Invesco Select Trust plc
Annual Financial Report Announcement
Year Ended 31 May 2021
Financial Performance
Cumulative Total Returns(1)(2) To
31 May 2021
|
One |
Three |
Five |
UK Equity Share
Portfolio |
Year |
Years |
Years |
Net Asset Value |
34.6% |
12.2% |
38.4% |
Share Price |
31.6% |
6.8% |
31.2% |
FTSE All–Share Index |
23.1% |
5.9% |
40.5% |
|
|
|
|
|
|
|
|
|
One |
Three |
Five |
Global Equity Income Share
Portfolio |
Year |
Years |
Years |
Net Asset Value |
35.9% |
25.6% |
74.8% |
Share Price |
32.6% |
24.4% |
72.3% |
MSCI World Index (£) |
22.3% |
40.2% |
99.2% |
|
|
|
|
|
|
|
|
|
One |
Three |
Five |
Balanced Risk Allocation Share
Portfolio |
Year |
Years |
Years |
Net Asset Value |
25.4% |
18.4% |
38.3% |
Share Price |
26.4% |
16.8% |
36.7% |
ICE BoA Merrill Lynch 3 month LIBOR
plus 5% per annum |
5.1% |
16.8% |
27.7% |
|
|
|
|
|
|
|
|
|
One |
Three |
Five |
Managed Liquidity Share
Portfolio |
Year |
Years |
Years |
Net Asset Value |
3.6% |
6.0% |
6.4% |
Share Price |
0.5% |
1.6% |
2.6% |
Year end Net Asset Value, Share Price
and Discount
|
Net Asset |
Share |
|
|
Value |
Price |
|
Share Class |
(pence) |
(pence) |
Discount |
UK Equity |
188.33 |
176.00 |
(6.5)% |
Global Equity Income |
233.91 |
226.00 |
(3.4)% |
Balanced Risk Allocation |
169.33 |
163.00 |
(3.7)% |
Managed Liquidity |
108.11 |
102.00 |
(5.7)% |
(1) Alternative Performance Measure (APM). See Glossary of
Terms and Alternative Performance Measures on pages 110 to 113 of
the financial report for details of the explanation and
reconciliations of APMs.
(2) Source: Refinitiv.
Chairman’s Statement
Highlights
– All four portfolios delivered positive outperformance over the
period.
– Dividends rose to 6.65p per UK Equity Share and 7.10p per
Global Equity Income Share.
– Company size increased to £230.6 million at 31 May 2021 following the combination of Invesco
Income Growth Trust plc with the UK Equity Share Class.
– Lower investment management fees negotiated for the UK Equity
& Global Equity Income share classes.
– UK Equity portfolio now managed in partnership between
James Goldstone and Ciaran Mallon, with income growth added to the
objective.
– Derek Steeden appointed to run
Managed Liquidity Share Portfolio.
– Change of benchmark for Balanced Risk Allocation
Portfolio.
This is my first statement as Chairman of your Company, since
being appointed Chair on 1 June 2021.
I would like to thank my predecessor, Graham Kitchen, for his hard work, valuable
inputs and effective chairmanship of your Company since 2019,
through both the pandemic and the combination of Invesco Income
Growth Trust plc with the UK Equity Share Portfolio.
The Company
The Company’s investment objective is to provide shareholders
with a choice of investment strategies and policies, each intended
to generate attractive risk-adjusted returns.
The Company’s share capital comprises four share classes:
UK Equity Shares, Global Equity Income Shares, Balanced Risk
Allocation Shares and Managed Liquidity Shares, each of which has
its own separate portfolio of assets and attributable
liabilities.
The investment objectives and policies of each of the Portfolios
are set out on pages 39 to 41.
The Company’s structure enables shareholders to adjust their
asset allocation to reflect their views of the prevailing market
outlook. As set out on the inside of the front cover, shareholders
have the opportunity to convert between share classes, free of
capital gains tax, every three months.
Performance
The NAV total return of the UK Equity Share Portfolio over the
year was 34.6%, which compares with the total return of 23.1% from
the FTSE All-Share Index. The share price total return was
31.6%.
The NAV total return of the Global Equity Income Share Portfolio
over the year was 35.9%, which compares with the total return from
the MSCI World Index (£) of 22.3%. The share price total return was
32.6%.
The NAV total return of the Balanced Risk Allocation Share
Portfolio was 25.4%, which compares with its benchmark of
3 months LIBOR plus 5%, which returned 5.1%. The share price
total return was 26.4%.
The NAV total return of the Managed Liquidity Share Portfolio
was 3.6%. The share price total return was 0.5%. Shareholders will
recall that a historical management fee error was reported in the
Chairman’s Statement for the 30 November
2017 half year report, which resulted in an overcharging of
management fees by the Manager. As part of the restitution, it was
agreed that the Manager would make payments directly to affected
shareholders. Having exhausted all reasonable avenues to locate all
affected shareholders, an amount remained unpaid for shareholders
that could not be located and has been returned to the Managed
Liquidity Share portfolio under the restitution agreement. This
receipt has contributed to a 2% uplift to the NAV at the year
end.
It was pleasing to note, both for the Board and for
shareholders, that all four Portfolios outperformed their
benchmarks over the period.
Investment Management Changes
The Managed Liquidity Portfolio saw Derek Steeden being appointed as portfolio
manager with effect from 1 December 2020. Derek is a Portfolio
Manager for the Invesco Investment Solutions team, which provides
customised, multi-asset investment strategies for clients. He
joined Invesco in 2019, having begun his investment career in 2005.
The Portfolio continues to be invested in other collective
investment vehicles, but the principal investment was changed to
the iShares – Sterling Ultrashort Bond UCITS ETF.
Balanced Risk Allocation Benchmark
Change
Since adopting the strategy in 2012, the returns of the Balanced
Risk Allocation Portfolio have been compared against 3-month LIBOR
+ 5% per annum. Following discussion, the Directors have taken the
view that a cash plus benchmark does not reflect the strategy. The
new comparator benchmark is a composite whose components are
approximate proxies for the portfolio’s holdings. The new benchmark
took effect from 1 June 2021 and is a
blend comprising 50% 30-year UK Gilts Index, 25% GBP hedged
MSCI World Index (net) and 25% GBP hedged S&P Goldman
Sachs Commodity Index (all total return).
Business Combination with Invesco
Income Growth Trust plc
On 23 April 2021 the proposed
combination of Invesco Income Growth Trust plc (‘IIGT’) with the
Company’s UK Equity Share Portfolio was completed, resulting in a
transfer of approximately £120 million of assets into the Company
in exchange for the issue of new UK Equity shares to IIGT
shareholders.
Ciaran Mallon, who has managed
IIGT’s portfolio since 2005, became joint portfolio manager of the
UK Equity Share Portfolio, with James
Goldstone, who has managed it since October 2016. The Board believes that the two
managers’ combined and complementary skills, with a disciplined
investment process, can deliver attractive returns for
shareholders. Ciaran and James jointly manage Invesco’s largest
open-ended UK equity funds, which have outperformed their benchmark
since appointment.
The size of your Company’s combined UK Equity portfolio will
give the managers freedom to invest across the market
capitalisation and liquidity spectrum and to offer the prospect of
a genuine best ideas portfolio, clearly distinguished from their
open-ended funds, where stock selection is limited to larger, more
liquid investments. The change will bring the benefits of increased
scale, including enhancing secondary market liquidity and the
spreading of fixed costs over a larger cost base.
Fees
Additionally, the Board negotiated improved management fee
arrangements to apply from the scheme effective date of
23 April 2021. The flat annual
management fee of 0.55% of net assets payable by the UK Equity
Share Portfolio was reduced, with 0.55% now payable on its net
assets up to £100 million and 0.50% over £100 million; and the
performance fee was also removed. In the interests of alignment,
the 0.55% management fee on the Company’s Global Equity Income
Share Portfolio was amended in the same way, and its performance
fee removed. The costs of the transaction were significantly
mitigated by Invesco waiving its accrued performance fee of
£531,000 in respect of the UK Equity Share Portfolio.
The Portfolio is able to employ gearing by means of a bank loan
facility. Your Board has recently extended the size of this
facility, from £20 million to £40 million, to allow a similar
percentage level of gearing, if desired, across the larger
post-merger Portfolio.
The Company will retain its innovative capital structure,
offering investors the opportunity to switch (on a quarterly basis)
between its UK Equity, Global Equity Income, Balanced Risk
Allocation and Managed Liquidity share classes in order to position
their portfolios for changing investment conditions.
Outlook
We live in continuing uncertain times. Whilst we have witnessed
a significant increase in M&A activity, Covid-19 resurgence and
variance fears are continuing to cause market jitters regarding
global economic recovery. The debate and concerns around inflation
and the application of central bank policy will, no doubt, go on
for some time yet. There are mixed views at the Monetary Policy
Committee regarding the need to tighten policy and whether the
pick-up in inflation is temporary. The immense support provided by
the Treasury and the Bank of England has avoided deep economic scarring.
The route back out from restricted economies across the globe is
likely to experience road-bumps which after a period of relative
calm could give rise to increased market volatility.
In an environment such as this, Select’s multi-portfolio
structure provides a flexible tool for shareholders, or their
advisors, to reflect their future market expectations. The
Company’s two equity Portfolios are run by forward-looking active
fund managers, whose bottom-up stock-picking approach is not
constrained by a rigid target benchmark. Both sets of equity fund
managers have sought to build balance in their portfolios, so that
any unexpected Covid curve-balls do not derail the progress of the
overall share class. The equity managers also have the additional
tool of gearing that they can employ (within overall parameters set
by your board) to reflect their view of the attractiveness of the
asset class. Income is an important component of the total return
of these share classes and the ability of companies to start,
resume or increase dividend distributions is closely monitored.
Alongside this, your board has the capacity to supplement the
dividend paid out to shareholders with any revenue reserves and
capital reserves.
Complementary to the equity share classes, the Balanced Risk
Allocation Share Portfolio looks to provide shareholders with
attractive total returns regardless of the economic or inflationary
backdrop, across the three asset classes of debt securities,
equities and commodities. Lastly, the Managed Liquidity Share
Portfolio offers a higher degree of security for those with a more
conservative outlook. I believe your Company’s structure and
portfolios should be well positioned to traverse a variety of
market outcomes over the long term.
The Board
I am delighted to welcome Davina
Curling, Mark Dampier and
Tim Woodhead, who joined the Board on completion of the
business combination on 23 April
2021. As part of the business combination, Alan Clifton and three long-standing directors
of Invesco Income Growth Trust plc, the chair, Hugh Twiss, Jonathan
Silver and Roger Walsom
retired from their positions. We thank them for their significant
contribution in bringing the combination to fruition.
Graham Kitchen stepped down from
the Board on 31 May 2021 and I
succeeded him as Chairman on 1 June
2021. The Board extend their gratitude to Alan and Graham
for their extensive contribution, knowledge and guidance during
their time on the Board.
Dividends
We have continued to apply the dividend policy adopted five
years ago, and supported by shareholder advisory votes, whereby for
both UK Equity and Global Equity Income Shares, dividends are paid
by way of three equal interim dividends declared in July, October
and January with a ‘wrap-up’ fourth interim declared in April. For
the year under review the first three dividends declared for the UK
Equity Shares were 1.50p per share and for the Global Equity Income
Shares 1.55p per share. The fourth interim dividends were 2.15p per
share for the UK Equity Shares, bringing the total to 6.65p per
share for the year, and 2.45p per share for the Global Equity
Income Shares, bringing that total to 7.10p per share for the
year.
There were a number of dividend cuts in the year, due to
Covid-19, meaning a greater contribution from capital was required
for the Company’s dividends again this year to meet the Board’s
target level. For the Global Equity Income a contribution from
capital of approximately 3.15p per share was required to achieve
the dividend level (2020: 0.4p per share). For the UK Equity Shares
a contribution from capital of approximately 2.75p per share was
required to achieve the dividend level (2020: 2.5p per share).
We intend to continue with the policy of a partial augmentation
from capital where appropriate and investors are again being given
advisory votes on it. However, whereas in recent years we have set
a target of at least maintaining the dividend level from year to
year for each of the equity Portfolios, with the current
uncertainty of future income flows due to Covid-19 the Directors
have not set dividend targets for the year to 31 May 2022.
The first interim dividends declared in respect of the year to
May 2022, which will be paid on
16 August 2021 to shareholders on the
register on 23 July 2021, were 1.50p
per share for UK Equity, 1.55p per share for Global Equity
Income and 1.00p per share for Managed Liquidity.
It continues to be the case that in order to maximise the
capital return on the Balanced Risk Allocation Shares, the
Directors only intend to declare dividends on the Balanced Risk
Allocation Shares to the extent required, having taken into account
the dividends paid on the other Share classes, to maintain the
Company’s status as an investment trust. No dividends have been
paid on the Balanced Risk Allocation Shares over the period.
Despite continuing low interest rates, it remains the Directors’
intention to distribute substantially all net revenues earned by
the Portfolio going forward. Given the quantum involved it is
unlikely that such payments will be more frequent than annually and
may indeed be less frequent. Following the receipt of a £34,000
payment, which has been returned to the Portfolio as part of the
management fee restitution agreement, the Board declared an interim
dividend of 1.00p per share and intend to use the remaining amount
to smooth dividend payments over the next couple of years.
Discount Policy
The Company adopted a discount control policy for all four Share
classes in January 2013, whereby the
Company offers to issue or buy back Shares of all classes with a
view to maintaining the prices of the Shares at close to their
respective net asset values. The policy has been successful to date
and your Board remain committed to its utilisation. The ongoing
implementation of this policy is dependent upon the Company’s
authority to buy back Shares, and the Directors’ authority to issue
Shares for cash on a non pre-emptive basis being renewed at general
meetings of the Company.
Share Capital Movements
During the year to 31 May 2021,
the Company bought back and placed in treasury 10,769,463 UK Equity
Shares, 4,939,000 Global Equity Income Shares, 951,000 Balanced
Risk Allocation Shares and 569,000 Managed Liquidity Shares. In
connection with the business combination, 66,628,879 UK Equity
Shares were issued on 26 April 2021.
Other than this and as an artefact of the share conversion process,
no other Shares were issued or sold from treasury and no treasury
shares were cancelled. Since the year end a further 4,860,000 UK
Equity Shares and 63,000 Managed Liquidity Shares have been bought
back into treasury. The Board intends to use the Company’s buy back
and issuance authorities when this will benefit existing
shareholders as a whole and to operate the discount control policy
mentioned above, and will ask shareholders to renew the authorities
as and when appropriate.
Share Class Conversions
The Company enables shareholders to adjust their asset
allocation to reflect their views of future market conditions.
Shareholders have the opportunity to convert their holdings of
Shares into any other class of Share, without incurring any tax
charge (under current legislation). The conversion dates for the
forthcoming year are as follows: 2 August 2021; 1 November 2021; 1 February 2022; and
3 May 2022. Should you wish to
convert Shares at any of these dates, conversion forms, which are
available on the Manager’s website at
www.invesco.co.uk/investmenttrusts, or CREST instructions must be
received at least ten days before the relevant conversion date.
Articles Refresh
One of the resolutions being proposed at this AGM is an
amendment to the Company’s articles of association (the “Articles”)
to allow for ‘hybrid’ shareholder meetings to be held where some
attendees are based in a single physical location and others
attend, participate and vote by electronic means. Certain
consequential changes to the Articles in order to facilitate this
amendment will also be made. While the Board does not currently
intend to hold meetings in this way, the resolution would allow the
Board to hold hybrid meetings when in the best interests of
shareholder safety, for example, in the event of a continuing
lockdown. The amendments will not prevent the Company from holding
physical meetings and the Board’s intention is always to hold a
physical general meeting when safe and practical to do so. A
summary of the changes being introduced can be found in the
Appendix section on page 104.
Annual General Meeting (‘AGM’)
Following the Government’s lifting of all legal restrictions on
social contact on 19 July 2021, I am
pleased to once again invite all our shareholders to the Company’s
AGM and have the opportunity to meet and question the Directors and
the Manager. The business of the AGM is summarised in the
Directors’ Report on pages 51 to 56. The AGM will be held at
43-45 Portman Square, London
W1H 6LY at 11.30am on 5 October
2021. I hope as many of you as possible will attend. However,
should further restrictions be re-imposed the AGM may have to be
held as a closed meeting again. In this eventuality, the Board will
communicate any necessary changes to shareholders in the form of an
RNS announcement and on the Company’s web page at
www.invesco.co.uk/investmenttrusts. It is recommended that
shareholders exercise their votes by means of registering them with
the Company’s registrar ahead of the meeting, online or by
completing paper proxy forms, and appoint the Chairman of the
meeting as their proxy. The Board has considered all the
resolutions proposed in the Notice of the AGM and believe they are
in the best interests of shareholders and the Company as a whole.
Accordingly, the Directors recommend that shareholders vote in
favour of each resolution, as will the Directors in respect of
their own shareholdings. All shareholders are welcome and may bring
a guest with them. To register your interest in attending, please
contact us at investmenttrusts@invesco.com.
Shareholder Web Call
We also note that online meetings have been very popular during
Covid-19 restrictions and so for those shareholders unable to
travel to the AGM and also for potential investors, we will be
holding an online presentation on 28
September 2021 at 11.30am.
Presentations will be made by James
Goldstone, Ciaran Mallon and
Stephen Anness followed by a
question and answer session.
Shareholders can submit questions during the presentation or in
advance by writing to the Company Secretary at the address given on
page 109 or by email to investmenttrusts@invesco.com. Details on
how to register for the event are available via the Company’s
website www.invesco.co.uk/investmenttrusts.
Engagement with Shareholders and
Investors
In combination with the Distribution Team of the Manager we are
exploring new avenues to enhance our engagement with private
clients, to ensure that we are able to provide updates and insight
into the management of each of the strategies. One such initiative
that we have recently supported, is a new start-up called Doceo,
which currently provides our investors with a 2 minute overview of
the UK Equity portfolio managers’ approach, as well as a slightly
longer video providing an update on the Portfolio. We will continue
to assess these opportunities and provide an update in future
reports.
I hope to meet as many of you as possible at the AGM or on the
webinar.
Victoria
Muir
Chairman
5 August 2021
Strategic Report
UK Equity Share Portfolio Manager’s
Report
Q How has
the Company performed in the 12 months to 31
May 2021?
A The
Portfolio outperformed its benchmark over the 12 months to
31 May 2021, with a net asset value
total return of +34.6%. Over the same period the FTSE All-Share
Index rose +23.1%. Whilst volatile, the UK equity market performed
strongly over the 12 month period. The social and economic
impact of the pandemic dominated market sentiment together with the
additional issues of Brexit, UK domestic politics, US-China
trade relations and the US Presidential Election. The rapid
and meaningful response by central banks and governments around the
world to loosen monetary and fiscal policy in order to cushion the
economic shock of the pandemic provided an effective level of
support.
In the autumn, news of a number of successful Coronavirus
vaccine trials boosted sentiment and the UK equity market rose in
response. The subsequent roll out of vaccinations in 2021 has
progressed rapidly in the UK and there has also undoubtedly been a
positive effect following the negotiation of a Brexit deal.
Q What
have been the key contributors and detractors to performance over
the year?
A Over the
period, positive performance relative to the benchmark was seen in
nine out of the eleven sectors in which the portfolio is invested.
The decision making behind the allocation of capital across the
major sectors was strong, as was the stock selection within some of
these sectors.
The biggest contribution to positive performance versus the FTSE
All-Share Index over the period was from the portfolio’s
significant underweight to the large pharmaceutical companies
GlaxoSmithKline and AstraZeneca for most of the time. This was
helpful to relative performance as both underperformed the Index. A
position in AstraZeneca has now been added to the portfolio, a
reflection of improved execution in its pipeline of clinical
success and the prospects for improvement in cash flows following
the acquisition of Alexion.
Medical technology company PureTech Health contributed strongly
to relative performance against the Index. The company aims to
address significant areas of un-met medical need with novel and
lower risk route to market products and approaches, along the
brain-immuno-gut axis. There have been some significantly positive
developments over the last twelve months, most notably the approval
of group company Gelesis’s obesity product “Plenity”.
Consumer discretionary stocks also performed well on a relative
basis over the period. The retail sector had a particularly strong
period of performance with the holdings of veterinary services
group CVS and Next key contributors to relative performance. CVS
released very strong half year results, and Next performed well as
demand remained robust for those companies with strong online
offerings.
Technology company Future, which publishes a range of special
interest websites and magazines including TechRadar was again one
of the portfolio’s better performing holdings. The company also
generates revenue through online advertising and commissions from
reader ‘click through’ and recently acquired the price comparison
website Go Compare which was well received by the market.
Being underweight the consumer staples sector was helpful to
relative performance. Whilst the holdings of Tesco and British
American Tobacco detracted from relative performance this was more
than offset by the benefit of not having any exposure to very
highly rated international consumer staples which underperformed
over the past year.
Within financials, Banks were overall positive for relative
performance and Barclays, which was a top five contributor,
reported better than expected results on lower loan losses and a
sharp increase in trading activity within the investment bank.
Industrials and basic materials were the main detractors to
relative performance over the 12 month period. Babcock
International underperformed over the period but the new management
team have recently provided a more positive update in respect of
liquidity and financing in their strategic review than many had
expected which has been supportive of the share price recently.
However, this underperformance was partially offset by the positive
relative performance of industrial equipment rental business
Ashtead.
Not owning any significant holdings in any of the industrial
metals & mining companies proved to be biggest detractor from
relative performance. In a reflationary environment, industrial
commodities have in the near term been particularly strong (iron
ore & copper). The portfolio is positioned to benefit from what
we believe to be more sustainable long-term dynamics favouring gold
miners. Whilst the price of gold increased modestly over the period
as a whole, it was volatile as the debate continued around
expectations for future inflation and the impact of negative real
interest rates. In the absence of any significant corporate news
flow, the gold mining holdings Barrick
Gold, Agnico Eagle Mines, Wheaton Precious Metals and
Newmont detracted from relative performance.
|
|
Year end |
|
Total |
Portfolio |
Key Contributors |
Impact % |
Weight % |
AstraZeneca |
+1.89 |
3.4 |
GlaxoSmithKline |
+1.63 |
— |
Barclays |
+1.59 |
4.1 |
Future |
+1.55 |
1.6 |
CVS Group |
+1.44 |
1.2 |
|
|
Year end |
|
Total |
Portfolio |
Key Detractors |
Impact % |
Weight % |
Barrick Gold |
–1.82 |
3.9 |
Babcock International |
–1.73 |
1.1 |
Agnico Eagle Mines |
–0.96 |
— |
Tesco |
–0.83 |
1.8 |
Wheaton Precious Metals |
–0.80 |
— |
Q How has
gearing impacted the performance and what is your strategy going
forward?
A The use
of gearing in the portfolio over the period enhanced performance.
Gearing at the start of the 12 month period was around 10% and this
was increased to approaching 20% at the end of 2020. Following the
combination with Invesco Income Growth Trust plc in April the
gearing has been reduced to around 10%. This level is below the
limit of 25% set by the Board.
The appropriate level of gearing is under regular review.
Looking forwards we are comfortable that the current level of
gearing provides an opportunity to enhance the Portfolio’s returns
relative to the FTSE All-Share Index as our view remains that the
UK companies remain attractively valued compared to their 20 year
average and compared to other developed markets such as the US.
Q Has the
crisis changed your approach at all?
A
Fundamentally there has been no change in the approach we have
taken to managing the portfolio during the crisis. We believe that
there is significant opportunity within the UK equity market with
some highly favoured companies trading on excessively high
valuations, whilst other stocks remain heavily out of favour and
undervalued.
We are now co-managing the portfolio using the joint investment
process that has been applied with good effect to other portfolios
that we have co-managed since May
2020. We have reduced the number of stocks in the portfolio
as part of the combination of the two trusts so that the portfolio
is more concentrated in stocks in which we have the most
conviction. The portfolio is also positioned in holdings that we
believe will withstand the various possible economic environments
and different market outcomes that follow as we transition out of
the crisis.
Q How is
the UK Equity Share Portfolio positioned following the appointment
of Ciaran as joint manager?
A On a
sectoral basis and relative to the FTSE All-Share Index, we are
over-weight Utilities and Consumer Discretionary stocks.
Overall, the position in the utilities sector has been increased
with additions to the holdings of National Grid, United Utilities
and SSE. These additions offer an inflation linked return that is
in our view underappreciated. In addition, we have increased our
exposure to Energy companies which have a lot of the same
characteristics of the metals and mining companies.
Existing positions of RELX and Barratt Developments have also
been added to whilst positions in Barclays, Tesco, British American
Tobacco and Babcock International were reduced.
We are under-weight Financials in general but have a sizeable
position in Barclays because our view is that it is still the
standout company among UK Banks. We are also under-weight what we
see as expensive Consumer Staples and Basic Materials businesses
(principally, industrial metals and mining).
But a perhaps a more meaningful way of looking at the portfolio
is to think in terms of five broad investment themes that the
portfolios are exposed to, and our conviction in key stocks that
fall within these themes:
1. “UK Domestics” (approx. 27% of the portfolios):
companies that are particularly exposed to the UK. Examples include
Barclays, Legal & General, National Grid, and United
Utilities.
2. “International Value” (approx. 27%): companies that
though listed in the UK, derive much of their earnings overseas.
Examples include BP and Royal Dutch
Shell. AstraZeneca is a recent addition in this theme.
3. “International Growth” (approx. 27%): UK listed,
world-class businesses, with real potential to deploy more capital
and grow returns overseas. Examples include: RELX, Smith &
Nephew and JD Sports Fashion.
4. “Recovery” (5-10%): companies that are in the early
stages of recovery either from a particular dislocation in markets,
or from company specific issues. Examples include: Compass,
Whitbread and Young & Co’s Brewery.
5. “Transformers” (5-10%): companies that are changing to
take advantage of new opportunities. Examples include: PureTech
Health, Next, SSE, and Drax.
Underlying Portfolio Characteristics at Year End
|
|
12 month |
Free Cash |
Return |
31 May |
Price/book |
forward |
Flow |
on |
2021 |
value (x) |
p/e ratio(%) |
Ratio (%) |
Equity (%) |
UK Equity Share |
|
|
|
|
Portfolio |
1.9 |
14.9 |
5.3 |
12.1 |
FTSE All-Share Index |
1.8 |
13.5 |
6.1 |
12.7 |
Q What is
your outlook for the next 12 months and beyond? Why invest in the
UK now?
A All
things considered we are optimistic for a recovery in the global
economy over next 12 months as vaccines continue to be distributed
around the world and lock-downs ease. There is undoubtedly still
some uncertainty with regard to how the pandemic might evolve and
what government policy, in reacting to the pandemic, might look
like. Consequently, we are keen to have a balanced portfolio that
can perform in a range of economic outcomes. If we continue to see
strong economic growth on the back of strong growth in earnings
then we have a part of the portfolio that will benefit from that
very constructive backdrop but by the same token, if there are some
roadblocks along the way and it is more of a stuttering recovery,
then we have a part of the portfolio that will provide some element
of protection in such an environment.
We have frequently referenced our analysis that shows
UK equities to be cheap across a blend of valuation measures,
relative to history, and also particular relative to the US market.
We have also said that this opportunity is evident in every major
sector, not just at an index level.
We are excited at the prospects for the UK Equity Portfolio,
which comprises our highest conviction, best ideas. The portfolio
is concentrated around very high quality, cash generative
businesses, with strong liquidity, that are likely to emerge from
the pandemic in an even better competitive position than
beforehand, which leaves us very optimistic for the second half of
2021 and beyond.
James
Goldstone & Ciaran
Mallon
Joint Portfolio Managers
5 August 2021
UK Equity Share Portfolio List of
Investments
AT 31 May 2021
Ordinary shares listed in the UK unless stated otherwise
|
|
Market |
|
|
|
Value |
% of |
Company |
Sector† |
£’000 |
Portfolio |
Next |
Retailers |
8,763 |
5.0 |
Barclays |
Banks |
7,214 |
4.1 |
Barrick Gold – Canadian Listed |
Precious Metals & Mining |
6,818 |
3.9 |
SSE |
Electricity |
6,670 |
3.8 |
National Grid |
Gas, Water &
Multi-Utilities |
6,642 |
3.8 |
RELX |
Media |
6,044 |
3.4 |
AstraZeneca |
Pharmaceuticals &
Biotechnology |
5,943 |
3.4 |
Royal Dutch Shell – B Shares |
Oil, Gas & Coal |
5,564 |
3.2 |
BP |
Oil, Gas & Coal |
5,368 |
3.0 |
Young & Co’s Brewery –
Non-Voting |
Travel & Leisure |
5,346 |
3.0 |
Top Ten Holdings |
|
64,372 |
36.6 |
Newmont – US Listed |
Precious Metals & Mining |
5,342 |
3.0 |
Legal & General |
Life Insurance |
4,924 |
2.8 |
Experian |
Industrial Support Services |
4,611 |
2.6 |
British American Tobacco |
Tobacco |
4,007 |
2.3 |
Ferguson |
Industrial Support Services |
3,983 |
2.3 |
Smith & Nephew |
Medical Equipment &
Services |
3,944 |
2.2 |
Bunzl |
General Industrials |
3,792 |
2.1 |
Vodafone |
Telecommunications Service
Providers |
3,760 |
2.1 |
Barratt Developments |
Household Goods & Home
Construction |
3,718 |
2.1 |
Ashtead |
Industrial Transportation |
3,501 |
2.0 |
Top Twenty Holdings |
|
105,954 |
60.1 |
Drax |
Electricity |
3,471 |
2.0 |
United Utilities |
Gas, Water &
Multi-Utilities |
3,265 |
1.9 |
JD Sports Fashion |
Retailers |
3,263 |
1.9 |
Croda International |
Chemicals |
3,260 |
1.8 |
Phoenix |
Life Insurance |
3,250 |
1.8 |
Ultra Electronics |
Aerospace & Defence |
3,221 |
1.8 |
Tesco |
Personal Care, Drug & Grocery
Stores |
3,219 |
1.8 |
Whitbread |
Travel & Leisure |
3,041 |
1.7 |
Future |
Software & Computer
Services |
2,868 |
1.6 |
Chemring |
Aerospace & Defence |
2,714 |
1.5 |
Top Thirty Holdings |
|
137,526 |
77.9 |
Coats |
General Industrials |
2,635 |
1.5 |
PureTech Health |
Pharmaceuticals &
Biotechnology |
2,591 |
1.5 |
Jupiter Fund Management |
Investment Banking & Brokerage
Services |
2,571 |
1.5 |
Nichols |
Beverages |
2,526 |
1.4 |
Compass |
Consumer Services |
2,437 |
1.4 |
CVS |
Consumer Services |
2,094 |
1.2 |
Fevertree Drinks |
Beverages |
2,086 |
1.2 |
JTC |
Investment Banking & Brokerage
Services |
2,023 |
1.1 |
Hays |
Industrial Support Services |
1,988 |
1.1 |
Treatt |
Chemicals |
1,868 |
1.1 |
Top Forty Holdings |
|
160,345 |
90.9 |
Babcock International |
Aerospace & Defence |
1,848 |
1.1 |
Johnson Service |
Industrial Support Services |
1,784 |
1.0 |
XPS Pensions |
Investment Banking & Brokerage
Services |
1,699 |
1.0 |
DFS Furniture |
Retailers |
1,639 |
0.9 |
Sirius Real Estate |
Real Estate Investment &
Services |
1,624 |
0.9 |
Essentra |
Industrial Support Services |
1,589 |
0.9 |
Chesnara |
Life Insurance |
1,570 |
0.9 |
Restaurant Group |
Travel & Leisure |
1,519 |
0.9 |
Lancashire |
Non-Life Insurance |
1,466 |
0.8 |
PRS REIT |
Real Estate Investment Trusts |
933 |
0.5 |
Top Fifty Holdings |
|
176,016 |
99.8 |
Sherborne Investors (Guernsey)
C |
Investment Banking & Brokerage
Services |
418 |
0.2 |
Total Holdings 51 (2020: 65) |
|
176,434 |
100.0 |
AIM Investments quoted on AIM.
† FTSE
Industry Classification Benchmark.
Global Equity Income Share Portfolio
Manager’s Report
Q How has
the Company performed in the year to 31 May 2021?
A The NAV
of the share class grew by 35.9% (total return in sterling terms).
This compares to a rise of 22.3% (total return in sterling terms)
in the MSCI World Index (£) which we use as a benchmark. Global
equity markets were strong throughout the year as optimism around
economic recovery post the Covid-19 crisis grew through the summer
of 2020 on the back of coordinated central bank monetary and
governmental fiscal stimulus. The rally in markets gathered pace in
the autumn of 2020 when strong clinical trial data from a number of
vaccine candidates showed high levels of efficacy, raising
expectations of a path back to normality in 2021.
Q What
were the key contributors to and detractors from performance in the
year?
A Overall,
through the year the portfolio has been relatively over-exposed to
more economically sensitive companies and sectors, which has
clearly been beneficial to performance. Our view through
Spring/Summer 2020 was that we were being asked to pay too high a
price for the safe, secure winners from the crisis, and that the
opportunity for gains was elsewhere in the market. As Spring 2021
approached our positioning became more balanced as those gains in
cyclical sectors were realised.
Our holdings in two of the world’s largest semiconductor
companies delivered strong outperformance. Both Samsung
Electronics, the South Korean company, and Taiwan Semiconductor
Manufacturing, based in Taiwan,
have built formidable technological and scale leadership in the
production of a range of semiconductors. Demand for semiconductors
continued to be strong through the pandemic across a range of
applications from cloud computer storage, to mobile telephony and
the automotive industry. Our sense is that the trend towards ‘the
digitalisation of everything’ may mean these companies continue to
see strong growth in the years to come, our challenge is to judge
when all the good news is priced into the shares.
Through the dark days of Spring 2020 we retained exposure to
companies which we believed had strong, durable business models
which would emerge from the crisis stronger than before. Companies
such as Ashtead, the UK listed industrial equipment hire company,
the bulk of whose business is in the US, and Next, the UK retail
group with a strong online offering, are good examples of such
business. These companies performed particularly well through the
latter part of 2020 as the market began to price in a more normal
world in 2021/2.
Some of our biggest detractors in terms of relative performance
have included companies such as Tesla, which we have not owned due
to its valuation which, in our view, is extremely extended. We
have, however, owned Volkswagen, a company with a chequered history
in terms of governance, the ‘Dieselgate’ scandal of 2016 being a
significant example. We have, like many other investors, engaged
with this company in order to drive improvements in its corporate
culture. Whilst we acknowledge the company has much work to do, we
note it is likely to be the largest electric vehicle manufacturer
in the world by 2023. The shares were strong performers in the past
year.
In terms of negative performance contributors, we would
highlight the pharmaceutical sector which underperformed in all
regions over the year. Overall, we were underweight in the sector
compared to the benchmark, nevertheless our two key holdings, Roche
and Novartis, both based in Switzerland, lagged the performance of the
market and peers in the sector. Concerns around reforms to drug
pricing in the US market as well as company specific issues drove
this underperformance. We continue to own these companies in the
view of the strength of scientific research, strong balance sheets
and cash generation which funds an attractive growing dividend
stream.
|
Total |
Year end |
Key Contributors |
Impact % |
Portfolio Weight
% |
Taiwan Semiconductor |
|
|
Manufacturing |
+2.63 |
4.6 |
Samsung Electronics |
+2.14 |
3.1 |
Ashtead |
+1.69 |
2.3 |
JPMorgan Chase |
+1.17 |
3.9 |
Texas Instruments |
+0.86 |
3.2
|
|
Total |
Year end |
Key Detractors |
Impact % |
Portfolio Weight
% |
Novartis |
–0.93 |
3.1 |
Roche |
–0.84 |
2.6 |
Bayer |
–0.79 |
– |
Alimentation Couche-Tard |
–0.74 |
2.1 |
Bristol Myers Squibb |
-0.54 |
– |
Source: Invesco.
Q How has
the portfolio evolved over the period?
A At the
beginning of the period we were in the midst of the crisis, and the
consensus was being willing to pay an extremely high price for
security of earnings, consequently shunning any stock or sector
vulnerable to negative profits revisions. In fund manager parlance
‘the valuation dispersion’ in the market was extremely high both
between sectors and stocks within sectors. We took the view that
the opportunity going forward lay in more economically sensitive
sectors of the market such as financials, as well as certain
technology, industrial and consumer discretionary companies where
valuations seemed to discount a permanent lockdown and economic
recession. We also added to positions in certain consumer
orientated stocks which were badly impacted by Covid-19, such as
Coca-Cola, and Diageo, the UK drinks company.
As the year went on, and especially after the strong market
rally we saw in the fourth quarter of 2020, our analysis began to
indicate many more economic cyclicals were discounting a full
normalisation of consumer behaviour and a continued strong economic
recovery into 2022. The good news was in the price. Hence over the
last quarter of the period the portfolio has become more balanced
between companies and sectors more sensitive to the economic cycle
and those with more defensive earnings streams such as consumer
staples and certain stocks in the insurance and real estate
sectors.
Underlying Portfolio Characteristics at Year End
|
|
12 month |
Free Cash |
Return |
31 May |
Price/book |
forward |
Flow |
on |
2021 |
value (x) |
p/e ratio(%) |
Ratio (%) |
Equity (%) |
Global Equity Income |
|
|
|
|
Share Portfolio |
4.5 |
17.7 |
5.4 |
20.5 |
MSCI World Index (£) |
3.5 |
19.9 |
4.1 |
18.5 |
Q Have you
altered your investment approach in response to the Covid-19
crisis?
A No,
absolutely not. Our process, seeks to identify high quality
companies in all sectors of the market. We aim to acquire them when
for whatever reason they are trading at a discount to our estimate
of their intrinsic value. We like to buy good companies when they
are ‘on sale’.
This crisis is however (hopefully) a once in a career event, and
we have used it to completely re-examine our investment case for
all the companies in the portfolio. We are conscious of the
evolution in business models and the strenuous efforts management
teams have taken to adapt to new circumstances. Our sense is,
providing vaccines continue to offer strong protection, most
companies and sectors will revert to something close to the ‘old
normal’ in a year or two. However, we are constantly alert for
evidence of permanent change which may reduce the long term
earnings power of our holdings.
Perhaps the one area where we are taking a more cautious view is
financial leverage. Whilst corporate debt helps to enhance returns
to equity holders, too much debt increases risk, especially in an
environment where interest rates may trend modestly higher in the
coming years.
Q How has
the ability to use some gearing influenced performance over the
past 12 months?
A Clearly
it has been a positive for the Portfolio in the rising markets
which we have enjoyed over the last year. Our view in
May/June 2020 was that the consensus
was assuming the Covid-19 crisis to be semi-permanent, and hence
equities were oversold and undervalued. We were therefore happy to
use our leverage capability for the benefit of shareholders. We
have been comfortable to remain with between 10-13% leverage ever
since. Rest assured, when we feel the risk/reward balance tilts
towards the negative we will reduce our leverage and indeed run a
net cash position when we feel it to be appropriate.
Q What is
your outlook for the next 12 months and beyond?
A On
balance we would be constructive on the outlook for global equities
over the next 12 months. There appears to be no appetite from
governments around the world to impose post GFC-style austerity
policies. The huge sums borrowed will need to be repaid, and strong
economic growth is the best way to generate the tax revenue
required. Hence, we sense a willingness to run the global economy
‘hot’ in the coming few years. We acknowledge equity valuations are
relatively high at present, and we would therefore expect positive
returns from equities to fall well short of corporate earnings
growth, allowing valuations to somewhat normalise over the next
year to 18 months.
We would judge the key risk to our benign scenario as signs of
the current pick-up in inflation, most of which we view as
temporary, becoming more permanently incorporated into investor and
consumer expectations leading to a more material derating of equity
valuations.
In the longer term, we know changes to consumption and
investment patterns will occur, not least because of our move
towards a ‘net zero carbon’ economy, which will gather pace as we
move through the decade. How that will impact investor returns from
the global equity market is still too early to assess.
Q After
the strong performance in 2020/21, why invest in Global Equities
now?
A The
great thing about the ability to invest globally is the sheer range
of opportunities we have access to around the world, from larger
companies to smaller, from new
business models targeting industries of the future to older
business models which offer sustainable growth. Whilst we
acknowledge valuations today are relatively high, we see nothing in
the economic, or market outlook to suggest the investor with
patience and a longer term time horizon will do any worse owning
equities than someone who invested in the asset class 10 or
20 years ago.
Stephen
Anness
Portfolio Manager
5 August 2021
Global Equity Income Share Portfolio
List of Investments
AT 31 May 2021
Ordinary shares unless stated
otherwise
|
|
|
Market |
|
|
|
|
Value |
% of |
Company |
Industry Group† |
Country |
£’000 |
Portfolio |
Taiwan Semiconductor |
Information Technology |
Taiwan |
2,977 |
4.6 |
Manufacturing |
|
|
|
|
Microsoft |
Information Technology |
United States |
2,832 |
4.5 |
Alphabet |
Communication Services |
United States |
2,641 |
4.2 |
Coca-Cola |
Consumer Staples |
United States |
2,607 |
4.1 |
JPMorgan Chase |
Financials |
United States |
2,504 |
3.9 |
Progressive |
Financials |
United States |
2,497 |
3.9 |
3i |
Financials |
United Kingdom |
2,295 |
3.6 |
TencentR |
Communication Services |
China |
2,265 |
3.4 |
Texas Instruments |
Information Technology |
United States |
2,055 |
3.2 |
American Tower |
Real Estate |
United States |
2,032 |
3.2 |
Top Ten Holdings |
|
|
24,705 |
38.6 |
Novartis |
Health Care |
Switzerland |
1,991 |
3.1 |
Zurich Insurance |
Financials |
Switzerland |
1,957 |
3.1 |
Samsung Electronics – |
Information Technology |
South Korea |
1,944 |
3.1 |
preference shares |
|
|
|
|
American Express |
Financials |
United States |
1,939 |
3.0 |
Standard Chartered |
Financials |
United Kingdom |
1,771 |
2.8 |
Nestlé |
Consumer Staples |
Switzerland |
1,688 |
2.6 |
Roche |
Health Care |
Switzerland |
1,681 |
2.6 |
Lundin Energy |
Energy |
Sweden |
1,612 |
2.5 |
Home Depot |
Consumer Discretionary |
United States |
1,577 |
2.5 |
PepsiCo |
Consumer Staples |
United States |
1,568 |
2.5 |
Top Twenty Holdings |
|
|
42,433 |
66.4 |
Ashtead |
Industrials |
United Kingdom |
1,455 |
2.3 |
AIA |
Financials |
Hong Kong |
1,455 |
2.3 |
NetEase – ADR |
Communication Services |
China |
1,398 |
2.2 |
Union Pacific |
Industrials |
United States |
1,396 |
2.2 |
RELX |
Industrials |
United Kingdom |
1,373 |
2.2 |
Alimentation Couche-Tard – |
Consumer Staples |
Canada |
1,356 |
2.1 |
Class B |
|
|
|
|
Facebook |
Communication Services |
United States |
1,243 |
1.9 |
Installed Building Products |
Consumer Discretionary |
United States |
1,174 |
1.8 |
Diageo |
Consumer Staples |
United Kingdom |
1,132 |
1.8 |
Inditex |
Consumer Discretionary |
Spain |
1,112 |
1.7 |
Top Thirty Holdings |
|
|
55,527 |
86.9 |
Melrose Industries |
Industrials |
United Kingdom |
1,057 |
1.6 |
Berkeley |
Consumer Discretionary |
United Kingdom |
1,025 |
1.6 |
Rolls-Royce |
Industrials |
United Kingdom |
1,016 |
1.6 |
TJX Companies |
Consumer Discretionary |
United States |
951 |
1.5 |
Volkswagen – preference |
Consumer Discretionary |
Germany |
930 |
1.5 |
shares |
|
|
|
|
Accenture – A Shares |
Information Technology |
United States |
914 |
1.4 |
Ping An InsuranceH |
Financials |
China |
742 |
1.2 |
Total |
Energy |
France |
600 |
0.9 |
Colgate-Palmolive |
Consumer Staples |
United States |
574 |
0.9 |
Sberbank – ADR |
Financials |
Russia |
566 |
0.9 |
Total Holdings 40 (2020: 45) |
|
|
63,902 |
100.0 |
ADR American Depositary Receipts – are certificates
that represent shares in the relevant stock and are issued by a US
bank. They are denominated and pay dividends in
US dollars.
H H-Shares – shares issued
by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong
Kong Stock Exchange.
R Red Chip Holdings –
holdings in companies incorporated outside the PRC, listed on the
Hong Kong Stock Exchange, and controlled by PRC entities by way of
direct or indirect shareholding and/or representation on the
board.
† MSCI and Standard
& Poor’s Global Industry Classification Standard.
Balanced Risk Allocation Share
Portfolio Manager’s Report
Q How has
the strategy performed in the year under review?
A The
Invesco Balanced Risk Allocation Portfolio posted a strong return
of 25.4% over the fiscal year, outperforming the benchmark by
20.3%. The recovery from Covid-19 lows was bumpy at the beginning
of the period as positive developments in the form of expanding
economic and manufacturing activity were met with concerns over
pockets of increased incidence of Covid-19 infections and the
potential for a rollback of reopening efforts. However, 2020
finished off strong with the development of several vaccines
igniting a powerful rally in risky assets. The combination of the
possibility of an end to lockdowns, along with the staggering
degree of monetary and fiscal stimulus introduced to combat the
negative economic impact from the virus, led to a broad-based rally
in global equities and across the four commodity complexes. Bonds,
which had fulfilled their role as safe-haven assets earlier in the
year, saw prices drift lower as fear gave way to hope.
The increase in total vaccinations along with easing
restrictions sparked a powerful rebound in risky assets to start
2021. Equity markets posted gains in the first five months of 2021
as pent-up demand was released, and commodity prices generally rose
as demand outstripped supply. Bond yields predominately rose over
the period on a lack of safe-haven demand and central banks’
apparent willingness to tolerate higher rates at the long end of
the curve.
Q What
were the biggest contributors and detractors to performance?
A Exposure
to commodity markets was the top contributor to performance with
all four subcomplexes posting positive returns. Energy was the top
contributor of the complexes as demand increased with the reopening
of economies. Agriculture also contributed due to increased demand
from China after their crops got
wiped out in floods in 2020. Industrial metals generated gains as
both aluminium and copper prices rose in response to strong
manufacturing activity and, in the case of copper, the strong
performance of clean energy and electric vehicle positions coupled
with supply shortages due to Covid-related mine disruptions in
South America. Precious metals
posted positive returns but muted relative to the other complexes
after leading the asset class at the beginning period. Both gold
and silver saw prices fell later in the fiscal year on a stronger
dollar, higher real rates and lack of a safe-haven bid.
Equity markets contributed to results led by US equities with
small caps benefitting from the dramatic rise in industries like
clean energy and biotechnology. Asian markets posted handsome
contributions from both Japan and
Hong Kong. Increased manufacturing
activity along with an earlier exit from Covid-19 lockdowns were
likely factors contributing to the strong relative performance.
European and UK equities saw share prices rise despite having a
protracted battle with the virus and attendant restrictions.
Central bank support and expectations for a continued rebound in
demand despite the reimposed restrictions helped improve
sentiment.
Exposure to government bonds detracted from performance with
four markets producing negative returns as strong growth and
concerns about mounting inflationary pressures elevated yields.
Japanese yields were flat.
Q How did
the tactical allocation perform?
A The
tactical allocation added to results with gains in all three asset
classes. Tactical equity was the top contributor, primarily due to
timely overweights in US small caps. Gains from tactical
positioning within commodities were driven by overweights in
agriculture, industrial metals and precious metals. Tactical
positioning within energy detracted due to underweight
positioning.
Q What is
your 30-day outlook?
A The
Balanced Risk Allocation Portfolio strategy is rebalanced monthly
and its time horizon is 30 days as part of the investment
process/philosophy. The continued rollout of vaccines, along with
the seemingly successful application of therapeutics such as
ivermectin in Latin America and
India, have allowed further
relaxing of restrictions put in place to contain Covid-19
infections. The reopening has led to a further increase in demand
while supply is constrained either as a result of supply chain
issues or labour shortages. Much has been made about the uptick in
inflation and whether the effects will be transitory or more
persistent. To be sure, low base effects are having an impact, but
if the supply issue and labour shortages continue, inflation may
prove stickier than not.
Tactical positioning for June has overweights to all six equity
markets. In fixed income, the strategy is neutral Australia and Japan, but underweight Canada, the UK and the US. Due to the negative
yields in Germany, the portfolio
continues to exclude fixed income from this country. Across
commodities, the strategy is overweight coffee, corn, cotton, the
soy complex, sugar, wheat, gold and silver. The strategy is
underweight gasoil, natural gas, heating oil and industrial metals.
The rest of the commodity exposures are carried at neutral.
Scott
Wolle
Portfolio Manager
5 August 2021
Balanced Risk Allocation Share
Portfolio List of Derivative Instruments
AT 31 May 2021
|
|
Notional |
|
Notional |
Exposure |
|
Exposure |
as % of |
|
£’000 |
Net Assets |
Government Bond Futures: |
|
|
Australia |
1,296 |
18.8 |
Canada |
1,092 |
15.8 |
UK |
1,018 |
14.8 |
US |
440 |
6.4 |
Japan |
97 |
1.4 |
Total Bond Futures (5) |
3,943 |
57.2 |
Equity Futures: |
|
|
Japan |
620 |
9.0 |
UK |
562 |
8.2 |
Emerging markets |
532 |
7.7 |
Europe |
451 |
6.5 |
US small cap |
397 |
5.8 |
US large cap |
295 |
4.3 |
Total Equity Futures (6) |
2,857 |
41.5 |
Commodity Futures: |
|
|
Agriculture |
|
|
Soy bean |
161 |
2.4 |
Cotton |
146 |
2.1 |
Soybean meal |
139 |
2.0 |
Soy bean oil |
56 |
0.8 |
Wheat |
47 |
0.7 |
Corn |
46 |
0.7 |
Coffee |
43 |
0.6 |
Sugar |
41 |
0.6 |
Precious Metals |
|
|
Gold |
403 |
5.8 |
Silver |
197 |
2.9 |
Energy |
|
|
Gasoline |
127 |
1.8 |
Brent crude |
96 |
1.4 |
WTI crude |
92 |
1.3 |
Low sulphur gasoline |
80 |
1.2 |
New York Harbor ultra-low sulphur
diesel |
61 |
0.9 |
Natural gas |
46 |
0.7 |
Industrial Metals |
|
|
Copper |
181 |
2.6 |
Aluminium |
174 |
2.5 |
Total Commodity Futures (18) |
2,136 |
31.0 |
Total Derivative Instruments
(29) |
8,936 |
129.7 |
Target Annualised Risk
The targeted annualised risk (volatility of monthly returns) for
the portfolio as listed above is analysed as follows:
Asset Class |
Risk |
Contribution |
Equities |
4.6% |
50.0% |
Commodities |
2.9% |
31.3% |
Fixed Income |
1.7% |
18.7% |
|
9.2% |
100.0% |
List of Investments
|
|
Market |
% |
|
Yield |
value |
of |
|
% |
£’000 |
Portfolio |
Short Term Investments |
|
|
|
Invesco Liquidity Funds plc -
Sterling |
0.03 |
2,359 |
41.1 |
UK Treasury Bill – 0% 20 Sep
2021 |
0.04 |
750 |
13.1 |
UK Treasury Bill – 0% 08 Nov
2021 |
0.06 |
750 |
13.1 |
UK Treasury Bill – 0% 15 Nov
2021 |
0.06 |
749 |
13.0 |
UK Treasury Bill – 0% 02 Aug
2021 |
— |
550 |
9.6 |
UK Treasury Bill – 0% 01 Nov
2021 |
0.06 |
300 |
5.2 |
UK Treasury Bill – 0% 16 Aug
2021 |
0.02 |
278 |
4.8 |
Total Short Term Investments |
|
5,736 |
99.9 |
Hedge Funds(1) |
|
|
|
Harbinger Class PE Holdings |
|
4 |
0.1 |
Harbinger Class L Holdings |
|
1 |
– |
Total Hedge Funds |
|
5 |
0.1 |
Total Fixed Asset Investments |
|
5,741 |
100.0 |
(1) The hedge fund investments are residual holdings of the
previous investment strategy, which are awaiting realisation of
underlying investments.
Derivative instruments held in the Balanced Risk Allocation
Share Portfolio are shown on the previous page. At the year end all
the derivative instruments held in the Balanced Risk Allocation
Share Portfolio were exchange traded futures contracts. Holdings in
futures contracts that are not exchange traded are permitted as
explained in the investment policy on page 40.
Managed Liquidity Share Portfolio
Manager’s Report
Q How does
the portfolio generate returns?
A The
investment objective of the Portfolio is to produce an appropriate
level of income return combined with a high degree of
security. We aim to generate returns by investing mainly in
sterling-based high quality debt securities and similar assets but
with the flexibility to invest in assets with a greater weighted
average maturity than a money market fund. Accordingly the value of
the Portfolio may rise or fall.
The majority of the portfolio is invested in the iShares –
Sterling Ultrashort Bond UCITS ETF. We reviewed the Exchange Traded
Fund (ETF) universe in December 2020
and as a result switched from the PIMCO Sterling Short Maturity
Source UCITS ETF to improve the portfolio’s characteristics. This
resulted in a moderate reduction in average maturity and charges
and a moderate improvement in average credit quality and liquidity,
with the expectation of a moderately higher net yield as a
result. We also hold a portion of the Portfolio in the
Sterling Liquidity Portfolio of Invesco Liquidity Funds plc. to
meet short term payment obligations.
The iShares – Sterling Ultrashort Bond UCITS ETF invests in
Sterling denominated investment grade corporate bonds and
quasi-government bonds, aiming to track performance of the Markit
iBoxx GBP Liquid Investment Grade Ultrashort Index and has a
weighted average maturity of around one year.
Q What has
the performance of your fund been over the last year?
A The
Managed Liquidity Portfolio NAV total return for the year ended
31 May 2021 was 1.6%, excluding the
one-off rebate of management fee referred to in the Chairman’s
statement, which accounted for 2% of the total return.
While low relative to historical cash rates, and particularly in
comparison with strong equity returns over the year, the
Portfolio’s return remained meaningfully above the Bank of
England’s Base Rate (0.1% since March
2020) and the average overnight interbank rate (SONIA,
0.05%) over the year.
Q What’s
the outlook for returns given low interest rates and rising
inflation?
A We
expect interest rates to remain low into 2022 as central banks
globally continue to provide emergency support to businesses
emerging from Covid-19 related restrictions. However, this support
also benefits the Portfolio, as facilities such as the Bank of
England’s Coronavirus Business Interruption Loan Scheme (CBILS)
provide working capital to those large firms who need it.
The additional spread of credit returns over base rates are also
tight, as demand for low-risk paper remains strong, limiting the
potential for returns from ultrashort bonds.
Regarding inflation, changes in consumer preferences, and
supply/demand imbalances have led to some variability in the
calculation of consumer price inflation over the past 12 months. As
the economy reopens we expect to see the transitory effect of this
in rising inflation over the next year. Brexit-related trade and
labour frictions may contribute to moderately higher UK inflation
over the longer term, although negative real interest rates remain
a global and structural phenomenon. As such would expect liquidity
portfolios to continue to deliver returns below inflation.
Nevertheless, we expect ultrashort bonds to continue to deliver
a meaningful pickup over base rates while providing ready access to
capital with a high degree of security.
Derek Steeden
Portfolio manager
5 August 2021
Managed Liquidity Share Portfolio List
of Investments
AS AT 31 MAY |
|
|
|
|
|
2021 |
2020 |
|
Market |
|
Market |
|
|
Value |
% of |
Value |
% of |
|
£’000 |
Portfolio |
£’000 |
Portfolio |
|
|
|
|
|
PIMCO Sterling Short Maturity Source
UCITS ETF |
— |
— |
2,642 |
98.5 |
Invesco Liquidity Funds plc –
Sterling |
140 |
7.7 |
40 |
1.5 |
iShares – Sterling Ultrashort Bond
UCITS ETF |
1,669 |
92.3 |
— |
— |
|
1,809 |
100.0 |
2,682 |
100.0 |
Environmental, Social and Corporate
Governance (ESG) statement from the Managers
UK Equity Share Portfolio & Global
Equity Income Share Portfolio
Ciaran Mallon
UK Equities Fund Manager
James Goldstone
UK Equities Fund Manager
Stephen Anness
Global Equities Fund Manager
What does ESG mean to us?
• Investing in stocks which have the right
Environmental, Social and Governance (ESG) momentum behind them can
be a positive way for our portfolios to potentially generate
returns in excess of the benchmark
• We draw upon ESGintel, Invesco’s proprietary
tool, which helps us to better understand how companies are
addressing ESG issues
• Engaging with companies to understand
corporate strategy today in order to assess how this could evolve
in the future
• Monitoring how companies are performing from
an ESG perspective and if the valuations fairly reflect the
progress being made
Our focus as active fund managers is always on finding mispriced
stocks and ESG integration underpins our investment process.
The incorporation of ESG into our investment process considers
ESG factors as inputs into the wider investment process as part of
a holistic consideration of the investment risk and opportunity,
from valuation through investment process to engagement and
monitoring. The core aspects of our ESG philosophy include:
materiality; ESG momentum; and engagement.
• Materiality refers to the consideration of
ESG issues that are financially material to the company we are
analysing.
• The concept of ESG Momentum, or improving
ESG performance over time, indicates the degree of improvement of
various ESG metrics and factors and help fund managers identify
upside in the future. We find that companies which are improving in
terms of their ESG practices may enjoy favourable financial
performance in the longer term.
• Engagement is part of our responsibility as
active owners which we take very seriously, and we see engagement
with companies as an opportunity to encourage continual
improvement. Dialogue with portfolio companies is a core part of
the investment process for our investment team. As such, we often
participate in board level dialogue and are instrumental in giving
shareholder views on management, corporate strategy, transparency,
and capital allocation as well as wider ESG aspects.
ESG integration is an ongoing strategic effort to systematically
incorporate ESG Factors into fundamental analysis. The aim is to
provide a 360 degree evaluation of financial and non-financial
materially relevant considerations and to help guide the portfolio
strategy.
Our investment process has four stages. In this note we go
through in detail how ESG is integrated into each stage of our
process.
Idea Generation
We believe it is important to spread our nets as wide as
possible when trying to come up with stock ideas which may find
their way into our portfolios. We remain open minded as to the type
of companies we will consider. This means not ruling out companies
just because they happen to be unpopular at that time and vice
versa. ESG can create opportunities too – for example, the benefits
of moving towards more sustainable sources of energy like wind,
solar and hydroelectric power generation. This was one of the
reasons we became interested in some of our utility holdings which
are held in the UK portfolio. This highlights the importance of
opportunities brought about by ESG and not just the risks.
Investing in stocks which have the right ESG momentum behind them –
by focussing on fundamentals and the broader investment landscape –
can be a unique way for our portfolios to potentially generate
returns in excess of the benchmark as those businesses that have
got ESG momentum behind them have the potential to be rerated.
Fundamental Research & ESG
Analysis
Research is at the core of what we do. Our fundamental analysis
covers many drivers, for example, corporate strategy, market
positioning, competitive dynamics, the macroeconomic environment,
financials, regulation, valuation, and, of course, ESG
considerations, which guide our analysis throughout.
We use a variety of tools from different providers to measure
ESG factors. In addition, at Invesco, we have developed ESGintel,
Invesco’s proprietary tool built by our Global ESG research team in
collaboration with our Technology Strategy Innovation and Planning
(SIP) team.
ESGintel provides fund managers with environmental, social and
governance insights, metrics, data points and direction of change.
In addition, ESGintel offers fund managers an internal rating on a
company, a rating trend, and a rank against sector peers. The
approach ensures a targeted focus on the issues that matter most
for sustainable value creation and risk management.
This provides a holistic view on how a company’s value chain is
impacted in different ways by various ESG topics, such as
compensation and alignment, health and safety, and low carbon
transition/ climate change.
We always try to meet with a company prior to investment. Based
on our fundamental research, including any ESG findings, we focus
on truly understanding the key drivers and, most importantly, the
path to change. This helps us better understand corporate strategy
today and how this could evolve in the future. Today, the subject
of ESG is increasingly part of these discussions, led by us.
Portfolio Construction
We aim to create a well-diversified portfolio of active
positions that reflect our assessment of the potential upside for
each stock weighted against our assessment of the risks.
Sustainability and ESG factors will be assessed alongside other
fundamental drivers of valuation. The impact of any new purchases
will need to be considered at a portfolio level. How will it affect
the shape of the portfolio having regard to objectives, existing
positions, overall size of the portfolio, liquidity and
conviction?
We do not seek out stocks which score well on internal or third
party research simply to reduce portfolio risk.
Ongoing Monitoring
Our fund managers and analysts continuously monitor how the
stocks are performing as well as considering possible replacements.
Is the company performing from an ESG perspective and are the
valuations fairly reflecting the progress being made or not?
How do we monitor our holdings from an ESG perspective? Again,
the same resources used during the fundamental stage are available
to us. Our regular meetings with the management teams of the
companies we own provides an ideal platform to discuss key ESG
issues, which will be researched in advance. We draw on our own
knowledge as well as relevant analysis from our ESG team and data
from our previously mentioned proprietary system ESGintel which
allows us to monitor progress and improvement against sector peers.
Outside of company management meetings we constantly discuss as a
team all relevant ESG issues, either stimulated internally or from
external sources.
Additional ESG analysis is carried out by the team, when
warranted, on particular companies. Such cases would be those that
are more controversial, considered to be higher risk and viewed
poorly by ESG providers, resulting in a valuation discount. We
don’t just look at the specific issue considered to be higher risk
either, for example the environmental risk of an oil company, but
all areas of ESG. This means undertaking extensive analysis of
social and governance policies and actions at the same time.
Challenge, Assessing & Monitoring
Risk
In addition, there are two more formal ways in which our
portfolios are monitored:
There is a rigorous semi-annual review process which includes a
meeting led by the ESG team to assess how our portfolios are
performing from an ESG perspective. This ensures a circular process
for identifying flags and monitoring of improvements over time.
These meetings are important in capturing issues that have
developed and evolved whilst we have been shareholders.
There is also the ‘CIO challenge’, a formal review meeting held
between the Henley Investment Centre’s Chief Investment Officer
(CIO) and each fund manager. This review includes a full breakdown
of the ESG performance using Sustainalytics and ISS data, such as
the absolute ESG performance of the portfolio, relative performance
to benchmarks, stocks exposed to severe controversies, top and
bottom ESG performers, carbon intensity and trends. The ESG team
review the ESG data and develop stock specific or thematic ESG
questions. The ESG performance of the portfolio is discussed with
the CIO using the data and the stock specific questions to analyse
the fund manager’s level of ESG integration. The aim of these
meetings is not to prevent a fund manager from holding any specific
stock: rather, what matters is that the fund manager can evidence
understanding of ESG issues and show that they have been taken into
consideration when building the investment case.
Company Specific Examples In the selection below, we
highlight some of the recent engagements that we have had with
companies to give you a flavour of how active engagement can create
positive outcomes.
UK Equity Portfolio Example
International transmission and
distributor of electricity and gas
Our assessment
– The company outlined their ESG strategy in
October 2020 and the key role they
will play in facilitating the electrification of high carbon
emitting industries and products such as electric vehicles, and
thus helping the UK achieve its ambitious greenhouse gas targets by
promoting decarbonisation of the grid. They outlined their carbon
reduction targets, which include a 2050 net-zero target as well
announcing on the webinar an interim scope 3* reduction target
for 2030.
– The company’s business model means it is less
exposed to carbon risk than utilities that have greater generation
capacity (the company are distributors), but the company lags many
peers in terms of supporting the transition to a less
carbon-intensive grid according to Sustainalytics. We know from our
conversations with the company, however, that they are trialling
new products in order to promote transition.
– We provided feedback to the company that although
the overall vision is very strong, more clarity is needed about how
their gas business can be decarbonised and the feasibility of
proposed solutions such as Renewable Natural Gas (RNG) or hydrogen
blending.
* Scope 3 refers to the indirect emissions that occur at
different points in the full range of activities undertaken in
order to create the products or services of the reporting
company.
International vending and catering
services
Our assessment
– Over the past two years and particularly in during
the Covid-19 Pandemic, we have been engaging with the board,
management and advisors to this company.
– During this time we have discussed and challenged
management on its business plan and strategy and the impact of
Covid-19. We have 1-1 conversations with the CFO and Head of
Investor Relations on issues including challenges in attracting
labour and ensuring work force safety.
– We have challenged the company on end to end chain
food wastage and what schemes can be implemented to significantly
reduce waste. We have also challenged their performance on recent
issues surrounding the provision of free school meals under
lockdown.
– We have questioned and tested their remuneration
policies to ensure management is aligned with shareholders,
incentivised and stable and that there are adequate succession
plans in place for the future. We have discussed the company’s
cultural values and concluded that their culture is one of safety,
for both employees and consumers.
Global Equity Income Portfolio
Example
US building materials company
Our assessment
– This company is a leading installer of insulation
products to the US residential and commercial construction sectors.
Building sustainable cities and communities is an Sustainable
Development Goal (SDG) and we view insulation as one of the most
cost effective ways to save energy. Its annual report contained
little of substance to allow investors to ascertain both its role
in reducing carbon emissions, and its policies towards reducing its
own and its suppliers carbon footprint. Furthermore, there was a
lack of disclosure around certain elements of the sustainability
programme, particularly around human capital to allow 3rd party
rating agencies to form a proper view of procedures.
– We have actively engaged with the company, our
internal ESG team has been extremely helpful to the company in
order to identify which issues around human capital were merely
related to lack of disclosure, and others, particularly around
carbon footprint, which have required more detailed audit and data
collection which the company has undertaken. We note a step change
in how the company present their ESG data in investor
presentations. Better disclosure we believe will help reclassify
the company from the ‘homebuilders’ to building materials sectors
of 3rd party rating agencies which will allow better peer to peer
comparison.
– There remain issues around governance which are
not unusual for founder owned companies and we would note the
founder CEO has been an excellent steward of shareholder capital
over the last 20 years.
Consumer and Industrial electric and
equipment provider
Our assessment
– The team actively engaged with the company on ESG
issues since inception of the position and believes it has seen
tangible progress on issues of concern.
– These would include improvements in shareholder
returns policy, improvements in the human rights (notably
whistle-blower policy) and employee safety.
– Furthermore, in corporate governance policies, a
greater level of transparency is apparent and independent board
members have been appointed.
– The team continues to engage with the company to
achieve progress on outstanding ESG issues of concern.
Voting Policy
We review AGM and EGM proposals taking into account our own
knowledge of the companies in which our portfolios are invested, as
well as the comments and recommendations of proxy voting analysis
providers ISS*, Glass Lewis and IVIS**. In addition, Invesco
provides proprietary proxy voting recommendations and publishes
these recommendations via its PROXYintel platform. All voting
decisions remain with the portfolio manager, however, where a
portfolio manager votes against an Invesco voting recommendation,
the rationale for such decision is recorded and available on the
platform. There will be times when we will follow the
recommendations made by proxy research providers but times where we
disagree with the stance being taken.
Voting in line with management recommendations should not be
seen as evidence of a lack of engagement or challenge on our part,
but rather that we believe that the governance of the companies in
which we are invested is appropriately robust and worthy of
support. There may be instances where we vote in support of
management, but the ESG performance of the company is not perfect
and issues have been identified. In this situation we would seek to
engage with the company leading up to the vote and if necessary,
would have raised concerns and likely given a time horizon or
measure for improvement which, if not met, could lead to a vote
against in the future. In that respect, our approach to governance
is one of engagement and improvement.
We do not expect companies to change overnight but we do expect
continual review of governance processes and continued improvement.
Further details of how the manager has voted on holdings in the
portfolio is available on the company’s webpage at
www.invesco.co.uk/selectuk and www.invesco.co.uk/selectglobal.
A recent example of voting engagement involved director
remuneration at a large international distribution and outsourcing
services group. We reviewed the company’s director remuneration
policy ahead of the AGM and noted that the group has formalised its
policy on post-employment shareholdings for directors which was an
issue we had raised previously. Given this, overall we were
supportive of the policy. However, prior to voting at the AGM we
continued to have an outstanding query on executive directors
pension benefits, and whether the pension contribution would be
aligned over time to those available to the wider workforce as this
did not appear to be the case. This was also flagged by a third
party research provider. We engaged with the company on the matter
and shortly after the company issued an announcement setting out
how the CEO’s remuneration would align with the pension
contribution rate for the majority of the wider workforce in the
UK. As a result we felt able to support all the resolutions at the
AGM and had successfully discharged our stewardship duties.
* ISS – Institutional Shareholder Services.
** IVIS – Institutional Voting Information Service.
Conclusion
The regulatory landscape is rapidly evolving, which increasingly
compels organisations and investors alike to clearly demonstrate
their awareness of ESG issues in their decisions. Landmark
initiatives such as the European Union’s new Sustainable Finance
Disclosure Regulation (SFDR) are at the forefront of this
shift.
We believe that our approach is honest, coherent and pragmatic.
Whilst we consider ESG aspects, we are not bound by any specific
ESG criteria and have the flexibility to invest across the ESG
spectrum from best to worst in class, but we think that the
principles behind ESG deserve to be embedded in an investment
framework which encourages positive change. Coupling this with a
focus on valuation is, to our minds, the best way to deliver strong
investment outcomes for our clients’ long term. This reinforces our
fundamental belief that responsible investing demands a long-term
view and that a stakeholder-centric culture of ownership and
stewardship is at the heart of ESG integration.
Business Review
Purpose, Business Model and
Strategy
Invesco Select Trust plc is a UK investment company with four
Share classes, each of which has separate investment objectives, as
set out below, and is represented by a separate Portfolio. The
Company’s purpose is to generate sustainable returns for its
shareholders by providing a choice of investment strategies and the
ability to switch between them, free of cost, according to their
needs. The underlying strategies are each targeted at achieving
returns corresponding with specified objectives through a
disciplined investment process. The strategy the Board follows to
achieve its overall objective and those of each Share class 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.
The business model the Company has adopted to achieve its
objective has been to contract investment management and
administration to appropriate external service providers. The Board
has oversight of the Company’s service providers, and monitors them
on a formal and regular basis. The Board has a collegiate culture
and pursues its fiduciary responsibilities with independence,
integrity and diligence, taking advice and outside views as
appropriate and constructively challenging and interacting with
service providers, including the Manager.
The principal service provider is Invesco Fund Managers Limited
(‘IFML’ or the ‘Manager’). In addition to managing the Portfolios
in accordance with the Board’s strategy and under its oversight,
the Manager is also responsible for providing company secretarial,
marketing, accounting and general administration services. In
practice, many of these services are performed under delegated
authority by Invesco Asset Management Limited (IAML), a company
related to IFML. References to the Manager in this annual financial
report should consequently be considered to include both
entities.
All administrative support is provided by third parties under
the oversight of the Board. In addition to the management and
administrative functions of the Manager, the Company has
contractual arrangements with Link Group to act as registrar and
The Bank of New York Mellon (International) Limited (BNYMIL) as
depositary and custodian.
Investment Policy
The Company’s and respective Share classes’ investment
objectives, investment policies and risk and investment limits
combine to form the ‘Investment Policy’ of the Company.
The Company
Investment Objective and Policy
The Company’s investment objective is to provide shareholders
with a choice of investment strategies and policies, each intended
to generate attractive risk-adjusted returns.
The Company’s share capital comprises four Share classes: UK
Equity Shares, Global Equity Income Shares, Balanced Risk
Allocation Shares and Managed Liquidity Shares, each of which has
its own separate portfolio of assets and attributable liabilities.
The investment objectives, policies and risks and limits of the
Portfolios for these Share classes follow. With the exception of
borrowings, the limits for the Company and the four Share classes
are measured at the point of acquisition of investments, unless
otherwise stated.
Investment Limits of the Company
The Board has prescribed limits on the Investment Policy of the
Company, which include the following:
• no more than 15% of the gross assets of the
Company may be invested in a single investment; and
• no more than 10% of the gross assets of the
Company may be invested in other listed investment companies
(excluding property companies structured as REITs).
UK Equity Share Portfolio
Investment Objective
The investment objective of the UK Equity Portfolio is to
provide shareholders with an attractive real long-term total
return, with an income that will grow over time, by investing
primarily in UK quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK-quoted
equities and may also hold equity-related or fixed interest
securities of UK companies across all market sectors. The Portfolio
will not invest in companies which are not listed, quoted or traded
at the time of investment, although it may have exposure to such
companies where, following investment, the relevant securities
cease to be listed, quoted or traded.
The Manager invests the UK Equity Portfolio so as to maximise
exposure to the most attractive sectors and securities, within a
portfolio structure that reflects the Manager’s view of the
macroeconomic environment. The Manager does not set out to manage
the risk characteristics of the UK Equity Portfolio relative to the
FTSE All-Share Index (the ‘benchmark index’) and the investment
process may result in potentially very significant over or
underweight positions in individual sectors versus the benchmark.
The size of weightings will reflect the Manager’s view of the
attractiveness of a security and the degree of conviction held. If
a security is not considered to be a good investment, it will not
be held in the UK Equity Portfolio, irrespective of its weight in
the benchmark index.
The Manager controls the stock-specific risk of
individual securities by ensuring that the UK Equity Portfolio
is always diversified across market sectors. In-depth and continual
analysis of the fundamentals of investee companies allows the
Manager to assess the financial risks associated with any
particular security.
It is expected that, typically, the Portfolio will hold between
40 and 50 securities.
The Directors believe that the use of borrowings can enhance
returns to shareholders and the UK Equity Portfolio will generally
use borrowings in pursuing its investment objective.
Investment Limits
The Board has prescribed limits on the investment policy of the
UK Equity Portfolio, which include the following:
• no more than 12% of the gross assets of the
UK Equity Portfolio may be held in a single investment;
• no more than 10% of the gross assets of the
UK Equity Portfolio may be held in other listed investment
companies (excluding REITs);
• no more than 20% of the gross assets of the
UK Equity Portfolio may be held in overseas assets; and
• borrowings may be used to raise equity
exposure up to a maximum of 25% of the net assets of the UK Equity
Portfolio when it is considered appropriate.
Global Equity Income Share
Portfolio
Investment Objective
The investment objective of the Global Equity Income Portfolio
is to provide an attractive and growing level of income return and
capital appreciation over the long term, predominantly through
investment in a diversified portfolio of equities worldwide.
Investment Policy and Risk
The Portfolio will be invested predominantly in a portfolio of
listed, quoted or traded equities worldwide, but may also hold
other securities from time to time including, inter alia, fixed
interest securities, preference shares, convertible securities and
depositary receipts. Investment may also be made in regulated or
authorised collective investment schemes. The Portfolio will not
invest in companies which are not listed, quoted or traded at the
time of investment, although it may have exposure to such companies
where, following investment, the relevant securities cease to be
listed, quoted or traded. The Manager will at all times invest and
manage the Portfolio’s assets in a manner that is consistent with
spreading investment risk, but there will be no rigid industry,
sector, region or country restrictions.
The Portfolio may utilise derivative instruments including
index-linked notes, contracts for differences, covered options and
other equity-related derivative instruments for efficient portfolio
management and investment purposes. Any use of derivatives for
investment purposes will be made on the basis of the same
principles of risk spreading and diversification that apply to the
Portfolio’s direct investments, as described above.
It is expected that, typically, the Portfolio will hold between
40 and 55 securities.
The Directors believe that the use of borrowings can enhance
returns to shareholders, and the Global Equity Income Portfolio may
use borrowings in pursuing its investment objective.
The Company’s foreign currency investments will not be hedged to
sterling as a matter of general policy. However, the Manager may
employ currency hedging, either back to sterling or between
currencies (i.e. cross hedging of portfolio investments).
Investment Limits
The Board has prescribed the following limits on the investment
policy of the Global Equity Income Portfolio:
• no more than 20% of the gross assets of the
Global Equity Income Portfolio may be invested in fixed interest
securities;
• no more than 10% of the gross assets of the
Global Equity Income Portfolio may be held in a single
investment;
• no more than 10% of the gross assets of the
Global Equity Income Portfolio may be held in other listed
investment companies (excluding REITs); and
• borrowings may be used to raise equity
exposure up to a maximum of 20% of the net assets of the Global
Equity Income Portfolio, when it is considered appropriate.
Balanced Risk Allocation Share
Portfolio
Investment Objective
The investment objective of the Balanced Risk Allocation
Portfolio is to provide shareholders with an attractive total
return in differing economic and inflationary environments, and
with low correlation to equity and bond market indices by gaining
exposure to three asset classes: debt securities, equities and
commodities.
Investment Policy and Risk
The Portfolio utilises two main strategies: the first seeks to
balance the risk contribution from each of three asset classes
(equities, bonds and commodities), with the aim of reducing the
probability, magnitude and duration of capital losses, and the
second seeks to shift tactically the allocation among the assets
with the aim of improving expected returns.
The Portfolio is constructed so as to achieve appropriate
diversity and to balance risk by asset class (bonds, equities and
commodities) and by asset within each asset class. Neutral risk
weighting is achieved when each asset class contributes an equal
proportion of the total Portfolio risk and each asset contributes
an equal proportion of the total risk for its respective asset
class. The Manager is permitted to actively vary asset class
weightings, subject to a maximum of 150% and a minimum of 50% of
each asset class’s neutral weight. The Manager is also permitted to
actively vary individual asset weightings, provided the asset class
guidelines are not violated. Asset weights may not be less than
zero (short) and will not exceed twice the neutral weight. For the
purposes of the maximum weighting only, commodity exposures are
aggregated and measured by commodity complex rather than by
individual assets.
The Portfolio will be mainly invested directly in highly liquid
and transparently priced exchange-traded futures contracts, with
cash and cash equivalents being held as collateral. However, the
Portfolio may also be invested in equities, equity-related
securities and debt securities (including floating rate notes).
Financial derivative instruments (including but not limited to
futures and total return swaps) are used only to achieve long
exposure to the three asset classes. The Portfolio may also use
financial derivative instruments, including currency futures and
forwards, for efficient portfolio management, hedging and
investment purposes. Financial derivative instruments will not be
used to create net short positions in any asset class. The
derivatives portfolio will typically comprise between 20 and 33
investment positions.
It is expected that the Portfolio’s investments will mainly be
denominated in sterling. Any non-sterling derivative investments
may be hedged back into sterling at the discretion of the Manager
when it is economic to do so.
Investment Limit
The Board has prescribed the following limits on the investment
policy of the Balanced Risk Allocation Portfolio:
• the aggregate notional amount of financial
derivative instruments positions may not exceed 250% of the net
assets of the Balanced Risk Allocation Portfolio; and
• no more than 10% of the gross assets of the
Balanced Risk Allocation Portfolio may be held in other listed
investment companies.
Managed Liquidity Share Portfolio
Investment Objective
The investment objective of the Managed Liquidity Portfolio is
to produce an appropriate level of income return combined with a
high degree of security.
Investment Policy and Risk
The Managed Liquidity Portfolio invests mainly in a range of
sterling-based or related high quality debt securities and similar
assets (which may include transferable securities, money market
instruments, warrants, collective investment schemes and deposits),
either directly or indirectly through authorised funds investing in
such instruments, including funds managed by Invesco.
The Managed Liquidity Portfolio generally invests in funds
authorised as UCITS schemes (Undertakings for Collective
Investments in Transferable Securities, being open ended retail
investment funds), which are required under governing regulations
to provide a prudent spread of risk. In the event that the Managed
Liquidity Portfolio is invested directly in securities and
instruments, the Manager will observe investment restrictions and
risk diversification policies that are consistent with
UCITS regulations.
Investment Limits
The Board has prescribed limits on the investment policy of the
Managed Liquidity Portfolio, which include the following:
• no more than 10% of the gross assets of the
Managed Liquidity Portfolio may be held in a single investment,
other than authorised funds or high quality sovereign debt
securities; and
• no more than 5% of the gross assets of the
Managed Liquidity Portfolio may be held in unquoted investments,
other than authorised funds.
Investors should note that the Managed Liquidity Shares are not
designed to replicate the returns or other characteristics of a
bank or building society deposit or money market fund. In
particular, the Portfolio will typically contain some assets with a
greater residual maturity, and as a whole will have greater
weighted average maturity, than is prescribed by regulation
governing money market funds.
Key Performance Indicators
The Board reviews the performance of the Company by reference to
a number of Key Performance Indicators, at either a Company or
Portfolio level, which include the following:
•
Investment Performance
• Revenue
and Dividends
•
Discount/Premium
• Ongoing
Charges
Investment Performance
To assess investment performance the Board monitors the net
asset value (NAV) performance of the individual Share classes
relative to that of benchmark indices it considers to be
appropriate. However, given the requirements and constraints of the
investment objectives and policies followed, no index can be
expected to fully represent the performance that might reasonably
be expected from any one or all of the Company’s Share classes.
The NAV total return performance of each of the Portfolios over
the year to 31 May 2021 and of
relevant benchmark indices were as follows:
UK Equity Portfolio |
34.6% |
FTSE All-Share Index |
23.1% |
Global Equity Income Portfolio |
35.9% |
MSCI World Index (£) |
22.3% |
Balanced Risk Allocation
Portfolio |
25.4% |
ICE BoA Merrill Lynch 3 month LIBOR
plus |
|
5% per annum |
5.1% |
Managed Liquidity Portfolio |
3.6% |
Source: Refinitiv.
Other performance periods, together with share price total
returns, are shown on pages 9, 16, 23 and 29.
Revenue and Dividends
The Directors review revenue estimates and prospective dividend
levels at each Board meeting. For the equity Share classes the
Directors have become more focused on total return since
sanctioning contributions to dividends from capital, but dividends
paid continue to be mostly constituted from revenue and revenue is
an important element of overall Portfolio returns.
UK Equity Shares
Revenue earnings per Share for the UK Equity Share Portfolio was
3.90p (2020: 4.12p), based on net revenue for the year of
£1,322,000 (2020: £1,340,000) with no receipts of special dividends
(2020: £61,000 receipts of non-recurring special dividends,
equivalent to 0.19p).
Dividend Policy:
It is the Board’s policy that the Directors will declare four
dividends in respect of each accounting year (with payment in the
month following) comprising of three equal interim dividends,
declared in July, October and January, and a ‘wrap-up’ fourth
interim dividend, declared in April. Depending on the level of
income received in each quarter, and in the year, these four
dividends may be enhanced with contributions from capital profits
to achieve the Board’s target level. In recent years the Directors
have set a target of at least maintaining, in the absence of
unforeseen circumstances, the level of annual UK Equity dividends
per share from year to year. The impact of Covid-19 constitutes
unforeseen circumstances in this context and, given uncertainty of
income flows, the Directors did not set dividend targets for the
year to 31 May 2021 and have not done
so for the year to 31 May 2022.
Dividends Declared:
The Directors have declared and paid four interim dividends for
the year ended 31 May 2021 totalling
6.65p per UK Equity Share (2020: 6.60p) of which 3.90p was met from
revenue earned in the year. The aggregate of dividends paid in
respect of the year was £1,814,000 (2020: £2,145,000) – the
decrease reflects the reduction of shares in issue following
conversions and buybacks in the year.
A first interim dividend for the year to 31 May 2022 of 1.50p was declared on 15 July 2021. In the absence of unforeseen
circumstances, and in accordance with the dividend policy set out
above, the Board intends for this to set the level for the next two
quarterly dividends.
Global Equity Income Shares
Revenue earnings per Share for the Global Equity Income Share
Portfolio was 3.95p (2020: 5.39p), based on net revenue for the
year of £1,024,000 (2020: £1,639,000), which included £192,000
(2020: £49,000) of non-recurring special dividends.
Dividend Policy:
It is the Board’s policy that the Directors will declare
four dividends in respect of each accounting year (with
payment in the month following) comprising of three equal interim
dividends, declared in July, October and January, and a ‘wrap-up’
fourth interim dividend, declared in April. Depending on the level
of income received in each quarter, and in the year, these four
dividends may be enhanced with contributions from capital profits
to achieve the Board’s target level. In recent years the Directors
have set a target of at least maintaining, in the absence of
unforeseen circumstances, the level of annual Global Equity Income
dividends per share from year to year. The impact of Covid-19
constitutes unforeseen circumstances in this context and, given
uncertainty of income flows, the Directors did not set dividend
targets for the year to 31 May 2021
and have not done so for the year to 31 May
2022.
Dividends Declared:
The Directors have declared and paid four interim dividends for
the year ended 31 May 2021 totalling
7.10p (2020: 7.05p) per Global Equity Income Share, of which 3.83p
was met from revenue earned in the year. The aggregate of dividends
paid in respect of the year was £1,815,000 (2020: £2,138,000) – the
decrease reflects the reduction of shares in issue following
conversions and buybacks in the year.
A first interim dividend for the year to 31 May 2022 of 1.55p was declared on 15 July 2021. In the absence of unforeseen
circumstances, and in accordance with the dividend policy set out
above, the Board intends for this to set the level for the next
two quarterly dividends.
Balanced Risk Allocation Shares
In order to maximise the capital return on the Balanced Risk
Allocation Shares, the Directors only intend to declare dividends
on the Balanced Risk Allocation Shares to the extent required,
having taken into account the dividends paid on the other Share
classes, to maintain the Company’s status as an investment trust
under section 1158 of the Corporation Tax Act 2010.
The Portfolio recorded a net revenue loss of £8,000 in
the year (2020: £1,000 net loss).
No dividends are required to be declared or paid for the year to
retain investment trust status.
Managed Liquidity Shares
The Board intends to declare dividends on the Managed Liquidity
Share Portfolio when the level of income available allows. No
dividends were paid in the year (2020: 0.80p). The Managed
Liquidity Portfolio recorded a net revenue profit for the year of
£33,000 (2020: £23,000).
A first interim dividend for the year to 31 May 2022 of 1.00p was declared on 15 July 2021. It is unlikely, given the quantum
of revenue being earned, that future dividends will be more
frequent than annual and they could be less frequent.
Discount/(Premium)
The Company has a discount control policy in place for all
four Share classes, whereby the Company offers to issue or buy
back Shares of all classes with a view to maintaining the market
price of the shares at close to their respective net asset values
and, by so doing, avoid significant overhangs or shortages in the
market. It is the Board’s policy to buy back shares and to sell
shares from treasury on terms that do not dilute the net asset
value attributable to existing shareholders at the time of the
transaction.
The operation of this policy is dependent upon the authorities
to buy back and issue shares being renewed by shareholders.
Notwithstanding the intended effect of this policy, there can be no
guarantee that the Company’s shares will trade at close to their
respective net asset values. Shareholders should also be aware that
there is a risk that this discount policy may lead to
a reduction in the size of the Company over time.
The Board and the Manager closely monitor movements in the
Company’s share prices and dealings in the Company’s shares. Share
movements in the year are summarised on page 43. At 31 May
2021, the share prices, net asset values (NAV) and the discounts of
the four Share classes were as follows:
|
2021 |
2020 |
|
|
Net Asset |
Share |
|
Net Asset |
Share |
|
Value |
Price |
|
Value |
Price |
Premium/ |
Share Class |
(Pence) |
(Pence) |
Discount |
(Pence) |
(Pence) |
(Discount) |
UK Equity |
188.33 |
176.00 |
(6.5%) |
145.78 |
139.50 |
(4.3)% |
Global Equity Income |
233.91 |
226.00 |
(3.4%) |
178.46 |
176.50 |
(1.1)% |
Balanced Risk Allocation |
169.33 |
163.00 |
(3.7%) |
135.06 |
129.00 |
(4.5)% |
Managed Liquidity |
108.11 |
102.00 |
(5.7%) |
104.40 |
101.50 |
(2.8)% |
The following charts show the premium/(discount) at which the
Shares traded over the two years to 31 May
2021. The Shares of all four Portfolios have, historically,
generally traded in a range of 0% to 4%. As can be seen below,
although this continued in the past year it was somewhat more
volatile from the onset of the market disruptions from Covid-19, in
March 2020, with higher levels of
discount being seen sporadically throughout the pandemic influenced
period.
Source: Refinitiv.
Ongoing Charges
The expenses of managing the Company are reviewed by the Board
at every meeting. The Board aims to minimise the ongoing charges
figure which provides a guide to the effect on performance of all
annual operating costs of the Company. The ongoing charges figure
is calculated by dividing the annualised ongoing charges, including
those charged to capital, by the average daily net asset value
during the year, expressed as a percentage.
At the year end the ongoing charges figure of the Company and
that for the different Share classes were as follows:
|
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
|
Company |
Equity |
Income |
Allocation |
Liquidity |
2021 |
0.87% |
0.91% |
0.81% |
1.21% |
0.39% |
2020 |
0.90% |
0.89% |
0.88% |
1.25% |
0.35% |
The above excludes rebates received by the Managed Liquidity
Portfolio. Performance fee arrangements were removed from both the
UK Equity and Global Equity Income Share Portfolios and no
performance fees were paid during the year. In addition to
inflationary effects, shrinkage from buybacks in connection with
the discount control policy will tend to cause the ongoing charge
percentages to gradually increase.
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 77 shows the assets and
liabilities at the year end. Details of the Company’s borrowing
facility are shown in note 12(b) of the financial statements on
page 88, with interest paid (finance costs) in note 5.
Owing to the readily realisable nature of the Company’s assets,
cash flow does not have the same significance as for an industrial
or commercial company. The Company’s principal cash flows arise
from the purchases and sales of investments and the income from
investments against which must be set the costs of borrowing and
management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has
established effective parameters for the Portfolios. Borrowing
levels are regularly reviewed. As part of the Company’s Investment
Policy, the approved borrowing limits are 25% of the net assets of
the UK Equity Portfolio and 20% of net assets of the Global Equity
Income Portfolio. The Balanced Risk Allocation Portfolio does not
use borrowings, but is geared by means of the derivative
instruments used to implement its investment policy. The Managed
Liquidity Portfolio does not use borrowings.
Issued Share Capital
All Share classes have a nominal value of 1 penny per Share.
The following table summarises the Company’s share capital at
the year end and movements during the year.
|
|
Global |
Balanced |
|
|
UK |
Equity |
Risk |
Managed |
Number of shares |
Equity |
Income |
Allocation |
Liquidity |
Shares in issue at the year
end: |
|
|
|
|
– excluding treasury |
88,321,988 |
23,770,805 |
4,069,095 |
1,607,679 |
– held in treasury |
22,747,275 |
15,453,159 |
6,272,218 |
9,250,678 |
Movements during the year: |
|
|
|
|
– increase/(decrease) arising from
conversions |
484,631 |
(76,995) |
(216,791) |
(320,353) |
– shares bought back into
treasury |
(10,769,463) |
(4,939,000) |
(951,000) |
(569,000) |
– increase from scheme of
reconstruction with |
|
|
|
|
Invesco Income Growth
Trust plc |
66,628,879 |
— |
— |
— |
– average price thereon |
157.1p |
194.8p |
145.7p |
101.8p |
Since the year end another 4,860,000 UK Equity Shares and 63,000
Managed Liquidity Shares have been bought into treasury at average
prices of 179p and 104p respectively.
Further details on net changes in issued share capital are set
out in note 13 to the financial statements on pages 89 and 90. No
treasury shares were cancelled during the year.
Current and Future Developments
As part of the Company’s overall strategy, the Company seeks to
manage its affairs so as to maximise returns for shareholders. The
Board also has a longer-term objective, consistent with the
business combination with Invesco Income Growth Trust plc in
April 2021, to increase the size of
the Company in the belief that increasing the assets of the Company
in this way will make the Company’s Shares more attractive to
investors and improve the liquidity of the Shares.
Details of trends and factors likely to affect the future
development, performance and position of the Company’s business can
be found in the Chairman’s Statement and the portfolio managers’
reports. Further details as to the risks affecting the Company are
set out under ‘Principal Risks and Uncertainties’ below.
Principal Risks and Uncertainties
The Audit Committee regularly undertakes a robust assessment of
the risks the Company faces, including those that would threaten
its business model, future performance, solvency, reputation or
liquidity and emerging risks, on behalf of the Board (see Audit
Committee Report on pages 59 and 60).
The following are considered to be the most significant risks to
the Company and to shareholders in relation to their investments in
the Company. Further details of risks and risk management policies
as they relate to the financial assets and liabilities of the
Company are detailed in note 16 to the financial statements.
Investment Objectives and Attractiveness to Investors
There is no guarantee that the Investment Policy of the Company
and of each Portfolio will provide the returns sought by the
Company. There can be no guarantee, therefore, that the Company
will achieve its investment objectives or that the Shares will
continue to meet investors’ needs.
The Board monitors the share registers and the performance of
the Company and each Portfolio. It has established a structure
offering a range of options for investors and has set guidelines to
ensure that the Investment Policy of the Company and each Portfolio
is pursued by the Manager.
Market Movements and Portfolio
Performance
Individual Portfolio performance is substantially dependent on
the performance of the securities (including derivative
instruments) held within the Portfolio. The prices of these
securities are influenced by many factors including the general
health of regional and worldwide economies; interest rates;
inflation; government policies; industry conditions; political and
diplomatic events; tax laws; environmental laws; and by the demand
from investors. The Manager strives to maximise the total return
from Portfolios, but the investments held are influenced by market
conditions and the Board acknowledges the external influences on
the performance of each Portfolio. Further risks specifically
applicable to the Balanced Risk Allocation Shares are set out on
page 45.
The extreme market volatility experienced in February and
March 2020 from the market reaction
to Covid-19, and the continuing effects, exemplify the risks from
external influences. All of the Company’s Portfolios, except for
Managed Liquidity, were, and are still being, affected. There is an
ongoing risk to global economies from the measures taken in
response to Covid-19, many companies are at risk from the effects
of the imposed lockdowns on their production and revenues and this
has a consequential effect on the availability of investment
income.
The performance of the Manager is carefully monitored by the
Board and the continuation of the Manager’s mandates is reviewed
each year. The Board has established guidelines to ensure that the
investment policies of each class of Share are pursued by the
Manager.
For a fuller discussion of the economic and market conditions
facing the Company and the current and future performance of the
different Portfolios of the Company, please see both the Chairman’s
Statement on pages 6 to 8 and the portfolio managers’ reports
starting on pages 11 to 31.
Risks Applicable to the Company’s
Shares
Shares in the Company are designed to be held over the long-term
and may not be suitable as short-term investments. There can be no
guarantee that any appreciation in the value of the Company’s
Shares will occur and investors may not get back the full value of
their investments. Owing to the potential difference between the
mid-market price of the Shares and the prices at which they are
sold, there is no guarantee that their realisable value will
reflect their mid-market price.
The market value of a Share, as well as being affected by its
net asset value (NAV), is also influenced by investor demand, its
dividend yield, where applicable, and prevailing interest rates,
amongst other factors. As such, the market value of a Share can
fluctuate and may not reflect its underlying NAV. Shares may
therefore trade at discounts to their NAVs. However, the Board has
adopted a discount control policy that applies to all Share classes
and the Board and the Manager monitor the market rating of each
Share class.
Past performance of the Company’s Shares is not necessarily
indicative of future performance.
While it is the intention of the Directors to pay dividends to
holders of the UK Equity, Global Equity Income and Managed
Liquidity Shares, this will be affected by the returns achieved by
the respective Portfolios and the dividend policy adopted by the
Board. Accordingly, the amount of dividends paid to shareholders
may fluctuate. Any change in the tax or accounting treatment of
dividends received or other returns may also affect the level of
dividend paid on the Shares in future years. The Directors have
resolved, in the absence of unforeseen circumstances, to supplement
revenue with capital profits in order to pay equity Portfolio
dividends at target levels set by the Board (see
pages 41 and 42).
Viability and Compulsory Conversion of
a Class of Share
It is possible that through poor performance, market sentiment,
or otherwise, lack of demand for one of the Company’s Share classes
could result in the relevant Portfolio becoming too small to be
viable. The Board monitors share conversions and Portfolio sizes
and liaises with the Manager on the continued viability of each
Share class. The Board has received assurances from the Manager
that the size of the portfolios is not critical to the Manager
being able to continue to offer its investment management services
in respect of any of the Company’s four portfolio strategies.
The continued listing on the Official List of each class of
Share is dependent on at least 25% of the Shares in that class
being held in public hands. This means that if more than 75% of the
Shares of any class were held by, inter alia, the Directors,
persons connected with Directors or persons interested in 5% or
more of the relevant Shares, the listing of that class of Share
might be suspended or cancelled. The Listing Rules state that the
FCA may allow a reasonable period of time for the Company to
restore the appropriate percentage if this rule is breached, but in
the event that the listing of any class of Shares were cancelled
the Company would lose its investment trust status.
Accordingly, if at any time the Board considers that the listing
of any class of Share on the Official List is likely to be
cancelled and the loss of such listing would mean that the Company
would no longer be able to qualify for approval as an investment
trust under section 1158 of the Corporation Tax Act 2010, the
Board may serve written notice on the holders of the relevant
Shares requiring them to convert their Shares into another Share
class.
Liability of a Portfolio for the
Liabilities of Another Portfolio
The Directors intend that, in the absence of unforeseen
circumstances, each Portfolio will effectively operate as if it
were a stand-alone company. However, investors should be aware of
the following factors:
• As a matter of law, the Company is a single
entity. Therefore, in the event that any of the Portfolios has
insufficient funds or assets to meet all of its liabilities, on a
winding-up or otherwise, such a shortfall would become a liability
of the other Portfolios and would be payable out of the assets of
the other Portfolios in such proportions as the Board may
determine; and
• The Companies Act 2006 prohibits the
Directors from declaring dividends in circumstances where,
following the distribution, the Company’s assets would represent
less than one and a half times the aggregate of its liabilities or
the amount of net assets would be less than the aggregate of its
share capital and undistributable reserves. If the Company were to
incur material liabilities in the future, a significant fall
in the value of the Company’s assets as a whole may affect the
Company’s ability to pay dividends on a particular class of
Share, even though there are distributable profits attributable to
the relevant Portfolio.
Gearing
Performance may be geared by use of the £40 million 364 day
multicurrency revolving credit facility. The Company also has an
uncommitted overdraft facility of up to 10% of net assets. There is
no guarantee that these facilities will be renewed at maturity or
on terms acceptable to the Company. If it were not possible to
renew these facilities or replace them with one from another
lender, the amounts owing by the Company would need to be funded by
the sale of securities. This facility was increased to its current
limit of £40 million in connection with the Company’s combination
with Invesco Income Growth Trust plc in April 2021, having previously stood at £20
million.
The Balanced Risk Allocation Portfolio may also be geared (by up
to 250%, according to the investment policy set out on page 40) by
means of the derivative instruments in which it invests. This is
discussed separately below, under the heading: Additional Risks
Applicable to Balanced Risk Allocation Shares.
Gearing levels of the different Portfolios will change from time
to time in accordance with the respective portfolio managers’
assessments of risk and reward. Where market exposure is geared,
any reduction in the value of the geared Portfolio’s investments
may lead to a correspondingly greater percentage reduction in its
NAV (which is likely to affect Share prices adversely). Any
reduction in the number of Shares in issue (for example, as a
result of buy backs) will, in the absence of a corresponding
reduction in borrowings, result in an increase in a Portfolio’s
gearing.
Whilst the use of borrowings by the Company should enhance the
total return on a particular class of Share where the return on the
underlying securities is rising and exceeds the cost of borrowing,
it will have the opposite effect where the underlying return is
falling, further reducing the total return on that Share class.
Similarly, the use of gearing by investment companies or funds in
which the Company invests increases the volatility of those
investments.
Hedging
The Company may use derivatives to hedge its exposure to
currency or other risks and for the purpose of efficient portfolio
management. There may be a correlation between price movements in
the underlying securities, currency or index, on the one hand, and
price movements in the investments, which are the subject of the
hedge, on the other hand. In addition, an active market may not
exist for a particular hedging derivative instrument at any
particular time.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue
of its status as a public limited investment company registered
under the Companies Act 2006, its status as an investment trust and
its listing on the London Stock Exchange. Loss of investment trust
status could lead to the Company being subject to UK Capital Gains
Tax on the sale of its investments. A serious breach of other
regulatory rules could lead to suspension from the London Stock
Exchange, a fine or a qualified Audit Report. Other control
failures, either by the Manager or any other of the Company’s
service providers, could result in operational or reputational
problems, erroneous disclosures or loss of assets through fraud, as
well as breaches of regulations.
The Manager reviews the level of compliance with the Corporation
Tax Act 2010 and other financial regulatory requirements on a daily
basis. All transactions, income and expenditure are reported to the
Board. The Board regularly considers the risks to which the Company
is exposed, the measures in place to control them and the potential
for other risks to arise. The Board ensures that satisfactory
assurances are received from service providers. The depositary and
the Manager’s compliance and internal audit officers report
regularly to the Company’s Audit Committee.
The risks and risk management policies and procedures as they
relate to the financial assets and liabilities of the Company are
also detailed in note 16 to the financial statements.
Additional Risks Applicable to
Balanced Risk Allocation Shares
The use of financial derivative instruments forms part of the
investment policy and strategy of the Balanced Risk Allocation
Portfolio. The Portfolio’s ability to use these instruments may be
limited by market conditions, regulatory limits and tax
considerations. The absence of a liquid market for any particular
instrument at any particular time may inhibit the ability of the
Manager to liquidate a financial derivative instrument at an
advantageous price. However, the Manager actively seeks the most
liquid means of obtaining the required exposures. The financial
derivative instruments used for the strategy are geared instruments
and the aggregate notional exposure will usually exceed the net
asset value of the Portfolio. Whilst this could result in greater
fluctuations in the net asset value, and consequently the share
price, the use of leverage is normally necessary to achieve the
target volatility required to meet the return objective. The degree
of leverage inherent in futures trading potentially means that a
relatively small price movement in a futures contract may result in
an immediate and substantial loss and it would be necessary to
increase the collateral held at the clearing broker to cover such
loss. This is mitigated by the Company not using financial
derivative instruments to create net short positions in any asset
class combined with holding cash balances sufficient to meet
collateral requirements.
Reliance on Third Party Service
Providers
The Company has no employees and the Directors have all been
appointed on a non-executive basis. The Company is therefore
reliant upon the performance of third party service providers for
its executive function. In particular, the Manager performs
services that are integral to the operation of the Company and the
custodian appointed by the depositary holds assets on its behalf.
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 successfully pursue its
Investment Policy.
The Manager may be exposed to reputational risks. In particular,
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 potential
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 successfully pursue its
Investment Policy.
The Directors continue to monitor the Covid-19 situation
closely, together with the Manager and third-party service
providers. A range of actions have been implemented to ensure
that the Company and its service providers are able to continue to
operate as normal, even in the prolonged disruption being
experienced. The Manager’s business continuity plans are reviewed
on an ongoing basis and the Directors are satisfied that the
Manager has in place robust plans and infrastructure to minimise
the impact on its operations so that the Company can continue
to trade, meet regulatory obligations, report and meet
shareholder requirements.
The Manager has mandated work from home arrangements
and split team working will be implemented when business
premises reopen. Any meetings are being held virtually or via
conference calls.
The Company’s other service providers have similar working
arrangements in place.
Viability Statement
The Company is an investment company which operates as a
collective investment vehicle, designed and managed for long term
investment. The Board considers long term for this purpose to be at
least three years and so has assessed the Company’s viability over
this period. However, the life of the Company is not intended to be
limited to that or any other period.
In assessing the viability of the Company the Board considered
the principal risks to which it is exposed, as set out on
pages 44 to 46, together with mitigating factors.
The risks of failure to meet the Company’s and the Portfolios’
investment objectives, contributory market and investment risks and
the challenges of lack of scale have been considered to be of
particular importance. The Board also took into account the
capabilities of the Manager and the varying market conditions
already experienced by the Company since its launch in 2006,
including from Covid-19 in the past year. Despite the disruption to
markets from Covid-19 and the impact on global economies, the
Directors remain confident that the Company’s investment strategies
will continue to serve shareholders well over the longer term. On
the question of scale, this has been mitigated by the business
combination of Invesco Income Growth Trust plc into the UK Equity
Portfolio and the Board has also concluded that if an individual
Portfolio became too small it should not cause the Company itself
to be unviable.
In terms of financial risks to viability, materially all of the
investments comprising the portfolios are readily realisable. The
equity portfolios also produce a stream of dividend income, which
may fluctuate but which the Board expects to continue. The Company
has no long term liabilities and the total value of the portfolios
is a multiple of the value of the Company’s short term liabilities
and annual operating costs. In arriving at this assessment, the
Board considered stressed scenario-testing for both income and loan
covenants; borrowing structure; level of gearing; and the liquidity
of the portfolios. Consequently, there appears little to no
prospect of the Company not being able to meet its financial
obligations as they fall due in the next three years.
Based on the above, the Board has a reasonable expectation that
the Company will be able to continue in operation and meet
its liabilities as they fall due over the three-year period of
their assessment.
Audit Committee Report
The extended audit committee report required by the UK Corporate
Governance Code is set out on pages 59 and 60. There
are no areas of concern in relation to the financial statements to
bring to the attention of shareholders.
Board’s Duty to Promote the Success of
the Company (s.172)
As set out in the Directors’ Report on page 51 the Directors
have a statutory duty to promote the success of the Company, whilst
also having regard to certain broader matters, including the need
to engage with employees, suppliers, customers and others, and to
have regard to their interests (s172 Companies Act 2006).
However, the Company has no employees and no customers in the
traditional sense.
In fulfilling these duties, and in accordance with the Company’s
nature as an investment trust, the Board’s principal concern has
been, and continues to be, the interests of the Company’s
shareholders taken as a whole. Notwithstanding this, the Board has
a responsible governance culture and also has due regard for
broader matters so far as they apply. In particular, the Board
engages with the Manager at every Board meeting and reviews the
Company’s relationships with other service providers, such as the
registrar, depositary and custodian, at least annually. During the
year the most significant engagement was with the Manager and, in
particular the individual portfolio managers. Matters engaged upon
included discussions in connection with the successful business
combination of Invesco Income Growth Trust plc into the UK Equity
Portfolio, the management of the enlarged UK Equity Portfolio and
the appointment of Ciaran Mallon as
joint manager, related investment management fee reduction and
removal of the performance fee for both the UK Equity and Global
Equity Income portfolios. Furthermore, Derek Steeden was appointed as the designated
portfolio manager for the Managed Liquidity Portfolio. As would be
expected, there was also engagement with service providers
generally in connection with the extended lockdown conditions due
to Covid-19, all of which were able to report business as
usual capability.
The Board is committed to maintaining high standards of
Corporate Governance. The Corporate Governance Statement required
by the UKLA Listing Rules is set out on page 58.
Environment, Social and Governance considerations are dealt with
in a separate section of this Strategic Report on
pages 34 to 38.
Shareholder relations are given high priority by the Board and
the Manager. The prime means by which the Company communicates with
shareholders are the annual and half-yearly financial reports,
which aim to provide shareholders with a full understanding of the
Company’s activities and its results. This information is
supplemented by daily publication of the NAVs of the Company’s
shares via the London Stock Exchange, ad hoc regulatory
announcements, monthly factsheets and other information on the
Manager’s website, including pre-investment information, key
information document (KID), shareholder circulars, Portfolio
disclosures, conversion forms and instructions, Stock Exchange
announcements, schedule of matters reserved for the Board, terms of
reference of Board Committees, Directors’ letters of appointment,
the Company’s share price and proxy voting results.
The Chairman and Directors welcome contact with shareholders,
although this has been difficult recently with the Covid-19
situation. There is a regular dialogue between the Manager and
individual major shareholders to discuss aspects of investment
performance, governance and strategy and to listen to shareholder
views in order to help develop a balanced understanding of their
issues and concerns. The Company’s corporate broker, Investec Bank
plc, is also consulted. General presentations to institutional
shareholders and analysts take place throughout the year. All
meetings between the Manager and institutional shareholders are
reported to the Board.
It is the intention of the Board that the annual financial
report and the notice of the AGM be issued to shareholders so as to
provide at least twenty working days’ notice of the AGM.
Shareholders wishing to lodge questions in advance of the AGM are
invited to do so, either on the reverse of the proxy card or in
writing to the Company Secretary at the address given on
page 109.
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 such communication, other than junk
mail, is redirected to the Chairman or Senior Independent Director
as appropriate.
Shareholders normally have the opportunity to communicate
directly with the Directors at the AGM. It is hoped that by
the date of this year’s AGM on 5 October
2021 restrictions due to Covid-19 will have eased and, if
so, shareholders are encouraged to attend the AGM. However, should
this not be the case the AGM may have to be held as a closed
meeting again. In this eventuality it is recommended that
shareholders exercise their votes by means of registering them
with the Company’s registrar ahead of the meeting, online or by
completing paper proxy forms, and appoint the Chairman of the
meeting as their proxy. Questions, on the business of the meeting
or otherwise, may be addressed to the Company Secretary, by
email to investmenttrusts@invesco.com or, by letter, to 43-45
Portman Square, London W1H
6LY.
Board Diversity
The Company’s policy on diversity is set out on page 53. At
the year end the Board comprised four male and two female
non-executive Directors resulting in female representation of 33%.
This figure increased to 40% from 1 June
2021. Summary biographical details of all the current
Directors are set out on page 50. The Company has no
employees.
Environment, Social and Governance
(ESG) Matters
As an investment company with no employees, property or
activities outside investment, environmental policy has limited
application. A greenhouse gas emissions statement is included in
the Directors’ Report on page 54. In relation to the
portfolios, the Company has delegated the management of the
Company’s investments to the Manager, who has an ESG Guiding
Framework which sets out a number of principles that are intended
to be considered in the context of its responsibility to manage
investments in the financial interests of shareholders.
The Manager is committed to being a responsible investor and
applies, and is a signatory to, the United Nations Principles for
Responsible Investment, which demonstrates its extensive efforts in
terms of ESG integration, active ownership, investor collaboration
and transparency. The Manager also achieved a global ‘A+’ rating
for its overall approach to responsible investment for the fourth
consecutive year since 2018 as well as achieving an ‘A’ or ‘A+’
across all categories in the 2020 assessment period from PRI for
Strategy and Governance. In addition, the Manager is an active
member of the UK Sustainable Investment and Finance Association as
well as a supporter of the Task Force for Climate Related Financial
Disclosure (TCFD) since 2019. The Manager has published its
inaugural Climate Change report in line with the TCFD in
July 2020. Although TCFD does not
apply directly for the Company at present, the Board confirms that
it will comply with all reporting regulations as they are
implemented.
The Manager has voluntarily complied with the Sustainable
Finance Disclosure Regulation (SFDR) which came into effect within
the European Union on 10 March 2021
and introduces a number of sustainability-related disclosure
requirements for financial market participants.
The Manager is also a signatory to the FRC Stewardship Code
2020, which seeks to improve the quality of engagement between
institutional investors and companies to help improve long-term
returns to shareholders and the efficient exercise of governance
responsibilities.
The equity investment teams incorporate ESG considerations in
their investment processes as part of the evaluation of new
opportunities, with identified ESG concerns feeding into the final
investment decision and assessment of relative value.
The portfolio managers make their own conclusions about the
ESG characteristics of each investment held and about the overall
ESG characteristics of the portfolio, although third party ESG
ratings may inform their view. Additionally, the Manager’s ESG team
provides formalised ESG portfolio monitoring. This is a rigorous
semi-annual process where the portfolios are reviewed from an ESG
perspective.
Regarding stewardship, the Board considers that the Company has
a responsibility as a shareholder towards ensuring that high
standards of corporate governance 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 Company’s
stewardship functions have been delegated to the Manager, which has
adopted a clear and considered policy towards its responsibility as
a shareholder on behalf of the Company. As part of this policy, 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. A copy of the current Manager’s
Stewardship Policy, which is updated annually, can be
found at www.invesco.co.uk/investmenttrusts. Further details are
shown in the ESG Statement from the Managers on
pages 34 to 38.
As an investment vehicle the Company does not provide goods or
services in the normal course of business, and does not have
customers. Accordingly, the Directors consider that the Company is
not within the scope of the Modern Slavery Act 2015.
This Strategic Report was approved by the Board on 5 August 2021.
Invesco Asset Management 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 in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under the law the Directors
have elected to prepare financial statements in accordance with UK
Accounting Standards, including FRS 102 ‘The Financial Reporting
Standard applicable in the UK and Republic of Ireland.’ Under
company law, the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or
loss of the Company for that period.
In preparing these financial statements, the Directors are
required to:
• select suitable accounting policies and then
apply them consistently;
• make judgements and estimates that are
reasonable and prudent;
• state whether applicable accounting
standards have been followed, subject to any material departures
disclosed and explained in the financial statements; and
• prepare the financial statements on the
going concern basis unless it is inappropriate to presume that the
Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and which enable them to ensure
that the financial statements comply with the Companies Act 2006.
They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, a Directors’ Report,
which includes a Corporate Governance Statement, and a Directors’
Remuneration Report that comply with that law and those
regulations.
The Directors confirm that:
• in so far as they are aware, there is no
relevant audit information of which the Company’s Auditor is
unaware; and
• each Director has taken all the steps that
they ought to have taken as a Director in order to make themselves
aware of any relevant audit information and to establish that the
Company’s Auditor is aware of that information.
The Directors of the Company each confirm to the best of their
knowledge that:
• the financial statements, prepared in
accordance with the applicable set of accounting standards, give a
true and fair view of the assets, liabilities, financial position,
net return and cash flows of the Company; and
• this annual financial report includes a fair
review of the development and performance of the business and the
position of the Company together with a description of the
principal risks and uncertainties that it faces.
The Directors consider that this annual financial report, taken
as a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s
position and performance, business model and strategy.
Signed on behalf of the Board of Directors
Victoria
Muir
Chairman
5 August 2021
Income Statement
FOR THE YEAR ENDED 31 MAY
|
2021 |
2020 |
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Notes |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Gains/(losses) on investments held
at |
|
|
|
|
|
|
|
fair value |
9 |
— |
28,391 |
28,391 |
— |
(12,632) |
(12,632) |
Gains/(losses) on derivative
instruments |
10 |
38 |
1,701 |
1,739 |
2 |
(159) |
(157) |
Losses on foreign exchange |
|
— |
(104) |
(104) |
— |
(22) |
(22) |
Income |
2 |
3,184 |
539 |
3,723 |
3,950 |
80 |
4,030 |
Investment management fees |
3 |
(198) |
(454) |
(652) |
(206) |
(473) |
(679) |
Performance fee waiver |
3 |
— |
531 |
531 |
— |
— |
— |
Other expenses |
4 |
(385) |
(23) |
(408) |
(463) |
(9) |
(472) |
Net return before finance costs and
taxation |
|
2,639 |
30,581 |
33,220 |
3,283 |
(13,215) |
(9,932) |
Finance costs |
5 |
(38) |
(90) |
(128) |
(37) |
(88) |
(125) |
Return before taxation |
|
2,601 |
30,491 |
33,092 |
3,246 |
(13,303) |
(10,057) |
Tax |
6 |
(230) |
— |
(230) |
(245) |
— |
(245) |
Return after taxation for the
financial year |
|
2,371 |
30,491 |
32,862 |
3,001 |
(13,303) |
(10,302) |
Return per ordinary share |
7 |
|
|
|
|
|
|
– UK Equity Share
Portfolio |
|
3.90p |
41.42p |
45.32p |
4.12p |
(24.75)p |
(20.63)p |
– Global Equity Income Share
Portfolio |
|
3.95p |
57.28p |
61.23p |
5.39p |
(16.58)p |
(11.19)p |
– Balanced Risk Allocation
Share Portfolio |
|
(0.17)p |
33.10p |
32.93p |
(0.02)p |
(3.88)p |
(3.90)p |
– Managed Liquidity Share
Portfolio |
|
1.35p |
0.95p |
2.30p |
0.65p |
0.03p |
0.68p |
The total column of this statement represents the Company’s
profit and loss account, prepared in accordance with UK Accounting
Standards. The return after taxation for the financial year is the
total comprehensive income and therefore no additional statement of
other comprehensive income is presented. The supplementary revenue
and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the
Association of Investment Companies. All items in the above
statement derive from continuing operations of the Company. On
23 April 2021 the Company acquired
the assets of Invesco Income Growth Trust plc following a scheme of
reconstruction. No other operations were acquired or discontinued
in the year. Income Statements for the different Share classes are
shown on pages 15, 22, 28 and 32 for the UK Equity, Global Equity
Income, Balanced Risk Allocation and Managed Liquidity Share
Portfolios respectively.
Statement of Changes in Equity
FOR THE YEAR ENDED 31 MAY
|
|
|
|
|
Capital |
|
|
|
|
|
Share |
Share |
Special |
redemption |
Capital |
Revenue |
|
|
|
capital |
premium |
reserve |
reserve |
reserve |
reserve |
Total |
|
Notes |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
At 31 May 2019 |
|
1,055 |
1,290 |
66,372 |
353 |
62,871 |
354 |
132,295 |
Cancellation of deferred shares |
|
— |
— |
(6) |
6 |
— |
— |
- |
Shares bought back and held in
treasury |
|
— |
— |
(9,986) |
— |
— |
— |
(9,986) |
Share conversions |
|
(5) |
— |
5 |
— |
— |
— |
- |
Return after taxation per the
income |
|
|
|
|
|
|
|
|
statement |
|
— |
— |
— |
— |
(13,303) |
3,001 |
(10,302) |
Dividends paid |
8 |
— |
— |
(931) |
— |
— |
(3,407) |
(4,338) |
At 31 May 2020 |
|
1,050 |
1,290 |
55,454 |
359 |
49,568 |
(52) |
107,669 |
Cancellation of deferred shares |
|
— |
— |
(5) |
5 |
— |
— |
— |
Shares bought back and held in
treasury |
|
— |
— |
(28,704) |
— |
— |
— |
(28,704) |
Share conversions |
|
(1) |
— |
1 |
— |
— |
— |
— |
Return after taxation per the
income |
|
|
|
|
|
|
|
|
statement |
|
— |
— |
— |
— |
30,491 |
2,371 |
33,862 |
Dividends paid |
8 |
— |
— |
(1,283) |
— |
— |
(2,346) |
(3,629) |
Issue of shares on business |
|
|
|
|
|
|
|
|
combination |
13(f) |
666 |
121,859 |
— |
— |
— |
— |
122,525 |
Cost of shares issued in |
|
|
|
|
|
|
|
|
respect of the business
combination |
|
— |
(159) |
— |
— |
— |
— |
(159) |
At 31 May 2021 |
|
1,715 |
122,990 |
25,463 |
364 |
80,059 |
(27) |
230,564 |
Balance Sheet
AS AT 31 MAY 2021
|
|
|
Global |
Balanced |
|
|
|
|
UK |
Equity |
Risk |
Managed |
|
|
|
Equity |
Income |
Allocation |
Liquidity |
Total |
|
Notes |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Fixed assets |
|
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
|
or loss |
9 |
176,434 |
63,902 |
5,741 |
1,809 |
247,886 |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Derivative assets held at fair value
through profit |
|
|
|
|
|
|
or loss |
10 |
— |
— |
292 |
— |
292 |
Debtors |
11 |
1,040 |
299 |
190 |
36 |
1,565 |
Cash and cash equivalents |
|
2,331 |
137 |
704 |
32 |
3,204 |
|
|
3,371 |
436 |
1,186 |
68 |
5,061 |
Creditors: amounts falling due
within one year |
|
|
|
|
|
|
Derivative liabilities held at
fair |
|
|
|
|
|
|
value through profit or
loss |
10 |
— |
— |
(18) |
— |
(18) |
Other creditors |
12(a) |
(1,629) |
(186) |
(19) |
(139) |
(1,973) |
Bank facility |
12(b) |
(11,842) |
(8,550) |
— |
— |
(20,392) |
|
|
(13,471) |
(8,736) |
(37) |
(139) |
(22,383) |
Net current
(liabilities)/assets |
|
(10,100) |
(8,300) |
1,149 |
(71) |
(17,322) |
Net assets |
|
166,334 |
55,602 |
6,890 |
1,738 |
230,564 |
Capital and reserves |
|
|
|
|
|
|
Share capital |
13(a) |
1,111 |
392 |
103 |
109 |
1,715 |
Share premium |
14 |
121,700 |
— |
1,290 |
— |
122,990 |
Special reserve |
14 |
9,224 |
14,305 |
817 |
1,117 |
25,463 |
Capital redemption reserve |
14 |
74 |
81 |
27 |
182 |
364 |
Capital reserve |
14 |
34,225 |
40,824 |
4,718 |
292 |
80,059 |
Revenue reserve |
14 |
— |
— |
(65) |
38 |
(27) |
Shareholders’ funds |
|
166,334 |
55,602 |
6,890 |
1,738 |
230,564 |
Net asset value per ordinary
share |
15 |
188.33p |
233.91p |
169.33p |
108.11p |
|
The financial statements were approved and authorised for issue
by the Board of Directors on 5 August
2021.
Signed on behalf of the Board of Directors
Victoria
Muir
Chairman
Balance Sheet
AS AT 31 MAY 2020
|
|
|
Global |
Balanced |
|
|
|
|
UK |
Equity |
Risk |
Managed |
|
|
|
Equity |
Income |
Allocation |
Liquidity |
Total |
|
Notes |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Fixed assets |
|
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
|
or loss |
9 |
52,121 |
55,778 |
6,347 |
2,682 |
116,928 |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Derivative assets held at fair value
through profit |
|
|
|
|
|
|
or loss |
10 |
– |
– |
401 |
– |
401 |
Debtors |
11 |
236 |
2,607 |
248 |
15 |
3,106 |
Cash and cash equivalents |
|
– |
146 |
251 |
50 |
447 |
|
|
236 |
2,753 |
900 |
65 |
3,954 |
Creditors: amounts falling due
within one year |
|
|
|
|
|
|
Derivative liabilities held at
fair |
|
|
|
|
|
|
value through profit or
loss |
10 |
– |
– |
(151) |
– |
(151) |
Other creditors |
12(a) |
(938) |
(2,179) |
(23) |
(140) |
(3,280) |
Bank overdraft |
12(b) |
(2) |
– |
– |
– |
(2) |
Bank facility |
12(b) |
(4,800) |
(4,980) |
– |
– |
(9,780) |
|
|
(5,740) |
(7,159) |
(174) |
(140) |
(13,213) |
Net current
(liabilities)/assets |
|
(5,504) |
(4,406) |
726 |
(75) |
(9,259) |
Net assets |
|
46,617 |
51,372 |
7,073 |
2,607 |
107,669 |
Capital and reserves |
|
|
|
|
|
|
Share capital |
13(a) |
439 |
393 |
106 |
112 |
1,050 |
Share premium |
14 |
– |
– |
1,290 |
– |
1,290 |
Special reserve |
14 |
25,931 |
24,926 |
2,556 |
2,041 |
55,454 |
Capital redemption reserve |
14 |
74 |
78 |
27 |
180 |
359 |
Capital reserve |
14 |
20,173 |
25,975 |
3,151 |
269 |
49,568 |
Revenue reserve |
14 |
– |
– |
(57) |
5 |
(52) |
Shareholders’ funds |
|
46,617 |
51,372 |
7,073 |
2,607 |
107,669 |
Net asset value per ordinary
share |
15 |
145.78p |
178.46p |
135.06p |
104.40p |
|
Cash Flow Statement
FOR THE YEAR ENDED 31 MAY
|
|
2021 |
2020 |
|
Notes |
£’000 |
£’000 |
Cash flows from operating
activities |
|
|
|
Net return before finance costs and
taxation |
|
33,220 |
(9,932) |
Tax on overseas income |
|
(230) |
(245) |
Adjustments for: |
|
|
|
Purchase of
investments |
|
(111,945) |
(97,439) |
Sale of investments |
|
129,265 |
110,920 |
Sale of futures |
|
1,715 |
(455) |
|
|
|
|
|
|
19,035 |
13,026 |
Scrip dividends |
|
(9) |
(57) |
(Gains)/losses on investments |
|
(28,391) |
12,632 |
(Gains)/losses on derivatives |
|
(1,739) |
157 |
(Decrease/(increase) in debtors |
|
(650) |
463 |
Decrease in creditors and
provision |
|
(460) |
(20) |
Net cash inflow from operating
activities |
|
22,076 |
16,024 |
Cash flows from investing
activities |
|
|
|
Cash acquired following business
combination(1) |
13(f) |
3,342 |
|
Net cash inflow from investing
activities |
|
3,342 |
|
Cash flows from financing
activities |
|
|
|
Interest paid on bank facility |
|
(128) |
(124) |
Increase/(decrease) in bank
facility |
|
10,612 |
(2,448) |
|
|
|
— |
Costs associated with the issue of
shares on business combination(1) |
|
(159) |
— |
Share buy back costs |
|
(29,357) |
(9,551) |
Equity dividends paid |
8 |
(3,629) |
(4,338) |
Net cash outflow from financing
activities |
|
(22,661) |
(16,461) |
Net increase/(decrease) in cash and
cash equivalents |
|
2,757 |
(437) |
Cash and cash equivalents at the
start of the year |
|
447 |
884 |
Cash and cash equivalents at the end
of the year |
|
3,204 |
447 |
Reconciliation of cash and cash
equivalents to the Balance Sheet is as follows: |
|
|
|
Cash held at custodian |
|
1,114 |
— |
Invesco Liquidity Funds plc –
Sterling, money market fund |
|
2,090 |
447 |
Cash and cash equivalents |
|
3,204 |
447 |
Cash flow from operating activities
includes: |
|
|
|
Interest received |
|
(1) |
3 |
Dividends received |
|
3,107 |
3,876 |
|
At |
|
At |
|
1 June |
Cash |
31 May |
|
2020 |
Flows |
2021 |
|
£’000 |
£’000 |
£’000 |
Analysis of changes in
net debt: |
|
|
|
Cash and cash
equivalents |
447 |
2,757 |
3,204 |
Bank overdraft |
(2) |
2 |
— |
Bank facility |
(9,780) |
(10,612) |
(20,392) |
Total |
(9,335) |
(7,853) |
(17,188) |
|
|
|
|
|
|
|
(1) For definition of business combination refer to Glossary of
Terms and Alternative Performance Measures on page 110.
The accompanying accounting policies and notes are an integral
part of these financial statements.
Notes to the Financial Statements
1. 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 are set out below:
(a) Basis of
Preparation
(i) Accounting
Standards Applied
The financial statements have been prepared in accordance with
applicable United Kingdom Accounting Standards, including FRS 102
‘the Financial Reporting Standard applicable in the UK and Republic
of Ireland’, and applicable law (UK Generally Accepted Accounting
Practice (UK GAAP)) and with the Statement of Recommended Practice
Financial Statements of Investment Trust Companies and Venture
Capital Trusts, issued by the Association of Investment Companies
(AIC) in October 2019. The financial
statements are issued on a going concern basis as disclosed on
page 53.
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. No accounting policies or
disclosures have changed as a result of the early adoption of the
revised SORP.
The accounting policies applied to these financial statements
are consistent with those applied for the preceding year.
(ii) Definitions
used in the financial statements
‘Portfolio’ the UK Equity Share Portfolio, the Global Equity
Income Share Portfolio, the Balanced Risk Allocation Share
Portfolio and/or the Managed Liquidity Share Portfolio (as the case
may be). Each comprises, or may include, an investment portfolio,
derivative instruments, cash, loans, debtors and other creditors,
which together make up the net assets as shown in the balance
sheet.
‘Share’ UK Equity Share, Global Equity
Income Share, Balanced Risk Allocation Share, Managed Liquidity
Share and/or Deferred Share (as the case may be).
The UK Equity, Global Equity Income, Balanced Risk Allocation
and Managed Liquidity Share Portfolios’ income statements and
summaries of net assets (shown on pages 15, 22, 28 and 32) do not
represent statutory accounts, are not required under UK Generally
Accepted Accounting Practice and the auditor does not express an
opinion on each individual portfolio. These have been disclosed to
assist shareholders’ understanding of the assets and liabilities,
and income and expenses of the different Share classes.
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by the AIC,
supplementary information which analyses the income statement
between items of a revenue and capital nature has been presented
alongside the income statement.
(iii) Functional and
presentational currency
The Company’s investments are made in several currencies,
however, the financial statements are presented in sterling, which
is the Company’s functional currency. In arriving at this
conclusion, the Directors considered that the Company’s shares are
listed and traded on the London Stock Exchange, the shareholder
base is predominantly in the United
Kingdom and the Company pays dividends and expenses in
sterling.
(iv) 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.
(v) Significant
Accounting Estimates and Judgements
The preparation of the financial statements may require the
Directors to make estimations where uncertainty exists. It also
requires the Directors to make judgements, estimates and
assumptions, in the process of applying the accounting policies.
There have been no significant judgements, estimates or assumptions
for the current or preceding year.
(vi) Issue of Shares
Pursuant to a Scheme of Reconstruction of Invesco Income Growth
Trust plc (“business combination”)
During the year, the UK Equity Share Portfolio issued new
ordinary shares to shareholders of Invesco Income Growth plc
(‘IIGT’) in respect of assets received following the business
combination. This transaction has been accounted for as a business
combination under Section 19 of FRS102 on the basis of the assets
and shareholder base added to the Company. The assets acquired
comprised of investments, accrued income and cash. These assets
have been recognised in share capital and share premium, as
disclosed in note 13(f) of the financial statements. Costs in
respect of the shares issued have been recognised in share premium,
whereas other professional costs in relation to the business
combination have been recognised as transaction costs
included within investment gains and losses.
(b) Financial
Instruments
The Company has chosen to apply the provisions of Sections 11
and 12 of FRS 102 in full in respect of the financial instruments,
which is explained below.
(i) Recognition of
Financial Assets and Financial Liabilities
The Company recognises financial assets and financial
liabilities when the Company becomes a party to the contractual
provisions of the instrument. The Company will offset financial
assets and financial liabilities if the Company has a legally
enforceable right to set off the recognised amounts and interests
and intends to settle on a net basis.
(ii) Derecognition
of Financial Assets
The Company derecognises a financial asset when the contractual
rights to the cash flows from the asset expire or it transfers the
right to receive the contractual cash flows on the financial asset
in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred. Any interest
in the transferred financial asset that is created or retained by
the Company is recognised as an asset.
(iii) Derecognition of
Financial Liabilities
The Company derecognises financial liabilities when its
obligations are discharged, cancelled or expire.
(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, including financial derivative
instruments, are classified as held at fair value through profit or
loss.
Financial assets held at fair value through profit or loss are
initially recognised at fair value, which is taken to be their
cost, with transaction costs expensed in the income statement, and
are subsequently valued at fair value.
Fair value for investments, including financial derivative
instruments, that are actively traded in organised financial
markets is determined by reference to stock exchange quoted bid
prices at the balance sheet date. For investments that are not
actively traded or where active stock exchange quoted bid prices
are not available, fair value is determined by reference to a
variety of valuation techniques including broker quotes and price
modelling. Where there is no active market, unlisted/illiquid
investments are valued by the Directors at fair value with regard
to the International Private Equity and Venture Capital Valuation
Guidelines and on recommendations from Invesco’s Pricing Committee,
both of which use valuation techniques such as earnings multiples,
recent arm’s length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative
instruments but including borrowings, are initially measured at
fair value, net of transaction costs and are subsequently measured
at amortised cost using the effective interest method.
(c)
Derivatives and hedging
Derivative instruments are valued at fair value in the balance
sheet. Derivative instruments may be capital or revenue in nature
and, accordingly, changes in their fair value are recognised in
revenue or capital in the income statement as appropriate.
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 included in capital reserves.
Futures contracts may be entered into for hedging purposes and
any profits and losses on the closure or revaluation of positions
are included in capital reserves. Where futures contracts are used
for investment exposure any income element arising on bond futures
is recognised as a gain on derivative instruments in the
income statement and shown in revenue.
(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: 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, have a maturity of less than three months at date of
origination and provide a return no greater than the rate of a
three-month high quality government bond. For the Balanced Risk
Allocation and Managed Liquidity Portfolios, cash and cash
equivalents do not include investments in Invesco Liquidity Funds
plc – Sterling as this forms part of those Portfolio’s fixed
assets.
(e) Income
Dividend income from investments is recognised when the
shareholders’ right to receive payment has been established,
normally the ex-dividend date. UK dividends are stated net of
related tax credits. Interest income arising from cash is
recognised on an accruals basis and underwriting commission is
recognised as earned. Special dividends are taken to revenue unless
they arise from a return of capital, when they are allocated to
capital in the income statement. Income from fixed income
securities is recognised in the income statement using the
effective interest method.
(f) Expenses and
finance costs
All expenses are accounted for on an accruals basis. Expenses
are charged to the income statement and shown in revenue except
where expenses are presented as capital items when
a connection with the maintenance or enhancement of the value
of the investments held can be demonstrated and thus management
fees and finance costs are charged to revenue and capital to
reflect the Directors’ expected long-term view of the nature of the
investment returns of each Portfolio.
Expenses charged to the Company in relation to a specific
Portfolio are charged directly to that Portfolio.
Expenses charged to the Company that are common to more than one
Portfolio are allocated between those Portfolios in the same
proportions as the net assets of each Portfolio at the latest
conversion date.
Finance costs are accounted for on an accruals basis using the
effective interest rate method.
The management fees and finance costs are charged in accordance
with the Board’s expected split of long-term returns, in the form
of capital gains and income, to the applicable Portfolio as
follows:
|
|
Revenue |
Capital |
Portfolio |
|
Reserve |
Reserve |
UK Equity |
|
30% |
70% |
Global Equity Income |
|
30% |
70% |
Balanced Risk Allocation |
|
30% |
70% |
Managed Liquidity |
|
100% |
— |
(g) Dividends
Dividends are accrued in the financial statements when there is
an obligation to pay the dividends at the balance sheet date.
(h) Taxation
Tax expense represents the sum of tax currently payable and
deferred tax. Any tax payable is based on taxable profit for the
period. Taxable profit differs from profit before tax as reported
in the income statement because it excludes items of income or
expenses that are taxable or deductible in other years and it
further excludes items that are never taxable or deductible. The
Company’s liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the balance
sheet date.
For the Company, any allocation of tax relief to capital is
based on the marginal basis, such that tax allowable capital
expenses are offset against taxable income. Where individual
Portfolios have extra tax capacity arising from unused tax
allowable expenses which can be used by a different Portfolio, this
extra tax capacity is transferred between the Portfolios at a
valuation of 1% of the amount transferred.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the balance
sheet date where transactions or events that result in an
obligation to pay more tax or a right to pay less tax in the future
have occurred. Timing differences are differences between the
Company’s taxable profits and its results as stated in the
financial statements. Deferred taxation assets are recognised
where, in the opinion of the Directors, it is more likely than not
that these amounts will be realised in future periods.
A deferred tax asset has not been recognised in respect of
surplus management expenses as the Company is unlikely to have
sufficient future taxable revenue to offset against these.
Investment trusts which have approval under the appropriate tax
regulations are not liable for taxation on capital gains.
2. Income
This note shows the income generated from the portfolios
(investment assets) of the Company and income received from any
other source.
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Income from investments: |
|
|
|
|
|
UK dividends: |
|
|
|
|
|
– ordinary
dividends |
1,460 |
142 |
— |
— |
1,602 |
– scrip dividends |
9 |
— |
— |
— |
9 |
|
1,469 |
142 |
— |
— |
1,611 |
Overseas dividends: |
|
|
|
|
|
– ordinary
dividends |
187 |
1,147 |
2 |
3 |
1,339 |
– special
dividends |
— |
192 |
— |
— |
192 |
Interest from Treasury bills |
— |
— |
2 |
— |
2 |
|
1,656 |
1,481 |
4 |
3 |
3,144 |
Other income |
|
|
|
|
|
Rebates of management fee |
— |
— |
— |
40(1) |
40 |
Total income |
1,656 |
1,481 |
4 |
43 |
3,184 |
(1) Includes a £34,000 (1.40p per share) refund of unpaid
management fees in respect of historic overcharges. As reported in
the 2017 half year financial report, it was agreed that the refund
would be paid directly to affected shareholders and any unpaid
amounts would be returned to the Company.
2020
Income from investments:
UK dividends: |
|
|
|
|
|
– ordinary
dividends |
1,401 |
361 |
– |
– |
1,762 |
– special dividends |
61 |
29 |
– |
– |
90 |
– scrip dividends |
50 |
7 |
– |
– |
57 |
|
1,512 |
397 |
– |
– |
1,909 |
Overseas dividends: |
|
|
|
|
|
– ordinary
dividends |
133 |
1,787 |
13 |
23 |
1,956 |
– special
dividends |
– |
20 |
– |
– |
20 |
Unfranked investment income |
11 |
– |
– |
– |
11 |
Interest from Treasury bills |
– |
– |
38 |
– |
38 |
|
1,656 |
2,204 |
51 |
23 |
3,934 |
Other income |
|
|
|
|
|
Deposit interest |
– |
– |
3 |
– |
3 |
Rebates of management fee |
– |
– |
– |
13 |
13 |
Total income |
1,656 |
2,204 |
54 |
36 |
3,950 |
There were £539,000 of special dividends in respect of the UK
Equity Portfolio recognised in capital during the year (2020:
£48,000 in respect of the UK Equity Portfolio and £32,000 in
respect of the Global Equity Income Portfolio).
3. Investment
management and performance fees
This note shows the fees paid to the Manager. These are made up
of the individual Portfolio investment management fees calculated
quarterly on the basis of their net asset values and the
performance fees of the UK Equity and Global Equity Income
Portfolios.
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Investment management fee: |
|
|
|
|
|
– charged to revenue |
91 |
88 |
16 |
3 |
198 |
– charged to capital |
213 |
204 |
37 |
- |
454 |
Total investment management fee |
304 |
292 |
53 |
3 |
652 |
2020
Investment management fee: |
|
|
|
|
|
– charged to revenue |
88 |
97 |
17 |
4 |
206 |
– charged to capital |
206 |
227 |
40 |
– |
473 |
Total investment management fee |
294 |
324 |
57 |
4 |
679 |
Details of the investment management agreement are given on page
54 in the Directors' Report.
Pursuant to the issue of shares pursuant to the Scheme of
Reconstruction of Invesco Income Growth Trust plc (“the
transaction”), an improved fee structure was proposed for the UK
Equity Share Portfolio and Global Equity Income Share Portfolio.
The management fee payable by the Company in respect of these two
share portfolios will be reduced to 0.55 per cent. per annum on the
net assets of up to £100 million, and 0.50 per cent. per annum on
the net assets of over £100 million.
As a result of the business combination the Manager agreed to
remove the performance fee arrangements which were in place for
both the UK Equity and Global Equity Income Share Portfolios.
Furthermore, the historical performance fee accrued on the
UK Equity Share Portfolio of £531,000 was also waived by the
Manager as a benefit towards the costs of the transaction and
written-back to capital in the Income Statement.
No performance fee was earned or paid during the year (2020:
none).
4. Other
Expenses
The other expenses of the Company, including those paid to
Directors and the auditor, are presented below; those paid to the
Directors and the auditor are separately identified.
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Charged to revenue: |
|
|
|
|
|
Directors’ remuneration (i)(ii) |
60 |
55 |
8 |
2 |
125 |
Auditor’s fees (iii): |
|
|
|
|
|
– for the audit of
the Company’s financial statements |
34 |
11 |
1 |
1 |
47 |
Other administrative expenses
(iv) |
111 |
73 |
25 |
4 |
213 |
|
205 |
139 |
34 |
7 |
385 |
Charged to capital: |
|
|
|
|
|
Custodian transaction charges |
17 |
4 |
2 |
— |
23 |
Total |
222 |
143 |
36 |
7 |
408 |
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2020 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Charged to revenue: |
|
|
|
|
|
Directors’ remuneration (i)(ii) |
58 |
64 |
8 |
3 |
133 |
Auditor’s fees (iii): |
|
|
|
|
|
– for the audit of
the Company’s |
|
|
|
|
|
financial
statements |
17 |
20 |
3 |
1 |
41 |
Other administrative expenses
(iv) |
122 |
133 |
29 |
5 |
289 |
|
197 |
217 |
40 |
9 |
463 |
Charged to capital: |
|
|
|
|
|
Custodian transaction charges |
3 |
5 |
1 |
– |
9 |
Total |
200 |
222 |
41 |
9 |
472 |
(i) The Director’s Remuneration Report provides
information on Directors’ fees. Included within other
administrative expenses is £12,000 (2020: £12,000) of employer’s
national insurance payable on Directors’ remuneration.
(ii) As at 31 May 2021, the
amounts outstanding on Directors’ fees and employer’s national
insurance was £26,000 (2020: £22,000).
(iii) The Auditor’s fees shown include out of pocket expenses,
but exclude VAT, which is included in other administrative
expenses. Grant Thornton LLP provided non-audit services related to
work on the business combination with Invesco Income Growth Trust
plc, which amounted to £23,000 (2020: none). This amount is
recognised in investment gains and losses as part of professional
fees in respect of the business combination.
(iv) Includes fees for custody, depositary, broker,
registrar, printing, postage, listing costs and other
administrative expenses.
5. Finance
Costs
Finance costs arise on any borrowing the Company has utilised in
the year. The Company has a committed £40 million revolving credit
facility (see note 12(b) for further details).
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Interest payable on borrowings
repayable within one year |
|
|
|
|
|
as follows: |
|
|
|
|
|
– charged to
revenue |
20 |
18 |
— |
— |
38 |
– charged to
capital |
48 |
42 |
— |
— |
90 |
Total |
68 |
60 |
— |
— |
128 |
2020
Interest payable on borrowings |
|
|
|
|
|
repayable within one year as
follows: |
|
|
|
|
|
Charged to revenue |
16 |
21 |
– |
– |
37 |
Charged to capital |
40 |
48 |
– |
– |
88 |
Total |
56 |
69 |
– |
– |
125 |
6. Tax
As an investment trust, the Company pays no tax on capital
gains. However, the Company suffers tax on certain overseas
dividends that is irrecoverable and this note shows details of the
tax charge. In addition, this note clarifies the basis for the
Company having no deferred tax asset or liability.
(a) Tax charge
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Overseas tax |
18 |
212 |
— |
— |
230 |
2020 |
|
|
|
|
|
Overseas tax |
15 |
230 |
– |
– |
245 |
The accounting policy for taxation is disclosed in note
1(h).
(b) Reconciliation of
tax charge
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Return before taxation |
15,392 |
16,085 |
1,559 |
56 |
33,494 |
Theoretical tax at the current |
|
|
|
|
|
UK Corporation Tax rate of 19.00%
(2020: 19.00%) |
2,924 |
3,056 |
296 |
11 |
6,287 |
Effect of: |
|
|
|
|
|
– Non-taxable gains on investments
and derivatives |
(2,521) |
(2,871) |
(320) |
(5) |
(5,717) |
– Non-taxable losses on foreign
exchange |
2 |
2 |
15 |
— |
19 |
– Non-taxable scrip dividends |
(2) |
— |
— |
— |
(2) |
– Non-taxable UK dividends |
(274) |
(27) |
— |
— |
(301) |
– Non-taxable overseas
dividends |
(35) |
(216) |
— |
— |
(251) |
– Non-taxable special dividends |
(102) |
(37) |
— |
— |
(139) |
– Overseas tax |
18 |
212 |
— |
— |
230 |
– Disallowable expenses |
3 |
1 |
— |
— |
4 |
– Accrued income taxable on
receipt |
- |
1 |
— |
— |
1 |
– Excess of allowable expenses over
taxable income |
5 |
91 |
9 |
(6) |
99 |
Tax charge for the year |
18 |
212 |
— |
— |
230 |
2020
Return before taxation |
(6,697) |
(3,171) |
(213) |
24 |
(10,057) |
Theoretical tax at the current |
|
|
|
|
|
UK Corporation Tax rate of 19%
(2019: 19.00%) |
(1,273) |
(602) |
(41) |
5 |
(1,911) |
Effect of: |
|
|
|
|
|
– Non-taxable losses on investments
and derivatives |
1,491 |
909 |
31 |
– |
2,431 |
– Non-taxable losses on foreign
exchange |
1 |
1 |
2 |
– |
4 |
– Non-taxable scrip dividends |
(19) |
(1) |
– |
– |
(20) |
– Non-taxable UK dividends |
(265) |
(69) |
– |
– |
(334) |
– Non-taxable UK special
dividends |
(12) |
(16) |
– |
– |
(28) |
– Non-taxable overseas
dividends |
(25) |
(335) |
– |
– |
(360) |
– Overseas tax |
15 |
230 |
– |
– |
245 |
– Disallowable expenses |
1 |
1 |
– |
– |
2 |
– Accrued income taxable on
receipt |
– |
7 |
– |
– |
7 |
– Excess of allowable expenses over
taxable income |
101 |
105 |
8 |
(5) |
209 |
Tax charge for the year |
15 |
230 |
– |
– |
245 |
Given the Company’s status as an investment trust, and the
intention to continue meeting the conditions required to retain
such status for the foreseeable future, the Company has not
provided any UK corporation tax on any realised or unrealised
capital gains or losses arising on investments.
(c) Factors that may
affect future tax charges
The Company has excess management expenses and loan relationship
deficits of £15,258,000 (2020: £14,735,000) that are available to
offset future taxable revenue. A deferred tax asset of £3,814,000
(2020: £2,800,000), measured at the substantively enacted
corporation tax rate of 25% (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 per
Ordinary Share
Return per share is the amount of profit (or loss) generated for
each share class in the financial year divided by the weighted
average number of the shares in issue. The basic and diluted
returns per share are identical as the ordinary shares for each of
the of portfolio are not dilutive.
Revenue, capital and total return per ordinary share is based on
each of the returns after taxation shown by the income statement
for the applicable Share class and on the following numbers of
Shares being the weighted average number of Shares in issue
throughout the year for each Share class:
|
Average |
|
number of
shares |
|
Share |
2021 |
2020 |
|
UK Equity |
33,926,654 |
32,530,315 |
|
Global Equity Income |
25,925,091 |
30,394,232 |
|
Balanced Risk Allocation |
4,733,820 |
5,465,560 |
|
Managed Liquidity |
2,436,740 |
3,551,612 |
|
|
|
|
8. Dividends
Dividends are distributions of Portfolio returns to
shareholders. These are determined by the Directors and paid four
times a year.
Dividends paid for each applicable Share class, which represent
distributions for the purpose of s1159 of the Corporation Tax Act
2010, follows:
|
2021 |
2020 |
|
Number |
Dividend |
Total |
Number |
Dividend |
Total |
|
of
shares |
rate (pence) |
£’000 |
of shares |
rate (pence) |
£’000 |
UK Equity |
|
|
|
|
|
|
First interim |
30,584,941 |
1.50 |
459 |
33,048,823 |
1.50 |
496 |
Second interim |
29,379,249 |
1.50 |
440 |
32,549,709 |
1.50 |
488 |
Third interim |
26,871,720 |
1.50 |
403 |
32,334,465 |
1.50 |
485 |
Fourth interim |
23,814,892 |
2.15 |
512 |
32,203,602 |
2.10 |
676 |
|
|
6.65 |
1,814 |
|
6.60 |
2,145 |
Global Equity Income |
|
|
|
|
|
|
First interim |
27,605,800 |
1.55 |
428 |
31,466,468 |
1.55 |
488 |
Second interim |
26,376,118 |
1.55 |
409 |
31,189,234 |
1.55 |
483 |
Third interim |
25,557,022 |
1.55 |
396 |
29,900,843 |
1.55 |
463 |
Fourth interim |
23,745,988 |
2.45 |
582 |
29,334,234 |
2.40 |
704 |
|
|
7.10 |
1,815 |
|
7.05 |
2,138 |
Managed Liquidity |
|
|
|
|
|
|
Prior year interim |
— |
— |
— |
4,370,361 |
0.80 |
35 |
Current year
interim |
— |
— |
— |
2,492,814 |
0.80 |
20 |
|
|
— |
— |
|
1.60 |
55 |
Total paid in the year |
|
|
3,629 |
|
|
4,338 |
|
|
|
|
|
|
|
|
No dividends have been paid to Balanced Risk Allocation
shareholders during the year (2020: nil).
The Company’s dividend policy permits the payment of dividends
by the UK Equity, Global Equity Income and Managed Liquidity
Portfolios from capital. An analysis of dividends paid in the year
from revenue and capital follows.
|
|
Global |
|
|
|
UK |
Equity |
Managed |
Company |
|
Equity |
Income |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
Dividends paid in the year: |
|
|
|
|
From revenue |
1,322 |
1,024 |
— |
2,346 |
From capital |
492 |
791 |
— |
1,283 |
|
1,814 |
1,815 |
— |
3,629 |
2020 |
|
|
|
|
Dividends paid in the year: |
|
|
|
|
From revenue – current year |
1,340 |
1,639 |
23 |
3,002 |
From revenue – reserves brought
forward |
– |
373 |
32 |
405 |
From revenue |
1,340 |
2,012 |
55 |
3,407 |
From capital |
805 |
126 |
– |
931 |
|
2,145 |
2,138 |
55 |
4,338 |
9. Investments held
at fair value
The portfolio is made up of investments which are listed, i.e.
traded on a regulated stock exchange, and a small proportion of
investments which are valued by the Directors as they are unlisted
or not regularly traded. Gains and losses are either:
• realised, usually arising when
investments are sold; or
• unrealised, being the difference
from cost on the investments held at the year end.
(a) Analysis of
investments:
|
2021 |
2020 |
|
£’000 |
£’000 |
UK listed investments |
178,775 |
58,159 |
Overseas listed investments(i) |
69,106 |
58,751 |
Unquoted hedge fund investments |
5 |
18 |
|
247,886 |
116,928 |
(i) Includes the Invesco Liquidity Funds plc – Sterling,
money market fund positions held by the Balanced Risk Allocation
Portfolio of £2,359,000 (2020: £2,330,000) and Managed Liquidity
Portfolio of £140,000 (2020: £40,000).
(b) Analysis of
investment gains
|
2021 |
2020 |
|
£’000 |
£’000 |
Opening valuation |
116,928 |
140,385 |
Movements in year: |
|
|
Purchases at cost |
230,052 |
99,149 |
Sales proceeds |
(127,485) |
(109,974) |
Gains/(losses) on
investments in the year |
28,391 |
(12,632) |
Closing valuation |
247,886 |
116,928 |
Closing book cost |
226,927 |
123,110 |
Closing investment holding
gains/(losses) |
20,959 |
(6,182) |
Closing valuation |
247,886 |
116,928 |
The Company received £127,485,000 (2020: £109,974,000) from
investments sold in the year. The book cost of these investments
when they were purchased was £125,833,000 (2020: £105,970,000)
realising a profit of £1,652,000 (2020: £4,004,000). 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.
(c) Transaction
costs
Transaction costs were £257,000 (2020: £158,000) on purchases
and £64,000 (2020: £49,000) on sales and are included in investment
gains and losses. Transaction costs in relation to investments
acquired from the business combination are shown in 9(d) below.
(d) Purchases at
cost
During the year £118,144,000 of investments were acquired in
respect of the business combination. Stamp duty of £475,000 plus
professional costs of £512,000 less cash benefits of £534,000 were
incurred and recognised in investment gains and losses.
10. Derivative
instruments
Derivative instruments are contracts whose price is derived from
the value of other securities or indices. The Balanced Risk
Allocation Portfolio uses futures, which represent agreements to
buy or sell commodities or financial instruments at a
pre-determined price in the future.
Excluding forward currency contracts used for currency hedging
purposes.
|
2021 |
2020 |
|
£’000 |
£’000 |
Opening derivative assets held at
fair value through profit or loss |
401 |
175 |
Opening derivative liabilities held
at fair value through profit or loss |
(151) |
(223) |
Opening net derivative
assets/(liabilities) held at fair value as shown in balance
sheet |
250 |
(48) |
Closing derivative assets held at
fair value through profit or loss |
292 |
401 |
Closing derivative liabilities held
at fair value through profit or loss |
(18) |
(151) |
Closing net derivative assets held
at fair value shown in balance sheet |
274 |
250 |
Movement in derivative holding
assets/liabilities |
24 |
298 |
Net realised gains/(losses) on
derivative instruments |
1,677 |
(457) |
Net capital gains/(losses) on
derivative instruments as shown in the income statement |
1,701 |
(159) |
Net income arising on
derivatives |
38 |
2 |
Total gains/(losses) on derivative
instruments |
1,739 |
(157) |
The derivative assets/liabilities shown in the balance sheet are
the unrealised gains/losses arising from the revaluation to fair
value of futures contracts held in the Balanced Risk Allocation
Share Portfolio, as shown on page 26.
11. Debtors
Debtors are amounts due to the Company, such as monies due from
brokers for investments sold and income which has been earned
(accrued) but not yet received.
|
2021 |
2020 |
|
£’000 |
£’000 |
Amounts due from brokers |
520 |
2,300 |
Collateral pledged for futures
contracts |
187 |
244 |
Tax recoverable |
204 |
223 |
Prepayments and accrued income |
654 |
339 |
|
1,565 |
3,106 |
12a. Other creditors
Creditors are amounts owed by the Company and include amounts
due to brokers for the purchase of investments and amounts owed to
suppliers, such as the Manager and auditor.
|
2021 |
2020 |
|
£’000 |
£’000 |
Shares bought back |
— |
653 |
Tax payable |
137 |
137 |
Amounts due to brokers |
1,205 |
1,653 |
Performance fee accrued(1) |
— |
531 |
Accruals |
631 |
306 |
Other payables |
1,973 |
3,280 |
(1) Performance fee accrued of £531,000 on the UK Equity Share
Portfolio was waived by the Manager and written-back as a benefit
towards the costs of the business combination with Invesco Income
Growth Trust plc.
12b.
Bank facility and overdraft
At the year end the Company had a £40 million (2020: £20
million) committed 364 day multicurrency revolving credit facility
(‘bank facility’), which is due for renewal on 26 April 2022. The facility renewal was
originally scheduled for 14 May 2021,
but was brought forward to 27 April
2021 as part of the business combination of the UK Equity
Share Portfolio with Invesco Income Growth Trust plc. In addition,
an overdraft facility for the purpose of short term settlement is
also available. Both facilities are with The Bank of New York
Mellon. The interest payable on the credit facility is based on the
Adjusted Reference Rate (principally SONIA, SOFR and €STR
respectively in respect of loans drawn in GBP, USD and Euro) plus a
margin for amounts drawn. In addition, there is a 0.15% commitment
fee on the facility amount not utilised.
Under the bank facility’s covenants, the Company’s total
indebtedness must not exceed 30% of total assets (excluding any
Balanced Risk Allocation Portfolio assets) and the total assets
must not be less than £120 million (2020: £60 million).
The Company has complied with the loan facility covenants
throughout the year.
13. Share Capital and
Reserves
Share capital represents the total number of shares in issue,
including treasury shares.
All shares have a nominal value of 1
pence.
(a) Movements in Share Capital during the Year
Issued and fully paid:
|
|
Global |
Balanced |
|
Total |
|
UK |
Equity |
Risk |
Managed |
Share |
|
Equity |
Income |
Allocation |
Liquidity |
Capital |
Ordinary Shares (number) |
|
|
|
|
|
At 31 May 2020 |
31,977,941 |
28,786,800 |
5,236,886 |
2,497,032 |
68,498,659 |
Shares bought back into
treasury |
(10,769,463) |
(4,939,000) |
(951,000) |
(569,000) |
(17,228,463) |
Arising on share conversion: |
|
|
|
|
|
– August 2020 |
(200,692) |
(315,682) |
84,642 |
738,300 |
306,568 |
– November 2020 |
122,471 |
210,904 |
(147,022) |
(340,649) |
(154,296) |
– February 2021 |
575,172 |
2,966 |
(143,595) |
(701,812) |
(267,269) |
– May 2021 |
(12,320) |
24,817 |
(10,816) |
(16,192) |
(14,511) |
Issue of shares on business
combination |
66,628,879 |
— |
— |
- |
66,628,879 |
At 31 May 2021 |
88,321,988 |
23,770,805 |
4,069,095 |
1,607,679 |
117,769,567 |
Treasury Shares (number) |
|
|
|
|
|
At 31 May 2020 |
11,977,812 |
10,514,159 |
5,321,218 |
8,681,678 |
36,494,867 |
Shares bought back into
treasury |
10,769,463 |
4,939,000 |
951,000 |
569,000 |
17,228,463 |
At 31 May 2021 |
22,747,275 |
15,453,159 |
6,272,218 |
9,250,678 |
53,723,330 |
Ordinary Shares of 1 penny each
(£’000) |
|
|
|
|
|
At 31 May 2020 |
319 |
288 |
52 |
25 |
684 |
Shares bought back into
treasury |
(108) |
(49) |
(9) |
(6) |
(172) |
– August 2020 |
(2) |
(3) |
1 |
7 |
3 |
– November 2020 |
2 |
2 |
(2) |
(3) |
(1) |
– February 2021 |
6 |
— |
(2) |
(7) |
(3) |
Issue of shares on business
combination |
666 |
— |
— |
— |
666 |
At 31 May 2021 |
883 |
238 |
40 |
16 |
1,177 |
Treasury Shares of 1 penny each
(£’000) |
|
|
|
|
|
At 31 May 2020 |
120 |
105 |
54 |
87 |
366 |
Shares bought back into
treasury |
108 |
49 |
9 |
6 |
172 |
At 31 May 2021 |
228 |
154 |
63 |
93 |
538 |
Total Share Capital (£’000) |
|
|
|
|
|
Ordinary share capital |
883 |
238 |
40 |
16 |
1,177 |
Treasury share capital |
228 |
154 |
63 |
93 |
538 |
At 31 May 2021 |
1,111 |
392 |
103 |
109 |
1,715 |
Average buy back price |
157.1p |
194.8p |
145.7p |
101.8p |
|
The total cost of share buy backs was £28,704,000 (2020:
£9,986,000). As part of the conversion process 457,600 (2020:
614,700) deferred shares of 1p each were created and subsequently
cancelled during the year. No deferred shares were in issue at the
start or end of the year.
No ordinary shares were issued from treasury during the year
(2020: nil).
(b) Movements in Share Capital after the Year
End
Since the year end, UK Equity and Managed Liquidity Portfolios
bought back 4,860,000 and 63,000 shares respectively to be held in
treasury.
(c) Voting Rights
Rights attaching to the Shares are described in the Directors’
Report on page 54.
(d) Deferred Shares
The Deferred shares do not carry any rights to participate in
the Company’s profits, do not entitle the holder to any repayment
of capital on a return of assets (except for the sum of 1p) and do
not carry any right to receive notice of or attend or vote at any
general meeting of the Company. Any Deferred shares that arise as a
result of conversions of Shares are cancelled in the same reporting
period.
(e) Future Convertibility of the Shares
Shares are convertible at the option of the holder into any
other class of Share. Further conversion details are given on page
2 and in the Shareholder Information on page 108.
(f) Issue of Shares pursuant to a business
combination with Invesco Income Growth Trust plc
On 26 April 2021, 66,628,879
ordinary shares of par value of 1p per share in the UK Equity Share
Portfolio were issued to the shareholders of Invesco Income Growth
Trust plc, in lieu of their investment in that company. The net
assets acquired for these shares was as follows:
|
Share |
Share |
|
|
Capital |
Premium |
Total |
|
£’000 |
£’000 |
£’000 |
Investments |
— |
|
118,144 |
Accrued income |
— |
|
1,039 |
Cash |
|
|
3,342 |
Net assets acquired |
|
|
122,525 |
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 new shares, after deduction of the
nominal amount of 1 penny and any applicable costs. The special
reserve arose from the cancellation of the share premium account,
in January 2007, and is available as
distributable profits to be used for all purposes under the
Companies Act 2006, including buy back of shares and payment of
dividends. The capital redemption reserve arises from the nominal
value of shares bought back and cancelled; this and the share
premium are non-distributable.
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 payments of any dividends. The capital and
revenue reserves are distributable.
15. Net Asset Value per
Share
The total net assets (total assets less total liabilities)
attributable to a share class are often termed shareholders’ funds
and are converted into net asset value per share by dividing by the
number of shares in issue.
The net asset value per Share and the net assets attributable at
the year end were as follows:
Ordinary Shares |
2021 |
2020 |
|
Net Asset |
|
Net Asset |
|
|
Value Per |
Net Assets |
Value Per |
Net Assets |
|
Share |
Attributable |
Share |
Attributable |
|
Pence |
£’000 |
Pence |
£’000 |
UK Equity |
188.33 |
166,334 |
145.78 |
46,617 |
Global Equity Income |
233.91 |
55,602 |
178.46 |
51,372 |
Balanced Risk Allocation |
169.33 |
6,890 |
135.06 |
7,073 |
Managed Liquidity |
108.11 |
1,738 |
104.40 |
2,607 |
Net asset value per Share is based on net assets at the year end
and on the number of Shares in issue (excluding Treasury Shares)
for each Share class at the year end as shown in note 13(a).
16. Financial
Instruments
This note summarises the risks deriving from the financial
instruments that comprise the Company’s assets
and liabilities.
The Company’s financial instruments comprise the following:
• investments in equities, fixed interest
securities and liquidity funds which are held in accordance with
the Company’s investment objectives and the investment objectives
of the four Portfolios;
• short-term debtors, creditors and cash
arising directly from operations;
• short-term forward foreign currency and
futures contracts; and
• bank facility and short-term overdrafts,
used to finance operations.
The financial instruments held in each of the four investment
portfolios are shown on pages 15, 22, 28 and 32.
The accounting policies in note 1 include criteria for the
recognition and the basis of measurement applied for these
financial instruments. Note 1 also includes the basis on which
income and expenses arising from financial assets and liabilities
are recognised and measured.
The Company’s principal risks and uncertainties are outlined in
the Strategic Report on pages 44 to 46. This note expands on
risk areas in relation to the Company’s financial instruments. The
Portfolios are managed in accordance with the Company’s investment
policies and objectives, which are set out on pages 39 to 41. The
management process is subject to risk controls, which the Audit
Committee reviews on behalf of the Board, as described on page
60.
The principal risks that an investment company faces in its
portfolio management activities are set out below:
Market risk – arising from fluctuations in the fair value
or future cash flows of a financial instrument because of changes
in market prices. Market risk comprises three types of risk:
currency risk, interest rate risk and other price risk:
Currency risk – arising from fluctuations in the fair
value or future cash flows of a financial instrument because of
changes in foreign exchange rates;
Interest rate risk – arising from fluctuations in the
fair value or future cash flows of a financial instrument because
of changes in market interest rates; and
Other price risk – arising from fluctuations in the fair
value or future cash flows of a financial instrument for reasons
other than changes in foreign exchange rates or market interest
rates, whether those changes are caused by factors specific to the
individual financial instrument or its issuer, or factors affecting
all similar financial instruments traded in the market.
Liquidity risk – arising from any difficulty in meeting
obligations associated with financial liabilities.
Credit risk incorporating counterparty 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
As an investment trust the Company invests in equities and other
investments for the long-term in accordance with its investment
policies so as to meet its investment objectives. In pursuing its
objectives, the Company is exposed to a variety of risks that could
result in a reduction in the Company’s net assets or a reduction of
the profits available for dividends. The risks applicable to the
Company and the Directors’ policies for managing these risks
follow. These have not changed from those applying in the previous
year.
The Directors have delegated to the Manager the responsibility
for the day-to-day investment activities of the Company as more
fully described in the Directors’ Report.
The main risk that the Company faces arising from its financial
instruments is market risk – this risk is reviewed in detail below.
Since the Company mainly invests in quoted investments and
derivative instruments traded on recognised exchanges, liquidity
risk and credit risk are significantly mitigated.
16.1
Market Risk
Market risk arises from changes in the fair value or future cash
flows of a financial instrument because of movements in market
prices. Market risk comprises three types of risk: currency risk
(16.1.1), interest rate risk (16.1.2) and other price risk
(16.1.3).
The Company’s portfolio managers assess the individual
investment portfolio exposures when making each investment decision
for their Portfolios, and monitor the overall level of market risk
on the whole of their investment portfolio on an ongoing basis. The
Board meets at least quarterly to assess risk and review investment
performance for the four Portfolios and the Company, as disclosed
in the Board Responsibilities section of the Directors’ Report on
page 51. Borrowings can be used by the UK Equity and Global Equity
Income Portfolios, which will increase the Company’s exposure to
market risk and volatility. The borrowing limits for these
Portfolios are 25% and 20% of attributable net assets,
respectively.
16.1.1 Currency Risk
A majority of the Global Equity Income Portfolio, derivative
instruments in the Balanced Risk Allocation Portfolio and a small
proportion of the UK Equity Portfolio consist of assets,
liabilities and income denominated in currencies other than
sterling. As a result, movements in exchange rates will affect the
sterling value of those items.
Management of the currency risk
The portfolio managers monitor the separate Portfolios’ exposure
to foreign currencies on a daily basis and report to the Board on a
regular basis. Forward foreign currency contracts can be used to
limit the Company’s exposure to anticipated future changes in
exchange rates and to achieve portfolio characteristics that assist
the Company in meeting its investment objectives in line with its
investment policies. All contracts are limited to currencies and
amounts commensurate with the exposure to those currencies. No such
contracts were in place at the current or preceding year end.
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 accrued and its receipt.
Foreign Currency Exposure
The fair value or amortised cost of the Company’s monetary items
that have foreign currency exposure at 31 May 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 in order to show the overall level of
exposure.
UK Equity Portfolio:
|
|
|
|
Foreign |
Investments |
|
|
|
|
Creditors |
currency |
at fair |
|
|
Debtors |
|
(due to |
exposure |
value |
Total net |
|
(due from |
Cash and |
brokers |
on net |
through |
foreign |
|
brokers & |
cash |
and |
monetary |
profit or |
currency |
|
dividends)* |
equivalents |
accruals) |
items |
loss |
exposure |
Currency |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Year ended 31 May 2021 |
|
|
|
|
|
|
Canadian Dollar |
40 |
— |
— |
40 |
6,818 |
6,858 |
Euro |
2 |
— |
— |
2 |
- |
2 |
US Dollar |
161 |
— |
— |
161 |
5,342 |
5,503 |
|
203 |
— |
— |
203 |
12,160 |
12,363 |
Year ended 31 May 2020 |
|
|
|
|
|
|
Canadian Dollar |
– |
– |
– |
– |
2,852 |
2,852 |
Euro |
2 |
– |
– |
2 |
– |
2 |
US Dollar |
24 |
– |
– |
24 |
4,454 |
4,478 |
|
26 |
– |
– |
26 |
7,306 |
7,332 |
Global Equity Income Portfolio:
|
|
|
|
|
Investments |
|
|
|
|
|
Foreign |
at fair value |
|
|
|
|
Creditors |
currency |
through |
|
|
Debtors |
|
(due to |
exposure |
profit or |
|
|
(due from |
|
brokers |
on net |
loss |
Total net |
|
brokers & |
Cash |
and |
monetary |
that are |
foreign |
|
dividends)* |
at bank |
accruals) |
items |
equities |
currency |
Currency |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Year ended 31 May 2021 |
|
|
|
|
|
|
Canadian Dollar |
— |
— |
— |
— |
1,356 |
1,356 |
Euro |
63 |
2 |
— |
65 |
2,642 |
2,707 |
Hong Kong Dollar |
20 |
— |
— |
20 |
4,462 |
4,482 |
Norwegian Krone |
6 |
— |
— |
6 |
— |
6 |
South Korean Won |
— |
— |
— |
— |
1,944 |
1,944 |
Swedish Krona |
8 |
— |
— |
8 |
1,612 |
1,620 |
Swiss Franc |
124 |
— |
— |
124 |
7,317 |
7,441 |
Taiwanese Dollar |
— |
— |
— |
— |
2,977 |
2,977 |
US Dollar |
45 |
— |
— |
45 |
30,468 |
30,513 |
|
266 |
2 |
— |
268 |
52,778 |
53,046 |
Year ended 31 May 2020
Brazilian Real |
7 |
– |
– |
7 |
– |
7 |
Canadian Dollar |
– |
1 |
– |
1 |
– |
1 |
Euro |
256 |
– |
– |
256 |
7,071 |
7,327 |
Hong Kong Dollar |
527 |
– |
(527) |
– |
1,650 |
1,650 |
Japanese Yen |
3 |
– |
– |
3 |
952 |
955 |
Korean Won |
– |
– |
– |
– |
1,911 |
1,911 |
Norwegian Krone |
6 |
– |
– |
6 |
– |
6 |
Swedish Krona |
4 |
– |
– |
4 |
1,395 |
1,399 |
Swiss Franc |
438 |
– |
(835) |
(397) |
5,066 |
4,669 |
Taiwanese Dollar |
– |
– |
– |
– |
2,372 |
2,372 |
US Dollar |
826 |
– |
(159) |
667 |
26,016 |
26,683 |
|
2,067 |
1 |
(1,521) |
547 |
46,433 |
46,980 |
Balanced Risk Allocation Portfolio:
|
Derivative |
|
|
Derivative |
|
Investments |
|
|
assets held |
|
|
liabilities |
Foreign |
at fair value |
|
|
at fair |
|
|
held at fair |
currency |
through |
|
|
value |
Debtors |
|
value |
exposure |
profit or |
|
|
through |
(due from |
|
through |
on net |
loss |
Total net |
|
profit |
brokers & |
Cash |
profit |
monetary |
that are |
foreign |
|
or loss |
dividends)* |
at bank |
or loss |
items |
equities |
currency |
Currency |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Year ended |
|
|
|
|
|
|
|
31 May 2021 |
|
|
|
|
|
|
|
Australian Dollar |
15 |
6 |
24 |
— |
45 |
— |
45 |
Canadian Dollar |
— |
23 |
18 |
(5) |
36 |
— |
36 |
Euro |
28 |
5 |
43 |
— |
76 |
— |
76 |
Japanese Yen |
14 |
20 |
21 |
— |
55 |
— |
55 |
US Dollar |
209 |
84 |
77 |
(13) |
357 |
5 |
362 |
|
266 |
138 |
183 |
(18) |
569 |
5 |
574 |
|
Derivative |
Debtors |
|
Derivative |
Total |
Investments |
|
|
assets |
due from/ |
|
liabilities |
foreign |
at fair |
|
|
at fair |
(creditors |
|
at fair |
currency |
value |
|
|
value |
due to) |
|
value |
exposure |
through |
Total net |
|
through |
brokers & |
Cash/ |
through |
on net |
profit or |
foreign |
|
profit |
dividends/ |
(overdraft) |
profit |
monetary |
loss that |
currency |
|
or loss |
(accruals)* |
at bank |
or loss |
items |
are equities |
exposure |
Currency |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Year ended |
|
|
|
|
|
|
|
31 May 2020 |
|
|
|
|
|
|
|
Australian Dollar |
– |
80 |
32 |
(29) |
83 |
– |
83 |
Canadian Dollar |
– |
20 |
19 |
(1) |
38 |
– |
38 |
Euro |
76 |
(12) |
53 |
– |
117 |
– |
117 |
Hong Kong Dollar |
– |
42 |
25 |
(4) |
63 |
– |
63 |
Japanese Yen |
57 |
(36) |
23 |
– |
44 |
– |
44 |
US Dollar |
207 |
170 |
70 |
(117) |
330 |
18 |
348 |
|
340 |
264 |
222 |
(151) |
675 |
18 |
693 |
* Debtors includes collateral pledged for futures contracts.
Foreign Currency sensitivity
The preceding exposure analysis is based on the Company’s
monetary foreign currency financial instruments held at each
balance sheet date and takes account of forward foreign exchange
contracts, if used, that offset the effects of changes in currency
exchange rates.
The effect of strengthening or weakening of sterling against
other currencies to which the Company is exposed is calculated by
reference to the volatility of exchange rates during the year using
the standard deviation of currency fluctuations against the mean,
giving the following exchange rate fluctuations:
|
2021 |
2020 |
£/Australian Dollar |
+/– 1.2% |
+/– 3.6% |
£/Brazilian Real |
+/– 5.5% |
+/– 12.3% |
£/Canadian Dollar |
+/– 1.2% |
+/– 2.6% |
£/Euro |
+/– 2.2% |
+/– 2.7% |
£/Hong Kong Dollar |
+/– 3.9% |
+/– 2.9% |
£/Japanese Yen |
+/– 4.7% |
+/– 3.5% |
£/Norwegian Krone |
+/– 1.5% |
+/– 6.1% |
£/South Korean Won |
+/– 2.6% |
+/– 2.0% |
£/Swedish Krona |
+/– 1.8% |
+/– 2.5% |
£/Swiss Franc |
+/– 3.3% |
+/– 3.1% |
£/Taiwan Dollar |
+/– 2.2% |
+/– 2.7% |
£/US Dollar |
+/– 3.8% |
+/– 2.8% |
The tables that follow illustrate the exchange rate sensitivity
of revenue and capital returns arising from the Company’s financial
non-sterling assets and liabilities for the year for the UK Equity,
Global Equity Income and Balanced Risk Allocation Portfolios using
the exchange rate fluctuations shown above.
If sterling had strengthened against other currencies by the
exchange rate fluctuations shown in the table above, this would
have had the following after tax effect:
UK Equity Portfolio:
|
2021 |
2020 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
return |
return |
return |
return |
return |
return |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Canadian Dollar |
– |
(82) |
(82) |
– |
(74) |
(74) |
Euro |
(2) |
– |
(2) |
(1) |
– |
(1) |
US Dollar |
(19) |
(203) |
(222) |
(5) |
(125) |
(130) |
|
(21) |
(285) |
(306) |
(6) |
(199) |
(205) |
Global Equity Income Portfolio:
|
|
2021 |
2020 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
return |
return |
return |
return |
return |
return |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Australian Dollar |
– |
– |
– |
(1) |
– |
(1) |
Canadian Dollar |
– |
(16) |
(16) |
(1) |
– |
(1) |
Euro |
(1) |
(58) |
(59) |
(12) |
(195) |
(207) |
Hong Kong Dollar |
(1) |
(174) |
(175) |
(15) |
(33) |
(48) |
Japanese Yen |
– |
– |
– |
(2) |
(33) |
(35) |
Norwegian Krone |
– |
– |
– |
(2) |
– |
(2) |
South Korean Won |
(3) |
(51) |
(54) |
(1) |
(38) |
(39) |
Swedish Krona |
(1) |
(29) |
(30) |
– |
(35) |
(35) |
Swiss Franc |
(8) |
(241) |
(249) |
(15) |
(131) |
(146) |
Taiwan Dollar |
(1) |
(65) |
(66) |
(2) |
(64) |
(66) |
US Dollar |
(22) |
(1,158) |
(1,180) |
10 |
(775) |
(765) |
|
(37) |
(1,792) |
(1,829) |
(41) |
(1,304) |
(1,345) |
Balanced Risk Allocation Portfolio:
|
|
2021 |
2020 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
return |
return |
return |
return |
return |
return |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Australian Dollar |
– |
(1) |
(1) |
– |
(3) |
(3) |
Canadian Dollar |
– |
– |
– |
– |
(1) |
(1) |
Euro |
– |
(2) |
(2) |
– |
(3) |
(3) |
Hong Kong Dollar |
– |
– |
– |
– |
(2) |
(2) |
Japanese Yen |
– |
(3) |
(3) |
– |
(2) |
(2) |
US Dollar |
– |
(14) |
(14) |
– |
(10) |
(10) |
|
— |
(20) |
(20) |
— |
(21) |
(21) |
If sterling had weakened by the same amounts, the effect would
have been the converse.
16.1.2 Interest Rate Risk
Interest rate movements may affect:
•
the fair value of the investments in fixed interest rate
securities;
•
the level of income receivable on cash deposits; and
•
the interest payable on variable rate borrowings.
Management of interest rate risk
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account as part of the portfolio management and borrowings
processes of the portfolio managers. The Board reviews on a regular
basis the investment portfolio and borrowings. This encompasses the
valuation of fixed-interest and floating rate securities and
gearing levels.
When the Company has cash balances, they are held in variable
rate bank accounts yielding rates of interest dependent on the base
rate of the custodian or deposit taker. The Company has a £40
million (2020: £20 million), 364 day multicurrency revolving credit
facility which is due for renewal on 26
April 2022. The Company uses the facility when required at
levels approved and monitored by the Board.
Interest rate exposure
The Company also has available an uncommitted overdraft facility
for settlement purposes and interest is dependent on the base rate
determined by the custodian.
At 31 May 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 reset; and
•
fixed interest rates (giving fair value interest rate risk) – when
the financial instrument is due for repayment.
The following table sets out the financial assets and financial
liabilities exposure at the year end:
|
Global |
Balanced |
|
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Exposure to floating interest
rates: |
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
or loss(1) |
— |
— |
2,359 |
140 |
2,499 |
Cash and cash equivalents |
2,331 |
137 |
704 |
32 |
3,204 |
Bank facility |
(11,842) |
(8,550) |
— |
— |
(20,392) |
|
(9,511) |
(8,413) |
3,063 |
172 |
(14,689) |
Exposure to fixed interest
rates: |
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
or loss including UK
Treasury Bills |
— |
— |
3,377 |
— |
3,377 |
Net exposure to interest rates |
(9,511) |
(8,413) |
6,440 |
172 |
(11,312) |
2020 |
|
|
|
|
|
Exposure to floating interest
rates: |
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
or loss(1) |
– |
– |
2,330 |
2,682 |
5,012 |
Cash and cash equivalents |
– |
146 |
251 |
50 |
447 |
Bank facility |
(4,800) |
(4,980) |
– |
– |
(9,780) |
Overdraft |
(2) |
– |
– |
– |
(2) |
|
(4,802) |
(4,834) |
2,581 |
2,732 |
(4,323) |
Exposure to fixed interest
rates: |
|
|
|
|
|
Investments held at fair value
through profit |
|
|
|
|
|
or loss including UK
Treasury Bills |
– |
– |
3,999 |
– |
3,999 |
Net exposure to interest rates |
(4,802) |
(4,834) |
6,580 |
2,732 |
(324) |
(1) Comprises holdings in Invesco Liquidity Funds plc – Sterling
and additionally, for 2020, PIMCO Sterling Short Maturity Source
UCITS ETF.
The income on the iShares - Sterling
Ultrashort Bond UCITS ETF, PIMCO Sterling Short Maturity Source
UCITS ETF and Invesco Liquidity Funds plc – Sterling investments
are affected by interbank lending rates; the principal amount
should normally remain stable regardless of interest rate
movements.
Interest rate sensitivity
At the maximum possible borrowing level of £40 million (2020:
£20 million), the maximum effect over one year of a 0.5%
movement in interest rates would be a £200,000 (2020: £100,000)
movement in the Company’s income and net assets.
The effect of a 1% movement in the interest rates on investments
held at fair value through profit and loss would result in a
£12,000 (2020: £12,000) maximum movement in the Company’s income
statement and net assets.
The above exposure and sensitivity analysis are not
representative of the year as a whole, since the level of exposure
changes frequently throughout the year.
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 role of the
portfolio managers to manage the Portfolios to achieve the best
returns they can.
16.1.3 Other Price Risk
Management of other price risk
The Directors monitor the market price risks inherent in the
investment portfolios by meeting regularly to
review performance.
The Company’s investment portfolios are the product of the
Manager’s investment processes and the application of the
Portfolios’ investment policies. Their value will move according to
the performance of the shares held within them. However, the
Portfolios do not replicate their respective benchmarks or the
markets in which the Portfolios invest, so their performance may
not correlate with them.
Notwithstanding the issue of correlation, if the fixed asset
value of an investment portfolio moved by 10% at the balance sheet
date, the profit after tax and net assets for the year would
increase/decrease by the following amounts:
|
|
Global |
Balanced |
|
|
|
Equity |
Risk |
Managed |
|
UK Equity |
Income |
Allocation |
Liquidity |
|
£’000 |
£’000 |
£’000 |
£’000 |
2021 |
|
|
|
|
Profit after tax increase/decrease
due to rise/fall of 10% |
17,643 |
6,390 |
574 |
181 |
2020 |
|
|
|
|
Profit after tax increase/decrease
due to rise/fall of 10% |
5,212 |
5,578 |
635 |
268 |
16.2
Liquidity Risk
Management of liquidity risk
Liquidity risk is mitigated by the investments held by the
Company’s four portfolios being diversified and the majority being
readily realisable securities which can be sold to meet funding
commitments. If required, the Company’s borrowing facilities
provide additional long-term and short-term flexibility.
The Directors’ policy is that in normal market conditions
short-term borrowings be used to manage short term liabilities and
working capital requirements rather than realising investments.
Liquidity risk
The contractual maturities of financial liabilities at the year
end, based on the earliest date on which payment can be required,
are as follows:
|
|
Global |
|
|
|
|
Equity |
Balanced
Risk |
Managed |
|
UK
Equity |
Income |
Allocation |
Liquidity |
|
3 months |
More than |
3 months |
3 months |
More than |
3 months |
Company |
|
or less |
3 months |
or less |
or less |
3 months |
or less |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Bank facility |
11,842 |
— |
8,550 |
— |
— |
— |
20,392 |
Amount due to brokers |
1,139 |
— |
— |
— |
— |
— |
1,139 |
Other creditors and accruals |
490 |
— |
186 |
19 |
— |
139 |
834 |
Derivative financial |
|
|
|
|
|
|
|
instruments |
— |
— |
— |
18 |
— |
— |
18 |
|
13,471 |
— |
8,736 |
37 |
— |
139 |
22,383 |
2020 |
|
|
|
|
|
|
|
Bank overdraft facility |
2 |
– |
– |
– |
– |
– |
2 |
Bank facility |
4,800 |
– |
4,980 |
– |
– |
– |
9,780 |
Amounts due to brokers |
132 |
– |
1,521 |
– |
– |
– |
1,653 |
Other creditors and accruals |
275 |
– |
658 |
23 |
– |
140 |
1,096 |
Performance fee accrued |
– |
531 |
– |
– |
– |
– |
531 |
Derivative financial |
|
|
|
|
|
|
|
instruments |
– |
– |
– |
95 |
56 |
– |
151 |
|
5,209 |
531 |
7,159 |
118 |
56 |
140 |
13,213 |
16.3
Credit Risk
Credit risk is that the failure of the counterparty in a
transaction to discharge its obligations under that transaction
could result in the Company suffering a loss.
This risk is managed as follows:
• investment transactions are carried out with
a selection of brokers, approved by the Manager and settled on a
delivery versus payment basis. Brokers’ credit ratings are
regularly reviewed by the Manager, so as to minimise the risk of
default to the Company;
• the derivative financial instruments are all
exchange traded and the exchange guarantees their settlement;
• the risk of counterparty exposure due to
failed trades causing a loss to the Company is mitigated by the
daily review of failed trade reports and the use of daily stock and
cash reconciliations. Only approved counterparties are used;
• the Company’s ability to operate in the
short-term may be adversely affected if the Company’s Manager,
other outsource service providers, or their delegates suffer
insolvency or other financial difficulties. The Board reviews
annual controls reports from major service providers;
• where an investment is made in a bond,
corporate or otherwise, the credit rating of the issuer is taken
into account so as to minimise the risk to the Company of default;
and
• cash balances
are limited to a maximum of £5 million for each of the UK Equity
and Global Equity Income Portfolios and £2.5m for each of the
Balanced Risk Allocation and Managed Liquidity Portfolios, with any
one deposit taker (other than cash collateral on derivative
instruments). Only deposit takers approved by the Manager are being
used. Cash held at brokers includes any cash collateral on futures
contracts and during the year only one futures clearing broker,
Merrill Lynch, was used.
The following table sets out the maximum credit risk exposure at
the year end:
|
Global |
Balanced |
|
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Bonds (UK Treasury bills) |
— |
— |
3,377 |
— |
3,377 |
Cash held as short-term
investment(1) |
— |
— |
2,359 |
140 |
2,499 |
Unquoted securities |
— |
— |
5 |
— |
5 |
Derivative financial
Instruments |
— |
— |
274 |
— |
274 |
Debtors(2) |
1,040 |
299 |
190 |
36 |
1,565 |
Cash and cash equivalents |
2,331 |
137 |
704 |
32 |
3,204 |
|
3,371 |
436 |
6,909 |
208 |
10,924 |
2020 |
|
|
|
|
|
Bonds (UK Treasury bills) |
– |
– |
3,999 |
– |
3,999 |
Cash held as short-term
investment(1) |
– |
– |
2,330 |
40 |
2,370 |
Unquoted securities |
– |
– |
18 |
– |
18 |
Derivative financial
instruments |
– |
– |
250 |
– |
250 |
Debtors(2) |
236 |
2,607 |
248 |
15 |
3,106 |
Cash and cash equivalents |
– |
146 |
251 |
50 |
447 |
|
236 |
2,753 |
7,096 |
105 |
10,190 |
(1) Invesco Liquidity Funds plc,
money market fund.
(2) Cash collateral pledged for
futures contracts of £187,000 is included in debtors (2020:
£244,000).
17. Fair Values of
Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset
can be bought or sold in a transaction between willing
parties, i.e. a market-based, independent measure of value. This
note sets out the fair value hierarchy comprising three ‘levels’
and the aggregate amount of investments in each level.
The financial assets and financial liabilities are either
carried in the balance sheet at their fair value (investments and
derivative instruments), or the balance sheet amount is a
reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures sets out
three fair value levels. These are:
Level 1 – fair value based on
quoted prices in active markets for identical assets.
Level 2 – fair values based on
valuation techniques using observable inputs other than quoted
prices within level 1.
Level 3 – fair values based on
valuation techniques using inputs that are not based on observable
market data.
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 majority of the Company’s
investments are quoted equity investments and Treasury bills which
are deemed to be Level 1. Level 2 comprises all other quoted fixed
income investments, derivative instruments and liquidity funds held
in the Balanced Risk Allocation and Managed Liquidity Portfolios.
Level 3 investments comprise any unquoted securities and the
remaining hedge fund investments of the Balanced Risk Allocation
Portfolio.
|
|
Global |
Balanced |
|
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
|
Equity |
Income |
Allocation |
Liquidity |
Total |
|
2021 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
|
Financial assets designated at fair
value through profit |
|
|
|
|
|
|
or loss: |
|
|
|
|
|
|
Level 1 |
176,434 |
63,902 |
3,377 |
1,669 |
245,382 |
|
Level 2 |
— |
— |
2,651 |
140 |
2,791 |
|
Level 3 |
— |
— |
5 |
— |
5 |
|
Total for financial assets |
176,434 |
63,902 |
6,033 |
1,809 |
248,178 |
|
Financial liabilities: |
|
|
|
|
|
|
Level 2 |
— |
— |
18 |
— |
18 |
|
|
|
Global |
Balanced |
|
|
|
UK |
Equity |
Risk |
Managed |
Company |
|
Equity |
Income |
Allocation |
Liquidity |
Total |
2020 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Financial assets at fair
value through profit or loss: |
|
|
|
|
|
Level 1 |
52,121 |
55,778 |
3,999 |
2,642 |
114,540 |
Level 2 |
– |
– |
2,731 |
40 |
2,771 |
Level 3 |
– |
– |
18 |
– |
18 |
Total for financial
assets |
52,121 |
55,778 |
6,748 |
2,682 |
117,329 |
Financial
liabilities: |
|
|
|
|
|
Level 2 – Derivative
instruments |
– |
– |
151 |
– |
151 |
|
|
|
|
|
|
|
|
|
|
|
|
18. Capital
Management
This note is designed to set out the Company’s objectives,
policies and processes for managing its capital. The capital is
funded from monies invested in the Company by shareholders (both
initial investment and any retained amounts) and any borrowings by
the Company.
The Company’s total capital employed at 31 May 2021 was £250,956,000 (2020: £117,449,000)
comprising borrowings of £20,392,000 (2020: £9,780,000) and equity
share capital and other reserves of £230,564,000 (2020:
£107,669,000).
The Company’s total capital employed is managed to achieve the
Company’s investment objective and policy as set out on
pages 30 to 40, including that borrowings may be used to raise
equity exposure up to a maximum of 25% of net assets. At the
balance sheet date, maximum gross gearing was 17.3% (2020: 18.6%).
The Company’s policies and processes for managing capital are
unchanged from the preceding year.
The main risks to the Company’s investments are shown in the
Directors’ Report under the ‘Principal Risks and Uncertainties’
section on pages 44 to 46. These also explain that the Company has
borrowing facilities which can be used in accordance with each
Portfolio’s investment objectivity and policy and that this will
amplify the effect on equity of changes in the value of each
applicable 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 Corporation Tax Act 2010 and by the Companies Act
2006, respectively, and with respect to the availability of the
overdraft 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 any drawings on the credit and/or overdraft
facilities, details of which are given in note 12.
19. Contingencies,
guarantees and financial commitments
Any liabilities the Company is committed to honour but which are
dependent on a future circumstance or event occurring would be
disclosed in this note if any existed.
There were 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 on page 62 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
Director’s Report on pages 53 and 54 and note 3.
21. Post Balance Sheet
Events
Any significant events that occurred after the Company’s
financial year end but before the signing of the balance sheet will
be shown here.
There are no significant events after the end of the reporting
period requiring disclosure.
The financial information set out above does not constitute the
Company’s statutory accounts for the year ended 31 May 2021.
The financial information for 2020 is derived from the statutory
accounts for the year ended 31 May
2020, which have been delivered to the Registrar of
Companies. The auditor has reported on the 2020 accounts; the
audit report was unqualified, did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying the report and did not contain a statement under
section 498 of the Companies Act 2006. The statutory accounts
for the year ended 31 May 2021 have
been finalised and audited but have not yet been delivered to the
Registrar of Companies.
The audited annual financial report will be available to
shareholders, and will be delivered to the Registrar of Companies,
shortly. Copies may be obtained during normal business hours
from the Company’s Registered Office, from its correspondence
address, 43-45 Portman Square, London W1H 6LY, and via the web pages of all
of the Share classes on the Manager’s website at
www.invesco.co.uk/investmenttrusts .
The Annual General Meeting will be held on 5 October 2021 at 11.30am at 43-45 Portman Square, London W1H 6LY.
By order of the Board
Invesco Asset Management Limited
29 July 2021
Contacts:
Angus Pottinger 020 3753 1000
Will
Ellis
020 3753 1000
.
Notice of Annual General Meeting
THIS Notice of Annual General Meeting IS IMPORTANT AND REQUIRES
YOUR IMMEDIATE ATTENTION. If you are in any doubt as to what action
to take, you should consult your stockbroker, solicitor, accountant
or other appropriate independent professional adviser authorised
under the Financial Services and Markets Act 2000. If you have sold
or otherwise transferred all your Shares in Invesco Select Trust
plc, please forward this document and the accompanying Form of
Proxy to the person through whom the sale or transfer was effected,
for transmission to the purchaser or transferee.
NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco
Select Trust plc will be held at 43-45 Portman Square,
London W1H 6LY at 11.30am on 5 October 2021 for the following
purposes:
Ordinary Business of the Company
1. To receive
the Annual Financial Report for the year ended 31 May 2021.
2. To approve
the Directors’ Remuneration Policy.
3. To approve
the Annual Statement and Report on Remuneration.
4. To re-elect
Craig Cleland as a Director of the
Company.
5. To re-elect
Victoria Muir as a Director of the
Company.
6. To elect
Davina Curling as a Director of the
Company.
7. To elect
Mark Dampier as a Director of the
Company.
8. To elect
Tim Woodhead as a Director of the
Company.
9. To re-appoint
Grant Thornton UK LLP as Auditor to the Company and authorise the
Audit Committee to determine the Auditor’s remuneration.
Ordinary Business of the UK Equity
Share Class
Only holders of UK Equity Shares may vote on this resolution,
which will be proposed as an Ordinary Resolution:
10. To approve the UK
Equity Share Class Portfolio dividend payment policy as set out on
page 41 of the 2021 annual financial report.
Ordinary Business of the Global Equity
Income Share Class
Only holders of Global Equity Income Shares may vote on this
resolution, which will be proposed as an Ordinary Resolution:
11. To approve the
Global Equity Income Share Class Portfolio dividend payment policy
as set out on page 42 of the 2021 annual financial report.
Special Business of the Company
To consider and, if thought fit, to pass the following
resolutions which will be proposed as an Ordinary Resolutions:
12. That:
the Directors be and they are hereby generally and
unconditionally authorised, for the purpose of section 551 of the
Companies Act 2006 as amended from time to time prior to the date
of passing this resolution (‘2006 Act’) to exercise all the powers
of the Company to allot relevant securities (as defined in sections
551(3) and (6) of the 2006 Act) up to an aggregate nominal amount
equal to £1,000,000 of UK Equity Shares, £1,000,000 of Global
Equity Income Shares, £1,000,000 of Balanced Risk Allocation Shares
and £1,000,000 of Managed Liquidity Shares, provided that this
authority shall expire at the conclusion of the next AGM of the
Company or the date falling 15 months after the passing of this
resolution, whichever is the earlier, but so that such authority
shall allow the Company to make offers or agreements before the
expiry of this authority which would or might require relevant
securities to be allotted after such expiry and the Directors may
allot relevant securities in pursuance of such offers or agreements
as if the power conferred hereby had not expired.
To consider and, if thought fit, to pass the following
resolutions which will be proposed as Special Resolutions:
13. That:
the Directors be and they are hereby empowered, in accordance
with sections 570 and 573 of the Companies Act 2006 as amended from
time to time prior to the date of the passing of this resolution
(‘2006 Act’) to allot Shares in each class (UK Equity, Global
Equity Income, Balanced Risk Allocation and Managed Liquidity) for
cash, either pursuant to the authority given by resolution 12 or
(if such allotment constitutes the sale of relevant Shares which,
immediately before the sale, were held by the Company as treasury
shares) otherwise, as if section 561 of the 2006 Act did not apply
to any such allotment, provided that this power shall be
limited:
(a) to the allotment of Shares in connection with a
rights issue in favour of all holders of a class of Share
where the Shares attributable respectively to the interests of all
holders of Shares of such class are either proportionate (as nearly
as may be) to the respective numbers of relevant Shares held by
them or are otherwise allotted in accordance with the rights
attaching to such Shares (subject in either case to such exclusions
or other arrangements as the Directors may deem necessary or
expedient in relation to fractional entitlements or legal or
practical problems under the laws of, or the requirements of, any
regulatory body or any stock exchange in any territory or
otherwise);
(b) to the allotment (otherwise than pursuant to a
rights issue) of equity securities up to an aggregate nominal
amount of £82,285 of UK Equity Shares, £24,661 of Global Equity
Income Shares, £4,180 of Balanced Risk Allocation Shares and £1,434
of Managed Liquidity Shares; and
(c) to the allotment of equity securities at a price
of not less than the net asset value per Share as close as
practicable to the allotment or sale
and this power shall expire at the conclusion of the next AGM of
the Company or the date 15 months after the passing of this
resolution, whichever is the earlier, but so that this power shall
allow the Company to make offers or agreements before the expiry of
this power which would or might require equity securities to be
allotted after such expiry as if the power conferred by this
resolution had not expired; and so that words and expressions
defined in or for the purposes of Part 17 of the 2006 Act shall
bear the same meanings in this resolution.
14. That:
the Company be generally and subject as hereinafter appears
unconditionally authorised in accordance with section 701 of the
Companies Act 2006 as amended from time to time prior to the date
of passing this resolution (‘2006 Act’) to make market purchases
(within the meaning of section 693(4) of the 2006 Act) of its
issued Shares in each Share class (UK Equity, Global Equity Income,
Balanced Risk Allocation and Managed Liquidity).
PROVIDED ALWAYS THAT:
(i) the maximum number of Shares hereby
authorised to be purchased shall be 14.99% of each class of the
Company’s share capital as at the date of the AGM;
(ii) the minimum price which may be paid for a
Share shall be 1p;
(iii) the maximum price which may be paid for a
Share in each Share class must not be more than the higher of: (a)
5% above the average of the mid-market values of the Shares for the
five business days before the purchase is made; and (b) the higher
of the price of the last independent trade in the Shares and the
highest then current independent bid for the Shares on the London
Stock Exchange;
(iv) any purchase of Shares will be made in the
market for cash at prices below the prevailing net asset value per
Share (as determined by the Directors);
(v) the authority hereby conferred shall expire at
the conclusion of the next AGM of the Company or, if earlier, on
the expiry of 15 months from the passing of this resolution unless
the authority is renewed at any other general meeting prior to such
time; and
(vi) the Company may make a contract to purchase
Shares under the authority hereby conferred prior to the expiry of
such authority which will be executed wholly or partly after the
expiration of such authority and may make a purchase of Shares
pursuant to any such contract.
15. That:
the period of notice required for general meetings of the
Company (other than Annual General Meetings) shall be not less than
14 days.
16 That :
The Articles of Association as produced
to the meeting and initialled by the Chairman for the purpose of
identification (the ‘Articles’) be adopted as the Articles of
Association of the Company in substitution for, and to the
exclusion of, the existing Articles of Association.
All Resolutions are explained further in the Directors’ Report
on pages 55 to 56.
Dated 5 August 2021
By order of the Board
Invesco Asset Management Limited
Company Secretary