individual responsibility for
the day to day management of the portfolio is Mark Barnett.
Investment Objective and Policy
Investment Objective
The Company invests primarily in UK securities with the long term objective of
achieving:
1. an increase of the Net Asset Value per share by more than the growth in the
FTSE All-Share Index; and
2. growth in dividends per share by more than the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock
exchange in the UK. The Company may also invest up to 20% of the market value
of the Company's investment portfolio, measured at the time of any acquisition,
in securities listed on stock exchanges outside the UK. The portfolio is
selected by the Manager on the basis of its assessment of the fundamental value
available in individual securities. Whilst the Company's overall exposure to
individual securities is monitored carefully by the Board, the portfolio is not
primarily structured on the basis of industry weightings. The securities of no
one company may, as determined at the time of acquisition, represent more than
10% of the market value of the Company's equity portfolio. Similarly, the
Company may not hold more than 5% of the issued share capital (or voting
shares) in any one company. Investment in convertibles is subject to normal
security limits. Should these or any other limit be exceeded by subsequent
market movement, each resulting position is specifically reviewed by the Board.
The Company may borrow money to provide gearing to the equity portfolio up to
25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted
within the following constraints: the writing of covered calls against
securities which in aggregate amount to no more than 10% of the value of the
portfolio and the investment in FTSE 100 futures which when exercised would
equate to no more than 15% of the value of the portfolio. Other derivative
instruments may be employed, subject to prior Board approval, provided that the
cost (and potential liability) of exercise of all outstanding derivative
positions at any time should not exceed 25% of the value of the portfolio at
that time. The Company may hedge exposure to changes in foreign currency rates
in respect of its overseas investments.
Results and Dividends
At the year end the share price was 662p per ordinary share (2014: 594p). The
net asset value (debt at par) and net asset value (debt at market value) per
ordinary share were 704.23p and 686.07p respectively. The comparative figures
on 31 March 2014 were 628.18p and 613.25p.
Subject to approval at the AGM, the final proposed dividend for the year ended
31 March 2015 of 8.60p (2014: 8.50p) per ordinary share will be payable on 31
July 2015 to shareholders on the register on 12 June 2015. The shares will be
quoted ex-dividend on 11 June 2015. This will give total dividends for the year
of 23.85p per share, an increase of 1.5% on the previous year's dividends of
23.50p. The revenue return per share for the year was 24.8p, a 6.9% increase on
the 2014 return of 23.2p.
Performance
The Board reviews the Company's performance by reference to a number of key
performance indicators (KPIs) which are set out below. Notwithstanding that
some KPIs are beyond its control, they are measures of the Company's absolute
and relative performance. The KPIs assist in managing performance and
compliance and are reviewed by the Board at each meeting.
Year to 31 March 2015 2014
Total Return:
Net asset value (per share debt at par)(1) 16.5% 12.3%
Net asset value (per share debt at market value)(1) 16.2% 14.3%
Share price(1) 15.7% 8.0%
FTSE All-Share Index(1) 6.6% 8.8%
Discount to NAV (debt at par) 6.0% 5.4%
Discount to NAV (debt at market value) 3.5% 3.1%
Revenue return per share 24.8p 23.2p
Dividend per share 23.85p 23.5p
Gross gearing 10.9% 16.3%
Ongoing charges ratio(2) - excluding performance fee 0.6 0.7
Performance fee(3) n/a 0.4
(1) Source: Thomson Reuters Datastream.
(2) Calculated in accordance with AIC Guidelines i.e. total ongoing expenses ÷
average NAV (debt at market value).
(3) As of 1 April 2014, a performance fee is no longer payable.
Past performance is not a guide to future returns.
The Chairman's Statement above gives a commentary on the performance of the
Company during the year, the gearing and the dividend.
Expenses are reviewed at each Board meeting enabling the Board, amongst other
things, to review costs and consider any expenditure outside that of its normal
operations. For the year being reported, all KPIs are considered satisfactory.
The Board also regularly reviews the performance of the Company in relation to
the 21 investment trusts in the UK Equity Income sector. As at 31 March 2015,
the Company was ranked 3rd by NAV performance in this sector over one year, 5th
over three years and 3rd over five years (source: JPMorgan Cazenove).
Analysis of Analysis of Performance -
Performance analyses the relative
performance of the Company
FOR THE YEAR to its benchmark index.
Total return Basis ENDED Relative performance -
represents the arithmetic
31 MARCH difference between the NAV
2015 and the benchmark.
% Net gearing effect -
measures the impact of the
Net asset value 16.5 debenture stock, bank loan
total return and cash on the Company's
relative performance. This
Benchmark total 6.6 will be positive if the
return portfolio has positive
performance.
Relative performance 9.9
Interest - arising from the
Analysis of Relative debenture stock and bank
Performance loan reduces the assets
available to invest and has
Portfolio total 16.1 a negative impact
return on performance.
Less Benchmark total 6.6 Management fee - the base
return fee reduces the Company's
net assets and decreases
Portfolio 9.5 performance.
outperformance
Other expenses and tax -
Borrowings: reduce the level of assets
and therefore result in a
Net gearing effect 2.0 negative effect for
relative performance.
Interest (0.9)
Management fee (0.5)
Other expenses (0.1)
Tax (0.1)
Total 9.9
Financial Position and Borrowings
At 31 March 2015 the Company's net assets were valued at £1,376 million (2014:
£1,228 million) comprising principally a portfolio of equity investments, cash
and borrowings. Borrowings at the year end comprised the £100 million 73/4%
debenture which matures in 2022 and amounts drawn down on the Company's £100
million bank revolving credit facility of £50 million. During the year the
Company's £100 million 111/2% debenture matured and was replaced by this more
flexible facility.
The Company also has a bank overdraft facility of up to 10% of assets held by
the custodian, which is available to facilitate settlement of short-term cash
timing differences. As at 31 March 2015, £0.2 million (2014: £nil) was drawn
down.
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. Details of the principal risks affecting the
Company follow.
Principal Risks and Uncertainties
The Company's key long-term investment objectives are an increase in the net
asset value per share by more than the growth in the FTSE All-Share Index (the
`benchmark') and an increase in dividends by more than the growth in RPI. The
principal risks and uncertainties facing the Company are an integral
consideration when assessing the operations in place to monitor these
objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems but
the day-to-day operation and monitoring is delegated to the Manager. As
described in the following sections, the Board is actively engaged in assessing
and monitoring the principal risks facing the Company.
Market Risk
A great majority of the Company's investments are traded on recognised stock
exchanges. The principal risk for investors in the Company is a significant
fall, and/or a prolonged period of decline in those markets. The Company's
investments, and the income derived from them, are influenced by many factors
such as general economic conditions, interest rates, inflation, political
events, and government policies as well as by supply and demand reflecting
investor sentiment. Such factors are outside the control of the Board and
Manager and may give rise to high levels of volatility in the prices of
investments held by the Company. The asset value and price of the Company's
shares and its earnings and dividends may consequently also experience
volatility and may decline.
Investment Performance Risk
The Board sets performance objectives and delegates the investment management
process to the Manager. The achievement of the Company's performance objectives
relative to the market requires active management of the portfolio of assets
and securities. The Manager's approach is to construct a portfolio which should
benefit from expected future trends in the UK and global economies. The Manager
is a long term investor, prepared to take substantial positions in securities
and sectors which may well be out of fashion, but which the Manager believes
will have potential for material increases in earnings and, in due course,
dividends and share prices. Strategy, asset allocation and stock selection
decisions by the Manager can lead to underperformance of the benchmark and/or
income targets. The Manager's style may result in a concentrated portfolio with
significant overweight or underweight positions in individual stocks or sectors
compared to the index and 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 holding many of the same
stocks as the Company which reflects the Manager's high conviction style of
investment management. This could significantly increase the liquidity and
price risk of certain stocks under certain scenarios and market conditions.
However, the Board and Manager believe that the investment process and policy
outlined above should, over the long term, meet the Company's objectives of
capital growth in excess of the benchmark and real dividend growth.
Investment selection is delegated to the Manager. The Board does not specify
asset allocations. Information on the Company's performance against the
benchmark and peer group is provided to the Board on a quarterly basis. The
Board uses this to review the performance of the Company, taking into account
how performance relates to the Company's objectives. The Manager is responsible
for monitoring the portfolio selected and seeks to ensure that individual
stocks meet an acceptable risk-reward profile.
As shown in the investment policy, derivatives may be used provided that the
market exposure arising is less than 25% of the value of the portfolio. During
the year, no forward currency contracts or derivatives were used for hedging or
market exposure respectively.
Gearing and Borrowing Risk
The Company has the ability to invest up to £200 million from its £100 million
debenture stock and £100 million revolving credit facility in the equity
market. The principal gearing risk is that the level of gearing may have an
adverse impact on performance. Secondary risks relate to whether the cost of
borrowing is too high and whether the term of borrowing is appropriate.
The Manager has full discretion over the amount of the borrowing it uses to
gear its portfolio, whilst the issuance, repurchase or restructuring of
borrowing are for the Board to decide. Information related to borrowing and
gearing is provided to the Directors as part of the Board papers. Additionally,
the Board keeps under review the cost of buying back debt.
Income/Dividend Risk
The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts
and comparison against budget. These are contained within the Board papers. The
Board considers the level of income at each meeting.
Share Price Risk
There is a risk that the Company's prospects and NAV may not be fully reflected
in the share price from time-to-time.
The share price is monitored on a daily basis. The Board is empowered to
repurchase shares within agreed parameters. The discount at which the shares
trade to NAV can be influenced by share repurchases. The Company has not
repurchased shares in the last year.
Control Systems Risk
The Board delegates a number of specific risk control activities to the Manager
including:
• good practice industry standards in fund management operations;
• financial controls;
• meeting regulatory requirements;
• the management of the relationship with the depositary;
• via the depositary, the management of the custody and security of the
Company's assets; and
• the management of the relationship with the registrar.
Consequently in respect of these activities the Company is dependent on the
Manager's control systems and those of its depositary and registrars, both of
which are monitored by the Manager in the context of safeguarding the Company's
assets and interests. There is a risk that the Manager fails to ensure that
these controls are operated in a satisfactory manner. In addition, the Company
relies on the soundness and efficiency of the custodian for good title and
timeliness of receipt and delivery of securities.
A risk-based programme of internal audits is carried out by the Manager
regularly to test the controls environment. An internal controls report
providing an assessment of these risks and operation of the controls is
prepared by the Manager and considered by the Audit Committee, and is formally
reported to and considered by the Board.
Reliance on the Manager and other Third Party Providers
The Company has no employees and the Directors are all appointed on a
non-executive basis. The Company is reliant upon the performance of third party
providers for its executive function and other service provisions. The
Company's most significant contract is with the Manager, to whom responsibility
both for the Company's portfolio and for the provision of company secretarial
and administrative services is delegated. The Company has other contractual
arrangements with third parties to act as auditor, registrar, depositary and
broker. Failure by any service provider to carry out its obligations to the
Company in accordance with the terms of its appointment could have a materially
detrimental impact on the operation of the Company and could affect the ability
of the Company to pursue successfully its investment policy and expose the
Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation
to agreed service standards on a regular basis, and any issues and concerns are
dealt with promptly and reported to the Board. The Manager formally reviews the
performance of all third party providers and reports to the Board on an annual
basis.
• The Board reviews the performance of the Manager at every Board meeting and
otherwise as appropriate. The Board has the power to replace the Manager and
reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of the named
portfolio manager. Mark Barnett is Head of UK Equities at Invesco Perpetual. He
has worked in equity markets since 1992 and has been part of the UK equities
team at Invesco Perpetual for 18 years.
• The risk that the portfolio manager might be incapacitated or otherwise
unavailable is mitigated by the fact that he works within, and is supported by,
the wider Invesco Perpetual UK Equity team.
• The Board has set guidelines within which the portfolio manager is permitted
wide discretion. Any proposed variation outside these guidelines is referred to
the Board and compliance with the guidelines and the guidelines themselves are
reviewed at every Board meeting.
Other Risks
The Company may be exposed to other business and strategic risks in the future,
including fiscal, legal or regulatory changes, and the perceived impact of the
designated Investment Manager ceasing to be involved with the Company.
The instruments in which the Company's cash positions are invested are reviewed
by the Board to ensure credit, liquidity and concentration risks are adequately
managed. Where an Invesco Group vehicle is utilised, it is assessed for
suitability against other similar investment options.
The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory requirements
that are applicable to listed closed-ended investment companies. The Company is
subject to the continuing obligations imposed by the UK Listing Authority on
all companies whose shares are listed on the Official List. A breach of the
conditions for approval as an investment trust could lead to the Company being
subject to capital gains tax on the sale of the investments in the Company's
portfolio. A serious breach of other regulatory rules may lead to suspension
from listing on the Stock Exchange.
The most significant regulatory change in the year has been the implementation
of the Alternative Investment Fund Managers Directive. This has required the
appointment of a depositary and a change in the contractual arrangements with
the Manager, who bears the main compliance obligations.
The Manager is regulated by the Financial Conduct Authority and failure to
comply with the relevant regulations could harm the Manager's reputation with a
potential detrimental effect on the Company.
The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis.
There is an ongoing process for the Board to consider these other risks. In
addition, the composition of the Board is regularly reviewed to ensure the
membership offers sufficient knowledge and experience to assess, anticipate and
mitigate these risks, as far as possible.
Board Diversity
The Company's policy on diversity is set out on page 25 in the Annual Financial
Report. The Board considers diversity, including the balance of skills,
knowledge, diversity (including gender) and experience, amongst other factors
when reviewing its composition and appointing new directors, but does not
consider it appropriate to establish targets or quotas in this regard. As a
norm the Board comprises either five or six non-executive directors of which,
at present, one is female. Summary biographical details of the Directors are
set out on page 17 in the Annual Financial Report. 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, or
not to, make an investment on environmental and social grounds alone. The
Company does not have a human rights policy, although the Manager does apply
the United Nations Principles for Responsible Investment.
.
PORTFOLIO MANAGER'S REPORT
Market Review
The year ending 31 March 2015 produced a total return of 6.6% for the UK equity
market, as measured by the FTSE All-Share Index, the Company's benchmark index.
The market performance was held back for most of the year as a result of
concerns over future profit growth caused by the strength of sterling, the end
to the Quantitative Easing (QE) programme in the US, rising geopolitical risk,
and the prospect of UK domestic elections. A renewed sense of optimism
developed at the start of 2015 fuelled by a significant fall in energy prices,
declining bond yields, and by an increase in M&A speculation - despite
uncertainty ahead of the UK general election in May.
As the year unfolded, fears over China's growth rate and a weakening European
economy became more relevant concerns. However, offsetting this, the fall in
the price of oil in the second half of the year increased optimism that
consumer disposable income would rise as fuel and utility costs fell. The
deflationary impact of this would also serve to reduce any short-term upward
pressure on interest rates. A final positive factor for the market was the news
in January that the European Central Bank had decided to introduce a programme
of QE in Europe.
Portfolio Strategy and Review
The Company's total return net asset value (debt at market) was 16.2% during
the year compared to 6.6% for the benchmark index.
The portfolio's continued rise in value over a period which saw several high
profile profit warnings and pronounced swings in sentiment is encouraging. The
market has been driven by a more positive view of those companies able to
deliver sustainable growth in earnings, cash-flow and, particularly, dividends.
The portfolio's holdings in tobacco companies delivered a significant positive
contribution to performance over the period under review. A combination of
continuing robust profit margins and solid dividend growth helped drive
performance. Altria Group (the parent company of Philip Morris USA), Reynolds
American, and Imperial Tobacco delivered total share price returns of 58%, 51%
and 32% respectively over the year. The two strongest performers, Altria Group
and Reynolds American, both operate in the North American market. The
underlying driver of the US market has been to prioritise prices over volume
which has resulted in a positive pricing environment for all companies in the
sector.
At the company level, Reynolds American's agreed acquisition of North American
competitor Lorillard announced last summer, should further strengthen its
position in the US market. Imperial Tobacco also stands to benefit from the
deal, which is currently awaiting approval from the US Federal Trade
Commission, as it will make a strategic purchase of some of Lorillard's North
American brands.
Within the global tobacco industry, there remain high barriers to entry for new
competitors and the existing premium brands strategy continues to demonstrate
revenue growth despite a more difficult operating environment in many parts of
the world. All three companies held in the portfolio continue to offer above
average dividend yields, in spite of the strong share price performance over
the last 12 months.
Other strong contributors to performance during the financial year were BAE
Systems and AstraZeneca. BAE Systems reported in February that defence spending
remained a high priority in a number of international markets and commented
that in spite of continuing pressure on public spending in the UK, the company
benefited from having long-term contracts in place. The company also
highlighted that its large order backlog of £40.5 billion continued to provide
`good, multi-year visibility across many of their businesses'.
The value inherent in AstraZeneca's drug pipeline was highlighted in April 2014
when Pfizer made a bid for the company, which was subsequently rejected by the
AstraZeneca board. The company has continued to make progress and, at the time
of the company's full year results in February, the chief executive described
2014 as having been a `remarkable' year during which six product approvals were
announced and the drugs pipeline was accelerated across all main therapy areas.
The company continues to expand in China which is now its second largest
national market. AstraZeneca remains a core holding in our portfolio.
The other industry that contributed positively to performance over the period
was financials. The portfolio has maintained significant holdings in insurance
companies, specialist lenders, and property companies - all of which have
contributed positively to performance during the period. The portfolio
continues to have no exposure to banks.
Among the detractors to performance were the holdings in Drax, Rolls-Royce and
Serco. Whilst the portfolio's exposure to the oil and gas sector is relatively
low, the impact of a falling oil price was felt through the holdings in UK
power generators, especially Drax, as earnings forecasts were downgraded and
sentiment turned negative. Furthermore, Drax was also impacted by the UK
government's decision to change its method of subsidy for future biomass
conversions and by the possibility of EU intervention.
There was continuing disappointing news from the holding in Rolls-Royce. Having
issued a profits warning at the start of 2014, the company warned again in
September that sales would decline in 2014 as a whole and could fall again in
2015 as a result of lower demand for defence equipment, client specific order
delays, and Russian sanctions, which have blocked diesel-engine exports to
Russia. It was widely felt that the company could have communicated this news
to the market more effectively and action has subsequently been taken by the
company to address this issue.
The holding in Serco fell in value. The company had a difficult year with
several profit warnings and a change of management, which resulted in
significant provisions and impairments being made.
Portfolio Activity
In terms of portfolio activity, new investments were made in Game Digital, P2P
Global Investments, Workspace Group and TalkTalk Telecom. The holdings in
Sanofi, Paypoint and Catlin Group were sold.
Outlook
The recent performance of the UK equity market has seen further strong positive
returns, with the FTSE All-Share Index recently hitting a new all-time high,
which makes the near term outlook more subdued. The continued rerating of
equities primarily as a result of the policies of central banks has resulted in
boosting asset values to the point where the market looks more fully valued
than for many years. This high level of valuation coupled with a low level of
earnings growth is the primary risk to the current level of share prices.
Furthermore, the increased probability of a change in monetary policy from the
US central bank represents a more difficult backdrop for government bond
markets which will inevitably have a knock-on impact into equities. The
unexpected outright Conservative victory in the general election was positive
for business and for UK plc. Importantly, it removes the uncertainty that would
have surrounded a hung parliament and fears of anti-business legislation.
However, as a result of this outcome two new political risks have risen to
prominence. First, the risk surrounding the successful integration of the
Scottish Nationalist Party (SNP) into the UK parliamentary system and second,
the longer term risk relating to the EU "in-out" referendum in 2017. The latter
will certainly have an impact on financial markets and the domestic economy in
due course.
Notwithstanding the challenging backdrop, the portfolio remains well positioned
to prosper in this environment of continued low interest rates and low nominal
GDP growth. Identifying companies that can cope with this environment and where
the ability to fund a sustainable and growing dividend remains a key principle
of corporate strategy is central to the portfolio manager's approach. The
portfolio is well represented with businesses with these qualities which
should, over the long term, provide the shareholders of the Company with a
healthy total return from a combination of capital and income growth.
Mark Barnett
Portfolio Manager
The Strategic Report was approved by the Board of Directors on 20 May 2015.
Invesco Asset Management Limited
Company Secretary
.
INVESTMENTS IN ORDER OF VALUATION
AT 31 MARCH 2015
UK listed and ordinary shares unless stated otherwise
AIM Investments quoted on AIM
MARKET
VALUE % OF
INVESTMENT SECTOR £'000 PORTFOLIO
Reynolds American - US common Tobacco 78,221 5.2
stock
British American Tobacco Tobacco 71,771 4.7
BT Group Fixed Line 70,441 4.6
Telecommunications
Imperial Tobacco Tobacco 70,362 4.6
AstraZeneca Pharmaceuticals & 69,208 4.6
Biotechnology
Roche - Swiss common stock Pharmaceuticals & 65,475 4.3
Biotechnology
BAE Systems Aerospace & Defence 64,521 4.3
GlaxoSmithKline Pharmaceuticals & 49,999 3.3
Biotechnology
BP Oil & Gas Producers 47,312 3.1
Altria - US common stock Tobacco 42,611 2.8
Ten Top Holdings 629,921 41.5
Provident Financial Financial Services 41,647 2.8
Capita Support Services 40,499 2.7
Legal & General Life Insurance 38,209 2.5
SSE Electricity 36,945 2.5
London Stock Exchange Financial Services 36,893 2.4
Reed Elsevier Media 33,342 2.2
Rolls-Royce Aerospace & Defence 33,183 2.2
Compass Travel & Leisure 32,805 2.2
BTG Pharmaceuticals & 31,380 2.1
Biotechnology
Babcock International Support Services 31,154 2.1
Twenty Top Holdings 985,978 65.2
G4S Support Services 30,664 2.0
Hiscox Non-life Insurance 30,465 2.0
Derwent London Real Estate Investment 29,116 1.9
Trusts
Reckitt Benckiser Household Goods & Home 28,624 1.9
Construction
Amlin Non-life Insurance 26,614 1.8
Smith & Nephew Health Care Equipment & 25,941 1.7
Services
Shaftesbury Real Estate Investment 25,878 1.7
Trusts
Novartis - Swiss common stock Pharmaceuticals & 25,704 1.7
Biotechnology
Thomas Cook Travel & Leisure 25,457 1.7
GAME Digital General Retailers 20,328 1.4
Thirty Top Holdings 1,254,769 83.0
Centrica Gas, Water & Multiutilities 20,298 1.3
Rentokil Initial Support Services 19,808 1.3
NewRiver RetailAIM Real Estate Investment 18,935 1.3
Trusts
Beazley Non-life Insurance 18,304 1.2
Drax Electricity 18,047 1.2
P2P Global Investments - C Investment Instruments 17,415 1.2
Shares
CLS Real Estate Investment & 15,631 1.0
Services
Lancashire Non-life Insurance 15,244 1.0
IP Group Financial Services 13,974 0.9
HomeServe Support Services 13,927 0.9
Forty Top Holdings 1,426,352 94.3
KCOM Fixed Line 13,616 0.9
Telecommunications
Workspace Real Estate Investment 13,245 0.9
Trusts
TalkTalk Telecom Fixed Line 11,450 0.8
Telecommunications
N Brown General Retailers 11,147 0.7
Raven Russia - Ordinary Real Estate Investment & 6,948
Services
Raven Russia - Preference 3,785
10,733 0.7
Vectura Pharmaceuticals & 9,047 0.6
Biotechnology
Burford CapitalAIM Investment Instruments 6,134 0.4
ReddeAIM Financial Services 4,394 0.3
Serco - Ordinary Support Services 3,040
Serco - Rights 16 Apr 2015 908
3,948 0.3
Barclays Bank - Nuclear Power Investment Instruments 1,797 0.1
Notes 28 Feb 2019
Fifty Top Holdings 1,511,863 100.0
Eurovestech - Unquoted Financial Services 390 -
Proximagen - Rights 12 Sept Pharmaceuticals & 378 -
2017 - Unquoted Biotechnology
Total Holdings (52) 1,512,631 100.0
.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
in respect of the annual financial report and the financial statements
The Directors are responsible for preparing the annual financial report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with UK Accounting Standards.
Under company law, the Directors must not approve the financial statements
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 have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, a Directors' Remuneration
Report and a Corporate Governance Statement that complies with that law and
those regulations.
In so far as each of the Directors is aware:
• there is no relevant audit information of which the Company's auditor is
unaware; and
• the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditor is aware of that information.
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 of the Company;
• 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; and
The Directors consider that this annual financial report, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's performance, business model and strategy.
Jim Pettigrew
Chairman
Signed on behalf of the Board of Directors
20 May 2015
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH
2015 2014
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 158,768 158,768 - 112,468 112,468
Foreign exchange profits - 2 2 - 154 154
Income - note 2 56,045 - 56,045 55,360 22 55,382
Investment management fee - (2,035) (4,748) (6,783) (2,084) (9,689) (11,773)
note 3
Other expenses (870) (1) (871) (785) (2) (787)
Net return before finance 53,140 154,021 207,161 52,491 102,953 155,444
costs and taxation
Finance costs (3,515) (8,203) (11,718) (5,850) (13,651) (19,501)
Return on ordinary 49,625 145,818 195,443 46,641 89,302 135,943
activities before tax
Tax on ordinary activities (1,278) - (1,278) (1,417) - (1,417)
Return on ordinary 48,347 145,818 194,165 45,224 89,302 134,526
activities after tax for
the financial year
Return per ordinary share
Basic - note 4 24.8p 74.7p 99.5p 23.2p 45.8p 69.0p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. 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 and the Company has no other gains or losses therefore no
statement of recognised gains or losses is presented. No operations were
acquired or discontinued in the year.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDER'S FUNDS
FOR THE YEAR ENDED 31 MARCH
CAPITAL
SHARE SHARE REDEMPTION CAPITAL REVENUE
CAPITAL PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 March 2013 48,779 6,639 24,676 997,171 60,481 1,137,746
Dividends paid - note 5 - - - - (44,461) (44,461)
Net return on ordinary - - - 89,302 45,224 134,526
activities
Balance at 31 March 2014 48,779 6,639 24,676 1,086,473 61,244 1,227,811
Dividends paid - note 5 - - - - (46,025) (46,025)
Net return on ordinary - - - 145,818 48,347 194,165
activities
Balance at 31 March 2015 48,779 6,639 24,676 1,232,291 63,566 1,375,951
.
BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH
2015 2014
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 1,512,631 1,420,220
Current assets
Debtors 12,428 10,500
Cash and cash funds 100 7,025
12,528 17,525
Creditors: amounts falling due within one year (51,091) (112,068)
Net current liabilities (38,563) (94,543)
Total assets less current liabilities 1,474,068 1,325,677
Creditors: amounts falling due after more than one year (98,117) (97,866)
Net assets 1,375,951 1,227,811
Capital and reserves
Share capital - note 6 48,779 48,779
Share premium 6,639 6,639
Capital redemption reserve 24,676 24,676
Capital reserve 1,232,291 1,086,473
Revenue reserve 63,566 61,244
Shareholders' funds 1,375,951 1,227,811
Net asset value per ordinary share
Basic - note 7 704.23p 628.18p
These financial statements were approved and authorised for issue by the Board
of Directors on 20 May 2015.
Signed on behalf of the Board of Directors
Jim Pettigrew
Chairman
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH
2015 2014
£'000 £'000
Cash inflow from operating activities 43,049 32,888
Servicing of finance (14,303) (19,250)
Capital expenditure and financial investment 60,124 37,761
Equity dividends paid - note 5 (46,025) (44,461)
Net cash inflow before management of liquid resources and 42,845 6,938
financing
Management of liquid resources 6,700 (6,800)
Financing (50,000) -
(Decrease)/increase in cash (455) 138
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash (455) 138
Cashflow from movement in liquid resources (6,700) 6,800
Debenture stock non-cash movement (251) (251)
Cash inflow from bank facility drawn down (50,000) -
Cash outflow from repayment of debenture stock 30 June 100,000 -
2014
Movement in net debt in the year 42,594 6,687
Net debt at beginning of year (190,841) (197,528)
Net debt at end of year (148,247) (190,841)
.
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 with the Statement of Recommended
Practice (SORP) `Financial Statements of Investment Trust Companies and Venture
Capital Trusts', issued by the Association of Investment Companies in January
2009. The financial statements are also prepared on a going concern basis.
2. Income
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2015 2014
£'000 £'000
Income from listed investments
UK dividends
- Ordinary dividends 37,540 40,502
- Special dividends 4,391 3,441
Overseas dividends
- Ordinary dividends 10,615 10,125
- Special dividends 2,583 311
Scrip dividends 911 969
Income from money market funds 4 11
56,044 55,359
Other income
Deposit interest 1 -
Underwriting commission - 1
Total income 56,045 55,360
No special dividend was recognised in capital during the year (2014: £22,000).
3. Investment Management Fees
This note shows the fees due to the Manager. These are made up of the
management fee calculated and paid monthly. A performance fee is no longer
payable.
2015 2014
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Investment 2,035 4,748 6,783 2,084 4,863 6,947
management fee
Performance fee - - - - 4,826 4,826
2,035 4,748 6,783 2,084 9,689 11,773
Details of the investment management agreement are disclosed on page 27 in the
Directors' Report in the Annual Financial Report. At 31 March 2015 investment
management fees of £592,000 (2014: £579,000) were accrued. As the Manager is
no longer entitled to a performance fee from 1 April 2014, there is no performance
fee accrual (2014: £4,826,000).
4. Return per Ordinary Share
Return per share is the amount of gain generated for the financial year divided
by the weighted average number of ordinary shares in issue.
The basic, capital and total returns per ordinary share are based on each
return on ordinary shares after tax and on 195,116,734 (2014: 195,116,734)
ordinary shares, being the number of shares in issue during the year.
5. Dividends
Dividends represent the distribution of income to shareholders. The Company
pays four dividends a year - three interim and one final dividend.
2015 2014
PENCE £'000 PENCE £'000
Dividends paid and recognised in the
year:
Third interim paid in respect of 5.00 9,756 5.00 9,756
previous year
Final paid in respect of previous year 8.50 16,585 7.80 15,219
First interim paid 5.00 9,756 5.00 9,756
Second interim paid 5.10 9,951 5.00 9,756
23.60 46,048 22.80 44,487
Unclaimed dividends - (23) - (26)
23.60 46,025 22.80 44,461
Dividends on shares payable in respect of
the year:
First interim 5.00 9,756 5.00 9,756
Second interim 5.10 9,951 5.00 9,756
Third interim 5.15 10,049 5.00 9,756
Proposed final 8.60 16,780 8.50 16,585
23.85 46,536 23.50 45,853
The proposed final dividend is subject to approval by ordinary shareholders at
the AGM.
6. Share Capital
Share capital represents the total number of shares in issue, on which
dividends accrue.
2015 2014
NUMBER £'000 NUMBER £'000
Allotted, called-up and fully paid
Ordinary shares of 25p each 195,116,734 48,779 195,116,734 48,779
7. Net Asset Value (NAV) per Ordinary Share
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into NAV per ordinary share by
dividing by the number of shares in issue.
The NAV - debt at par is the NAV with the value of the £100 million debenture
(the debt) at its nominal (equivalent to the par) value of £100 million. The
NAV - debt at market value reflects the debenture stock at the value that a
third party would be prepared to pay for the debt, and this amount fluctuates
owing to various factors including changes in interest rates and the remaining
life of the debt. The number of ordinary shares in issue at the year end was
195,116,734 (2014: 195,116,734).
(a) NAV - debt at par
The shareholders' funds in the balance sheet are accounted for in accordance
with accounting standards; however, this does not reflect the rights of
shareholders on a return of assets under the Articles of Association. These
rights are reflected in the net assets with debt at par and the corresponding
NAV per share. A reconciliation between the two sets of figures follows:
2015 2014
NAV SHAREHOLDERS' NAV SHAREHOLDERS'
PER SHARE FUNDS PER SHARE FUNDS
PENCE £'000 PENCE £'000
Shareholders' funds 705.19 1,375,951 629.27 1,227,811
Less: Unamortised (0.96) (1,883) (1.09) (2,134)
discount and expenses
arising from debenture
issue
NAV - debt at par 704.23 1,374,068 628.18 1,225,677
(b) NAV - debt at market value
The market value of the debenture stocks is determined by reference to the
daily closing price, and is subject to review against various data providers to
ensure consistency between data providers and against the reference gilts.
The net asset value per share adjusted to include the debenture stocks at
market value rather than at par is as follows:
2015 2014
NAV SHAREHOLDERS' NAV SHAREHOLDERS'
PER SHARE FUNDS PER SHARE FUNDS
PENCE £'000 PENCE £'000
NAV - debt at par 704.23 1,374,068 628.18 1,225,677
Debt at par 51.25 100,000 102.50 200,000
Debt at market value
- 73⁄4% Debenture Stock (69.41) (135,439) (64.52) (125,892)
2022
- 111⁄2% Debenture Stock - - (52.91) (103,231)
2014
NAV - debt at market 686.07 1,338,629 613.25 1,196,554
value
8. Related Party Transactions and Transactions 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. Under accounting standards,
the Manager is not a related party but disclosures are made in accordance with
industry practice.
Under UK GAAP, the Company has identified the Directors as related parties. The
Directors' remuneration and interests have been disclosed in the Annual
Financial Report with additional disclosure in the notes to the financial
statements. No other related parties have been identified.
Up to 22 July 2014, the Manager was Invesco Asset Management Limited.
Thereafter, the Manager was Invesco Fund Managers Limited. Details of the
Manager's services and fees are disclosed in the Directors' Report in the
Annual Financial Report, and in note 3 above.
9. This Annual Financial Report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 31 March 2014 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 March 2014 received an audit report which was unqualified, did not
include a reference to any matters to which the auditor 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 statutory
accounts for the financial year ended 31 March 2015 have been approved and
audited but have not yet been filed.
10. The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP. A
copy of the Annual Financial Report will be available from Invesco Perpetual on
the following website:
www.invescoperpetual.co.uk/edinburgh
11. The Annual General Meeting of the Company will be held at 11.00 am on 24
July 2015 at the Weston Link, National Galleries of Scotland, Princes Street,
Edinburgh.
By order of the Board
Invesco Asset Management Limited - Company Secretary
EDINBURGH INVESTMENT : Annual Financial Report
May 21, 2015 at 02:01 am EDT
Share
Share
© PRNewswire - 2015
