SCHRODER ASIAN TOTAL RETURN INV CO

Interim / Quarterly Report • Mar 28, 2018

National Storage Mechanism | Additional information

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RNS Number : 1552J

Schroder Asian Total Retn InvCo PLC

28 March 2018

28 March 2018

ANNUAL REPORT AND ACCOUNTS

Schroder Asian Total Return Investment Company plc (the "Company") hereby submits its Annual Report for the year ended 31 December 2017 as required by the UK Listing Authority's Disclosure Guidance and Transparency Rule 4.1. 

The Company's Annual Report and Accounts for the year ended 31 December 2017 are also being published in hard copy format and an electronic copy will shortly be available to download from the Company's website www.schroders.co.uk/satric. Please click on the following link to view the document:

http://www.rns-pdf.londonstockexchange.com/rns/1552J_-2018-3-27.pdf

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

Enquiries:

Benjamin Hanley

Schroder Investment Management Limited              

Tel: 020 7658 3847

Schroder Asian Total Return Investment Company plc

Chairman's Statement

Performance

I am delighted to report on another year of excellent absolute and relative returns from our investments during the year ended 31 December 2017. The Company produced a net asset value ("NAV") total return of 34.8%, outperforming the total return of 25.1% from the Reference Index and a total return of 29.9% from the average peer group NAV. The share price produced a total return of 43.9%, and moved to a premium of 2.0% at the year end. Excellent stock picking offset the cost of our hedging instruments.

Further comment on performance and investment policy may be found in the Portfolio Managers' review.

Dividend

The revenue return from the portfolio for the year increased marginally when compared to the previous year, from 5.40p per share in 2016 to 5.48p per share for the year under review.

The Board has recommended a final dividend of 4.80p per share for the year ended 31 December 2017, an increase of 6.7% over the final divided of 4.50p per share paid in respect of the previous financial year.

In order to provide shareholders with the opportunity to vote on the quantum of the dividend, the Board is proposing that it will be payable as a final dividend, subject to shareholder approval at the Annual General Meeting ("AGM"). The dividend will be paid on 16 May 2018 to shareholders on the register on 6 April 2018.

Promotion and share issuance

The Board has long held the view that the key to narrowing the discount in investment trusts is a mix of a differentiated investment process, excellent performance, and active marketing of both. The Board and our Portfolio Managers have been focused on widening the appreciation of our offering among investors and this has been reflected in healthy demand for our shares from new and existing shareholders.

The result is that the Company's average discount during the year of 2.2% was markedly narrower than the peer group average of 8.7%. Indeed, since October 2017, the Company's shares have traded at a premium to net asset value. The Board utilised the authority granted by shareholders at the AGM on 26 April 2017 to reissue shares held in treasury to provide liquidity to the market. From the date of the 2017 AGM up to October 2017, 1,570,000 shares were reissued largely at a discount, and from then on the Company's shares began trading at a premium to NAV. Following this, a further 5,707,914 shares were reissued at a premium to NAV, fully utilising the authority granted by shareholders.

Since the year end, shareholders have granted authority to the Board to issue a further 10% of the Company's share capital and an additional 1,575,000 ordinary shares have been reissued from treasury at a premium since that time. A resolution to renew the authorities will be proposed at the AGM, details of which can be found on page 52 of the 2017 Annual Report.

Previously the Board had been given permission by shareholders to reissue 3% of its shares held in treasury at a discount of less than 4%. The Directors now take the view that having established and maintained a premium to NAV for several months, it would be wrong to seek a further mandate to reissue shares from treasury at a discount while the shares are trading at a premium.

If the company repurchases substantial numbers of shares at a discount in the future and believes it is in the shareholders' interests to have the authority to issue shares at a discount, then the Board will seek permission to do so.

Should the need arise, the Company will continue to implement a discount management policy, which continues to target a discount to NAV of no more than 5% in normal market conditions. 120,000 shares were purchased by the Company in the early part of the year to be held in treasury, in support of the discount policy. The Board believes that overall liquidity and the relative discount to the Company's peers has also to be considered in any decision to buy back shares.

Gearing and the use of derivatives

Gearing continues to be utilised by the Portfolio Managers. The Company may use gearing to enhance performance but net gearing will not exceed 30% of NAV. The Board has agreed a disciplined framework for gearing to increase market exposure, based on a number of valuation indicators. Gearing stood at 4.5% at the end of the year, compared to 7.0% at the beginning of the year. Shareholders should be aware that the use of borrowings must be seen in the context of the use of derivative hedging instruments to reduce the volatility of the portfolio.

Reduction in management fee cap

One of the responsibilities of the Board is to continue to review the management fee arrangements in place with the Manager and to ensure that they remain in the best interests of shareholders.

The continued strong performance during the year triggered the payment of a performance fee amounting to £4,177,000. The total management fees, including the performance fee, were capped at 2.0% of net assets, in accordance with the agreement with the Manager. The Board has reviewed the fee arrangements and, while it remains satisfied that the individual elements of the fees paid to the Manager remain competitive, it believes that the overall amount of fees should be reduced.

It has been agreed, therefore, that for years ending 31 December 2018 onwards, the overall cap on management fees will be reduced from 2% to 1.5% of net assets. The Board believes that the potential for significantly lower management fees in circumstances where performance remains strong will help to ensure that the Company remains competitive in its peer group.

Management arrangements

During the year, Robin Parbrook has re-located from Hong Kong to London. The Board is satisfied that this move should have no adverse implications for the Company and indeed brings Robin closer to our predominantly UK-based shareholders. His co-manager King Fuei Lee remains based in Singapore.

Board succession and refreshment

The Board continues to consider its ongoing refreshment in line with the policy set out in my statement last year. I am pleased to welcome Sarah MacAulay to the Board following her appointment on 2 March 2018. Ms MacAulay's biographical details can be found on page 18 of the 2017 Annual Report. Ms MacAulay brings significant investment management expertise and experience to the Board. In accordance with the Company's Articles of Association, a resolution to elect her as a Director of the Company will be proposed at the forthcoming AGM.

Christopher Keljik and Alexandra Mackesy will retire from the Board at the AGM and will not seek re-election. I would like to take this opportunity to thank Mr Keljik and Mrs Mackesy for their invaluable contribution to the Board during their 10 years and 9 years of tenure, respectively. Caroline Hitch will succeed Mr Keljik as the Senior Independent Director.

Annual General Meeting

The Annual General Meeting will be held at 12.00 noon on Wednesday, 9 May 2018 at 31 Gresham Street, London EC2V 7QA, the offices of Schroders, and shareholders are encouraged to attend. One of the Portfolio Managers will attend to give a presentation on the Company's investment strategy and prospects for Asia. The AGM will be followed by a buffet lunch.

Outlook

Following a year of strong absolute performance in 2017, achieved in spite of the protective hedging which underpins the investment policy, it is possible that markets may prove more challenging this year. Should this be the case, we remain confident that the derivative protection integrated into the investment strategy will be of comfort for those looking for long-term exposure to Asia with lower volatility than the Reference Index.

David Brief

Chairman

27 March 2018

Portfolio Managers' Review

Market background

Asian equities delivered strong absolute returns over the year as investor sentiment was boosted by signs of a pick-up in global economic growth and positive revisions to corporate earnings. Despite uncertainties at the end of 2016 over the potential trade and foreign policy implications from the new administration of US President Donald Trump, Asian stock markets shrugged off initial jitters to deliver one of the strongest returns in the last 10 years.

Across the region, the Chinese stock market delivered the strongest gains with technology and internet stocks leading the rally. Shares of internet heavyweights Tencent and Alibaba continued to reach record highs bolstered by strong earnings delivery and solid growth outlook. The Hong Kong stock market also benefited from positive sentiment as consumer stocks advanced on the back of a stronger than expected domestic economy in China.

Strength in the technology sector helped drive the Korean and Taiwanese stock markets higher. Korean chipmakers rallied as Samsung Electronics and SK Hynix posted record operating profits amid a boom in the memory chip market driven by cloud centre demand and new applications like A.I. which led to very tight supply. In Taiwan, Apple supply chain and component stocks extended gains on hopes of a new iPhone 'super-cycle', though reports of weaker than expected sell-through led to profit taking towards the year end.

Performance Analysis

ASEAN markets were up but trailed the region as high valuations and relatively weak earnings growth weighed on sentiment. The Australian market index was a laggard, dragged down by the heavily weighted financial sector as tighter regulations and slowing home loan growth weighed on the longer term outlook for the major banks.

Overall, global risk appetite saw a marked pick up in 2017 despite continued uncertainties on the political and economic front, as strong earnings revisions helped power Asian equities to a return of 30.2% in local currency terms. This translates to a gain of 25.1% in sterling terms.

The NAV produced a total return of 34.8% over the year, compared to the Reference Index, which produced a total return of 25.1%.

Chinese stocks were the biggest contributors to returns, with internet, consumer discretionary and healthcare names performing positively. Internet stocks saw a strong re-rating on the back of a global tech rally and on expectations of continued expansion of China's growing online economy. Share prices of Tencent, Alibaba and Sina surged to record highs amid consistent upgrades to earnings forecasts and a robust growth outlook.

Other key contributors were consumer names China Lodging and New Oriental Education, as well as healthcare stocks Hutchison China Meditech and Wuxi Biologics, which performed strongly as the market gained greater confidence in their new drug pipelines. The portfolio's holdings in Chinese A-share companies Hangzhou Hikvision and Midea also outperformed with their share prices supported by strong Northbound flows ahead of the MSCI's inclusion of China A-shares in its benchmark indices.

Across other markets, technology stocks advanced led by Korean IT conglomerate Samsung Electronics with overall profits boosted significantly by an upswing in the memory market. The announcement of a shareholder return programme with enhancements in dividend payouts and share buybacks further supported sentiment towards the stock.

In Taiwan, Apple supply chain stocks rallied in the lead up to the launch of the new iPhone X, though gave back gains following concerns that demand might not be as strong as initially expected. A top performer was Chroma ATE, a manufacturer of test equipment for the semiconductor industry, which surged after reporting solid Q3 earnings with high order visibility and positive outlook for 2018.

Among the laggards, Australian logistics company Brambles corrected after the group announced a profit downgrade due to revenue and cost pressures in its North American business. With its business in the other regions remaining strong, we expect the cyclical pressures in the US to pass soon, and for Brambles to resume its steady growth trajectory again. Sluggish growth for some of the ASEAN consumer staples names also weighed on returns with RFM Corp and Sumber Alfaria Trijaya underperforming following weak earnings results against a muted consumption backdrop. We have since sold out of our positions in ASEAN consumer names.

Capital protection (in the form of put options on the Australian, Hong Kong, China H-share, Korean and Taiwan markets), was a drag given strong rising markets. For the currency hedge on the Australian dollar, we have closed out the position as we see limited downside at current levels. Adjusting for the derivative protection, net exposure was approximately 80.2% (90.0% delta-adjusted) at the end of December 2017.

Portfolio positioning and key transactions

Following the strong rally in technology and internet stocks, we trimmed our exposure into strength, exiting positions in AAC Technologies and Vanguard International Semiconductor, and reducing our holdings in Sunny Optical and Largan Precision. We also took some profits in Alibaba, Tencent and Sina, which are trading close to or above our fair value estimates. We maintain significant positions, however, given our long term view that the big internet platform companies with all the data flows are likely to dominate the sector.

We pared our remaining exposure to telecom stocks, selling out of positions in HKT Trust and Far EasTone Telecommunications due to the challenging earnings outlook. With governments in several countries still keen to encourage competition and keep pricing down, we increasingly view this sector as a value trap. In Hong Kong, we exited our position in Sunlight REIT given full valuations, as well as CK Hutchison due to worries about the lack of clarity on overall group strategy.

Proceeds from the sales were reinvested into stocks where we still see good value and which offer solid long-term total return potential. We added to stocks in Hong Kong which have lagged the broader market rally, including property names Hang Lung Properties and Swire Properties, and ASM Pacific Technology following a pullback in the share price after a slight miss in 1H17 results. We also increased our exposure to banks, topping up positions in OCBC, HSBC and Dah Sing Bank, given undemanding valuations and favourable gearing of the stocks to rising interest rates.

Within the China onshore A-share market, we continue to find selected opportunities in private sector companies where a combination of scale and technological innovation has allowed them to move up the value curve. We increased our exposure to Midea, one of China's largest manufacturers of home appliances, and initiated a new position in Zhejiang Sanhua, a global manufacturer of controls and components for air conditioners. We also bought into China Yangtze Power, a Chinese utilities company, which is a defensive play with strong cash flow generation, stable return on equity and a good dividend payout.

In India where we are turning increasingly cautious due to high valuations and structural problems in the economy, we have continued to reduce positions. We sold out of healthcare stock Apollo Hospitals and media group Zee Entertainment following earnings disappointment. The only positions we are comfortable holding in India are in the best private sector banks where their good use of technology, combined with the huge advantage of competing against public sector banks, means they should be able to grow market share for many years ahead.

Across other markets, we added to Crown Resorts and Lendlease Group in Australia on the back of an improving earnings outlook. In ASEAN, we continued to trim exposure with sales in Waskita Beton Precast, RFM Corp, Ayala Land and GMA Network, as well as Singapore names Comfortdelgro and iFAST given near-term headwinds and rich valuations.

As at 31 December 2017, 13.2% of the portfolio was held in companies with a market capitalisation of less than US$3billion (2016: 24.7%). The decrease was due to sales of small cap positions in ASEAN and Hong Kong.

Investment trends and outlook

After one of the strongest calendar year returns on record, Asian markets started to trade off at the end of January 2018 with a fairly indiscriminate, broad-based sell-off. This seems to have pricked what increasingly looked like an incipient bubble in Asia and, whilst painful in absolute terms, comes with an element of relief as irrational markets are never good for the long-term health of an asset class.

The key question now is have we moved into a bear market and are the conditions in place for another financial crisis and more serious market correction? With US interest rates now set to rise, and the US bond market vulnerable given an ill-timed fiscal stimulus and already rising inflationary pressures, we expect further volatility in markets. What is impossible to predict is, as interest rates rise, will there be significant financial dislocations and will we get a much larger market correction? Ten years of effectively zero percent interest rates is bound to mean there are distortions in the system and plenty of leverage where there shouldn't be.

As credit markets continue to tighten, we expect casualties to come. The worst of the distortions look likely to be in the debt markets where high yield debt and emerging market debt rose to unsustainable levels buoyed by hot money flows. We also suspect a lot of leveraged private equity deals may surprise as weak cash flows on dowdy consumer staples brands being disrupted, or highly leveraged care home deals with debt secured on depreciating property come unstuck. The financial deleveraging that should have happened post the Global Financial Crisis failed to materialise and this is why we think even a small rise in interest rates has the potential to result in material market turmoil.

For Asian equities themselves we are a bit less worried. Market valuations are above trend but not in bubble territory. Debt levels, whilst they have risen, especially in China, are not at the levels we have in the West, and unlike the 1997/98 financial crisis period, Asia does not have significant offshore short-term US borrowings that could trigger a crisis as overseas lenders panic. All in all, in Asia at least we don't see the ingredients for a major crisis. The economic outlook looks positive and the earnings picture mostly reassuring.

Having said this, markets are clearly not cheap, and there are parts of the market that look very materially overvalued to us, whether this be selected internet names, consumer stocks in ASEAN and India, healthcare, or most Korean and Taiwanese domestic stocks. With consensus earnings expectations for 2018 also having been ratcheted up, the risk to your Portfolio Managers is that earnings actually disappoint given the high expectations.

Looking at the portfolio's models, the long-term country models are now neutral to cautious on all markets except Australia and China, so we have taken profits since the year end on our put options in Taiwan and Korea and switched stock positions there to alpha transfer (i.e. we have hedged out the market risk via the sale of index futures). The tactical model is bordering on neutral to negative depending on the behaviour of equity and bond market volatility, but if we assume bond market volatility continues, it is flagging caution. Our bottom-up value indicator is clearly flagging caution with only 35% of stocks we cover offering upside to fair value.

On the flip side, a significant part of the Asian market looks reasonably valued. We are happy with banks in Hong Kong and Singapore, Chinese and Hong Kong industrials, technology hardware in the right space and selected Hong Kong and Australian domestic names that have lagged the market.

In a nutshell we think caution is warranted and we expect higher levels of market volatility to continue. We do not see the current conditions triggering a market meltdown in Asia but we do see them as a trigger for an overdue reality check. We are likely to maintain the overall current level of hedging in the portfolio but may rearrange how this is achieved. Stock wise we are starting to add to a couple of names in China that look oversold but otherwise are happy to hold our firepower as we believe there is choppy trading to come as credit markets tighten.

Robin Parbrook, King Fuei Lee

For Schroder Investment Management Limited

27 March 2018

Securities shown are for illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Principal risks and uncertainties

The Board is responsible for the Company's system of risk management and internal control and for reviewing its effectiveness. The Board has adopted a detailed matrix of principal risks affecting the Company's business as an investment trust and has established associated policies and processes designed to manage and, where possible, mitigate those risks, which are monitored by the Audit and Risk Committee on an ongoing basis. This system assists the Board in determining the nature and extent of the risks it is willing to take in achieving the Company's strategic objectives. Both the principal risks and the monitoring system are also subject to robust review at least annually. The last review took place in March 2018.

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

The principal risks and uncertainties faced by the Company have remained unchanged throughout the year under review, except in respect of cyber risk relating to the Company's service providers, which has now been extended beyond the custodian. Cyber risk relating to all of the Company's key service providers is considered an increased threat in light of the rising propensity and impact of cyber attacks on businesses and institutions. To address the risk, the Board is seeking enhanced reporting on cyber risk mitigation and management from its key service providers to ensure that it is managed and mitigated appropriately.

Actions taken by the Board and, where appropriate, its Committees, to manage and mitigate the Company's principal risks and uncertainties are set out in the table below.

Risk	Mitigation and management
Strategic
The Company's investment objectives may become out of line with the requirements of investors, resulting in a wide discount of the share price to underlying NAV per share.	Appropriateness of the Company's investment remit periodically reviewed and success of the Company in meeting its stated objectives is monitored. Share price relative to NAV per share monitored and use of buy back authorities considered on a regular basis. Marketing and distribution activity actively reviewed.
The Company's cost base could become uncompetitive, particularly in light of open ended alternatives.	Ongoing competitiveness of all service provider fees subject to periodic benchmarking against competitors. Annual consideration of management fee levels.
Investment management
The Manager's investment strategy, if inappropriate, may result in the Company underperforming the market and/or peer group companies, leading to the Company and its objectives becoming unattractive to investors.	Review of: the Manager's compliance with the agreed investment restrictions, investment performance and risk against investment objectives and strategy; relative performance; the portfolio's risk profile; and appropriate strategies employed to mitigate any negative impact of substantial changes in markets. Annual review of the ongoing suitability of the Manager.
Financial and currency
The Company is exposed to the effect of market and currency fluctuations due to the nature of its business. A significant fall in regional equity markets or substantial currency fluctuation could have an adverse impact on the market value of the Company's underlying investments.	Risk profile of the portfolio considered and appropriate strategies to mitigate any negative impact of substantial changes in markets discussed with the Manager. Derivative strategy employed by the Manager subject to review by the Board. Board considers overall hedging policy on a regular basis.
Custody
Safe custody of the Company's assets may be compromised through control failures by the Depositary, including cyber hacking.	Depositary reports on safe custody of the Company's assets, including cash, and portfolio holdings independently reconciled with the Manager's records. Review of audited internal controls reports covering custodial arrangements. Annual report from the Depositary on its activities, including matters arising from custody operations.
Gearing and leverage
The Company utilises credit facilities. These arrangements increase the funds available for investment through borrowing. While this has the potential to enhance investment returns in rising markets, in falling markets the impact could be detrimental to performance.	Gearing monitored and strict restrictions on borrowings imposed: gearing continues to operate within pre-agreed limits so as not to exceed 30% of net asset value. Board oversight of the Manager's use of derivatives.
Accounting, legal and regulatory
In order to continue to qualify as an investment trust, the Company must comply with the requirements of Section 1158 of the Corporation Tax Act 2010. Breaches of the UK Listing Rules, the Companies Act or other regulations with which the Company is required to comply, could lead to a number of detrimental outcomes.	Confirmation of compliance with relevant laws and regulations by key service providers. Shareholder documents and announcements, including the Company's published Annual Report, subject to stringent review processes. Procedures established to safeguard against disclosure of inside information.
Service provider
The Company has no employees and has delegated certain functions to a number of service providers, principally the Manager, Depositary and Registrar. Failure of controls, including as a result of cyber hacking, and poor performance of any service provider, could lead to disruption, reputational damage or loss.	Service providers appointed subject to due diligence processes and with clearly-documented contractual arrangements detailing service expectations. Regular reporting by key service providers and monitoring of the quality of services provided. Review of audited internal controls reports from key service providers, including confirmation of business continuity arrangements and follow up of remedial actions as required and IT controls.

Risk assessment and internal controls

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

No significant control failings or weaknesses were identified from the Audit and Risk Committee's ongoing risk assessment which has been in place throughout the financial year and up to the date of this Report.

A full analysis of the financial risks facing the Company is set out in note 21 to the accounts on pages 46 to 51 of the 2017 Annual Report.

Viability statement

The Directors have assessed the viability of the Company over a five year period, taking into account the Company's position at 31 December 2017 and the potential impact of the principal risks and uncertainties it faces for the review period.

A period of five years has been chosen as the Board believes that this reflects a suitable time horizon for strategic planning, taking into account the investment policy, liquidity of investments, potential impact of economic cycles, nature of operating costs, dividends and availability of funding.

In its assessment of the viability of the Company, the Directors have considered each of the Company's principal risks and uncertainties detailed on pages 14 and 15 of the 2017 Annual Report and in particular the impact of a significant fall in regional equity markets on the value of the Company's investment portfolio. The Directors have also considered the Company's income and expenditure projections and the fact that the Company's investments comprise readily realisable securities which can be sold to meet funding requirements if necessary.

Based on the Company's processes for monitoring operating costs, the Board's view that the Manager has the appropriate depth and quality of resource to achieve superior returns in the longer term, the portfolio risk profile, limits imposed on gearing, counterparty exposure, liquidity risk and financial controls, the Directors have concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of their assessment.

In reaching this decision, the Board has taken into account the Company's next continuation vote, on the assumption that it will be passed in 2019.

Going concern

Having assessed the principal risks and the other matters discussed in connection with the viability statement set out above, and the "Guidance on Risk Management, Internal Control and Related Financial and Business Reporting" published by the FRC in 2014, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

Statement of Directors' responsibilities in respect of the financial statements

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). 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 the financial statements, the Directors are required to:

-        select suitable accounting policies and then apply them consistently;

-        state whether applicable United Kingdom Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

-        make judgements and accounting estimates that are reasonable and prudent; 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 enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006.

The Directors are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Manager is responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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

Each of the Directors, whose names and functions are listed on pages 17 and 18 of the 2017 Annual Report, confirm that, to the best of their knowledge:

-        the Company's financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

-        the Directors' 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.

Income Statement

for the year ended 31 December 2017

		Revenue	2017 Capital	Total	Revenue	2016 Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments held at fair value through profit or loss		-	78,351	78,351	-	46,666	46,666
Net losses on derivative contracts		-	(8,866)	(8,866)	-	(485)	(485)
Net foreign currency gains/(losses)		-	1,665	1,665	-	(2,289)	(2,289)
Income from investments		5,483	30	5,513	4,765	-	4,765
Other interest receivable and similar income		11	-	11	34	-	34
Gross return		5,494	71,180	76,674	4,799	43,892	48,691
Investment management fee		(428)	(1,283)	(1,711)	(317)	(950)	(1,267)
Performance fee		-	(4,177)	(4,177)	-	(2,650)	(2,650)
Administrative expenses		(646)	-	(646)	(564)	-	(564)
Net return before finance costs and taxation		4,420	65,720	70,140	3,918	40,292	44,210
Finance costs		(78)	(235)	(313)	(42)	(126)	(168)
Net return on ordinary activities before taxation		4,342	65,485	69,827	3,876	40,166	44,042
Taxation on ordinary activities		(159)	-	(159)	64	-	64
Net return on ordinary activities after taxation		4,183	65,485	69,668	3,940	40,166	44,106
Return per share - basic and diluted		5.48p	85.78p	91.26p	5.40p	55.07p	60.47p

The "Total" column of this statement is the profit and loss account of the Company. The "Revenue" and "Capital" columns represent supplementary information prepared under guidance issued by The Association of Investment Companies. The Company has no items of other comprehensive income, and therefore the net return on ordinary activities after taxation is also the total comprehensive income for the year.

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

Statement of Changes in Equity

for the year ended 31 December 2017

	Called-up		Capital
	share	Share	redemption	Special	Capital	Revenue
	capital	premium	reserve	reserve	reserves	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 December 2015	4,260	5	11,646	29,182	98,120	10,973	154,186
Repurchase of the Company's own shares into treasury	-	-	-	-	(503)	-	(503)
Net return on ordinary activities	-	-	-	-	40,166	3,940	44,106
Dividend paid in the year	-	-	-	-	-	(2,772)	(2,772)
At 31 December 2016	4,260	5	11,646	29,182	137,783	12,141	195,017
Repurchase of the Company's own shares into treasury	-	-	-	-	(334)	-	(334)
Reissue of shares out of treasury	-	12,340	-	-	21,008	-	33,348
Net return on ordinary activities	-	-	-	-	65,485	4,183	69,668
Dividend paid in the year	-	-	-	-	-	(3,273)	(3,273)
At 31 December 2017	4,260	12,345	11,646	29,182	223,942	13,051	294,426

Statement of Financial Position

at 31 December 2017

		2017	2016
		£'000	£'000
Fixed assets
Investments held at fair value through profit or loss		311,798	207,947
Current assets
Debtors		269	1,255
Cash at bank and in hand		2,315	7,310
Derivative financial instruments held at fair value through profit or loss		594	2,681
		3,178	11,246
Current liabilities
Creditors: amounts falling due within one year		(20,330)	(24,176)
Derivative financial instruments held at fair value through profit or loss		(220)	-
		(20,550)	(24,176)
Net current liabilities		(17,372)	(12,930)
Total assets less current liabilities		294,426	195,017
Net assets		294,426	195,017
Capital and reserves
Called-up share capital		4,260	4,260
Share premium		12,345	5
Capital redemption reserve		11,646	11,646
Special reserve		29,182	29,182
Capital reserves		223,942	137,783
Revenue reserve		13,051	12,141
Total equity shareholders' funds		294,426	195,017
Net asset value per share
Undiluted		354.79p	268.07p
Diluted		354.79p	267.09p

Cash Flow Statement

for the year ended 31 December 2017

		2017	2016
		£'000	£'000
Net cash inflow from operating activities		572	3,037
Servicing of finance
Interest paid		(310)	(161)
Net cash outflow from servicing of finance		(310)	(161)
Investment activities
Purchases of investments		(111,024)	(61,360)
Sales of investments		86,511	54,721
Cash flows on derivative instruments		(6,558)	(2,839)
Net cash outflow from investment activities		(31,071)	(9,478)
Dividends paid		(3,273)	(2,772)
Net cash outflow before financing		(34,082)	(9,374)
Financing
Bank loan (repaid)/drawn down		(3,905)	10,776
Reissue of shares out of treasury		33,348	-
Repurchase of the Company's own shares into treasury		(334)	(503)
Net cash inflow from financing		29,109	10,273
Net cash (outflow)/inflow in the year		(4,973)	899

Notes to the Accounts

1.       Accounting Policies

The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice ("UK GAAP"), in particular in accordance with Financial Reporting Standard (FRS) 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and with the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" (the "SORP") issued by the Association of Investment Companies in November 2014 and updated in January 2017. All of the Company's operations are of a continuing nature.

The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments and derivative financial instruments held at fair value through profit or loss.

The accounts are presented in sterling and amounts have been rounded to the nearest thousand.

The accounting policies applied to these accounts are consistent with those applied in the accounts for the year ended 31 December 2016.

2.       Taxation

The Company has no corporation tax liability for the year ended 31 December 2017. Please refer to Note 7 on page 40 of the 2017 Annual Report.

3.       Dividends

Dividends paid and declared	2017	2016
	£'000	£'000
2016 final dividend of 4.50p (2015: 3.80p), paid out of revenue profits1	3,273	2,772

	2017	2016
	£'000	£'000
2017 final dividend proposed of 4.80p (2016: 4.50p), to be paid out of revenue profits2	3,983	3,274

1The 2016 final dividend amounted to £3,274,000. However the amount actually paid was £3,273,000 as shares were repurchased into treasury after the accounting date but prior to the dividend Record Date.

2The proposed final dividend amounting to £3,983,000 (2016: £3,274,000) is the amount used for the basis of determining whether the Company has satisfied the distribution requirements of Section 1158 of the Corporation Tax Act 2010. The revenue available for distribution by way of dividend for the year is £4,183,000 (2016: £3,940,000).

4.       Return per share

	2017	2016
	£'000	£'000
Revenue return	4,183	3,940
Capital return	65,485	40,166
Total return	69,668	44,106
Weighted average number of shares in issue during the year	76,336,740	72,931,791
Revenue return per share	5.48p	5.40p
Capital return per share	85.78p	55.07p
Total return per share	91.26p	60.47p

There is no dilution to the above returns per share when the diluted returns are calculated in accordance with the requirements of IAS 33, as is required by FRS 102.

Details of changes in the number of potentially dilutive treasury shares in issue during the year are given in note 15 on page 44 of the 2017 Annual Report.

5.       Called-up share capital

	2017	2016
	£'000	£'000
Allotted, called-up and fully paid:
Ordinary shares of 5p each:
Opening balance of 72,749,141 (2016: 72,949,141) shares	3,637	3,647
Reissue of 10,357,914 (2016: nil) shares out of treasury	518	-
Repurchase of 120,000 (2016: 200,000) shares into treasury	(6)	(10)
Subtotal of 82,987,055 (2016: 72,749,141) shares	4,149	3,637
2,217,757 (2016: 12,455,671) shares held in treasury	111	623
Closing balance1	4,260	4,260

1Represents 85,204,812 (2016: 85,204,812) shares of 5p each, including 2,217,757 (2016: 12,455,671) held in treasury. During the year, a total of 10,357,914 shares (2016: nil), nominal value £517,896, were reissued to the market out of treasury to satisfy demand, at an average price of 322.0p per share, for a total consideration of £33,348,000. During the year 120,000 shares, nominal value £6,000, were repurchased to hold in treasury, for a total consideration of £334,000 representing 0.16% of the shares outstanding at the beginning of the year. The reason for these share purchases was to seek to manage the volatility of the share price discount to net asset value per share.

6.       Net asset value per share

	2017	2016
Undiluted
Total equity shareholders' funds (£'000)	294,426	195,017
Shares in issue at the year end	82,987,055	72,749,141
Net asset value per share	354.79p	268.07p
Diluted
Total equity shareholders' funds assuming reissue of any dilutive treasury shares (£'000)	294,426	213,790
Potential shares in issue at the year end	82,987,055	80,044,055
Net asset value per share	354.79p	267.09p

The diluted net asset value per share assumes that all the remaining potentially dilutive treasury shares in issue were reissued at a discount of 4% to the net asset value per share at the year end. At the Annual General Meeting on 26 April 2017, the Company was granted authority to reissue up to 7,277,914 shares out of treasury (representing 10% of shares in issue at the date of notice of the AGM), at a discount of no greater than 4% to the net asset value per share at the time of sale. The entire number of these have been reissued since that AGM and thus there were no potentially dilutive treasury shares in issue at the year end. At the comparative year end there were 7,294,914 potentially dilutive treasury shares in issue, under an authority granted at a General Meeting on 15 November 2016.

7.       Reconciliation of total return on ordinary activities before finance costs and taxation to net cash inflow from operating activities

	2017	2016
	£'000	£'000
Net return before finance costs and taxation	70,140	44,210
Less capital return on ordinary activities before finance costs and taxation	(65,720)	(40,292)
Stock dividends received as income	-	(53)
Decrease in prepayments and accrued income	65	45
Increase in other debtors	(10)	(14)
Increase in other creditors	1,746	2,738
Special dividend allocated to capital	30	-
Management fee allocated to capital	(1,283)	(950)
Performance fee allocated to capital	(4,177)	(2,650)
Taiwanese withholding tax recovered	183	317
Overseas withholding tax deducted at source	(402)	(314)
Net cash inflow from operating activities	572	3,037

8.       Disclosures regarding financial instruments measured at fair value

The Company's financial instruments within the scope of FRS 102 that are held at fair value include its investment portfolio and derivative financial instruments.

FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below.

Level 1 - valued using unadjusted quoted prices in active markets for identical assets.

Level 2 - valued using observable inputs other than quoted prices included within Level 1.

Level 3 - valued using inputs that are unobservable.

Details of the Company's policy for valuing investments and derivative instruments are given in note 1(b) on page 37 and 1(g) on page 38 of the 2017 Annual Report.

The following table sets out the fair value measurements using the FRS 102 hierarchy at 31 December:

	2017
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments and derivative financial instruments	286,995	-	-	286,995
Participatory notes1	-	25,177	-	25,177
Total	286,995	25,177		312,172

	2016
	Level 1	Level 2	Level 3	Total
	£'000	£'000	£'000	£'000
Financial instruments held at fair value through profit or loss
Equity investments and derivative financial instruments	200,492			200,492
Participatory notes1		10,136		10,136
Total	200,492	10,136		210,628

1Participatory notes are valued using the quoted bid prices of the underlying securities and have been allocated to Level 2 as, strictly, they are not identical assets.

There have been no transfers between Levels 1, 2 and 3 during the year (2016: nil).

9.       Post balance sheet event

At a General Meeting held on 23 January 2018, the Directors were granted shareholder authority to reissue the remaining 2,217,757 shares held in treasury at a price representing a discount of no greater than 4% to the NAV per share at the latest practical date prior to such reissue. This authority will lapse at the conclusion of the Annual General Meeting of the Company, to be held on 9 May 2018.

10.     Status of announcement

2016 Financial Information

The figures and financial information for 2016 are extracted from the published Annual Report and Accounts for the year ended 31 December 2016 and do not constitute the statutory accounts for that year. The 2016 Annual Report and Accounts have been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2017 Financial Information

The figures and financial information for 2017 are extracted from the Annual Report and Accounts for the year ended 31 December 2017 and do not constitute the statutory accounts for the year. The 2017 Annual Report and Accounts include the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The 2017 Annual Report and Accounts will be delivered to the Registrar of Companies in due course.

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

This information is provided by RNS

The company news service from the London Stock Exchange

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