Edinburgh Investment Trust : Final Results and Declaration of Special Dividend

The Edinburgh Investment Trust plc

ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED 31 MARCH 2021

Financial Information and Performance Statistics

The Company’s benchmark is the FTSE All-Share Index.

Notes:

⁽¹⁾     These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 79 to 81 of the Annual Report. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges. Dividend yield is inclusive of the 4.65 pence per share special dividend declared. The Dividend Yield excluding this special dividend is 4.0%.

⁽²⁾     Source: Refinitiv.

⁽³⁾     Key Performance Indicator.

⁽⁴⁾     The Manager waived its investment management fee for the first three months of its appointment from 4 March 2020. The Ongoing Charges Ratio disclosed above show the actual charges incurred during the period. The pro-forma charges had the investment management fees not been waived over this period would have been 0.51% (2020 0.58%).

Chairman’s Statement

Dear Shareholder

This time last year I began this statement describing the challenging times that faced us both economically and socially. This year, those challenges are still here but we are beginning to see some light at the end of the pandemic tunnel. Still, I would again like to take this opportunity to say that I hope you remain safe and well.

Since this marks the first full year of Majedie Asset Management’s tenure as portfolio manager, I think it would be helpful to start with a reminder of the context in which we should think about how to evaluate the performance of the Company.

You will no doubt be aware that the Company has two objectives:

1. An increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and
2. Growth in dividends per share in excess of the rate of UK inflation.

In the five years before the start of the current period, the Company met its objective in terms of dividends – in fact, dividends grew by 3.7% per annum compared with 2.6% per annum for the UK Retail Price Index in that period. However, over the same period the Company failed to meet the capital return objective and, perhaps more importantly, the Company’s total return fell behind the return on the benchmark. This was clearly unsatisfactory and, combined with fact that the UK equity market has been out of favour with investors for most of that period, contributed to a significant widening of the discount of the share price to NAV during 2019.

As I explained in last year’s annual report, in December 2019 the Board decided that this unsatisfactory performance was best addressed through a change of manager. Accordingly, following the consideration of a number of potential managers, including a “beauty parade”, the Board appointed Majedie Asset Management, and in particular James de Uphaugh, one of the co-founders of Majedie, as its portfolio manager.

We were impressed in particular by James’ emphasis on taking a ‘total return’ approach to stock selection and portfolio composition: to simplify considerably, this is an analytical approach that emphasises the long term returns from capital investment by companies as well as their immediate dividend paying capacity.

This was (and is) an important issue in current market circumstances. Many companies, such as banks, have been asked to reduce dividend payments because of pressures from regulators; competition (where, for example, the emergence of companies such as Amazon has seriously affected the profitability of high street retailers); environmental changes (such as those facing energy companies); and lastly the pandemic itself. It is worth noting that - while this is a worldwide issue - its impact on equity valuations is greater in the UK given the much larger weight of banks, retailers, and energy companies in indices than elsewhere. It is unlikely that total return expectations in the market have changed much but the market is increasingly giving value to companies which can show long-term returns from capital investment as well as to those that can produce sustainable dividends.

On top of this, shareholders will be aware that in the past year, the prospect of a gradual long-term rise in interest rates has begun to be priced in the markets. This has come through a rise in long term interest rates as well as through market talk – but as yet no tangible sign – of a sustained rise in inflation. A sustained rise in long term interest rates – and its consequence, a steepening of the yield curve – would represent a significant change in market conditions.

This is a difficult environment for all portfolio managers. The Board believes that James de Uphaugh’s style has the necessary flexibility to adapt as the market environment changes.

RETURNS

Against this background, I am pleased to report that the Company’s Net Asset Value (NAV) on a total return basis, i.e. including reinvested dividends, returned 34.8% over the financial year ended 31 March 2021 and the share price returned 46.4%. These compare with a total return of 26.7% for the FTSE All-Share Index. The equivalent returns on a capital only basis are 28.1% for the NAV, 38.2% for the share price, and 23.3% for the index. The difference between the NAV total return and capital return is explained not only by the dividends received by the Company, but also because the Company has been using some of its reserves to pay dividends to shareholders (discussed in more detail below). Over the past three years, the Company’s NAV return has been 1.8% cumulatively, with the Company’s benchmark index returning 9.9% over the same period. Over the past five years, the Company’s NAV return has been 10.3% cumulatively, with the Company’s benchmark index returning 35.7% over the same period. In all these cases, the NAV is stated after deducting debt at market values.

Further information on the portfolio, and contributors to returns, is set out in the Manager’s Report.

I would like to note that performance has come from a diversified range of stocks, with an additional boost from the effect of the Company’s borrowings. The portfolio is relatively concentrated, containing approximately 50 stocks. This means shareholders should expect performance to come in a lumpy fashion, as the last year illustrates: the bulk of the outperformance has come in the last six months, since the announcement of vaccines. Nonetheless, while still early days for Majedie in their role as the Company’s manager, I am delighted that they have made such a strong start – particularly given the challenging market backdrop.

DIVIDENDS

In November 2020, the Board announced a change in the underlying level of dividends to be paid to the Company’s shareholders: we explained at the time that this year’s first interim dividend – and the expectation for each subsequent interim and the final dividend – would be 6.00 pence per share, for a total of 24.00 pence per share. Last year, the equivalent figure was 28.65 pence per share. While this means we have not met the Company’s objective to grow the dividend per share in excess of inflation for the last two financial years, the Board believes this rebased level is a sustainable one from which the Company’s dividend objective can be met in the years ahead.

This rebasing reflects as discussed above the fact that the overall yield on the UK market had become increasingly dependent on a small number of companies and sectors and that many of these were facing pressures even before the impact of the COVID-19 related lockdowns. The effect of the crisis caused by the pandemic, added to the ongoing structural changes to the economy, was to erode the income available from much of the UK equity market. The Board concluded that the previous level of Company dividends was unlikely to be sustainable. While there remains uncertainty over the speed of the current recovery in market earnings and dividends, dividends from across the UK market are now more balanced.

The Board recognises the importance of dividends to shareholders, especially in an uncertain environment and at a time when other sources of income are under pressure. An attractive feature of investment trusts is the ability to use revenue reserves, built up in years when revenues exceed dividends paid to shareholders, to smooth dividend distributions in years when revenues are weaker. On this front, your Company is in a strong position. Reflecting this, the Board will use revenue reserves to maintain the total dividend per share this year at the 2019/20 level through the payment of a special dividend. Therefore, in addition to recommending a final dividend of 6.00p per share, which shareholders will be asked to approve at the Annual General Meeting, the Board has decided to pay a special dividend of 4.65p. This will supplement the underlying distribution of 24.00p and result in a total distribution of 28.65p, unchanged from the previous financial year.

SHARE PRICE DISCOUNT TO NET ASSET VALUE

It is encouraging that the discount has narrowed by 7% percentage points in the last 12 months. This reflects not only improved sentiment towards the UK market as Brexit-related uncertainty has receded and recovery prospects after the COVID-19 related shutdowns, but also an understanding and an appreciation of James’ investment style and approach.

The Board’s policy continues to be to manage the discount actively through share buy backs as appropriate. During the year we instructed the Company’s broker to repurchase 2,500,000 shares in the market. The amount and cumulative effect of these repurchases is noted in the table on page 15 of the Annual Report. The last buy back took place on 20 October 2020. At 25 May 2021, the last practical date before signing this report, the discount was 5.4%.

BORROWINGS

At 31st March 2021 the net debt of the Company, with the debenture at market value, stood at £76.5 million, resulting in gearing of the Company of 7.1% of net assets. All debt is currently achieved through the Company’s debenture, which is due for redemption in September 2022. The Board is considering how best to take advantage of the Company’s ability to borrow to enhance returns. This takes account of the Manager’s perception of gearing risk, the lower level of prevailing interest rates compared with the debenture’s coupon, the cashflows of the company and possible share-buy backs in the future.

REAPPOINTMENT OF MANAGER

The Board considers that the reappointment of Majedie is in the best interest of shareholders.

OTHER MATTERS

At an operational level, the change this time last year to the new manager and a new company secretary, PraxisIFM, proceeded smoothly. I would like to thank the many colleagues both at Majedie and at PraxisIFM who have worked so hard to deliver this result, especially given the difficult circumstances due to the pandemic.

ANNUAL GENERAL MEETING (‘AGM’)

Details of the AGM are given in the Notice of Annual General Meeting on pages 73 to 76 of the Annual Report. We are planning for this event to take place in person. We had our first in person Board meeting last week and we look forward to meeting as many of you as possible in person in Edinburgh on 22 July. We will revert to the pre-pandemic AGM format of an update from me and from the Manager, and allow plenty of time for questions and informal discussions between the Directors and shareholders. I very much hope as many of you as possible will be able to attend as it will be the first opportunity for shareholders to meet the new Manager. However, we recognise that some shareholders may not be able to join in person and in the Notice of Annual General Meeting we set out how shareholders can also submit questions in advance of the AGM and participate virtually. Should changes to the timetable for the lifting of gathering restrictions mean we are forced to amend arrangements for the AGM, we will notify shareholders via a regulatory announcement and give details of the new arrangements on our website www.edinburghinvestmenttrust.com. We also propose to have an Investor Day in London in September 2021, following on from the format we adopted in 2019.

BOARD

Max Ward will stand down at this year’s AGM after ten years of service on the Board. We were fortunate that this time last year Max agreed to remain in place for an additional year - on top of the nine years that he had originally intended to serve - in order to help the Company with the transition to the new Manager. As an experienced fund manager himself, Max has brought invaluable insight and judgment as well as market knowledge that has been critical on the Board.

Also standing down at this year’s AGM after ten years of service on the Board is Gordon McQueen. For the last 10 years Gordon has served as Chair of the Audit Committee. Once again, we were fortunate that this time last year Gordon agreed to remain in place for an additional year – on top of the nine years that he had originally intended to serve – in order to help with the transition to the new Manager as well as the transition to PwC, appointed as auditor in 2019 after a tender.

I am immensely grateful to both Max and Gordon for the huge contributions that both have made to the Board’s work and effectiveness over the years.

Steve Baldwin will take over as Chair of the Audit Committee at a time when the responsibility of the Audit Committee for risk management and controls is increasing. Boards like ours face a bigger challenge in managing the broader social impact of our decisions within the traditional constraints of the need to pursue shareholder value.

I was pleased to welcome Patrick Edwardson to the Board as a new Director. Patrick has 27 years of investment experience as a fund manager with Baillie Gifford, where he was a Partner and Head of the Multi-Asset Team before his recent retirement. Along with his knowledge of the UK equity market and deep knowledge of investment companies, Patrick brings extensive experience of income investing from his role as the Fund Manager of the Scottish American Investment Company from 2004 to 2014. I have no doubt that he will rapidly become an extremely valuable member of the Board.

We will be asking for shareholders’ approval at the AGM for some changes to the Directors’ remuneration. Further details are set out on page 41 of the Annual Report.

Finally, as shareholders will be aware, my own term as a Director will come to an end at next year’s AGM in July 2022. In order to ensure a seamless and orderly success, the Board, overseen by Vicky Hastings, the Senior Independent Director, has recommended that Elisabeth Stheeman be nominated as Chair Elect to succeed me. Elisabeth has made significant contributions to the Board’s work since her appointment in 2019 and brings a wealth of experience from her work across financial markets to the Board.

I would like to take this opportunity to thank all the Directors on behalf of shareholders for the contributions that they have made in ensuring that the Company is better able to meet its objectives and satisfy the expectations of shareholders.

OUTLOOK

The successful development of vaccines against COVID-19 has been a major turning point, at least for those developed economies fortunate enough to be experiencing their roll out. Yet, the pandemic is far from over, as current events in parts of the world such as India sadly highlight. In Western economies, there remain significant restrictions on travel and gatherings: it remains to be seen how the major sections of the economy that are exposed to this will recover. Despite cautions of this kind, the arrival of vaccines, combined with concerted financial actions by governments and interventions by Central Banks around the world, means that this year’s annual report contains a notably more positive tone than last year’s.

In closing, I would like to thank shareholders for their patience in recent years. Your Company has undergone a material change with the appointment of the new manager, and the improvements that have been made to the portfolio.

GLEN SUAREZ / CHAIRMAN / 27 May 2021

Portfolio Manager’s Report

For the year ended 31 March 2021

INTRODUCTION

It has been our great privilege to complete our first full year as manager of your historic and prestigious Company. This has also been a year quite unlike any other that we have experienced, with an ongoing pandemic and stock market volatility. Nevertheless, we have maintained our focus on the two core objectives of the Company:

1. An increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index;
2. Growth in dividends per share in excess of the rate of UK inflation.

To do this, we invest across global markets, with at least 80% of the Company's portfolio by value listed in the UK. We take a team-based approach, with final investment decisions taken by the manager. Our research is stock-driven: we believe we will add most value for shareholders over the medium term by identifying strong and attractively priced businesses. Our investment approach is a flexible total return one - there are no built-in biases to particular 'types' of investment. We therefore attempt to identify companies that will deliver attractive total returns comprising income and capital growth. Both are important elements and receive equal attention. As we will illustrate with examples later in this report, we are acutely aware of the growing ESG responsibilities of companies, particularly those potentially contributing to rapid and worrying climate change.

The end result for shareholders is a differentiated portfolio that should enable the Company to meet its two investment objectives set out above. Our aspiration is for the Company to be a core part of investors' portfolios.

We have set out our core investment beliefs in more detail on page 13 of the Annual Report: we hope that these provide shareholders with a clear explanation of our process. We also keep the Company's website up to date with a range of materials including factsheets, videos, and other pieces of intellectual capital that explain our views and approach. Shareholders can subscribe to notifications for updates at www.edinburghinvestmenttrust.com.

INVESTMENT RESULTS OVER THE COMPANY'S FINANCIAL YEAR

Stock markets have staged a major recovery over this period. The Company's previously disappointing returns, prior to our appointment, were measured up to a point at which the stock market was not far from its pandemic-driven lows. The last year therefore represents a welcome recovery, more so as since 2016 the Company's shares had lagged the index. It is therefore pleasing to be able to report a rise in the Company's net asset value per share ('NAV') of 34.8%, and a share price rise of 46.4%, both on a total return basis. Over the same period, the FTSE All-Share Index returned 26.7%. The share price outperformed the NAV, reflecting a closing of the 'discount' – the term for the percentage by which the share price is below NAV. The discount moved in from 11.5% on 31 March 2020, to 4.5% by the same date this year.

In our view, a twelve-month period is too short to assess an investment manager's performance. A three-year period is likely to be more realistic, particularly as we take multi-year views when assessing and making investment decisions. At this stage, we would simply note that things that are firmly in our control, such as the work ethic of our investment team, have been effective and productive – despite most of us working from home for much of the last year. Investment idea generation has been strong, with many of the Company's new holdings since our appointment contributing to the positive results of the last year. As we now begin to return to our open-plan London office, we look forward to the return of even closer collaboration across the team. Teams working together in person should be more effective than teams working over 'Teams'.

Given our stock-driven approach and bearing in mind our caution that one year is too short a period to assess manager skill, a factual appraisal of the positive and negative stock contributors should give shareholders an early sense of our investment approach. We will begin with those stocks that hindered returns. The key point here is that the portfolio avoided stocks with any major problems or issues and performance detractors were typically those companies whose shares modestly underperformed the market. Indeed, somewhat counterintuitively, one of the biggest negatives was the holding in Tesco, which had a strong year operationally. Its share price was subdued, even though it – along with the other UK supermarkets – did an excellent job of prioritising food availability over profits. For this reason, Tesco is a great example of a business with a strong ESG signature. A new chief executive and finance director give us confidence that they can build on the solid operational progress of the last year, and we have been buying more shares. Another holding with a share price that gave up ground was Smith & Nephew. This is a global leader in the design and manufacture of orthopaedic and other medical devices. Their products are used by hospitals around the world to replace joints and to help treat wounds and traumas. The company has an enviable long-term record. However, in the last year the market took the view that it was less competitive in areas such as replacement joints, for example for knees. We view this as the inevitable ebb and flow of market shares. We place much greater emphasis on Smith & Nephew's high margins and opportunities to grow across multiple product lines. We are happy to retain the holding.

In terms of stock positive contributor, we are encouraged to see holdings in mid-sized businesses making prominent contributions. Top of the list is Ashtead, a business which rents out industrial equipment to a wide variety of commercial customers. As this description suggests, it is a cyclical business, with a positive structural undercurrent, and thus it has benefitted from economies emerging from lockdowns. For us, the more important feature is that management have maintained a clear focus on the long-term success of the business, despite the many challenges of the last fifteen months. This is a great example of what we describe as a Darwinian winner: one that is gently crunching the competition. It is emerging from the economic crisis even stronger.

Another positive contributor is a stock with an improving ESG profile: Weir. This business, with a rich Scottish heritage, has become a key supplier of engineering solutions that help improve their customers' safety, efficiency and sustainability. These customers are often major mining companies. In a similar vein, a third notable positive contributor is itself a miner: Anglo American. It has benefitted from rising commodity prices over the last year. More importantly, it has made changes to the profile of its business, including the welcome sale of its thermal coal assets – something we have been engaging with management on for some time.

As the above examples should illustrate, throughout our stock deliberations we are focused on the ESG profile of the businesses in which we invest the Company's assets. For us, ESG is not an add-on, but thoroughly integrated into our research and debate about stocks and their prospects. The portfolio's carbon footprint, in terms of carbon intensity, is also below the average of the index. This is in part due to the sale of BP, reflecting our lack of conviction in its management's energy transition plan.

Another significant contributor to the Company's NAV returns ahead of the index was that of borrowings. We discuss our thinking on this topic at greater length further below. But for now, it is important to note that our decision to invest most of the Company's long-term borrowings accounted for 3.5% of the 8.1% excess return.

Overall, we view the last year as an encouraging start in our role as the Company's manager. Clearly the market return was flattered by the depressed level of markets this time last year, but we are encouraged that in general the diversified range of stocks that we hold performed well at an operational level. For the Company's shareholders, it has also been encouraging to see the discount narrow.

ACTIVITY OVER THE YEAR

At the beginning of our tenure, last March, we moved the Company to a relatively defensive stance. The news then at a human level was, frankly, gut-wrenching. It was the same at an investment level. It is easy to forget how challenging things were then. The rapidly changing environment since then, and exceptionally high level of volatility, has presented us with an unusually high number of investment opportunities. Major net purchases over the year include Standard Chartered Bank, which should capitalise on recovering Asian economies, and Ascential, a global information services leader offering a unique collection of fast-growing ecommerce data analytics assets. Significant sales have included GlaxoSmithKline, Legal & General and Barrick Gold, all of which were sold or reduced, the latter two after strong share price recoveries. In aggregate, portfolio turnover (calculated by taking the lower of the value of purchases and sales, divided by the average portfolio value) during the year was 39%. This is higher than we would typically expect: longer-term turnover might more realistically be in the range of 25% to 33%, which is equivalent to holding periods of three to four years.

Despite this level of turnover, a key advantage of a relatively small boutique manager such as MAM is that we have been able to re-orientate the Company quickly and efficiently. This was particularly the case after the announcement of the approval of COVID-19 vaccines late in 2020. We have moved the portfolio to build gently on the pro-cyclical stance that has come from holdings such as Weir and Ashtead. These changes have made a difference to shareholder results.

CURRENT PORTFOLIO

There are many data points that indicate the potential for a strong recovery in the UK economy. Perhaps the most important one is that, at the time of writing a total of over fifty million COVID-19 vaccines have been administered, with over fifteen million UK citizens having received both jabs. The US is reporting a similarly strong roll out of vaccines, and the European Union, after a slow start – is also now in full flow. We are under no illusion that the virus and its consequences will be with us for many years to come. Nonetheless, the gentle pro-cyclical tilt that we described above remains, in our view, appropriate. Should the recovery come through, especially given the degree of government largesse involved, there is a risk of higher inflation and higher interest rates. These factors have led us to have more modest positions in stocks that are sensitive to potentially tighter credit conditions – such as the insurer Legal & General.

The UK market has been in the doldrums for an extended period. Indeed, some say of UK equities, 'why bother'? To that, our retort is that the UK is rich in stocks that are exceptionally well-placed both operationally and in valuation terms. While we do not expect a repeat of the exceptionally strong returns of last year, we do think there is scope for further attractive returns. It has undoubtedly been a Cinderella to global equities, particularly since 2016. There are a number of reasons for this. The sword of Damocles that was Brexit has gone. There is also the issue that the UK market plainly has had fewer technology stocks than other markets, particularly the US equity market. But with the UK's vaccine rollout programme among the leading ones around the world, and Brexit 'done', the outlook is much more positive. The UK is home to a wide range of world class business. Take Electrocomponents, the global distributor of industrial components. It has made a successful move to an online proposition. Through the pandemic it has been able to entrench further its lead over its competition, enabling it to grow at two to three times the rate of its peers. As well as identifying strong businesses for the long term, an important part of our investment process is thinking about valuation. On this score, we are particularly excited about the opportunities available in the UK: we are firmly of the view that the UK market contains an exciting range of globally leading businesses with the double benefit of being undervalued versus their international peers.

Where there are attractive stocks or sectors that, for whatever reason, are listed outside the UK, the Company has the flexibility to buy them. We have used this feature only sparingly in the last year. This partly reflects the very attractive range of strong, compellingly valued UK-listed businesses. It also reflects the fact that a year ago sterling was weaker, raising the bar for overseas stocks given the risks of a recovery in our domestic currency. Since then, sterling has recovered to a degree, in turn lowering the bar a little. But as with any UK stock, prospective overseas investments must pass the muster of our investment process. Recent non-UK purchases include A.P. Moller-Maersk, the global container shipping group, also a great example of the sort of business that has no equivalents listed in London, and NXP, the US listed semiconductor group.

We therefore think Edinburgh Investment Trust offers shareholders a compelling combination of a differentiated portfolio, containing companies that are performing strongly on a global stage, often priced at a discount. Despite the strong last year, on a medium-term view there is still much to go for.

DIVIDENDS

Many companies cut dividends in the aftermath of the pandemic. The Company's holdings were not exempt from this, as the Revenue columns in the Income Statement illustrate. Revenue for the year was £32.84m, versus £58.96m in the prior twelve months. During the year we also received a significant special dividend from Tesco, following the sale of the Thai operation. For the Company this amounted to £10.98m and has been booked as a capital return. It does not form part of the Company's revenue for the year. As the Chairman has set out in his statement, the overall fall in revenue was a contributory factor to the decision by the Board last autumn to rebase the underlying dividend per share to 24.00 pence.

Today, we are in a position where the level of dividends paid across the market is generally more sustainable. As economic visibility steadily improves, more companies have begun to reinstate, or rebuild, dividends. A good example of this phenomenon, in an early phase, is in the banking sector where, for example, NatWest Group has set out a minimum monetary level of dividend that it expects to pay out annually in dividends over the period 2021 to 2023. Drawing all this together, we expect the Company's revenue from dividends to recover during this financial year and in the following year. As the Chairman has also noted, we aim for the dividends paid to the Company's shareholders to be covered by revenues in the medium term.

BORROWINGS

As managers of the Company, our core task is to construct a portfolio that generates an attractive positive return over the medium to long term. Assuming this positive result, borrowings should enhance shareholder returns over these time horizons. This is a key differentiator for investment trusts versus their open-ended 'fund' brethren. We support the concept of borrowings as an important investment trust tool that can enhance underlying equity returns. As we noted earlier, exactly this dynamic played out this year, with 3.5% of the Company's 8.1% NAV excess return being attributable to the effect of borrowings. However, as any homeowner with a mortgage in the early 1990's may recall, borrowings exaggerate financial losses too, particularly if assets are sold when prices are low. Here, again though, investment trusts have an advantage: because of their relatively stable equity capital base, closed-end investment trusts do not typically have to sell assets at market lows to satisfy redemptions. Taking all this together, we are supportive of the long-term role of borrowings for investment trusts, viewing their periodically unhelpful role in market falls as a price to be paid for the undoubted benefits of boosting long term returns.

At a practical level, the Company today has a long-term debt structure through a £100m debenture. There is also a bank facility of up to £50m, which has not been used during the year or since the year end. The market value of the debenture, and adjusting for the Company's modest cash balance, equates to net gearing (defined as net borrowing divided by net assets) of 7.1% at the year end. The debenture will redeem in September 2022. As the Chairman has said in his statement, ahead of that redemption we are collectively reviewing gearing options and will keep the market apprised.

OUTLOOK

The stocks held by the Company are performing well operationally. At the same time, many of the UK-listed stocks held are priced at a discount to their peers in other markets internationally. With some UK-specific issues such as Brexit receding, and a robust vaccine rollout across the country, there are sound reasons to believe the valuation gap should narrow from here. How quickly this might happen is clearly unknown. In the meantime, we will patiently back the stocks that our in-depth fundamental research indicates have the greatest upside. In this respect, the UK market is supplying us with an attractive and diversified selection of businesses. Through a combination of capital gains and dividend distributions, reflecting strong fundamentals, we believe these companies will underpin above average returns for the Company's shareholders over time.

JAMES DE UPHAUGH / PORTFOLIO MANAGER

CHRIS FIELD / DEPUTY PORTFOLIO MANAGER

27 MAY 2021

BUSINESS REVIEW

STRATEGY AND BUSINESS MODEL

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 the Manager to manage and administer 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 James de Uphaugh and the deputy portfolio manager is Chris Field.

In addition, the Company has contractual arrangements with Link Group to act as registrar, The Bank of New York Mellon (International) Limited as depositary and custodian, and PraxisIFM Fund Services (UK) Limited to act as Company Secretary.

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 in excess of the growth in the FTSE All-Share Index; and
2. growth in dividends per share in excess of 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. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company’s investment 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 of 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 600.00p per ordinary share (2020: 434.00p). The net asset value (debt at market value) per ordinary share was 628.29p (2020 490.40p).

It is intended that a further payment of 10.65p should be made in respect of the year to 31 March 2021 (2020: 9.45p). This comprises a special dividend of 4.65p (2020: nil), already declared and a proposed final dividend of 6.00p (2020: 9.45p), which is subject to approval at the AGM. This will be payable on 29 July 2021 to shareholders on the register on 25 June 2021. The shares will be quoted ex-dividend on 24 June 2021. This will give total dividends for the year of 28.65p per share (2020: 28.65p). The revenue return per share for the year was 16.21p, a 41.8% decrease on the 2020 return of 27.83p.

PERFORMANCE

The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are shown on Financial Information and Performance Statistics section. 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.

The Chairman’s Statement above gives a commentary on the performance of the Company during the year, the gearing and the dividend.

The Board reviews an analysis of expenditure at each Board meeting, and the Audit and Management Engagement Committees formally review the fees payable to the main service providers, including the Investment Manager, on an annual basis. The ongoing charges figure is calculated in accordance with the AIC methodology and is reviewed by the Board annually in comparison to peers.

The Board also regularly reviews the performance of the Company in relation to the 21 investment trusts in the UK Equity Income sector (including the Company). As at 31 March 2021 the Company was ranked 11th by NAV performance in this sector over one year, 19th over three years and 20th over five years (source: Morningstar).

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 can be found on the relevant section further above.

FINANCIAL POSITION AND BORROWINGS

The Company’s balance sheet shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 7 ¾% debenture which matures in 2022 and £nil (2020: £nil) drawn down on the Company’s £50 million bank revolving credit facility (2020: £150 million). Details of this bank facility are contained in note 11.

PERFORMANCE ATTRIBUTION

⁽¹⁾     Source: Refinitiv.

Performance Attribution – analyses the performance of the Company relative to its benchmark index. The Analysis of Relative Performance seeks to estimate the quantum of relative performance that is attributable to each of the factors set out in this table. The table is intended to be indicative rather than precise; the accuracy of each estimate is determined by a variety of factors such as the volatility of investment returns over the year and intra-month, and the timing of income receipts and expenditure payments.

Relative performance – represents the arithmetic difference between the NAV and benchmark returns.

Portfolio total return – represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.

Net gearing effect – measures the impact of the debenture stock, bank facility and cash on the Company’s relative performance. This will be positive if the portfolio has positive capital performance, total return is positive and negative if capital performance total return is negative.

Interest – the debenture stock and bank facility interest paid has a negative impact on performance.

Management fee – the base fee reduces the Company’s net assets and decreases returns.

Other expenses and tax – reduce the level of assets and therefore result in a negative effect on relative performance.

Share buybacks – measures the effect of ordinary shares bought back at a discount to net asset value on the Company’s relative performance.

Investments in Order of Valuation

At 31 March 2021

UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED

^UQ            Unquoted investment.

Principal Risks and Uncertainties

RISK MANAGEMENT AND MITIGATION

The Board, through the Audit Committee and with the assistance of the Manager, maintains and regularly reviews a report of potential risks to the Company in the form of a risk control summary. The document includes a description of each identified risk, the mitigating action taken, reporting and disclosure to the Board and an impact and probability risk rating. The rating is given both prior to and after the Board’s mitigation of each risk. The information is then displayed in matrix form which allows the Board to identify the Company’s key risks. As the changing risk environment in which the Company operates has evolved, the total number of risks has fluctuated, with certain risks having been removed and new risks added with emerging risks actively discussed as part of this process and, so far as practicable, mitigated.

The composition of the Board is regularly reviewed to ensure its members offer sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.

The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the annual rate of inflation. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet 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. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity with consideration being given to the effect of the COVID-19 pandemic and possible regulatory uncertainty arising from Brexit. The following sets out a description of the principal risks and how they are being managed or mitigated.

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, the severe impact of the COVID-19 pandemic, political events including Brexit 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.

Market risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, the Board receives reports on the performance of the portfolio at each meeting.

INVESTMENT PERFORMANCE RISK

The Board sets investment policy and risk guidelines, together with investment limits, and monitors adherence to these at each Board meeting. All Individual investment decisions are delegated to the Manager. 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, across a range of different types of stock. This reflects the Manager’s high conviction, stock-driven investment process and total return approach. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the portfolio relative to 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 at each Board meeting. 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 described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio.

Investment Performance risk is included in the risk control summary report that is reviewed by the Board at each meeting. The Board also receives reports on the performance of the portfolio and on compliance with the Company’s investment policy guidelines from the Manager at each meeting.

BORROWING RISK

The Company may borrow to provide gearing to the equity portfolio of up to 25% of net assets. Borrowing is a mix of the Company’s £100 million debenture stock and the Company’s £50 million bank facility. Details of all borrowings are given in Notes 11 and 12. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the bank facility can be renewed and on terms acceptable to the Company.

Within an overall limit set by the Board, 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.

Borrowing and gearing risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, compliance with the Company’s investment policy guidelines is continuously monitored by the Manager and reported to the Board at each meeting.

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 and 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 and, at the request of the Board, the Company is empowered to repurchase shares within agreed parameters which are regularly reviewed with the Company’s broker. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company repurchased 2,500,000 shares for holding in treasury (2020: 20,798,805) and the effect of these repurchases was to add 0.2% to the Net Asset Value of the Company.

Share Price risk is included in the risk control summary report that is reviewed by the Board at each meeting.

CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK

The Board has delegated to third party service providers the management of the investment portfolio, depositary and custody services (which include the safeguarding of the assets), registration services, accounting and company secretarial services.

The principal risks arising from the above contracts relate to performance of the Manager, the performance of administrative, registration, depositary, custodial and banking services, and the failure of information technology systems used by third party service providers. These risk areas could lead to the loss or impairment of the Company’s assets, inadequate returns to shareholders and loss of investment trust status. Consequently, in respect of these activities the Company is dependent on the Manager’s control systems and those of its administrator, depositary, custodian and registrar.

An annual review of the control environments of all service providers is carried out by the Company Secretary who provides an assessment of these risks and the operation of the controls for consideration by the Audit Committee and is formally reported to and considered by the Board.

RELIANCE ON THE MANAGER AND OTHER THIRD PARTY PROVIDERS RISK

The Company is reliant upon the performance of third party service providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility for management of the Company’s portfolio is delegated. The Company has other contractual arrangements with third parties to act as administrator, company secretary, registrar, depositary and broker. The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers, including fraud, sabotage or crime against the Company. 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 Company Secretary reviews the performance and the service organisation control reports of third party service 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, James de Uphaugh, Chairman and Chief Investment Officer of Majedie Asset Management. He is a Fund Manager and Analyst with 33 years’ investment experience in UK and international equity markets. James is responsible for co-managing the UK Equity Fund of Majedie and managing the Edinburgh Investment Trust.

–    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 Majedie team. Moreover, Chris Field, as deputy portfolio manager, would be able to manage the portfolio if James de Uphaugh were unable to do so for any reason.

–    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.

EMERGING RISKS

The Board has put in place robust procedures to assist with identifying emerging risks that arise from existing risks or from new situations. The Board is kept informed through its advisors and Manager regarding any political, economic or legal or regulatory changes that affect the Company.

Physical and Transitional Climate Change

Globally, climate change effects are already emerging in the form of changing weather patterns. Extreme weather events could potentially impair the operations of individual investee companies, potential investee companies, their supply chains and their customers. Legislative changes are driving an economic adjustment towards a low-carbon economy. There are considerable risks to the value, business model and operations of investee and potential investee companies due to stranded assets and how investors, financial regulators and policymakers respond to climate concerns. The Manager takes such risks into account, along with the downside risk to any company – whether in the form of its business prospects, market valuation or sustainability of dividends – that is perceived to be making a detrimental contribution to climate change. The Company invests in a broad portfolio of businesses with operations spread geographically, which should limit the impact of location-specific weather events.

Pandemic (COVID-19)

The rapid spread of COVID-19 has caused governments to implement policies to restrict the gathering, interaction or movement of people. These policies have inevitably changed the nature of the operations of some aspects of the Company, its key service providers and the companies in which it invests. As cited in Market Risk, share prices respond to assessments of future economic activity as well as their own forecast performance and the COVID-19 pandemic has had a materially negative impact on the economy and will continue do so for a period of time. The Board and its manager have regular discussions to assess this impact on both the investment portfolio and on its ability to generate income for shareholders.

OTHER RISKS

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.

The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis with any issues being immediately brought to the attention of the Board.

The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), credit, liquidity and concentration risks. The risk control summary report allows the Board to considers all these risks, the measures in place to control them and the possibility of any other risks that could arise.

The Board ensures that satisfactory assurances are received from the service providers. The Manager’s compliance officers produce regular reports for review by the Company’s Audit Committee.

Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.

Brexit

The Board considered the market uncertainty arising from the effect of the negotiated trade deal with the EU at the end of the transition period. As the Company’s shares are not currently marketed in Europe, investee companies are predominantly listed in the UK and key counterparties of and service providers to the Company are UK domiciled with suitable contingency arrangements available as necessary, the Board does not expect the Company’s operations or performance over the longer term, to be materially affected by Brexit.

Viability Statement

The directors’ view of the Company’s viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

There are no current plans to amend the investment strategy, which has delivered long term good investment performance for shareholders and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.

In assessing the viability of the Company under various scenarios, the Directors undertook a robust assessment of the risks to which it is exposed (including the issues arising from the COVID-19 pandemic and climate change), as set out above together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company’s borrowings as considered in further detail in the Going Concern Statement below; the ability of the Company to meet its liabilities as they fall due; the Company’s annual operating costs and that, as a closed ended investment trust, the Company is not affected by the liquidity issues of open-ended companies caused by large or unexpected redemptions.

In taking account of these factors and on reviews conducted as part of the detailed internal controls and risk management processes set out on page 32, the Directors have concluded that the viability of the Company may start to be challenged if the value of investments reduced by over 80% from the aggregate level at the year end and the board considers this implausible having noted that since the inception of the Company’s All-Share Index Total Return benchmark in December 1985, the largest fall over any calendar year has been 29.9%, the largest fall over any rolling five year period was 28.8% and the largest fall over any period was 42.9% (all based on benchmark calendar month end values).

Based on the above, and assuming there is no adverse change to the regulatory environment and tax treatment of UK investment trusts to the extent that would challenge the viability of the UK investment trust industry as a whole, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

GOING CONCERN

The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being taken as twelve months after the signing of the balance sheet, for the same reasons as set out in the Viability Statement above. In considering this, the Directors took into account both ongoing expenses and any obligations under the Company’s borrowing (both the debenture and the bank facility). In reaching this conclusion, the Directors have considered the liquidity of the Company’s portfolio of investments as well as its cash position, income and expense flows. As at 31 March 2021, the Company held £32.6 million (2020: £44.0 million) in cash and cash equivalents and £1,151.0 million (2020: £922.4 million) in quoted investments. The Company’s audited net assets at 31 March 2021 were £1,091.2 million (2020: £872.5 million).

Given the level of market volatility experienced due to the impact of the COVID-19 pandemic, the Manager has performed stress tests on the Company’s portfolio of investments under current conditions and the Board remain comfortable with the liquidity of the portfolio.

It is estimated that over 99% by value of the quoted investments held at the year end could be realised in one month under normal market conditions.

The Board also considered the Company’s obligations under the Company’s borrowing. The £100 million debenture matures in September 2022. The Board does not anticipate difficulties in meeting this repayment obligation, either through replacement borrowings or the realisation of Company assets. The Board routinely monitors adherence to the borrowing restriction set out in Note 12, noting the substantial headroom at the balance sheet date. The bank facility which is not currently drawn, remains available whilst the Company’s Net Asset Value is above £500 million (see notes 11 and 12 to the financial statements). The bank facility was renewed on 17 June 2020 at £50 million and matures on 16 June 2021.

The total ongoing charges (excluding taxation, non-recurring legal and professional fees and finance costs) for the year ended 31 March 2021 were £4.2 million (2020: £6.8 million).

Section 172 Statement, Company Sustainability and Stakeholders

BOARD RESPONSIBILITIES

As set out in the Directors’ Report on pages 33 to 39 of the Annual Report the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. Consistent with the Company’s nature as an investment trust, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole.

COMPANY SUSTAINABILITY AND STAKEHOLDERS

As an externally managed investment company, the Company does not have any employees. The Board considers its main stakeholders to be its shareholders, service providers, investee companies and the Manager.

ENGAGEMENT WITH SHAREHOLDERS

Shareholder relations are given high priority by both the Board and the Manager and the Board welcomes feedback from shareholders throughout the year. The prime medium by which the Company communicates with shareholders is through the half-yearly and annual financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and results. This information is supplemented by the daily publication of the net asset value, monthly factsheets as well as dividend and other announcements.

Feedback from shareholders forms part of the discussion at all Board meetings and at the Board’s annual strategy meeting which involves consideration of how the Company is meeting shareholder expectations.

Shareholders can also visit the Company’s website www.edinburghinvestmenttrust.com in order to access copies of the annual and half-yearly financial reports, pre-investment information, Key Information Documents (KIDs), proxy voting results, factsheets and stock exchange announcements. The Company’s website also hosts videos and other applicable written materials by the Manager to enhance the information available.

Typically at each AGM, a presentation is made by the Manager following the formal business of the meeting and shareholders have the opportunity to attend, vote and most importantly to communicate directly with the Manager and Board. Presentations to both institutional shareholders and analysts also follow the publication of the annual results. In addition to the AGM and presentation, the Board and Manager also host an annual Shareholder event in London. The Chairman uses these events to lead the Company’s engagement with its shareholders.

Regular dialogue is maintained between the Manager and major institutional shareholders throughout the year to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop an understanding of their issues and concerns. All meetings between the Manager and shareholders are reported to the Board.

There is a clear channel of communication between the Board and the Company’s Shareholders via the Company Secretary. The Company Secretary has no express authority to respond to enquiries addressed to the Board and all communications, other than junk mail, are redirected to the Chairman.

During the year the Board considered the dividend strategy and following the perceived impact of the COVID-19 pandemic and in-depth discussions at the Board’s strategy meeting, the decision was taken to reduce the dividend to a more sustainable level. Feedback from the Manager and the Broker was taken into account in the decision making process and a full assessment on the impact of the decision on shareholders was considered against the long term success of the Company.

ENGAGEMENT WITH THE MANAGER, SERVICE PROVIDERS AND INVESTEE COMPANIES

At least annually the Board reviews the performance and services of all its service providers including the Manager, and receives and considers the internal control reports from them covering their operations, their policies and control environments. The Board has regular dialogue with and reporting from the Manager on the portfolio of investments and a representative of the Manager attends each Board meeting to provide updates and answer questions from the Board. Following the emergence of the COVID-19 pandemic, the Board has continued engagement with its service providers to ensure that their responses to the pandemic are adequate and also to provide them with additional support where required.

The Manager maintains regular dialogue with both investee and potential investee companies and reports back on these conversations to the Board. As described below the Board and Manager believe engagement with investee companies is positive, beneficial and welcomed and that consistent exercise of voting rights is a key activity in the dialogue with these companies.

CONCLUSION

The Directors believe that they have fulfilled their duties under s172 of the Companies Act 2006 in their deliberations on all matters. The Board takes into account the interests of all the Company’s key stakeholders, as outlined above, in its decision-making which reflects the Boards belief that the long term sustainable success of the Company is linked direct to its key stakeholders.

ENVIRONMENTAL SOCIAL AND GOVERNANCE (“ESG”) 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 Manager is a signatory to the Principles for Responsible Investment ('PRI') and has pledged its commitment to the Net Zero Asset Managers initiative. Further information is available at www.majedie.com and through the investment company ESG disclosures at www.theaic.co.uk.

EXERCISE OF VOTING POWERS AND STEWARDSHIP CODE

Stewardship

The Board considers that the Company has a responsibility as a shareholder towards ensuring that high Environmental, Social and Governance standards are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company’s voting rights are exercised on an informed and independent basis.

The Manager has adopted a clear and considered policy towards its stewardship responsibility on behalf of the Company. The Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The Manager’s approach to corporate governance and the UK Stewardship Code can be found on the Manager’s website at www.majedie.com together with a copy of the Manager’s Stewardship Policy and the Manager’s global proxy voting policy.

Two members of the Manager’s investment team are responsible for overseeing all aspects of the Stewardship process, including voting on all resolutions at all Annual General Meetings and Extraordinary General Meetings in the UK and overseas ballots. The Manager assesses corporate governance, remuneration policies and if deemed necessary will challenge management where it is felt that the best interests of shareholders are not being met.

When voting against or abstaining in a vote the Manager may communicate with management beforehand, either setting out its position in its regular meetings with the management of investee companies or in a communication to management.

The Manager discloses its voting record to the Board at each meeting with notes explaining the reasons for any votes against resolutions.

In addition, the Manager discloses to all clients an annual Responsible Capitalism report, providing cumulative voting statistics, full disclosure on voting policy and extracts of engagement for the year. The Manager publishes an annual voting record for the previous year on its website www.majedie.com

MODERN SLAVERY DISCLOSURE

The Company aims to adopt the highest standards and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery is an important part of corporate good governance.

The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

ANTI-BRIBERY AND CORRUPTION

It is the Company’s policy to conduct all of its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company’s policy and the procedures that implement it are designed to support that commitment.

PREVENTION OF THE FACILITATION OF TAX EVASION

The Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion.

GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON REPORTING (SECR)

The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little or no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations aside from travel to board meetings, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013.

As the Company has no material operations and therefore has low energy usage, it has not included an energy and carbon report.

This Strategic Report was approved by the Board on 27 May 2021

PRAXISIFM FUND SERVICES (UK) LIMITED / COMPANY SECRETARY

Statement of Directors’ Responsibilities

in respect of the preparation of the Annual Financial Report

The Directors are responsible for preparing the annual financial report and financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The FinancialReporting Standard applicable in the UK and Republic of Ireland.

The revised SORP issued in April 2021 is applicable for accounting periods beginning on or after 1 January 2021. The SORP has no substantive changes but has been updated to reflect changes IFRS standards and regulatory requirements. No accounting policies or disclosures have changed as a result of the revised SORP.

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 its profit or loss 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;
• assess the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006.

They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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, Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, which is maintained by the Company’s Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
• the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

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

Signed on behalf of the Board of Directors

GLEN SUAREZ / CHAIRMAN / 27 MAY 2021

Income Statement

For the year ended 31 March

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

Statement of Changes in Equity

⁽¹⁾          The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.

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

Balance Sheet

As at 31 March

These financial statements were approved and authorised for issue by the Board of Directors on 27 May 2021.

GLEN SUAREZ / CHAIRMAN

Signed on behalf of the Board of Directors

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

Notes to the Financial Statements

1. PRINCIPAL ACCOUNTING POLICIES

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

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

A. Basis of Preparation

Accounting Standards Applied

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (SORP).

The revised SORP issued in April 2021 is applicable for accounting periods beginning on or after 1 January 2021. The SORP has no substantive changes but has been updated to reflect changes to IFRS standards and regulatory requirements. The Company has not early adopted the revised SORP in these financial statements. No accounting policies or disclosures have changed as a result of the revised SORP.

The financial statements are issued on a going concern basis. Details of the Directors assessment of the going concern status of the Company, which considered the adequacy of the Company’s resources and the impacts of the COVID-19 Pandemic, are given above.

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

Significant Accounting Estimates, Assumptions and Judgements

The preparation of the financial statements may require the use of estimates, assumptions and judgements which may affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates. The directors do not believe that any accounting estimates, assumptions or judgements have been applied to these accounting statements that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. The Directors do apply judgement as to the allocation of expenses between capital and revenue in the income statement. The allocation and rationale is set out in Note 1G.

B. Foreign Currency and Segmental Reporting

(i)   Functional and presentational currency

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

(ii)  Transactions and balances

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

(iii) Segmental reporting

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

C. Financial Instruments

The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.

(i)   Recognition of financial assets and financial liabilities

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

(ii)  Derecognition of financial assets

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

(iii) Derecognition of financial liabilities

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

(iv) Trade date accounting

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

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

–    Financial assets

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

Financial assets held at fair value through profit or loss are initially recognized as fair value, which is taken to be their acquisition price, with transaction costs expensed in the income statement. These are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.

–    Financial liabilities

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

D. Cash and Cash Equivalents

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

E. Hedging

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

F. Income

Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’.

Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.

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

G. Expenses and Finance Costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.

The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.

Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.

H. Taxation

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

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

A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that it is probable that the Company will be able to recover them from future taxable revenue.

I. Dividends Payable

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

J. Critical accounting estimates and judgements

The Directors made one material accounting judgement during the year as set out in the paragraph below.

Tesco PLC Capital Special Dividend - £10,981,000

Further to the announcement on 18 December 2020 Tesco PLC had completed the disposal of the entirety of its shareholding in Tesco Stores (Thailand) Limited and Tesco Stores (Malaysia) Sdn Bhd. From the net proceeds of £7.8 billion an additional pension contribution of £2.5 billion was made and nearly £5 billion was distributed to Shareholders’ via a Special Dividend of 50.93 pence per Ordinary Share in the capital of the Company.

This Special Dividend was treated as Capital in nature due to the source being covered by the proceeds of disposal. The Special Dividend was approved by Shareholders’ at the Annual General Meeting on 25 January 2021 and went ex-dividend on 15 February 2021.This amount is disclosed as part of the amount in the footnote of Note 2 Income.

Apart from the above, the Directors do not believe that any other accounting judgements have been made. There are no estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.

K. Accounting for reserves

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.

The revenue reserve shows the net revenue reserve retained after payment of any dividends. The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.

2. INCOME

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

Special dividends of £11,041,000 were recognised in capital during the year (2020: £1,467,000).

3. INVESTMENT MANAGEMENT FEE

This note shows the fee due to the Manager. This is calculated and paid monthly.

Details of the investment management agreement is disclosed on page 37 in the Directors’ Report of the Annual Report. At 31 March 2021 investment management fees of £407,000 (2020: £385,000) were accrued.

4. OTHER EXPENSES

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

The maximum Directors’ fees authorised by the Articles of Association are £250,000 per annum.

1. There were seven directors for a period during the year and the Director’s Remuneration Report on page 41 of the Annual Report provides further information on Directors’ fees.
2. Auditor’s fees include expenses but excludes VAT.
3. Other expenses include:

–    £18,000 (2020: £16,000) of employer’s National Insurance payable on Directors’ remuneration. As at 31 March 2021, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £42,000 (2020: £7,000); and

–    custodian transaction charges of £14,000 (2020: £6,000). These are charged to capital.

–    other expenses also include fees of £nil (2020: £704,000). These costs relate to fees and expenses incurred in relation to the review of the previous manager and subsequent change of manager.

5. FINANCE COSTS

Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £100 million debenture stock and a £50 million bank revolving credit facility.

6. TAX AND TOTAL RETURN ON ORDINARY ACTIVITIES

As an investment trust the Company pays no tax on capital gains. As the Company invests principally in UK equities, it has little overseas tax and the overseas tax charge is the result of withholding tax deducted at source. This note also clarifies the basis for the Company having no deferred tax asset or liability.

(a) Tax charge

(b) Reconciliation of tax charge

(c) Deferred tax

Owing to the Company’s status as an investment company, and the Directors’ intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.

(d) Factors that may affect future tax changes

The Company has cumulative excess management expenses of £477,190,000 (2020: £464,617,000) that are available to offset future taxable revenue.

The deferred tax asset of £90,666,112 (2020: £88,277,000) at 19% (2020: 19%) has not been recognised in respect of these expenses, since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.

7. RETURN/(LOSS) 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 revenue, capital and total returns/(loss) per ordinary share is based on each of the returns on ordinary activities after taxation and on 173,236,905 (2020: 185,459,576) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

8. DIVIDENDS ON ORDINARY SHARES

Dividends represent the distribution of income to shareholders. The Company pays four dividends a year – three interims and one final dividend.

The proposed final dividend is subject to approval by ordinary shareholders at the AGM.

9. INVESTMENTS

The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.

Gains or losses are either:

–     realised, usually arising when investments are sold; or

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

(a) Analysis of investments by listing status

(b) Analysis of investment gains/(losses)

The Company received £435,697,000 (2020: £1,307,177,000) from investments sold in the year. The book cost of these investments when they were purchased was £458,854,000 (2020: £1,427,740,000) realising a loss of £23,157,000 (2020: £120,563,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.

The transaction costs included in gains on investments amount to £1,917,000 (2020: £4,856,000) on purchases and £167,000 (2020: £444,000) for sales.

10. DEBTORS

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

11. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors are the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments or amounts owed to suppliers (accruals) such as the Manager and auditor.

The Company has a 364 day committed revolving credit facility (the 'bank facility') of £50 million (2020: £150 million) with the lender, The Bank of New York Mellon. The bank facility was renewed on 17 June 2020 and matures on 16 June 2021. Interest is payable at 1.00% over LIBOR for drawn amounts, with a commitment fee of 0.20% per annum for undrawn amounts. Under the bank facility's covenants, the Company’s total indebtedness must not exceed 25% of net assets and net assets must not be less than £500 million (2020: £700 million).

12. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

These creditors are amounts that must be paid, as shown by note 11, but are due more than one year after the balance sheet date.

The debenture is secured by a floating charge on the Company, under which borrowing must not exceed a sum equal to the Adjusted Total of Capital and Reserves. The interest on the 7¾% debenture is payable in half-yearly instalments, in March and September, each year.

The effect on the net asset value of deducting the debenture stock at market value, rather than at par, is disclosed in note 15.

13. SHARE CAPITAL

Share capital represents the total number of shares in issue.

During the year the Company bought back, into treasury, 2,500,000 ordinary shares at an average price of 458.79p (including costs). Since the year end,  no shares have been bought back into treasury.

The Directors’ Report on pages 37 and 38 of the Annual Report sets out the Company’s share capital structure, restrictions and voting rights.

14. RESERVES

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

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.

The revenue reserve shows the net revenue retained after payment of any dividends..  The capital and revenue reserves are distributable by way of dividend.

15. NET ASSET VALUE 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 172,182,929 (2020: 174,682,929).

(a) NAV – debt at par value

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 value and the corresponding NAV per share. A reconciliation between the two sets of figures follows:

(b) NAV – debt at market value

The market value of the debenture stock 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 gilt.

The net asset value per share adjusted to include the debenture stock at market value rather than at par is as follows:

16. RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.

Financial instruments

The Company’s financial instruments mainly comprise its investment portfolio (as shown above), a debenture, a bank facility as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note ‘cash’ should be taken to comprise cash and cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:

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

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

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

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

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors’ Report.

As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company’s investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The associated risk management policies are summarised below and have remained substantially unchanged for the two years under review.

16.1 Market Risk

The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on pages 33 and 34 of the Annual Report. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company’s exposure to market risk and volatility. The Company has the ability to gear by using its £100 million debenture stock 2022 and its bank facility of £50 million (2020: £150 million). Debenture stock 2022 market value £109,041,000 (2020: £115,209,000).

16.1.1 Currency risk

The majority of the Company’s assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.

Management of the currency risk

The Manager monitors the Company’s direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company’s exposure to foreign currencies arising naturally from the Manager’s choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No Forward currency contracts were used during the year (2020: none).

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

The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of non-UK securities total £98.8 million (2020: £67.2 million) representing 8.6% (2020: 7.2%) of the portfolio.

Currency exposure

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

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

Currency sensitivity

In respect of the Company’s material direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 4.1% (2020: 2.8%) for the US dollar, 2.6% (2020: 3.3%) for the Swiss franc and 1.9% (2020: 2.7%) for the Euro during the year, capital return and net assets of the Company would have increased by £3.0 million (2020: £2.0 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling’s fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company’s investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.

16.1.2 Interest rate risk

Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian, The Bank of New York Mellon.

The Company has in place a revolving credit facility (the 'bank facility'), details of which are shown in note 11. The Company uses the bank facility when required at levels monitored by the Board. At the maximum possible bank facility gearing of £50 million (2020: £150 million), the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s income of £500,000 (£2020: £1,500,000) per annum.

The Company also has an uncommitted bank overdraft facility which it uses for settlement purposes and the interest rate is dependent on the base rate as determined by the custodian. At the year end, no amounts were overdrawn (2020: none).

The Company’s debt of £100 million (2020: £100 million) of debenture stock is fixed which exposes the Company to changes in market value in the event that the debt is repaid before maturity. Details of the debenture stock interest is shown in note 12, with details of its market value and the affect on net asset value in note 15(b).

The Company held one fixed income security during the year (2020: one), being a short-term zero coupon government bond which matured on the 22 June 2020. As at 31 March 2020 this government bond was recognised as a Cash and Cash Equivalent on the Balance Sheet.

Interest rate exposure

At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:

• floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; and
• fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.

16.1.3 Other price risk

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

Management of the other price risk

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

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

If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £115.1 million (2020: £92.2 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.

16.2 Liquidity risk

Liquidity risk is minimised as the majority of the Company’s investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has a bank facility which it can use to provide short-term funding flexibility.

Liquidity risk exposure

The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

16.3 Credit risk

Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. However, with the support of the depositary’s restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 6% of net assets in aggregate in liquidity funds with credit ratings of AAAm (or equivalent). These limits are at the discretion of the Board and are reviewed on a regular basis. The investment policy also allows for UK Government Treasuries to be held. Such holdings are recorded as cash equivalents if they meet the criteria set out in Note 1D.

17. FAIR VALUE

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

Fair Value Hierarchy Disclosures

All except one of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow.

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

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

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

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

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

The valuation techniques used by the Company are explained in the accounting policies note. At the end of the financial year there were no Level 2 investments. The investment in Level 3 is in the unquoted company Eurovestech. The holding in Eurovestech did not change during the year, but the fair value was reduced to £105,000 (2020: £154,000).

The book cost and fair value of the debenture stock, based on the offer value at the balance sheet date, are as follows:

Incorporating the fair value of the debenture, results in the reduction of the net asset value per ordinary share to 628.29p (2020: 490.40p).

18. CAPITAL MANAGEMENT

The Company’s total capital employed at 31 March 2021 was £1,190,854,000 (2020: £971,856,000) comprising borrowings of £99,623,000 (2020: £99,372,000) and equity share capital and other reserves of £1,091,231,000 (2020: £872,484,000).

The Company’s total capital employed is managed to achieve the Company’s objective and investment policy as set out on above, including that borrowings may be used to provide gearing of the equity portfolio up to the maximum authorised by shareholders, currently 25% of net assets. Net gearing was 7.1% (2020: 8.3%) at the balance sheet date. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.

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

The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.

The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1158 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the bank facility by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise the debenture stock, details of which are contained in note 12, a bank facility and an uncommitted overdraft facility which may be used for short-term funding requirements.

19. CONTINGENCIES, GUARANTEES AND FINANCIAL COMMITMENTS

This note would show any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring.

There are no contingencies, guarantees or financial commitments of the Company at the year end (2020: £nil).

20. 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.

Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed in pages 42 and 43 of the Annual Report with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 37 of the Annual Report, and in note 3.

21. POST BALANCE SHEET EVENTS

There are no significant events or adjustment to the financial statements after the end of the reporting year requiring disclosure.

There are no significant events after the end of the reporting year requiring disclosure.

This announcement contains regulated information under the Disclosure Guidance and Transparency Rules of the FCA.

This announcement does not constitute the Company's statutory accounts.  The financial information for 2021 is derived from the statutory accounts for 2021, which will be delivered to the registrar of companies.  The statutory accounts for 2019 have been delivered to the registrar of companies.  The auditors have reported on the 2021 and 2020 accounts; their reports were unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006.

The Annual Financial Report will be available from the Company’s website: www.edinburghinvestmenttrust.com

The Annual Financial Report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/uk/NSM .

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 the Company’s website: www.edinburghinvestmenttrust.com

The Annual General Meeting of the Company will be held at 11 am on 22 July 2021 at The Hawthornden Lecture Theatre, The National Galleries of Scotland, Weston Link, The Mound, Edinburgh, EH2 2EL.

By order of the Board
PraxisIFM Fund Services (UK) Limited
Company Secretary
27 May 2021

Enquiries

Edinburgh Investment Trust plc
Glen Suarez (Chairman)  via Montfort below

Majedie Asset Management Limited     
James Mowat  + 44 20 7618 3900
Harry Steel

Investec Bank plc
Tom Skinner  + 44 20 7597 4000

Montfort Communications
Nick Bastin +44 7931 500066
Shireen Farhana+44 7757 299250
Miles McKechnie+44 7788 546279

About The Edinburgh Investment Trust plc
Founded over 130 years ago, The Edinburgh Investment Trust plc is listed on the London Stock Exchange and is included in the FTSE 250 index. It invests primarily in a portfolio of UK listed shares and has net assets of approximately 0.9 billion. The Company’s twin investment objectives for the long term are to outperform the FTSE All-Share Index on a Net Asset Value (NAV) basis and to produce dividend growth in excess of the rate of UK inflation. Majedie Asset Management became the Company’s AIFM with effect from 4 March 2020.

About Majedie Asset Management
Established in 2002, Majedie is an independent boutique. It actively manages equities for institutional investors, wealth managers and endowments across a range of UK, US and Global strategies. Its assets under management were £8bn at the 31 March 2021. It has a team of 19 fund managers and analysts, out of a total of 58 employees.