Annual Report • May 28, 2021
Annual Report
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| OVERVIEW | |
|---|---|
| Financial Information and Performance Statistics Chairman's Statement |
2 5 |
| STRATEGIC REPORT | |
| Portfolio Manager's Report Portfolio Manager's Core Investment Beliefs Business Review Investments in Order of Valuation Portfolio Analysis Principal Risks and Uncertainties Viability Statement |
9 13 14 16 18 19 22 |
| Section 172 Statement, Company Sustainability and Stakeholders | 23 |
| GOVERNANCE | |
| The Directors The Company's Corporate Governance Framework Corporate Governance Statement Audit Committee Report Directors' Report Statement of Directors' Responsibilities Directors' Remuneration Report |
26 28 29 30 33 40 41 |
| FINANCIAL REVIEW | |
| Independent Auditor's Report Income Statement Statement of Changes in Equity Balance Sheet Notes to the Financial Statements |
45 52 52 53 54 |
| OTHER INFORMATION FOR SHAREHOLDERS | |
| Notice of Annual General Meeting Shareholder Information Advisors and Principal Service Providers Glossary of Terms and Alternative Performance Measures Alternative Investment Fund Managers Directive Disclosures |
73 77 78 79 82 |
If you wish to contact members of the Edinburgh Investment Trust Board then please get in touch with the Company Secretary on +44 (0)20 4513 9260. If you have any enquiries for the Portfolio Manager, please contact them on +44 (0)20 7618 3900.
www.edinburghinvestmenttrust.com
The Company is a member of
The Edinburgh Investment Trust plc ('The Company') is an investment trust whose investment objective is to invest primarily in UK securities with the long term objective of achieving:
The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the portfolio in securities listed on stock exchanges outside the UK. The portfolio is selected on the basis of assessment of fundamental value of individual securities and is not structured on the basis of industry weightings.
The Company is a public listed Investment Company whose shares are traded on the London Stock Exchange. The business of the Company consists of investing the pooled funds of its shareholders, according to a specified investment objective and policy (set out on page 14), with the aim of spreading investment risk and generating a return for shareholders.
The Company uses borrowing to enhance returns to shareholders. This increases the risk to shareholders should the value of investments fall.
The Company has contracted with an external investment manager, Majedie Asset Management Limited ('MAM' or the 'Manager'), to manage its investments. Other administrative functions are contracted to external service providers. The Company has a Board of non-executive directors who oversee and monitor the activities of the Manager and other service providers on behalf of shareholders and ensure that the investment objective and policy is adhered to. The Company has no employees.
Share price
0.43% Ongoing charges ratio*
Gearing (net)*
Comparative figures for last year are given on page 2
* Alternative Performance Measures as defined on pages 79 to 81
| Total Return(1)(2)(3) (with dividends reinvested) | Year Ended 31 March 2021 |
Year Ended 31 March 2020 |
|---|---|---|
| Net asset value (NAV) – debt at market value(1) | +34.8% | -26.7% |
| Share price | +46.4% | -29.4% |
| FTSE All-Share Index | +26.7% | -18.5% |
The Company's benchmark is the FTSE All-Share Index.
| Capital Return(1) | At 31 March 2021 |
At 31 March 2020 |
Change % |
|---|---|---|---|
| NAV – debt at market value | 628.29p | 490.40p | +28.1 |
| Share price(2) | 600.00p | 434.00p | +38.2 |
| FTSE All-Share Index(2) | 3,831.05 | 3,107.42 | +23.3 |
| Discount(1)(3) – debt at market value | (4.5)% | (11.5)% | |
| Gearing (debt at market value)(1)(3) – gross gearing |
10.1% | 13.4% | |
| – net gearing | 7.1% | 8.3% |
| Revenue and Dividends(3) | Year Ended 31 March 2021 |
Year Ended 31 March 2020 |
Change % |
|
|---|---|---|---|---|
| Revenue return per ordinary share | 16.21p | 27.83p | -41.8 | |
| Dividends | – first interim | 6.00p | 6.40p | |
| – second interim | 6.00p | 6.40p | ||
| – third interim | 6.00p | 6.40p | ||
| – proposed final | 6.00p | 9.45p | ||
| – total dividends (excl special dividend) | 24.00p | 28.65p | -16.2 | |
| – declared special dividend | 4.65p | nil | ||
| – total dividends | 28.65p | 28.65p | nil | |
| Retail Price Index(2) – annual change | 1.5% | 2.6% | ||
| Consumer Price Index(2) – annual change | 0.7% | 1.5% | ||
| Dividend Yield(1) | 4.8% | 6.6% | ||
| Ongoing Charges Ratio(1)(3)(4) | 0.43% | 0.55% |
Notes:
(1) These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 79 to 81. NAV with debt at market value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges. Dividend yield is inclusive of the 4.65 pence per share special dividend declared. The Dividend Yield excluding this special dividend is 4.0%.
(2) Source: Refinitiv.
(3) Key Performance Indicator.
(4) The Manager waived its investment management fee for the first three months of its appointment from 4 March 2020. The Ongoing Charges Ratio disclosed above show the actual charges incurred during the period. The pro-forma charges had the investment management fees not been waived over this period would have been 0.51% (2020 0.58%).
| Per ordinary share | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Year ended 31 March |
Ordinary shareholders' funds £m |
Shares (bought back)/ issued m |
Revenue return p |
Dividend rate p |
Net asset value (debt at market value) p |
Share price p |
(Discount)/ Premium (debt at market value) % |
Gross gearing (debt at market value) % |
Net gearing (debt at market value) % |
| 2012 | 982 | – | 22.05 | 22.00 | 478.30 | 497.60 | 4.0 | 26.4 | 26.4 |
| 2013 | 1,138 | – | 22.01 | 22.80 | 559.01 | 572.00 | 2.3 | 22.4 | 22.4 |
| 2014 | 1,228 | – | 23.18 | 23.50 | 613.25 | 594.00 | (3.1) | 19.1 | 18.6 |
| 2015 | 1,376 | – | 24.83 | 23.85 | 686.07 | 662.00 | (3.5) | 13.9 | 13.8 |
| 2016 | 1,392 | 0.55 | 26.66 | 24.35 | 695.30 | 665.00 | (4.4) | 15.5 | 15.3 |
| 2017 | 1,535 | – | 27.94 | 25.35 | 768.81 | 713.50 | (7.2) | 15.9 | 15.7 |
| 2018 | 1,400 | – | 29.25 | 26.60 | 703.34 | 642.00 | (8.7) | 12.1 | 11.8 |
| 2019 | 1,382 | (0.19) | 28.66 | 28.00 | 696.91 | 644.00 | (7.6) | 11.0 | 10.8 |
| 2020 | 872 | (20.80) | 27.83 | 28.65 | 490.40 | 434.00 | (11.5) | 13.4 | 8.3 |
| 2021 | 1,091 | (2.50) | 16.21 | 28.65(1) | 628.29 | 600.00 | (4.5) | 10.1 | 7.1 |
(1) Including declared special dividend of 4.65p.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 3yr | 5yr | 10yr | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NAV (debt at market value) (%) | 10.2 | 16.9 | 9.7 | 11.9 | 1.3 | 10.6 | -8.5 | -0.9 | -29.6 | 28.1 | -10.7 | -9.6 | 44.8 |
| Share Price (%) | 12.1 | 15.0 | 3.8 | 11.4 | 0.5 | 7.3 | -10.0 | 0.3 | -32.6 | 38.2 | -6.5 | -9.8 | 35.1 |
| FTSE All-Share Index (%) | -2.1 | 12.6 | 5.2 | 3.0 | -7.3 | 17.5 | -2.4 | 2.2 | -21.9 | 23.3 | -1.6 | 12.8 | 24.9 |
Source: Refinitiv.
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 3yr | 5yr | 10yr | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| NAV (debt at market value) (%) | 16.3 | 22.9 | 14.3 | 16.2 | 5.0 | 14.7 | -5.9 | 2.9 | -26.7 | 34.8 | 1.8 | 10.3 | 117.4 |
| Share Price (%) | 17.6 | 20.1 | 8.0 | 15.7 | 4.0 | 11.2 | -6.7 | 4.6 | -29.4 | 46.4 | 8.1 | 12.1 | 106.0 |
| FTSE All-Share Index (%) | 1.4 | 16.8 | 8.8 | 6.6 | -3.9 | 22.0 | 1.2 | 6.4 | -18.5 | 26.7 | 9.9 | 35.7 | 79.0 |
Source: Refinitiv.
Cumulave Real Dividend Growth
Source: Refinitiv.
GLEN SUAREZ / CHAIRMAN
This year, those challenges are still here but we are beginning to see some light at the end of the pandemic tunnel. Still, I would again like to take this opportunity to say that I hope you remain safe and well.
Since this marks the first full year of Majedie Asset Management's tenure as portfolio manager, I think it would be helpful to start with a reminder of the context in which we should think about how to evaluate the performance of the Company.
You will no doubt be aware that the Company has two objectives:
In the five years before the start of the current period, the Company met its objective in terms of dividends – in fact, dividends grew by 3.7% per annum compared with 2.6% per annum for the UK Retail Price Index in that period. However, over the same period the Company failed to meet the capital return objective and, perhaps more importantly, the Company's total return fell behind the return on the benchmark. This was clearly unsatisfactory and, combined with fact that the UK equity market has been out of favour with investors for most of that period, contributed to a significant widening of the discount of the share price to NAV during 2019.
As I explained in last year's annual report, in December 2019 the Board decided that this unsatisfactory performance was best addressed through a change of manager. Accordingly, following the consideration of a number of potential managers, including a "beauty parade", the Board appointed Majedie Asset Management, and in particular James de Uphaugh, one of the co-founders of Majedie, as its portfolio manager.
We were impressed in particular by James' emphasis on taking a 'total return' approach to stock selection and portfolio composition: to simplify considerably, this is an analytical approach that emphasises the long term returns from capital investment by companies as well as their immediate dividend paying capacity.
This was (and is) an important issue in current market circumstances. Many companies, such as banks, have been asked to reduce dividend payments because of pressures from regulators; competition (where, for example, the emergence of companies such as Amazon has seriously affected the profitability of high street retailers); environmental changes (such as those facing energy companies); and lastly the pandemic itself. It is worth noting that - while this is a worldwide issue - its impact on equity valuations is greater in the UK given the much larger weight of banks, retailers, and energy companies in indices than elsewhere. It is unlikely that total return expectations in the market have changed much but the market is increasingly giving value to companies which can show long-term returns from capital investment as well as to those that can produce sustainable dividends.
On top of this, shareholders will be aware that in the past year, the prospect of a gradual long-term rise in interest rates has begun to be priced in the markets. This has come through a rise in long term interest rates as well as through market talk – but as yet no tangible sign – of a sustained rise in inflation. A sustained rise in long term interest rates – and its consequence, a steepening of the yield curve – would represent a significant change in market conditions.
This is a difficult environment for all portfolio managers: the Board believes that James de Uphaugh's style has the necessary flexibility to adapt as the market environment changes.
Against this background, I am pleased to report that the Company's Net Asset Value (NAV) on a total return basis, i.e. including reinvested dividends, returned 34.8% over the financial year ended 31 March 2021 and the share price returned 46.4%. These compare with a total return of 26.7% for the FTSE All-Share Index. The equivalent returns on a capital only basis are 28.1% for the NAV, 38.2% for the share price, and 23.3% for the index. The difference between the NAV total return and capital return is explained not only by the dividends received by the Company, but also because the Company has been using some of its reserves to pay dividends to shareholders (discussed in more detail below). Over the past three years, the Company's NAV return has been 1.8% cumulatively, with the Company's benchmark index returning 9.9% over the same period. Over the past five years, the Company's NAV return has been 10.3% cumulatively, with the Company's benchmark index returning 35.7% over the same period. In all these cases, the NAV is stated after deducting debt at market values.
Further information on the portfolio, and contributors to returns, is set out in the Manager's Report.
I would like to note that performance has come from a diversified range of stocks, with an additional boost from the effect of the Company's borrowings. The portfolio is relatively concentrated, containing approximately 50 stocks. This means shareholders should expect performance to come in a lumpy fashion, as the last year illustrates: the bulk of the outperformance has come in the last six months, since the announcement of vaccines. Nonetheless, while still early days for Majedie in their role as the Company's manager, I am delighted that they have made such a strong start – particularly given the challenging market backdrop.
In November 2020, the Board announced a change in the underlying level of dividends to be paid to the Company's shareholders: we explained at the time that this year's first interim dividend – and the expectation for each subsequent interim and the final dividend – would be 6.00 pence per share, for a total of 24.00 pence per share. Last year, the equivalent figure was 28.65 pence per share. While this means we have not met the Company's objective to grow the dividend per share in excess of inflation for the last two financial years, the Board believes this rebased level is a sustainable one from which the Company's dividend objective can be met in the years ahead.
This rebasing reflects as discussed above the fact that the overall yield on the UK market had become increasingly dependent on a small number of companies and sectors and that many of these were facing pressures even before the impact of the COVID-19 related lockdowns. The effect of the crisis caused by the pandemic, added to the ongoing structural changes to the economy, was to erode the income available from much of the UK equity market. The Board concluded that the previous level of Company dividends was unlikely to be sustainable. While there remains uncertainty over the speed of the current recovery in market earnings and dividends, dividends from across the UK market are now more balanced.
The Board recognises the importance of dividends to shareholders, especially in an uncertain environment and at a time when other sources of income are under pressure. An attractive feature of investment trusts is the ability to use revenue reserves, built up in years when revenues exceed dividends paid to shareholders, to smooth dividend distributions in years when revenues are weaker. On this front, your Company is in a strong position. Reflecting this, the Board will use revenue reserves to maintain the total dividend per share this year at the 2019/20 level through the payment of a special dividend. Therefore, in addition to recommending a final dividend of 6.00p per share, which shareholders will be asked to approve at the Annual General Meeting, the Board has decided to pay a special dividend of 4.65p. This will supplement the underlying distribution of 24.00p and result in a total distribution of 28.65p, unchanged from the previous financial year.
It is encouraging that the discount has narrowed by 7% percentage points in the last 12 months. This reflects not only improved sentiment towards the UK market as Brexit-related uncertainty has receded and recovery prospects after the COVID-19 related shutdowns, but also an understanding and an appreciation of James' investment style and approach.
The Board's policy continues to be to manage the discount actively through share buy backs as appropriate. During the year we instructed the Company's broker to repurchase 2,500,000 shares in the market. The amount and cumulative effect of these repurchases is noted in the table on page 15. The last buy back took place on 20 October 2020. At 25 May 2021, the last practical date before signing this report, the discount was 5.4%.
At 31st March 2021 the net debt of the Company, with the debenture at market value, stood at £76.5 million, resulting in gearing of the Company of 7.1% of net assets. All debt is currently achieved through the Company's debenture, which is due for redemption in September 2022. The Board is considering how best to take advantage of the Company's ability to borrow to enhance returns. This takes account of the Manager's perception of gearing risk, the lower level of prevailing interest rates compared with the debenture's coupon, the cashflows of the company and possible share-buy backs in the future.
The Board considers that the reappointment of Majedie is in the best interest of shareholders.
At an operational level, the change this time last year to the new manager and a new company secretary, PraxisIFM, proceeded smoothly. I would like to thank the many colleagues both at Majedie and at PraxisIFM who have worked so hard to deliver this result, especially given the difficult circumstances due to the pandemic.
Details of the AGM are given in the Notice of Annual General Meeting on pages 73 to 76. We are planning for this event to take place in person. We had our first in person Board meeting last week and we look forward to meeting as many of you as possible in person in Edinburgh on 22 July. We will revert to the pre-pandemic AGM format of an update from me and from the Manager, and allow plenty of time for questions and informal discussions between the Directors and shareholders. I very much hope as many of you as possible will be able to attend as it will be the first opportunity for shareholders to meet the new Manager. However, we recognise that some shareholders may not be able to join in person and in the Notice of Annual General Meeting we set out how shareholders can also submit questions in advance of the AGM and participate virtually. Should changes to the timetable for the lifting of gathering restrictions mean we are forced to amend arrangements for the AGM, we will notify shareholders via a regulatory announcement and give details of the new arrangements on our website www.edinburghinvestmenttrust. com. We also propose to have an Investor Day in London in September 2021, following on from the format we adopted in 2019.
Max Ward will stand down at this year's AGM after ten years of service on the Board. We were fortunate that this time last year Max agreed to remain in place for an additional year - on top of the nine years that he had originally intended to serve - in order to help the Company with the transition to the new Manager. As an experienced fund manager himself, Max has brought invaluable insight and judgment as well as market knowledge that has been critical on the Board.
Also standing down at this year's AGM after ten years of service on the Board is Gordon McQueen. For the last 10 years Gordon has served as Chair of the Audit Committee. Once again, we were fortunate that this time last year Gordon agreed to remain in place for an additional year – on top of the nine years that he had originally intended to serve – in order to help with the transition to the new Manager as well as the transition to PwC, appointed as auditor in 2019 after a tender.
I am immensely grateful to both Max and Gordon for the huge contributions that both have made to the Board's work and effectiveness over the years.
Steve Baldwin will take over as Chair of the Audit Committee at a time when the responsibility of the Audit Committee for risk management and controls is increasing. Boards like ours face a bigger challenge in managing the broader social impact of our decisions within the traditional constraints of the need to pursue shareholder value.
I was pleased to welcome Patrick Edwardson to the Board as a new Director. Patrick has 27 years of investment experience as a fund manager with Baillie Gifford, where he was a Partner and Head of the Multi-Asset Team before his recent retirement. Along with his knowledge of the UK equity market and deep knowledge of investment companies, Patrick brings extensive experience of income investing from his role as the Fund Manager of the Scottish American Investment Company from 2004 to 2014. I have no doubt that he will rapidly become an extremely valuable member of the Board.
We will be asking for shareholders' approval at the AGM for some changes to the Directors' remuneration. Further details are set out on page 41.
Finally, as shareholders will be aware, my own term as a Director will come to an end at next year's AGM in July 2022. In order to ensure a seamless and orderly success, the Board, overseen by Vicky Hastings, the Senior Independent Director, has recommended that Elisabeth Stheeman be nominated as Chair Elect to succeed me. Elisabeth has made significant contributions to the Board's work since her appointment in 2019 and brings a wealth of experience from her work across financial markets to the Board.
I would like to take this opportunity to thank all the Directors on behalf of shareholders for the contributions that they have made in ensuring that the Company is better able to meet its objectives and satisfy the expectations of shareholders.
The successful development of vaccines against COVID-19 has been a major turning point, at least for those developed economies fortunate enough to be experiencing their roll out. Yet, the pandemic is far from over, as current events in parts of the world such as India sadly highlight. In Western economies, there remain significant restrictions on travel and gatherings: it remains to be seen how the major sections of the economy that are exposed to this will recover. Despite cautions of this kind, the arrival of vaccines, combined with concerted financial actions by governments and interventions by Central Banks around the world, means that this year's annual report contains a notably more positive tone than last year's.
In closing, I would like to thank shareholders for their patience in recent years. Your Company has undergone a material change with the appointment of the new manager, and the improvements that have been made to the portfolio.
For the year ended 31 March 2021
JAMES DE UPHAUGH / PORTFOLIO MANAGER
CHRIS FIELD / DEPUTY PORTFOLIO MANAGER
It has been our great privilege to complete our first full year as manager of your historic and prestigious Company. This has also been a year quite unlike any other that we have experienced, with an ongoing pandemic and stock market volatility.
Nevertheless, we have maintained our focus on the two core objectives of the Company:
To do this, we invest across global markets, with at least 80% of the Company's portfolio by value listed in the UK. We take a team-based approach, with final investment decisions taken by the manager. Our research is stock-driven: we believe we will add most value for shareholders over the medium term by identifying strong and attractively priced businesses. Our investment approach is a flexible total return one - there are no built-in biases to particular 'types' of investment. We therefore attempt to identify companies that will deliver attractive total returns comprising income and capital growth. Both are important elements and receive equal attention. As we will illustrate with examples later in this report, we are acutely aware of the growing ESG responsibilities of companies, particularly those potentially contributing to rapid and worrying climate change.
The end result for shareholders is a differentiated portfolio that should enable the Company to meet its two investment objectives set out above. Our aspiration is for the Company to be a core part of investors' portfolios.
We have set out our core investment beliefs in more detail on page 13: we hope that these provide shareholders with a clear explanation of our process. We also keep the Company's website up to date with a range of materials including factsheets, videos, and other pieces of intellectual capital that explain our views and approach. Shareholders can subscribe to notifications for updates at www.edinburghinvestmenttrust.com.
Stock markets have staged a major recovery over this period. The Company's previously disappointing returns, prior to our appointment, were measured up to a point at which the stock market was not far from its pandemicdriven lows. The last year therefore represents a welcome recovery, more so as since 2016 the Company's shares had lagged the index. It is therefore pleasing to be able to report a rise in the Company's net asset value per share ('NAV') of 34.8%, and a share price rise of 46.4%, both on a total return basis. Over the same period, the FTSE All-Share Index returned 26.7%. The share price outperformed the NAV, reflecting a closing of the 'discount' – the term for the percentage by which the share price is below NAV. The discount moved in from 11.5% on 31 March 2020, to 4.5% by the same date this year.
In our view, a twelve-month period is too short to assess an investment manager's performance. A three-year period is likely to be more realistic, particularly as we take multi-year views when assessing and making investment decisions. At this stage, we would simply note that things that are firmly in our control, such as the work ethic of our investment team, have been effective and productive – despite most of us working from home for much of the last year. Investment idea generation has been strong, with many of the
Company's new holdings since our appointment contributing to the positive results of the last year. As we now begin to return to our open-plan London office, we look forward to the return of even closer collaboration across the team. Teams working together in person should be more effective than teams working over 'Teams'.
Given our stock-driven approach and bearing in mind our caution that one year is too short a period to assess manager skill, a factual appraisal of the positive and negative stock contributors should give shareholders an early sense of our investment approach. We will begin with those stocks that hindered returns. The key point here is that the portfolio avoided stocks with any major problems or issues and performance detractors were typically those companies whose shares modestly underperformed the market. Indeed, somewhat counterintuitively, one of the biggest negatives was the holding in Tesco, which had a strong year operationally. Its share price was subdued, even though it – along with the other UK supermarkets – did an excellent job of prioritising food availability over profits. For this reason, Tesco is a great example of a business with a strong ESG signature. A new chief executive and finance director give us confidence that they can build on the solid operational progress of the last year, and we have been buying more shares. Another holding with a share price that gave up ground was Smith & Nephew. This is a global leader in the design and manufacture of orthopaedic and other medical devices. Their products are used by hospitals around the world to replace joints and to help treat wounds and traumas. The company has an enviable longterm record. However, in the last year the market took the view that it was less competitive in areas such as replacement joints, for example for knees. We view this as the inevitable ebb and flow of market shares. We place much greater emphasis on Smith & Nephew's high margins and opportunities to grow across multiple product lines. We are happy to retain the holding.
In terms of stock positive contributor, we are encouraged to see holdings in mid-sized businesses making prominent contributions. Top of the list is Ashtead, a business which rents out industrial equipment to a wide variety of commercial customers. As this description suggests, it is a cyclical business, with a positive structural undercurrent, and thus it has benefitted from economies emerging from lockdowns. For us, the more important feature is that management have maintained a clear focus on the long-term success of the business, despite the many challenges of the last fifteen months. This is a great example of what we describe as a Darwinian winner: one that is gently crunching the competition. It is emerging from the economic crisis even stronger.
Another positive contributor is a stock with an improving ESG profile: Weir. This business, with a rich Scottish heritage, has become a key supplier of engineering solutions that help improve their customers' safety, efficiency and sustainability. These customers are often major mining companies. In a similar vein, a
third notable positive contributor is itself a miner: Anglo American. It has benefitted from rising commodity prices over the last year. More importantly, it has made changes to the profile of its business, including the welcome sale of its thermal coal assets – something we have been engaging with management on for some time.
As the above examples should illustrate, throughout our stock deliberations we are focused on the ESG profile of the businesses in which we invest the Company's assets. For us, ESG is not an add-on, but thoroughly integrated into our research and debate about stocks and their prospects. The portfolio's carbon footprint, in terms of carbon intensity, is also below the average of the index. This is in part due to the sale of BP, reflecting our lack of conviction in its management's energy transition plan.
Another significant contributor to the Company's NAV returns ahead of the index was that of borrowings. We discuss our thinking on this topic at greater length further below. But for now, it is important to note that our decision to invest most of the Company's long-term borrowings accounted for 3.5% of the 8.1% excess return.
Overall, we view the last year as an encouraging start in our role as the Company's manager. Clearly the market return was flattered by the depressed level of markets this time last year, but we are encouraged that in general the diversified range of stocks that we hold performed well at an operational level. For the Company's shareholders, it has also been encouraging to see the discount narrow.
At the beginning of our tenure, last March, we moved the Company to a relatively defensive stance. The news then at a human level was, frankly, gut-wrenching. It was the same at an investment level. It is easy to forget how challenging things were then. The rapidly changing environment since then, and exceptionally high level of volatility, has presented us with an unusually high number of investment opportunities. Major net purchases over the year include Standard Chartered Bank, which should capitalise on recovering Asian economies, and Ascential, a global information services leader offering a unique collection of fast-growing ecommerce data analytics assets. Significant sales have included GlaxoSmithKline, Legal & General and Barrick Gold, all of which were sold or reduced, the latter two after strong share price recoveries. In aggregate, portfolio turnover (calculated by taking the lower of the value of purchases and sales, divided by the average portfolio value) during the year was 39%. This is higher than we would typically expect: longer-term turnover might more realistically be in the range of 25% to 33%, which is equivalent to holding periods of three to four years.
Despite this level of turnover, a key advantage of a relatively small boutique manager such as MAM is that we have been able to re-orientate the Company quickly and efficiently. This was particularly the case after the announcement of the approval of
COVID-19 vaccines late in 2020. We have moved the portfolio to build gently on the pro-cyclical stance that has come from holdings such as Weir and Ashtead. These changes have made a difference to shareholder results.
There are many data points that indicate the potential for a strong recovery in the UK economy. Perhaps the most important one is that, at the time of writing a total of over fifty million COVID-19 vaccines have been administered, with over fifteen million UK citizens having received both jabs. The US is reporting a similarly strong roll out of vaccines, and the European Union, after a slow start – is also now in full flow. We are under no illusion that the virus and its consequences will be with us for many years to come. Nonetheless, the gentle pro-cyclical tilt that we described above remains, in our view, appropriate. Should the recovery come through, especially given the degree of government largesse involved, there is a risk of higher inflation and higher interest rates. These factors have led us to have more modest positions in stocks that are sensitive to potentially tighter credit conditions – such as the insurer Legal & General.
The UK market has been in the doldrums for an extended period. Indeed, some say of UK equities, 'why bother'? To that, our retort is that the UK is rich in stocks that are exceptionally well-placed both operationally and in valuation terms. While we do not expect a repeat of the exceptionally strong returns of last year, we do think there is scope for further attractive returns. It has undoubtedly been a Cinderella to global equities, particularly since 2016. There are a number of reasons for this. The sword of Damocles that was Brexit has gone. There is also the issue that the UK market plainly has had fewer technology stocks than other markets, particularly the US equity market. But with the UK's vaccine rollout programme among the leading ones around the world, and Brexit 'done', the outlook is much more positive. The UK is home to a wide range of world class business. Take Electrocomponents, the global distributor of industrial components. It has made a successful move to an online proposition. Through the pandemic it has been able to entrench further its lead over its competition, enabling it to grow at two to three times the rate of its peers. As well as identifying strong businesses for the long term, an important part of our investment process is thinking about valuation. On this score, we are particularly excited about the opportunities available in the UK: we are firmly of the view that the UK market contains an exciting range of globally leading businesses with the double benefit of being undervalued versus their international peers.
Where there are attractive stocks or sectors that, for whatever reason, are listed outside the UK, the Company has the flexibility to buy them. We have used this feature only sparingly in the last year. This partly reflects the very attractive range of strong, compellingly valued UK-listed businesses. It also reflects the fact that a year ago sterling was weaker, raising the bar for overseas stocks given the risks of a recovery in our domestic currency. Since then, sterling has recovered to a degree, in turn lowering the bar a little. But as with any UK stock, prospective overseas investments must pass the muster of our investment process. Recent non-UK purchases include A.P. Moller-Maersk, the global container shipping group, also a great example of the sort of business that has no equivalents listed in London, and NXP, the US listed semiconductor group.
We therefore think Edinburgh Investment Trust offers shareholders a compelling combination of a differentiated portfolio, containing companies that are performing strongly on a global stage, often priced at a discount. Despite the strong last year, on a medium-term view there is still much to go for.
Many companies cut dividends in the aftermath of the pandemic. The Company's holdings were not exempt from this, as the Revenue columns in the Income Statement on page 52 illustrate. Revenue for the year was £32.84m, versus £58.96m in the prior twelve months. During the year we also received a significant special dividend from Tesco, following the sale of the Thai operation. For the Company this amounted to £10.98m and has been booked as a capital return. It does not form part of the Company's revenue for the year. As the Chairman has set out in his statement, the overall fall in revenue was a contributory factor to the decision by the Board last autumn to rebase the underlying dividend per share to 24.00 pence.
Today, we are in a position where the level of dividends paid across the market is generally more sustainable. As economic visibility steadily improves, more companies have begun to reinstate, or rebuild, dividends. A good example of this phenomenon, in an early phase, is in the banking sector where, for example, NatWest Group has set out a minimum monetary level of dividend that it expects to pay out annually in dividends over the period 2021 to 2023. Drawing all this together, we expect the Company's revenue from dividends to recover during this financial year and in the following year. As the Chairman has also noted, we aim for the dividends paid to the Company's shareholders to be covered by revenues in the medium term.
As managers of the Company, our core task is to construct a portfolio that generates an attractive positive return over the medium to long term. Assuming this positive result, borrowings should enhance shareholder returns over these time horizons. This is a key differentiator for investment trusts versus their openended 'fund' brethren. We support the concept of borrowings as an important investment trust tool that can enhance underlying equity returns. As we noted earlier, exactly this dynamic played out this year, with 3.5% of the Company's 8.1% NAV excess return being attributable to the effect of borrowings. However, as any homeowner with a mortgage in the early 1990's may recall, borrowings exaggerate financial losses too, particularly if assets are
sold when prices are low. Here, again though, investment trusts have an advantage: because of their relatively stable equity capital base, closed-end investment trusts do not typically have to sell assets at market lows to satisfy redemptions. Taking all this together, we are supportive of the long-term role of borrowings for investment trusts, viewing their periodically unhelpful role in market falls as a price to be paid for the undoubted benefits of boosting long term returns.
At a practical level, the Company today has a long-term debt structure through a £100m debenture. There is also a bank facility of up to £50m, which has not been used during the year or since the year end. The market value of the debenture, and adjusting for the Company's modest cash balance, equates to net gearing (defined as net borrowing divided by net assets) of 7.1% at the year end. The debenture will redeem in September 2022. As the Chairman has said in his statement, ahead of that redemption we are collectively reviewing gearing options and will keep the market apprised.
The stocks held by the Company are performing well operationally. At the same time, many of the UK-listed stocks held are priced at a discount to their peers in other markets internationally. With some UK-specific issues such as Brexit receding, and a robust vaccine rollout across the country, there are sound reasons to believe the valuation gap should narrow from here. How quickly this might happen is clearly unknown. In the meantime, we will patiently back the stocks that our in-depth fundamental research indicates have the greatest upside. In this respect, the UK market is supplying us with an attractive and diversified selection of businesses. Through a combination of capital gains and dividend distributions, reflecting strong fundamentals, we believe these companies will underpin above average returns for the Company's shareholders over time.
Majedie Asset Management was established in 2002 and to this day we remain loyal to our single purpose: to make money for our clients, responsibly. We are owned and managed internally. We only manage equity portfolios and have no other forms of income to fall back on, ensuring full alignment with our clients' interests.
Our competitive edge rests on the combination of our independent business structure and our flexible investment style. Our independence provides a stable environment in which our fund managers operate, and our investment approach produces portfolios that aim to deliver long-term outperformance on a repeatable basis.
Stock-driven. Share prices follow fundamentals over the long term. Through our proven investment approach, we expect to outperform over the long term, net of fees.
High conviction portfolio. We expect the portfolio to contain around 40 to 50 stocks. Holdings sizes reflect the conviction we have in each company and our assessment of the upside and downside potential of its share price.
Risk. We think of risk as permanent capital loss. To mitigate this, our analysis of a company's valuation is the first line of defence. Our risk management process combines our depth of knowledge of the stocks in the portfolio, plus separate analysis of portfolio risk by our Performance and Risk Team.
Open-minded approach. We do not have dogmatic style biases, such as 'growth' or 'value'. We are also prepared to invest in companies that we identify as having scope for recovery through management change, business transformation or an improving business environment. We expect the profile of the portfolio to evolve, depending on our assessment of individual companies, and our reading of the economic and market background.
Disciplined, rigorous, fundamental research. In keeping with the stock-driven nature of the portfolio, typically approximately three quarters of our effort takes the form of in-depth stock research. The remainder is spent on macroeconomic and geopolitical analysis.
ESG-related considerations have financial implications for the portfolio's holdings. We prioritise and engage our holdings on their key, material issues, many of which are ESG-related. The outcomes from our in-depth analysis and engagements help form our conviction level and investment decisions. In this way, ESG lies at the heart of our investment process.
A focus on both capital growth and income. We take a total return approach: investor returns should derive over the long term from both capital appreciation and dividend income. We often prefer companies with organic investment opportunities: as such, we normally expect companies with growing profits – and share prices – to contribute to returns. We view income as an important component rather than the primary driver of investment return. This aligns with the Company's twin objectives.
Typical holding period of 3-5 years. This is an appropriate period to ensure that underlying corporate fundamentals drive investment returns. It is therefore also a sensible period over which to measure an active manager.
Gearing should enhance shareholder returns. One of the advantages of an investment trust is the ability to borrow to enhance equity returns. We therefore expect gearing to boost investment returns over time.
Scale diseconomies. In our view, investment performance can rapidly suffer if assets under management become too large. Since being established in 2002, we have carefully managed capacity to ensure that the interests of existing clients take precedence over new clients. The approach ensures we retain a size advantage. It enables us to reposition the portfolio – and those of all our other clients – quickly and efficiently when required.
A close-knit investment team. Average experience for each member of the team is 15 years. The team has been stress-tested across various market cycles.
Challenge and debate. This is encouraged within a structured risk control environment, with robust oversight processes. All employees own equity in the firm, which fosters a deep sense of teamwork and collaboration.
The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective has been to contract the services of the Manager to manage and administer the portfolio in accordance with the Board's strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is James de Uphaugh and the deputy portfolio manager is Chris Field.
In addition, the Company has contractual arrangements with Link Group to act as registrar, The Bank of New York Mellon (International) Limited as depositary and custodian, and PraxisIFM Fund Services (UK) Limited to act as Company Secretary.
The Company invests primarily in UK securities with the long term objective of achieving:
The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company's investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company's overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company's investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.
The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.
At the year end the share price was 600.00p per ordinary share (2020: 434.00p). The net asset value (debt at market value) per ordinary share was 628.29p (2020 490.40p).
It is intended that a further payment of 10.65p should be made in respect of the year to 31 March 2021 (2020: 9.45p). This comprises a special dividend of 4.65p (2020: nil), already declared and a proposed final dividend of 6.00p (2020: 9.45p), which is subject to approval at the AGM. This will be payable on 29 July 2021 to shareholders on the register on 25 June 2021. The shares will be quoted ex-dividend on 24 June 2021. This will give total dividends for the year of 28.65p per share (2020: 28.65p). The revenue return per share for the year was 16.21p, a 41.8% decrease on the 2020 return of 27.83p.
The Board reviews the Company's performance by reference to a number of key performance indicators (KPIs) which are shown on page 2. Notwithstanding that some KPIs are beyond its control, they are measures of the Company's absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.
The Chairman's Statement on pages 5 to 7 gives a commentary on the performance of the Company during the year, the gearing and the dividend.
The Board reviews an analysis of expenditure at each Board meeting, and the Audit and Management Engagement Committees formally review the fees payable to the main service providers, including the Investment Manager, on an annual basis. The ongoing charges figure is calculated in accordance with the AIC methodology and is reviewed by the Board annually in comparison to peers.
The Board also regularly reviews the performance of the Company in relation to the 21 investment trusts in the UK Equity Income sector (including the Company). As at 31 March 2021 the Company was ranked 11th by NAV performance in this sector over one year, 19th over three years and 20th over five years (source: Morningstar).
The main trends and factors likely to affect the future development, performance and position of the Company's business can be found in the Portfolio Manager's Report. Details of the principal risks affecting the Company can be found on pages 19 to 21.
The Company's balance sheet on page 53 shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 7 ¾% debenture which matures in 2022 and £nil (2020: £nil) drawn down on the Company's £50 million bank revolving credit facility (2020: £150 million). Details of this bank facility are contained in note 11.
| for year ended 31 March 2021 % |
|
|---|---|
| Total Return Basis(1) | |
| NAV (debt at market value) | 34.8 |
| Less: Benchmark | 26.7 |
| Relative outperformance | 8.1 |
| Analysis of Relative Performance | |
| Portfolio total return | 31.8 |
| Less: Benchmark total return(1) | 26.7 |
| Portfolio outperformance | 5.1 |
| Borrowings: | |
| Net gearing effect | 3.5 |
| Interest | -0.8 |
| Market value movement | 0.6 |
| Management fee | -0.3 |
| Other expenses | -0.1 |
| Tax | -0.1 |
| Share buybacks | 0.2 |
| Total | 8.1 |
(1) Source: Refinitiv.
Performance Attribution – analyses the performance of the Company relative to its benchmark index. The Analysis of Relative Performance seeks to estimate the quantum of relative performance that is attributable to each of the factors set out in this table. The table is intended to be indicative rather than precise; the accuracy of each estimate is determined by a variety of factors such as the volatility of investment returns over the year and intra-month, and the timing of income receipts and expenditure payments.
Relative performance – represents the arithmetic difference between the NAV and benchmark returns.
Portfolio total return – represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.
Net gearing effect – measures the impact of the debenture stock, bank facility and cash on the Company's relative performance. This will be positive if the portfolio has positive capital performance, total return is positive and negative if capital performance total return is negative.
Interest – the debenture stock and bank facility interest paid has a negative impact on performance.
Management fee – the base fee reduces the Company's net assets and decreases returns.
Other expenses and tax – reduce the level of assets and therefore result in a negative effect on relative performance.
Share buybacks – measures the effect of ordinary shares bought back at a discount to net asset value on the Company's relative performance.
At 31 March 2021
| Value | % of | ||
|---|---|---|---|
| Investment | Sector | £'000 | Portfolio |
| Royal Dutch Shell - B shares | Oil, Gas and Coal | 37,833 | |
| Royal Dutch Shell - A shares | 28,516 | ||
| 66,349 | 5.8 | ||
| Anglo American | Precious Metals and Mining | 50,187 | 4.4 |
| Ashtead | Industrial Support Services | 49,367 | 4.3 |
| AstraZeneca | Pharmaceuticals and Biotechnology | 46,119 | 4.0 |
| Unilever | Food Producers | 45,255 | 3.9 |
| Tesco | Personal Care, Drug and Grocery Stores | 38,714 | 3.4 |
| Weir | Industrial Engineering | 36,962 | 3.2 |
| Mondi | Industrial Materials | 36,107 | 3.1 |
| NatWest | Banks | 35,967 | 3.1 |
| Smith & Nephew | Medical Equipment and Services | 35,916 | 3.1 |
| TEN TOP HOLDINGS | 440,943 | 38.3 | |
| Electrocomponents | Industrial Support Services | 35,399 | 3.1 |
| Hays | Industrial Support Services | 33,195 | 2.9 |
| BAE Systems | Aerospace and Defence | 30,932 | 2.7 |
| Direct Line Insurance | Non-Life Insurance | 30,804 | 2.7 |
| Dunelm | Retailers | 30,427 | 2.6 |
| Associated British Foods | Food Producers | 29,938 | 2.6 |
| Diageo | Beverages | 29,823 | 2.6 |
| HSBC | Banks | 25,383 | 2.2 |
| Barclays | Banks | 25,379 | 2.2 |
| Rio Tinto | Precious Metals and Mining | 24,859 | 2.2 |
| TWENTY TOP HOLDINGS | 737,082 | 64.1 | |
| Standard Chartered | Banks | 24,322 | 2.1 |
| Newmont – US Listed | Precious Metals and Mining | 22,771 | 2.0 |
| Wm Morrison Supermarkets | Personal Care, Drug and Grocery Stores | 21,397 | 1.8 |
| Bellway | Household Goods and Home Construction | 21,032 | 1.8 |
| Total – French Listed | Oil, Gas and Coal | 19,816 | 1.7 |
| Koninklijke KPN – Dutch Listed | Telecommunications Service Providers | 19,777 | 1.7 |
| Greggs | Personal Care, Drug and Grocery Stores | 19,101 | 1.7 |
| WPP | Media | 17,777 | 1.5 |
| Legal & General | Life Insurance | 17,719 | 1.5 |
| NXP Semiconductors – US Listed | Technology Hardware and Equipment | 17,110 | 1.5 |
| THIRTY TOP HOLDINGS | 937,904 | 81.4 | |
| Ascential | Media | 16,813 | 1.5 |
| Reckitt Benckiser | Household Goods and Home Construction | 15,859 | 1.4 |
| RELX | Media | 15,548 | 1.4 |
| Marshalls | Construction and Materials | 15,042 | 1.3 |
| Daily Mail & General Trust | Media | 14,319 | 1.2 |
| Polypipe | Construction and Materials | 14,306 | 1.2 |
| Vodafone | Telecommunications Service Providers | 13,949 | 1.2 |
| easyJet | Travel and Leisure | 13,640 | 1.2 |
| Serco | Industrial Support Services | 12,790 | 1.1 |
| Roche – Swiss Listed FORTY TOP HOLDINGS |
Pharmaceuticals and Biotechnology | 12,393 1,082,563 |
1.1 94.0 |
| Investment | Sector | Value £'000 |
% of Portfolio |
|---|---|---|---|
| Compass | Travel and Leisure | 12,364 | 1.1 |
| Convatec | Medical Equipment and Services | 12,152 | 1.1 |
| QinetiQ | Aerospace and Defence | 11,834 | 1.0 |
| Hargreaves Lansdown | Investment Banking and Brokerage Services | 6,946 | 0.6 |
| A.P. Moller-Maersk – Danish Listed | Industrial Transportation | 6,916 | 0.6 |
| Redrow | Household Goods and Home Construction | 6,875 | 0.6 |
| Centrica | Gas, Water and Multi-Utilities | 5,594 | 0.5 |
| Marks & Spencer | Retailers | 3,028 | 0.3 |
| Raven Property – Preference shares | Real Estate Investment and Services | 2,631 | 0.2 |
| EurovestechUQ | Investment Banking and Brokerage Services | 105 | 0.0 |
| TOTAL HOLDINGS (50) | 1,151,008 | 100.0 |
UQ Unquoted investment.
At 31 March 2021 and 2020
At 31 March 2021
The Board, through the Audit Committee and with the assistance of the Manager, maintains and regularly reviews a report of potential risks to the Company in the form of a risk control summary. The document includes a description of each identified risk, the mitigating action taken, reporting and disclosure to the Board and an impact and probability risk rating. The rating is given both prior to and after the Board's mitigation of each risk. The information is then displayed in matrix form which allows the Board to identify the Company's key risks. As the changing risk environment in which the Company operates has evolved, the total number of risks has fluctuated, with certain risks having been removed and new risks added with emerging risks actively discussed as part of this process and, so far as practicable, mitigated.
The composition of the Board is regularly reviewed to ensure its members offer sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.
The Company's key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the 'benchmark') and an increase in dividends in excess of the annual rate of inflation. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring is delegated to the Manager. The Board has carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity with consideration being given to the effect of the COVID-19 pandemic and possible regulatory uncertainty arising from Brexit. The following sets out a description of the principal risks and how they are being managed or mitigated.
A great majority of the Company's investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company's investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, the severe impact of the COVID-19 pandemic, political events including Brexit and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company's shares and its earnings and dividends may consequently also experience volatility and may decline.
Market risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, the Board receives reports on the performance of the portfolio at each meeting.
The Board sets investment policy and risk guidelines, together with investment limits, and monitors adherence to these at each Board meeting. All Individual investment decisions are delegated to the Manager. The Manager's approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Manager is a long-term investor, prepared to take substantial positions in securities and sectors, across a range of different types of stock. This reflects the Manager's high conviction, stock-driven investment process and total return approach. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the portfolio relative to the benchmark and/or income targets.
The Manager's style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company's performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager's high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company's objectives of capital growth in excess of the benchmark and real dividend growth. Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company's performance against the benchmark and peer group is provided to the Board at each Board meeting. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company's objectives. The Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk-reward profile.
As described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio.
Investment Performance risk is included in the risk control summary report that is reviewed by the Board at each meeting. The Board also receives reports on the performance of the portfolio and on compliance with the Company's investment policy guidelines from the Manager at each meeting.
The Company may borrow to provide gearing to the equity portfolio of up to 25% of net assets. Borrowing is a mix of the Company's £100 million debenture stock and the Company's £50 million bank facility. Details of all borrowings are given in Notes 11 and 12. The principal gearing risk is that the level of gearing may have an adverse impact on performance. Secondary risks include whether the cost of borrowing is too high and whether the bank facility can be renewed and on terms acceptable to the Company.
Within an overall limit set by the Board, the Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase, or restructuring of borrowing are for the Board to decide.
Borrowing and gearing risk is included in the risk control summary report that is reviewed by the Board at each meeting. Additionally, compliance with the Company's investment policy guidelines is continuously monitored by the Manager and reported to the Board at each meeting.
The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers and the Board considers the level of income at each meeting.
There is a risk that the Company's prospects and NAV may not be fully reflected in the share price from time-to-time.
The share price is monitored on a daily basis and, at the request of the Board, the Company is empowered to repurchase shares within agreed parameters which are regularly reviewed with the Company's broker. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company repurchased 2,500,000 shares for holding in treasury (2020: 20,798,805) and the effect of these repurchases was to add 0.2% to the Net Asset Value of the Company.
Share Price risk is included in the risk control summary report that is reviewed by the Board at each meeting.
The Board has delegated to third party service providers the management of the investment portfolio, depositary and custody services (which include the safeguarding of the assets), registration services, accounting and company secretarial services. The principal risks arising from the above contracts relate to performance of the Manager, the performance of administrative, registration, depositary, custodial and banking services, and the failure of information technology systems used by third party service providers. These risk areas could lead to the loss or impairment of the Company's assets, inadequate returns to shareholders and loss of investment trust status. Consequently, in respect of these activities the Company is dependent on the Manager's control systems and those of its administrator, depositary, custodian and registrar.
An annual review of the control environments of all service providers is carried out by the Company Secretary who provides an assessment of these risks and the operation of the controls for consideration by the Audit Committee and is formally reported to and considered by the Board.
The Company is reliant upon the performance of third party service providers for its executive function and other service provisions. The Company's most significant contract is with the Manager, to whom responsibility for management of the Company's portfolio is delegated. The Company has other contractual arrangements with third parties to act as administrator, company secretary, registrar, depositary and broker. The Company's operational structure means that all cyber risk (information and physical security) arises at its third party service providers, including fraud, sabotage or crime against the Company. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.
In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
The day-to-day management of the portfolio is the responsibility of the named portfolio manager, James de Uphaugh, Chairman and Chief Investment Officer of Majedie Asset Management. He is a Fund Manager and Analyst with 33 years' investment experience in UK and international equity markets. James is responsible for co-managing the UK Equity Fund of Majedie and managing the Edinburgh Investment Trust.
The Board has put in place robust procedures to assist with identifying emerging risks that arise from existing risks or from new situations. The Board is kept informed through its advisors and Manager regarding any political, economic or legal or regulatory changes that affect the Company.
Globally, climate change effects are already emerging in the form of changing weather patterns. Extreme weather events could potentially impair the operations of individual investee companies, potential investee companies, their supply chains and their customers. Legislative changes are driving an economic adjustment towards a low-carbon economy. There are considerable risks to the value, business model and operations of investee and potential investee companies due to stranded assets and how investors, financial regulators and policymakers respond to climate concerns. The Manager takes such risks into account, along with the downside risk to any company – whether in the form of its business prospects, market valuation or sustainability of dividends – that is perceived to be making a detrimental contribution to climate change. The Company invests in a broad portfolio of businesses with operations spread geographically, which should limit the impact of locationspecific weather events.
The rapid spread of COVID-19 has caused governments to implement policies to restrict the gathering, interaction or movement of people. These policies have inevitably changed the nature of the operations of some aspects of the Company, its key service providers and the companies in which it invests. As cited in Market Risk, share prices respond to assessments of future economic activity as well as their own forecast performance and the COVID-19 pandemic has had a materially negative impact on the economy and will continue do so for a period of time. The Board
and its manager have regular discussions to assess this impact on both the investment portfolio and on its ability to generate income for shareholders.
The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List.
The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis with any issues being immediately brought to the attention of the Board.
The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), credit, liquidity and concentration risks. The risk control summary report allows the Board to considers all these risks, the measures in place to control them and the possibility of any other risks that could arise.
The Board ensures that satisfactory assurances are received from the service providers. The Manager's compliance officers produce regular reports for review by the Company's Audit Committee.
Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chairman and the Audit Committee Chairman if needed during the year.
The Board considered the market uncertainty arising from the effect of the negotiated trade deal with the EU at the end of the transition period. As the Company's shares are not currently marketed in Europe, investee companies are predominantly listed in the UK and key counterparties of and service providers to the Company are UK domiciled with suitable contingency arrangements available as necessary, the Board does not expect the Company's operations or performance over the longer term, to be materially affected by Brexit.
The directors' view of the Company's viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company's investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company's viability over that period. However, the life of the Company is not intended to be limited to that or any other period.
There are no current plans to amend the investment strategy, which has delivered long term good investment performance for shareholders and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.
In assessing the viability of the Company under various scenarios, the Directors undertook a robust assessment of the risks to which it is exposed (including the issues arising from the COVID-19 pandemic and climate change), as set out on page 21 together with mitigating factors. The risks of failure to meet the Company's investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company's borrowings as considered in further detail in the Going Concern Statement on page 37; the ability of the Company to meet its liabilities as they fall due; the Company's annual operating costs and that, as a closed ended investment trust, the Company is not affected by the liquidity issues of open-ended companies caused by large or unexpected redemptions.
In taking account of these factors and on reviews conducted as part of the detailed internal controls and risk management processes set out on page 32, the Directors have concluded that the viability of the Company may start to be challenged if the value of investments reduced by over 80% from the aggregate level at the year end and the board considers this implausible having noted that since the inception of the Company's All-Share Index Total Return benchmark in December 1985, the largest fall over any calendar year has been 29.9%, the largest fall over any rolling five year period was 28.8% and the largest fall over any period was 42.9% (all based on benchmark calendar month end values).
Based on the above, and assuming there is no adverse change to the regulatory environment and tax treatment of UK investment trusts to the extent that would challenge the viability of the UK investment trust industry as a whole, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.
As set out in the Directors' Report on pages 33 to 39 the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. Consistent with the Company's nature as an investment trust, the Board's principal concern has been, and continues to be, the interests of the Company's shareholders taken as a whole.
As an externally managed investment company, the Company does not have any employees. The Board considers its main stakeholders to be its shareholders, service providers, investee companies and the Manager.
Shareholder relations are given high priority by both the Board and the Manager and the Board welcomes feedback from shareholders throughout the year. The prime medium by which the Company communicates with shareholders is through the half-yearly and annual financial reports, which aim to provide shareholders with a full understanding of the Company's activities and results. This information is supplemented by the daily publication of the net asset value, monthly factsheets as well as dividend and other announcements.
Feedback from shareholders forms part of the discussion at all Board meetings and at the Board's annual strategy meeting which involves consideration of how the Company is meeting shareholder expectations.
Shareholders can also visit the Company's website www.edinburghinvestmenttrust.com in order to access copies of the annual and half-yearly financial reports, pre-investment information, Key Information Documents (KIDs), proxy voting results, factsheets and stock exchange announcements. The Company's website also hosts videos and other applicable written materials by the Manager to enhance the information available.
Typically at each AGM, a presentation is made by the Manager following the formal business of the meeting and shareholders have the opportunity to attend, vote and most importantly to communicate directly with the Manager and Board. Presentations to both institutional shareholders and analysts also follow the publication of the annual results. In addition to the AGM and presentation, the Board and Manager also host an annual Shareholder event in London. The Chairman uses these events to lead the Company's engagement with its shareholders.
Regular dialogue is maintained between the Manager and major institutional shareholders throughout the year to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop an understanding of their issues and concerns. All meetings between the Manager and shareholders are reported to the Board.
There is a clear channel of communication between the Board and the Company's Shareholders via the Company Secretary. The Company Secretary has no express authority to respond to enquiries addressed to the Board and all communications, other than junk mail, are redirected to the Chairman.
During the year the Board considered the dividend strategy and following the perceived impact of the COVID-19 pandemic and in-depth discussions at the Board's strategy meeting, the decision was taken to reduce the dividend to a more sustainable level. Feedback from the Manager and the Broker was taken into account in the decision making process and a full assessment on the impact of the decision on shareholders was considered against the long term success of the Company.
At least annually the Board reviews the performance and services of all its service providers including the Manager, and receives and considers the internal control reports from them covering their operations, their policies and control environments. The Board has regular dialogue with and reporting from the Manager on the portfolio of investments and a representative of the Manager attends each Board meeting to provide updates and answer questions from the Board. Following the emergence of the COVID-19 pandemic, the Board has continued engagement with its service providers to ensure that their responses to the pandemic are adequate and also to provide them with additional support where required.
The Manager maintains regular dialogue with both investee and potential investee companies and reports back on these conversations to the Board. As described below the Board and Manager believe engagement with investee companies is positive, beneficial and welcomed and that consistent exercise of voting rights is a key activity in the dialogue with these companies.
The Directors believe that they have fulfilled their duties under s172 of the Companies Act 2006 in their deliberations on all matters. The Board takes into account the interests of all the Companys key stakeholders, as outlined above, in its decision-making which reflects the Boards belief that the long term sustainable success of the Company is linked direct to its key stakeholders.
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company's policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager is a signatory to the Principles for Responsible Investment ('PRI') and has pledged its commitment to the Net Zero Asset Managers initiative. Further information is available at www.majedie.com and through the investment company ESG disclosures at www.theaic.co.uk.
The Board considers that the Company has a responsibility as a shareholder towards ensuring that high Environmental, Social and Governance standards are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company's voting rights are exercised on an informed and independent basis.
The Manager has adopted a clear and considered policy towards its stewardship responsibility on behalf of the Company. The Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders' value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The Manager's approach to corporate governance and the UK Stewardship Code can be found on the Manager's website at www.majedie.com together with a copy of the Manager's Stewardship Policy and the Manager's global proxy voting policy.
Two members of the Manager's investment team are responsible for overseeing all aspects of the Stewardship process, including voting on all resolutions at all Annual General Meetings and Extraordinary General Meetings in the UK and overseas ballots. The Manager assesses corporate governance, remuneration policies and if deemed necessary will challenge management where it is felt that the best interests of shareholders are not being met.
When voting against or abstaining in a vote the Manager may communicate with management beforehand, either setting out its position in its regular meetings with the management of investee companies or in a communication to management.
The Manager discloses its voting record to the Board at each meeting with notes explaining the reasons for any votes against resolutions.
In addition, the Manager discloses to all clients an annual Responsible Capitalism report, providing cumulative voting statistics, full disclosure on voting policy and extracts of engagement for the year. The Manager publishes an annual voting record for the previous year on its website www.majedie.com
The Company aims to adopt the highest standards and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery is an important part of corporate good governance.
The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.
It is the Company's policy to conduct all of its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company's policy and the procedures that implement it are designed to support that commitment.
The Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion.
The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little or no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations aside from travel to board meetings, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.
As the Company has no material operations and therefore has low energy usage, it has not included an energy and carbon report.
This Strategic Report was approved by the Board on 27 May 2021
PRAXISIFM FUND SERVICES (UK) LIMITED / COMPANY SECRETARY
All Directors are non-executive and considered independent.
24 May 2013 Became Chairman on 22 November 2017
N Nomination
A Audit
Glen is Chairman of Knight Vinke Asset Management. Prior to joining Knight Vinke, he was a Partner in Soditic Limited and before that he was Head of Energy and Utilities at Morgan Stanley in Europe. He is a Fellow of the Institute of Chartered Accountants in England and Wales and a member of the Royal Society of Arts.
VICKY HASTINGS
Date of appointment: 23 May 2013
Vicky was appointed Senior Independent Director on 25 July 2019. She has over 30 years' experience in the investment management industry and is a non-executive director of Impax Environmental Markets plc and is chair of Henderson European Focus Trust plc. In her executive career, she was a European Equity fund manager and then held investment leadership roles at Merrill Lynch Investment Managers and JOHambro Capital Management. Previously held non executive directorships include Investment Trusts as well as JPMorgan Asset Management UK Ltd and JPMorgan Asset Management International Ltd. She is currently also a trustee of Moorfields Eye Charity.
GORDON MCQUEEN
31 May 2011
Gordon is a Chartered Accountant and a Fellow of the Chartered Institute of Bankers of Scotland. He is a former Finance Director of Bank of Scotland and until 2003, he was an Executive Director of HBOS plc, where his main role was Chief Executive, Treasury. He is a former nonexecutive director and audit committee Chairman of Scottish Mortgage Investment Trust plc, Shaftesbury plc and JPMorgan Midcap Investment Trust plc.
STEVE BALDWIN
Date of appointment: 10 September 2018
Steve is a Chartered Accountant. He is currently Chairman of TruFin plc, a non‑executive director at Plus500 Ltd and a Trustee at Howard de Walden Estates Limited. He was formerly a non-executive director of Elegant Hotels Group plc and Panmure Gordon & Co plc. He was the Head of European Equity Capital Markets and Corporate Broking at Macquarie Capital until February 2015. Prior to this Steve was a Director at JPMorgan Cazenove for ten years and was a Vice President of Corporate Finance at UBS from 1995-1998.
PATRICK EDWARDSON
Date of appointment: 11 February 2021
Patrick Edwardson joined Baillie Gifford in 1993 and became a partner in 2005. In a wideranging investment career, he managed bond, equity and multiasset portfolios, was manager of the Scottish American Investment Company plc between 2004 and 2014 and led Baillie Gifford's multi-asset investment team until his retirement in 2020. He is currently managing director of Atheian Ltd, a family investment office, and also a non-executive director of JPMorgan Multi Asset Growth and Income plc.
ELISABETH STHEEMAN
Date of appointment: 23 May 2019
Elisabeth is currently an External Member of the Financial Policy Committee (FPC) and Financial Markets Infrastructure (FMI) board of the Bank of England. She is a member of the supervisory board of Aareal Bank AG in Germany. She was recently appointed as an External Member of the Audit and Risk Committee of The Asian Infrastructure Investment Bank (effective from April 2021). She is also a member of Council at The London School of Economics and a member of Council of the German British Chamber of Industry and Commerce. Previously, she was a senior advisor to the Bank of England/Prudential Regulation Authority, an independent member of the board and audit committee for Korian SA in France and a member of the supervisory board and audit committee of TLG Immobilien AG and global chief operations officer and member of global management committee at LaSalle Investment Management and COO at Morgan Stanley International. She was previously a non-executive director at RDI REIT plc.
MAXWELL WARD
Date of appointment: 8 August 2011
Max joined Baillie Gifford in 1971 becoming a partner in the firm in 1975 and was head of the UK Equity Department from 1981 until his retirement in April 2000. He was also a member of the firm's Management and Investment Policy Committees and Chairman of Baillie Gifford Overseas. From 1989 until 2000 he was manager of Scottish Mortgage and Trust plc. Following his retirement from Baillie Gifford, he floated The Independent Investment Trust plc and has been its managing director since. He is a former nonexecutive director of Aegon UK plc and F&C Investment Trust plc.
Responsibility for good governance lies with the Board. The governance framework of the Company reflects the fact that it is an Investment Company with no employees and outsources investment management to the Manager and administration to the Manager and other external service providers.
Chairman Glen Suarez
Senior Independent Director Vicky Hastings
Five additional non-executive directors (NEDs)
Patrick Edwardson was appointed to the Board on 11 February 2021. Gordon McQueen and Maxwell Ward will retire from the Board at the AGM on 22 July 2021.
| Audit Committee | Management Engagement Committee |
Nomination Committee | Remuneration Committee Function |
|---|---|---|---|
| All NEDs | All NEDs | All NEDs | The Board as a whole performs this function |
| Chairman Gordon McQueen |
Chairman Glen Suarez |
Chairman Glen Suarez |
|
| Key responsibilities: – to oversee the control environment and financial reporting; – to make recommendation for the appointment of the auditor; and – to review the performance of other service providers, including the auditor. |
Key responsibilities: – to review regularly the management contract and the performance of the Manager. |
Key responsibilities: – to review regularly the Board's structure, composition and performance; and – to make recommendations for any changes or new appointments. |
Key responsibilities: – to set the remuneration policy of the Company. |
For the year ended 31 March 2021
This Corporate Governance statement forms part of the Directors' Report. The Board is committed to maintaining high standards of Corporate Governance and is accountable to shareholders for the governance of the Company's affairs.
The Board has considered the principles and recommendations of the 2019 AIC Code of Corporate Governance (the "AIC Code"). The Listing Rules and the Disclosure Guidance and Transparency Rules of the UK Listing Authority require listed companies to disclose how they have applied the principles and complied with the provisions of The UK Corporate Governance Code 2018 (the "UK Code"), as issued by the Financial Reporting Council ("FRC"). The UK Code can be viewed on the FRC's website.
The AIC Code is available from the Association of Investment Companies (www.theaic.co.uk). It includes an explanation of how the AIC Code adapts the Principles and Provisions set out in the UK Code to make them relevant for investment companies.
The Company has complied with the recommendations of the AIC Code and the relevant provisions of the UK Code, except the provisions relating to:
The Board considers these provisions are not relevant to the position of the Company, being an externally managed investment company with no executive employees. It considers an internal audit function unnecessary as the relevant issues are addressed through the Manager's own control environment which itself is subject to routine external independent review. The Company has therefore not reported further in respect of these provisions.
Information on how the Company has applied the principles of the AIC Code and the UK Code is provided in the Directors' Report as follows:
By order of the Board
COMPANY SECRETARY / 27 MAY 2021
For the year ended 31 March 2021
The Audit Committee comprises all the Directors, under my chairmanship Glen Suarez joined the Committee on 11 February 2021. Steve Baldwin will be appointed Chairman of the Audit Committee immediately following my retirement from the Board at the AGM on 22 July 2021.
The Committee has written terms of reference which clearly define its authority, meetings, duties and reporting. These were updated during the year, to ensure good practice and compliance with the latest AIC Code. They can be inspected at the registered office of the Company or viewed on the Company's website.
The responsibilities of the Audit Committee include:
consideration of the scope of work undertaken by the Manager's compliance department, monitoring and reviewing the effectiveness of the Manager's and the Company's procedures for detecting fraud;
management of the relationship with the external auditor, including evaluation of their reports and the scope, effectiveness, independence and objectivity of their audit, as well as making recommendations to the Board in respect of their appointment, reappointment and removal and for the terms of their audit engagement;
The Committee meets at least twice a year to review the internal financial and non-financial controls and, when applicable, the contents of the half-yearly and annual financial reports, including accounting policies. In addition, the Committee reviews the auditor's independence, objectivity and effectiveness, the quality of the services provided to the Company and, together with the Manager, reviews the Company's compliance with financial reporting and regulatory requirements as well as risk management processes. Representatives of the Manager's Compliance Department attend at least two meetings each year. Representatives of the auditor attend the Committee meetings at which the draft half-yearly and annual financial reports are reviewed and are given the opportunity to speak to Committee members in the absence of representatives of the Manager.
The external audit programme and timetable are drawn up and agreed with the auditor in advance of the end of the financial period and matters for audit focus are discussed and agreed. The auditor ensures that these matters are given particular attention during the audit process and reports on them, and other matters as required, in its report to the Committee. In addition, the Committee reviews any material issues raised by the auditor. There have been no such issues raised during the year. The auditor's report, together with reports from the Manager, the Manager's Compliance Department and the depositary, form the basis of the Committee's consideration and discussions with the various parties and any recommendations to the Board, including the Committee's recommendation to sign the 2021 financial statements.
For the year end, the following accounting matters were identified for specific consideration by the Committee:
| Significant area | How addressed |
|---|---|
| Accuracy of the portfolio valuation, with emphasis on any investments held at Directors' valuation. |
Actively traded listed investments are valued using stock exchange prices provided by third party pricing vendors. Investments that are unlisted or not actively traded are valued using a variety of techniques to determine their fair value. This is set out in accounting policies note 1C(v). Any such valuations are carefully considered by the Manager's pricing committee and the Committee. |
| Proof of existence of portfolio holdings. | The Manager, the auditor and the depositary confirmed that the holdings shown in the accounting records agreed with the custodian records. |
| Recognition of investment income, with emphasis on special dividend income. |
Investment income is recognised in accordance with accounting policies note 1F. The Manager provides detailed revenue estimates for the Board's review, and income is assessed to ensure it is complete and accounted for correctly. Careful consideration is given to special dividends. These are allocated to revenue or capital according to the nature of the payment by the underlying company and the allocation is also reviewed by the auditor. |
| The allocation of management fees and finance costs between revenue and capital. |
The allocation is reviewed by the Committee annually taking into account the long-term split of returns from the portfolio, both historic and projected; yield; the objective of the Company; and the latest market practice of peers. The committee last reviewed the allocation at its meeting in May 2021. |
| These matters were discussed with the Manager and the auditor in pre year end audit planning and were satisfactorily addressed through consideration of reports provided by, and discussed with, the Manager and the auditor at the conclusion of the audit process. Consequently, and following a thorough review process of the 2021 annual financial report, the Audit Committee advised the |
audit process. No significant modifications were required to the external audit approach. Combining the output of all the above, and the Audit Committee Chairman's and the Committee's direct interaction with PwC, the Committee concluded that it continued to be satisfied with the performance of PwC and that the auditor continued to display the necessary attributes of objectivity and independence. |
| Board that the 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. |
Prior to any engagement for non-audit services, the Audit Committee considers whether the skills and experience of the auditor make them a suitable supplier of such services and ensures there is no threat to objectivity and independence in the conduct of the audit as a result. Excluding VAT and any expenses, |
| REVIEW OF THE EXTERNAL AUDITOR, INCLUDING NON AUDIT SERVICES |
the annual audit fee was £33,000 (2020: £30,000) and the non audit fee was £3,000 (2020: £3,000); this latter item covered the annual certificate of compliance to the trustees of the debenture |
The Committee evaluated the performance and effectiveness of the external auditor and their audit process. This included a review of the audit planning, execution and reporting and the quality of the audit work, results and audit team. This review sought the view of the Manager in their dealings with the auditor. The Committee also considered the independence of PricewaterhouseCoopers LLP (PwC) and the objectivity of the
annual certificate of compliance to the trustees of the debenture stock. The Committee does not believe that this has impaired the auditor's independence and objectivity. Non-audit services up to £5,000 do not require approval in advance of the Audit Committee; amounts in excess of this require the approval of the Audit Committee.
PwC were appointed as the Company's Auditors at the AGM on 25 July 2019 and were re-appointed on 23 July 2020. After due consideration, the Committee recommends the re-appointment of PwC and their re-appointment will be put forward to the Company's shareholders at the 2021 AGM.
The Committee undertakes a robust assessment of the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place and relevant information reported to the Directors, throughout the year. The resultant ratings of the mitigated risks allow the Directors to concentrate on those risks that are most significant and also form the basis of the list of principal risks and uncertainties set out in the Strategic Report on pages 19 to 21.
The Committee, on behalf of the Board, is responsible for ensuring that the Company maintains a sound system of internal control to mitigate risk and safeguard the Company's assets. The effectiveness of the Company's system of internal controls, including financial, operational and compliance and risk management systems, is reviewed at least annually. Appropriate action is taken to remedy any significant failings or weaknesses identified from these reviews. No significant items were identified in the year. As part of this, the Committee receives and considers, together with representatives of the Manager, reports in relation to the operational controls of the Manager, accounting administrator, custodian, company secretary and registrar. These reviews identified no issues of significance during the year.
The Company, being an externally managed investment company with no employees, does not require its own specific internal audit function but relies on the control environment of the Manager which itself is subject to routine external independent reviews.
The Committee's activities fell within the scope of the review of Board effectiveness performed in the year. Details of this process can be found under 'Board, Committee and Directors' Performance Appraisal' on page 35.
GORDON McQUEEN / CHAIRMAN OF THE AUDIT COMMITTEE / 27 MAY 2021
For the year ended 31 March 2021
The Company was incorporated and registered in Scotland on 1 March 1889 as a public limited company, registered number SC1836. It is an investment company as defined by section 833 of the Companies Act 2006 and operates as an investment trust within the meaning of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011. HM Revenue & Customs have approved the Company's status as an investment trust and, in the opinion of the Directors, the Company has conducted its affairs so as to enable it to maintain such approval.
The Corporate Governance Statement set out on page 29 is included in this Directors' Report by reference.
At the year end the Board comprised seven non-executive Directors. The Company's Corporate Governance Framework is set out on page 28. This shows the key objectives of the Board and also the membership and key objectives of the Board's supporting committees which deal with specific aspects of the Company's affairs: the Audit, Management Engagement and Nomination Committees.
The Board regards all of the Directors to be wholly independent of the Company's Manager.
The Chairman of the Company is Glen Suarez. He has been a member of the Board since 2013 and was appointed Chairman on 22 November 2017.
The Company's Senior Independent Director is Vicky Hastings who was appointed to the role on 25 July 2019.
The Board's policy for the appointment of non-executive directors is based on its belief in the benefits of having a diverse range of experience, skills, length of service and backgrounds, including but not limited to gender diversity. The Board has considered the recommendations of the Davies and Hampton-Alexander reviews as well as the Parker review, but does not consider it appropriate to establish targets or quotas in these regards. The policy is always to appoint the best person for the job and there will be no discrimination on the grounds of gender, race, ethnicity, religion, sexual orientation, age or physical ability. The overriding aim of the policy is to ensure that the Board is composed of a combination of people with a range of business, financial or asset management skills and experience relevant to the direction and control of the Company for ensuring effective oversight of the Company and constructive support and challenge to the Manager.
The Board comprises seven non-executive directors of which, at present, two are female. Summary biographical details of the Directors are set out on pages 26 and 27.
The Board has overall responsibility for the Company's affairs. The Directors are equally responsible under UK law for promoting the success of the Company and for the proper conduct of the Company's affairs taking into consideration the likely consequences of any decision in the long-term; the need to foster business relationships with its Manager, other service providers and advisors; the impact of the Company's operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly between shareholders of the Company. This is reported in the Strategic Report on page 23. The Board is committed to the prevention of corruption in the conduct of the Company's affairs and, taking account of the nature of the Company's business and operations, has put in place procedures for and on behalf of the Company that the Board considers adequate to prevent persons associated with it from engaging in bribery. It has a zero tolerance approach towards the criminal facilitation of tax evasion. In addition, the Directors are responsible for ensuring that their policies and operations are in the interest of all of the Company's shareholders and that the interests of creditors and suppliers to the Company are properly considered.
The Board has a schedule of matters reserved for its consideration, which clearly define the Directors' responsibilities. The main responsibilities include: setting long-term strategy; setting the Company's objectives, policies and standards; ensuring that the Company's obligations to shareholders and others are understood and complied with; selecting an appropriate Manager; approving accounting policies and dividend policy; determining dividends payable; managing the capital structure; reviewing investment performance; assessing risk; approving borrowing; and reviewing, and, if agreed, approving recommendations made by the Board's committees. The schedule of matters reserved for the Board will be available for inspection at the AGM and is otherwise available at the registered office of the Company and on the Company's website.
The Board ensures that shareholders are provided with sufficient information in order to understand the risk-reward balance to which they are exposed by holding their shares, through the portfolio details given in the half-yearly and annual financial reports, factsheets and daily NAV disclosures.
The Board meets at least five times each year. Additional meetings are arranged as necessary. Regular contact is maintained by the Manager with the Board between formal meetings. Board meetings follow a formal agenda, which includes a review of the investment portfolio with a report from the Manager on the current investment position and outlook, strategic direction, performance against stock market indices and the Company's peer group, asset allocation, gearing policy, cash management, revenue forecasts
for the financial year, investment policy guidelines, marketing and shareholder relations, corporate governance, regulatory changes and industry and other issues.
To enable the Directors of the Board to fulfil their roles, the Manager and Company Secretary ensure that all Directors have timely access to all relevant management, financial and regulatory information.
There is an agreed procedure for the Directors, in the furtherance of their duties, to take legal advice at the Company's expense up to an initial cost of £10,000, having first consulted with the Chairman.
Finally, the Board as a whole undertakes the responsibilities which would otherwise be assumed by a remuneration committee, determining the Company's remuneration policy. The Board takes into account all factors which are deemed necessary in order to ensure that members of the Board are provided with appropriate compensation and are, in a fair and responsible manner, rewarded for their individual contributions to the success of the Company. The remuneration of Directors is reviewed periodically and reported on in more detail in the Directors' Remuneration Report.
The Directors confirm that, 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 steps that he or she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the Company's auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.
The Board has three committees: the Audit Committee, the Management Engagement Committee and the Nomination Committee. Each committee has written terms of reference, which clearly define each committee's responsibilities and duties. The terms of reference of each committee are available for inspection at the AGM, at the registered office of the Company and also available on the Company's page of the Manager's website.
The composition and activities of the Audit Committee are summarised in the Audit Committee Report on pages 30 to 32, which is included in this Directors' Report by reference.
The Management Engagement Committee comprises all directors under the chairmanship of Glen Suarez. The Committee meets at least annually to review the investment management agreement and to review the services provided by the Manager.
During the year the Committee met to consider the performance of the Manager.
All Directors are members of the Nomination Committee which is chaired by Glen Suarez. The Committee meets at least once a year to review the composition of the Board and its committees and evaluating whether they have the appropriate balance of skills, experience, independence and knowledge of the Company; and making recommendations to the Board for the re-election of directors at AGMs.
The Committee is also responsible for identifying and nominating to the Board suitable candidates taking into consideration the above requirements; the ability of any new director to devote sufficient time to the Company to carry out his or her duties effectively; and with due regard for the benefits of diversity (including gender). The Board has not set any measurable targets or quotas in respect of the latter.
During the year, the Committee led the process for the appointment of a new non-executive Director. Trust Associates, an executive search agency, were engaged to assist with the recruitment process. The Company and the Directors have no other connection with Trust Associates. The Committee provided their criteria for the appointment. Trust Associates introduced several candidates to the Committee who were invited to a two stage interview process involving all the existing Directors. Following which, the Committee met to discuss the candidates which culminated in the appointment of Patrick Edwardson on 11 February 2021.
No Director has a contract of employment with the Company. Directors' terms and conditions of appointment are set out in letters of appointment which are available for inspection at the registered office of the Company and will also be available at the AGM. A Director can be removed from office without notice or compensation upon being served with a written notice signed by all the other Directors.
New Directors are appointed by the Board following recommendation by the Nominations Committee. The Articles of Association require that a Director shall be subject to election at the first AGM after their appointment and re-election at least every three years thereafter. However, in accordance with the UK Code of Corporate Governance, the Board has resolved that all Directors shall stand for annual re-election at the AGM.
On being appointed to the Board, Directors are fully briefed as to their responsibilities and are continually updated throughout their term in office on industry and regulatory matters. The Company Secretary and the Board have formulated a programme of induction training for newly appointed Directors. They have
also put arrangements in place to address ongoing training requirements of Directors which include briefings from the Company Secretary which ensure that Directors can keep up to date with new legislation and the changing risk environment.
The Board has noted the implication of the provisions in the UK Corporate Governance Code that non-executive directors who have served for more than nine years should be presumed not to be independent. The AIC does not believe that this presumption is appropriate for investment companies and therefore does not recommend that long-serving directors be prevented from forming part of the independent majority of an investment trust board. It is the Board's policy that all Directors, including the Chairman, shall normally have tenure limited to nine years from their first appointment to the Board, except that the Board may determine otherwise if it is considered that the continued participation on the Board of an individual Director, or the Chairman, is in the best interests of the Company and its shareholders. This is also subject to the Director's re‑election annually by shareholders. The Board considers that this policy encourages regular refreshment and is conducive to fostering diversity. Two board members reached their ninth anniversary of their appointment to the Board during the year and will be retiring at the AGM on 22 July 2021 and therefore not standing for re-election. Gordon McQueen celebrated his ninth anniversary on 31 May 2020 and Maxwell Ward on 8 August 2020.
The Directors recognise the importance of the AIC Code's recommendation in respect of evaluating the performance of the Board as a whole, the Committees of the Board and individual Directors.
In 2020 the Board appointed Linstock Limited, an external consultant, to undertake a review of the Board, its Committees and the Directors individually. As no concerns were raised in these reports, the Board opted to conduct the 2021 performance evaluation through formal questionnaires and discussion between the Directors, the Chairman and the Audit Committee Chairman including the consideration of each Director's independence. The conclusion was that the performance of the Board as a whole, the Committees, the Chairman and individual Directors was effective and in the Board's considered view, all Directors were independent.
All Directors are considered to have a good attendance record at Board and Committee meetings of the Company. The table below sets out the number of scheduled Directors' meetings held during the year and the number of meetings attended by each Director. In addition, Directors attended a number of ad hoc meetings during the year.
The number of scheduled meetings held during the year to 31 March 2021 and the attendance of individual Directors are shown in the table below:
| Scheduled Board |
Audit Committee |
Management Engagement Committee |
Nomination Committee |
|
|---|---|---|---|---|
| Meetings held | 5 | 3 | 2 | 2 |
| Meetings attended: | ||||
| – Glen Suarez† | 5 | 3 | 2 | 2 |
| – Steve Baldwin | 5 | 2 | 2 | 2 |
| – Vicky Hastings | 5 | 3 | 2 | 2 |
| – Gordon McQueen | 5 | 3 | 2 | 2 |
| – Elisabeth Stheeman | 5 | 2 | 2 | 2 |
| – Maxwell Ward | 5 | 3 | 2 | 2 |
| – Patrick Edwardson†† | 1 | 1 | 1 | 1 |
† Glen Suarez became a member of the Audit Committee on 11 February 2021 and was in attendance at meetings prior to becoming a member.
†† Patrick Edwardson was appointed on 11 February 2021 and has attended all meetings since his appointment.
The Directors' interests in the ordinary share capital of the Company are disclosed in the Directors' Remuneration Report on page 43.
No Director was a party to, or had any interests in, any contract or arrangement with the Company at any time during the year or at the year end.
The Company maintains Directors' and Officers' liability insurance which provides appropriate cover for any legal action brought against its Directors. In addition, deeds of indemnity have been executed on behalf of the Company for each of the Directors under the Company's Articles of Association. Subject to the provisions of UK legislation, these deeds provide that the Directors may be indemnified out of the assets of the Company in respect of liabilities they may sustain or incur in connection with their appointment.
A Director must avoid a situation where he or she has, or can have, a direct or indirect interest that conflicts, or has the potential to conflict with the Company's interests. The Articles of Association of the Company give the Directors authority to authorise potential conflicts of interest and there are safeguards which apply when Directors decide whether to do so. First, only Directors who have no interest in the matter being considered are able to take the relevant decision, and second, in taking the decision the Directors must act in a way they consider, in good faith, will be most likely to promote the Company's success. The Directors can impose limits or conditions when giving authorisation if they think this is appropriate.
The Directors have declared any potential conflicts of interest to the Company. The register of potential conflicts of interests is kept at the registered office of the Company. It is reviewed regularly by the Board and Directors know to advise the Company Secretary as soon as they become aware of any potential conflicts of interest.
The Company's disclosure with respect to SECR reporting is given in the Strategic Report on page 24.
The directors propose payment of a final dividend to shareholders, the details of this are given on page 14 of the Strategic Report.
The AIC Code requires the Board to oversee the effectiveness of the Company's system of internal controls. The Board assumes its ultimate responsibility for the Company's system of internal controls and for monitoring its effectiveness. The system of internal controls is designed to manage rather than eliminate the risk of failure to achieve business objectives. It can provide only reasonable assurance against material misstatement or loss. The Board has undertaken a review of the aspects covered by the guidance and has identified risk management controls in the key areas of business objectives, accounting, compliance, operations and secretarial as being matters of particular importance upon which it requires reports.
The Board believes that the existing arrangements, set out below, represent an appropriate framework to meet the internal control requirements. By these procedures the Directors have kept under review the effectiveness of the internal control system throughout the year and up to the date of this report.
The Company's internal controls and risk management systems have been reviewed with the Manager against risk parameters approved by the Board. The Board reviews a risk control summary at its quarterly Board meetings and an annual formal review of the risk procedures and controls in place at the Manager and other key service providers is performed.
The Audit Committee reviews, and makes recommendations to the Board, at least annually, the effectiveness of the Company's system of internal controls, including financial, operational and compliance and risk management systems. The Company's system of internal controls is designed to manage rather than eliminate risk of failure to achieve the Company's investment objective and/ or adhere to the Company's investment policy and/or investment limits. This system can therefore provide only reasonable and not absolute assurance against material misstatement or loss. The Board confirms that necessary actions would be taken to remedy any significant failings or weaknesses identified from their review and that no significant failings or weaknesses occurred throughout the year ended 31 March 2021 and up to the date of this annual financial report.
The Board reviews financial reports and performance against forecasts, relevant stock market criteria and the Company's peer group. In addition, the Manager and custodian maintain their own systems of internal controls and risk management and the Board and Audit Committee receive regular reports from the Compliance Department of the Manager. Formal reports are also produced annually on the internal controls and procedures in place for the operation of secretarial, administrative, custodial, investment management and accounting activities.
The financial statements have been prepared on a going concern basis. The Directors consider this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being taken as twelve months after the signing of the balance sheet, for the same reasons as set out in the Viability Statement on page 22. In considering this, the Directors took into account both ongoing expenses and any obligations under the Company's borrowing (both the debenture and the bank facility). In reaching this conclusion, the Directors have considered the liquidity of the Company's portfolio of investments as well as its cash position, income and expense flows. As at 31 March 2021, the Company held £32.6 million (2020: £44.0 million) in cash and cash equivalents and £1,151.0 million (2020: £922.4 million) in quoted investments. The Company's audited net assets at 31 March 2021 were £1,091.2 million (2020: £872.5 million).
Given the level of market volatility experienced due to the impact of the COVID-19 pandemic, the Manager has performed stress tests on the Company's portfolio of investments under current conditions and the Board remain comfortable with the liquidity of the portfolio.
It is estimated that over 99% by value of the quoted investments held at the year end could be realised in one month under normal market conditions.
The Board also considered the Company's obligations under the Company's borrowing. The £100 million debenture matures in September 2022. The Board does not anticipate difficulties in meeting this repayment obligation, either through replacement borrowings or the realisation of Company assets. The Board routinely monitors adherence to the borrowing restriction set out in Note 12, noting the substantial headroom at the balance sheet date. The bank facility which is not currently drawn, remains available whilst the Company's Net Asset Value is above £500 million (see notes 11 and 12 to the financial statements). The bank facility was renewed on 17 June 2020 at £50 million and matures on 16 June 2021.
The total ongoing charges (excluding taxation, non-recurring legal and professional fees and finance costs) for the year ended 31 March 2021 were £4.2 million (2020: £6.8 million).
On 4 March 2020, the Board appointed Majedie Asset Management Limited as its new Manager. The Directors have delegated to Majedie the responsibility for the day-to-day investment management activities of the Company.
The Manager provides investment and administration services to the Company under an investment management agreement dated 3 March 2020. The agreement is terminable by either party by giving not less than three months' notice.
The management fee is calculated on 0.04000% on the first £500 million and 0.03875% on the remainder of the market capitalisation of the Company's ordinary shares at each month end and paid monthly in arrears (equivalent to an annualised fee of 0.480% on the first £500m and 0.465% on the remainder). There is no performance fee. The Manager waived its investment management fee from 4 March 2020 to 03 June 2020, the first three months of its appointment. As set out in the Additional Performance Measures, the Ongoing Charges Ratio, which would otherwise have been 0.51%, was 0.43% for the year. Based on the levels of Shareholders' Funds and the discount as at the balance sheet date, as well as the recurring costs anticipated for the upcoming year, the Ongoing Charges Ratio is estimated to be approximately 0.53% for the current financial year.
The Management Engagement Committee has carried out a review following the Company's 2020 financial year end and, following recommendation from the Committee, the Board considers that the continuing appointment of MAM as Manager is in the best interests of the Company and its shareholders.
On 3 March 2020, the Board appointed PraxisIFM Fund Services (UK) Limited as secretary to the Company. The Board has continuous direct access to the advice and services of the corporate Company Secretary, who are responsible for ensuring that the Board and Committee procedures are followed and that applicable rules and regulations are complied with. The Company Secretary provides full company secretarial services to the Company, ensuring that the Company complies with all legal, regulatory and corporate governance requirements and officiating at Board meetings and shareholders' meetings. The Company Secretary is also responsible to the Board for ensuring timely delivery of information and reports and that the statutory obligations of the Company are met. Finally, the Company Secretary is responsible for advising the Board through the Chairman on all governance matters.
At the year end, the Company's allotted and fully paid share capital consisted of 195,666,734 ordinary and treasury shares of 25p each of which 23,483,805 shares are held in treasury. To enable the Board to take action to deal with any significant overhang or shortage of shares in the market, it seeks approval from shareholders every year to buy back and sell shares. No shares were issued in the year. During the year 2,500,000 ordinary shares were repurchased for holding in treasury at an average price of 458.79p per share (including costs). Since the year end, no ordinary shares have been bought back for holding in treasury.
The Company is aware of, or has received notifications in accordance with the Financial Conduct Authority's ('FCA') Disclosure Guidance and Transparency Rule 5.1.2R of the following interests in 3% or more of the voting rights attaching to the Company's issued share capital:
| Shares | % | |
|---|---|---|
| Rathbone Investment Management | 10,243,933 | 5.26 |
| Brewin Dolphin Limited | 9,763,384 | 4.99 |
| Axa S.A. | 7,666,671 | 3.92 |
There are no restrictions concerning the transfer of securities in the Company, no special rights with regard to control attached to securities, no agreements between holders of securities regarding their transfer known to the Company, no restrictions on the distribution of dividends and the repayment of capital, and no agreements to which the Company is party that might affect its control following a successful takeover bid.
At a general meeting of the Company, every shareholder has one vote on a show of hands and, on a poll, one vote for each share held. The notice of general meeting specifies deadlines for exercising voting rights either by proxy or present in person in relation to resolutions to be passed at a general meeting.
The Board's current powers to repurchase shares and proposals for their renewal are disclosed on page 39.
The above rule requires listed companies to report certain information in a single identifiable section of their annual financial reports. None of the prescribed information is applicable to the Company for the year under review.
The ordinary shares of the Company are qualifying investments under applicable ISA regulations.
The following summarises the business of the forthcoming AGM of the Company, which is to be held on 22 July 2021 at 11am. The notice of the AGM and related notes can be found on pages 73 to 76. All resolutions are ordinary resolutions unless otherwise identified.
Resolution 1 is for members to receive and consider this Annual Financial Report (AFR), including the financial statements and auditor's report.
Resolution 2 is for members to approve the Annual Statement and Report on Remuneration for the year ended 31 March 2021.
Resolution 3 is to declare a final dividend for the year.
Resolutions 4 to 8 are to re-elect the Directors. Biographies of the Directors can be found on pages 26 and 27.
All Directors will stand for election or re-election by shareholders at the AGM. The Board has determined that each of the Directors is independent, continues to perform effectively and demonstrates commitment to their role. Their balance of knowledge and skills combined with their diversity and business experience makes a major contribution to the functions of the Board and its Committees. Glen Suarez's experience in the asset management industry and accountancy background brings valuable technical information to the meetings. Steven Baldwin is a Chartered Accountant and his experience in a range of industries brings a breadth of experience to the meetings. Victoria Hastings had an executive career in the investment management industry that has brought her broad sector experience to the Board. Elisabeth Stheeman has extensive executive and non-executive experience in financial services and real estate that bring highly relevant and valuable skills to the Board. Patrick Edwardson has years of investment experience as a fund manager and deep knowledge of the UK equity market and investment companies.
Resolutions 9 and 10 are to re-appoint PricewaterhouseCoopers LLP as auditor and to authorise the Audit Committee to determine their remuneration.
Resolution 11: Authority to Allot Shares is an Ordinary Resolution seeking renewal of the current authority for the Directors' to allot up to 10% of the issued ordinary share capital, this being an aggregate nominal amount of £4,304,573 as at 25 May 2021.
Special Resolution 12: Authority to Allot Shares is a Special Resolution which seeks renewal of the current authority to allot equity securities pursuant to a rights issue or to issue up to 10% of the issued ordinary share capital otherwise than in connection with a rights issue, dis-applying pre-emption rights. This will allow shares to be issued to new shareholders, within the prescribed limits, without having to be offered to existing shareholders first, thus broadening the shareholder base of the Company. The Directors will not dilute the interests of existing shareholders by using the authority to issue shares at a price which is less than the Net Asset Value (calculated with debt at market value) of the existing shares in issue at that time. These authorities will expire at the next AGM of the Company or fifteen months after the passing of the resolutions, whichever is the earlier.
This resolution seeks to renew the Directors' authority to purchase up to 14.99% of the Company's issued share capital, this being 25,810,221 ordinary shares as at 25 May 2021. The authority will expire at the Company's next AGM or 15 months following the passing of this resolution, if earlier. The principal purpose of share buy backs is to enhance the net asset value for remaining shareholders and purchases will only be made if they do so.
In accordance with the UK Listing Rules, the maximum price which may be paid for a share must not be more than the higher of: (i) 5% above the average of the mid-market values of the shares for the five business days before the purchase is made; and (ii) 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. The minimum price which may be paid will be 25p per share, this being the nominal value of a share. In making purchases, the Company will deal only with member firms of the London Stock Exchange.
The Company will finance the purchase of ordinary shares by using its existing cash balance or borrowing facilities or by selling securities in the Company's portfolio.
The Directors might consider holding repurchased shares as treasury shares with a view to possible resale.
Special Resolution 14: Notice Period for General Meetings
The Shareholder Rights Directive increased the notice period for general meetings of companies to 21 days unless certain conditions are met in which case it may be 14 days' notice. A shareholders' resolution is required to ensure that the Company's general meetings (other than Annual General Meetings) may be held on 14 days' notice. Accordingly, Special Resolution 14 will propose that the period of notice for general meetings of the Company (other than AGMs) shall not be less than 14 days' notice. It is intended that this flexibility will be used only where the Board believes it is in the best interests of shareholders as a whole, and an explanation will be provided.
The Directors have carefully considered all the resolutions proposed in the Notice of AGM and, in their opinion, consider them all to be in the best interests of shareholders as a whole. The Directors therefore recommend that shareholders vote in favour of each resolution as they intend to do in respect of their own beneficial holdings.
By order of the Board
PRAXISIFM FUND SERVICES (UK) LIMITED / COMPANY SECRETARY / 27 MAY 2021
The Directors are responsible for preparing the annual financial report and financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
The revised SORP issued in April 2021 is applicable for accounting periods beginning on or after 1 January 2021. The SORP has no substantive changes but has been updated to reflect changes IFRS standards and regulatory requirements. No accounting policies or disclosures have changed as a result of the revised SORP.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, which is maintained by the Company's Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We confirm that to the best of our knowledge:
We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Signed on behalf of the Board of Directors
GLEN SUAREZ /CHAIRMAN / 27 MAY 2021
This report has been prepared under the requirements of The Large and Medium-sized Companies and Group (Accounts and Reports) (Amendment) Regulations 2013.
The Company's auditor is required to audit certain of the disclosures provided in this Report. Where disclosures have been audited, they are indicated in this Report. The independent auditor's opinion is included on pages 45 to 51.
The Board has resolved that a remuneration committee is not appropriate for a company of this size and nature. Remuneration is therefore regarded as part of the Board's responsibilities to be addressed regularly. All Directors are non-executive and all participate in meetings of the Board at which Directors' remuneration is considered.
The Directors' Remuneration Policy is put before shareholders for approval every three years and was approved by shareholders at the AGM on 25 July 2019 and became effective on that date.
The policy is that the remuneration of Directors: be fair and reasonable in relation to that of other investment trusts and to the time commitment and responsibilities undertaken; be reviewed relative to movements in the Retail Price Index; be sufficient to retain and motivate appointees, as well as ensure that candidates of a high calibre are recruited to the Board but not be more than necessary for the purpose; and take into consideration any committee memberships and chairmanship duties.
Fees for the Directors are determined by the Board within the limits stated in the Company's Articles of Association ('Articles'). The maximum currently is £250,000 in aggregate per annum.
Directors do not have service contracts. Directors are appointed under letters of appointment, copies of which are available for inspection at the registered office of the Company. Directors are entitled to be reimbursed for any reasonable expenses properly incurred by them in the performance of their duties. Directors are not eligible for bonuses, pension benefits, share options or other incentives or benefits. There are no agreements between the Company and its Directors concerning compensation for loss of office.
Notwithstanding the above, the Company's Articles also provide that additional discretionary payments can be made for services which, in the opinion of the Directors, are outside the scope of the ordinary duties of a Director.
The level of Directors' remuneration is reviewed annually, although such review will not automatically result in any changes. This Directors' Remuneration Policy will apply to any new directors, who will be paid the appropriate fee based on
the Directors' fees level in place at the date of appointment. The Board will consider, where raised, shareholders' views on Directors' remuneration.
The Board may amend the level of remuneration paid to Directors within the parameters of the Directors' Remuneration Policy.
This Directors' Remuneration Policy is the same as that currently followed by the Board as disclosed in last year's Directors' Remuneration Report.
The Company has no employees and consequently has no policy on the remuneration of employees.
For the year ended 31 March 2021, fees paid to the Directors per annum were:
| Role | Current fee from 1 December 2020 £ |
Previous fee before 1 December 2020 £ |
Percentage increase during the year % |
|---|---|---|---|
| Chairman | 44,000 | 44,000 | – |
| Senior Independent Director |
30,250 | 27,500 | 10.0 |
| Audit Committee Chairman |
33,000 | 30,000 | 10.0 |
| Director | 26,500 | 24,200 | 9.5 |
During the year the Board reviewed Directors' fees and considered that the historic level of remuneration should be increased. In reaching their decision, the Board considered information supplied by the Company Secretary at their request. This included the fee rates of comparable investment companies. The Directors' fees had not been increased since 2007 (with the exception of an increase to the Audit Committee Chairman's fee in April 2015) and therefore these increases of approximately 10% bring the fee level more in line with market rates of the Company's peers. The increases also provide the Board with flexibility to appoint new Directors during a period of Board succession. The Chairman's fee will not change.
During the year the Board awarded Vicky Hasting a one off discretionary payment of £5,000 in recognition of her work on the change of manager in the previous year. No discretionary payments were made in the previous year.
The following graph plots, in annual increments, the net asset value total return and share price total return to ordinary shareholders compared to the total return of the FTSE All-Share Index over the ten years to 31 March 2021. This index is the benchmark adopted by the Company for comparison purposes. Total Return Graph (Figures have been rebased to 100) At 31 March 2010
Figures have been rebased to 100 as 31 March 2011
The single total figure of remuneration for each Director is detailed below, together with the prior year comparative:
| 2021 Taxable |
2020 Taxable |
Percentage of change of |
|||||
|---|---|---|---|---|---|---|---|
| Fees £ |
Benefits £ |
Total £ |
Fees £ |
Benefits(1) £ |
Total £ |
basic fees(2) % |
|
| Glen Suarez (Chairman) | 44,000 | – | 44,000 | 44,000 | 9,327 | 53,327 | 0.0 |
| Steve Baldwin | 24,967 | – | 24,967 | 24,200 | – | 24,200 | 3.2 |
| Vicky Hastings (Senior Independent Director) | 33,416 | – | 33,416 | 26,502 | – | 26,502 | 26.1(3) |
| Gordon McQueen (Chairman of the Audit Committee) |
31,000 | – | 31,000 | 30,000 | 3,109 | 33,109 | 3.3 |
| Maxwell Ward | 24,967 | – | 24,967 | 24,200 | 2,552 | 26,752 | 3.2 |
| Elisabeth Stheeman | 24,967 | – | 24,967 | 20,763 | – | 20,763 | 20.2(4) |
| Patrick Edwardson (appointed 11 February 2021 |
3,515 | – | 3,515 | – | – | – | – |
| Sir Nigel Wicks (retired 25 July 2019) | – | – | – | 8,759 | – | 8,759 | – |
| Total | 186,832 | – | 186,832 | 178,424 | 14,988 | 193,412 | n/a |
(1) Taxable benefits relate to grossed up costs of travel.
(2) In accordance with The Companies (Directors' Remuneration Policy and Directors' Remuneration Report) Regulations 2019, this column has been included to show the annual percentage change over the preceding financial year by comparison to the current financial year in respect of each Director. The Board will publish this annual percentage change cumulatively each year going forward until there is an annual percentage change over the five financial years preceding the relevant financial year in accordance with the new regulation. These fees exclude taxable benefits which could vary substantially as they reflect expenses incurred whilst carrying out the board's duties.
(3) The percentage change reflects the Board's award to Vicky Hastings of a one-off discretionary payment of £5,000. Excluding this amount the annual increase would have been 7.2%.
(4) The percentage change reflects the fact that Elisabeth Stheeman joined the Board on 23 May 2019.
Save as here stated, no Director had any interests, beneficial or otherwise, in the ordinary shares or debenture stock of the Company during the year. No changes to these holdings have been notified since the year end. No connected person interests have been notified.
Directors hold shares in the Company at their discretion. Share ownership is encouraged, but no guidelines have been set.
The beneficial interests of the Directors in the ordinary share capital of the Company are set out below:
| 31 March 2021 |
31 March 2020 |
|
|---|---|---|
| Glen Suarez | 37,000 | 37,000 |
| Steve Baldwin | – | – |
| Vicky Hastings | 9,000 | 5,000 |
| Gordon McQueen | 2,000 | 2,000 |
| Maxwell Ward | 20,000 | 20,000 |
| Elisabeth Stheeman | 3,000 | – |
| Patrick Edwardson1 | 60,000 | – |
(1) Patrick Edwardson's holding includes 13,000 shares which are being held by a connected person.
The following table compares the remuneration paid to the non-executive Directors with aggregate distributions to shareholders in respect of the year to 31 March 2021 and the prior year:
| 2021 £'000 |
2020 £'000 |
Change £'000 |
|
|---|---|---|---|
| Aggregate Directors' Remuneration | 187 | 193 | -6 |
| Aggregate Shareholder Distributions | 49,331 | 50,490 | -1,159 |
At the Annual General Meeting of the Company held on 23 July 2020 a resolution approving the Chairman's Annual Statement and Report on Remuneration were passed. The votes cast (including votes cast at the Chairman's discretion) were as follows.
| Votes For |
% | Votes Against |
% | Votes Withheld |
|
|---|---|---|---|---|---|
| Annual Statement and Report on Remuneration | 56,924,042 | 99.55 | 256,532 | 0.45 | 99,860 |
This Directors' Remuneration Report was approved by the Board of Directors on 27 May 2021.
Signed on behalf of the Board of Directors
To the members of The Edinburgh Investment Trust plc
In our opinion, Edinburgh Investment Trust plc's financial statements:
We have audited the financial statements, included within the Annual Financial Report (the "Annual Report"), which comprise: Balance Sheet as at 31 March 2021; the Income Statement and Statement of Changes in Equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
Our opinion is consistent with our reporting to the Audit Committee.
We conducted our audit in accordance with International Standards on Auditing (UK) ("ISAs (UK)") and applicable law. Our responsibilities under ISAs (UK) are further described in the Auditors' responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We remained independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC's Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC's Ethical Standard were not provided.
Other than those disclosed in the Audit Committee Report, we have provided no non-audit services to the company in the period under audit.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
Key audit matters are those matters that, in the auditors' professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
This is not a complete list of all risks identified by our audit.
The key audit matters below are consistent with last year.
| Key audit matter | How our audit addressed the key audit matter | ||||
|---|---|---|---|---|---|
| Valuation and existence of investments Refer to the Audit Committee Report, the Accounting Policies and |
We tested the valuation of the equity investments by agreeing the prices used in the valuation to independent third-party sources. No material misstatements were identified from this testing. |
||||
| Notes to the Financial Statements. The investment portfolio at the year end principally comprised quoted equity investments valued at £1,151 million. We focused on the valuation and existence of investments because investments represent the principal element of the net asset value as disclosed on the Balance Sheet in the Financial Statements. |
We tested the existence of the investment portfolio by agreeing investment holdings to an independent custodian confirmation. No material misstatements were identified from this testing. |
||||
| Income from investments Refer to the Audit Committee Report, the Accounting Policies and |
We assessed the accounting policy for investment income recognition for compliance with accounting standards and the AIC SORP and |
||||
| Notes to the Financial Statements. We focused on the accuracy, completeness and occurrence of investment income recognition as incomplete or inaccurate income could have a material impact on the Company's net asset value and dividend cover. |
performed testing to verify that income from investments had been accounted for in accordance with this stated accounting policy. We found that the accounting policies implemented were in accordance with accounting standards and the AIC SORP, and that income from investments has been accounted for in accordance with |
||||
| We also focused on the accounting policy for investment income recognition and the presentation of investment income in the Income Statement for compliance with the requirements |
the stated accounting policy. We tested accuracy of dividend receipts by agreeing the dividend rates from investments to independent market data. |
||||
| of The Association of Investment Companies Statement of Recommended Practice (the "AIC SORP"), as incorrect application could indicate a misstatement in income recognition. |
To test for completeness, we tested, for all investment holdings in the portfolio, that all dividends declared in the market for investment holdings had been recorded. |
||||
| We tested occurrence by tracing a sample of dividends received to bank statements. |
|||||
| We also tested the allocation and presentation of dividend income between the revenue and capital return columns of the Income Statement in line with the requirements set out in the AIC SORP by determining reasons behind dividend distributions, such as the Tesco PLC capital special dividend. |
|||||
Our procedures did not identify any material misstatements.
| Key audit matter | How our audit addressed the key audit matter |
|---|---|
| Consideration of the impact of COVID-19 Refer to the Chairman's Statement, Principal Risks and |
We evaluated the Directors' assessment of the impact of the COVID-19 pandemic on the Company by: |
| Uncertainties, Viability Statement and the Going Concern Statement, which disclose the impact of the COVID-19 coronavirus pandemic. The COVID-19 outbreak was declared a pandemic by the World Health Organisation and since the first quarter of 2020, as well as having a significant adverse humanitarian impact, it has caused significant economic uncertainty globally and disruption to supply chains and travel, slowed global growth and caused volatility in global markets and in exchange rates. This could have an impact on the valuation of investments in the Company, available liquidity and operational impacts given the Company's reliance on third parties. The Directors have prepared the Financial Statements of the Company on a going concern basis, and believe this assumption remains appropriate. This conclusion is based on the assessment that, notwithstanding the significant market fall and the related uncertainties, they are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and that the Company and its key third party service providers have in place appropriate business continuity plans and will be able to maintain service levels through the coronavirus pandemic. |
– Evaluating the Company's updated risk assessment and considering whether it addresses the relevant threats presented by COVID-19. |
| – Evaluating management's assessment of operational impacts, considering their consistency with other available information and our understanding of the business and assessing the potential impact on the financial statements. |
|
| We obtained and evaluated the Directors' going concern assessment which reflects conditions up to the point of approval of the Annual Report. |
|
| – We obtained evidence to support the key assumptions and forecasts driving the Directors' assessment. This included reviewing the Directors' assessment of the Company's financial position and forecasts, their assessment of liquidity and loan covenant compliance as well as their review of the operational resilience of the Company and oversight of key third-party service providers. |
|
| We assessed the disclosures presented in the Annual Report in relation to COVID-19 by: |
|
| – Reading the other information, including the Principal Risks and Uncertainties and Viability Statement set out in the Strategic Report, and assessing its consistency with the financial statements and the evidence we obtained in our audit. |
|
| Our conclusions relating to other information are set out in the 'Reporting on other information' section of our report. |
|
| Our conclusions relating to going concern are set out in the 'Conclusions relating to going concern' section below. |
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the company, the accounting processes and controls, and the industry in which it operates.
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
| Overall company materiality | £10.9m (2020: £8.7m). |
|---|---|
| How we determined it | 1% of Net Assets |
| Rationale for benchmark applied | We have applied this benchmark, which is a generally accepted auditing practice for investment trust audits. |
We use performance materiality to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds overall materiality. Specifically, we use performance materiality in determining the scope of our audit and the nature and extent of our testing of account balances, classes of transactions and disclosures, for example in determining sample sizes. Our performance materiality was 75% of overall materiality, amounting to £8.2m for the company financial statements.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £545,000 (2020: £436,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Our evaluation of the directors' assessment of the company's ability to continue to adopt the going concern basis of accounting included:
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
However, because not all future events or conditions can be predicted, this conclusion is not a guarantee as to the company's ability to continue as a going concern.
In relation to the directors' reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors' report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities.
With respect to the Strategic report and the Directors' Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
Based on our work undertaken in the course of the audit, the Companies Act 2006 requires us also to report certain opinions and matters as described below.
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and the Directors' Report for the year ended 31 March 2021 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and the Directors' Report.
In our opinion, the part of the Directors' Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.
The Listing Rules require us to review the directors' statements in relation to going concern, longer-term viability and that part of the corporate governance statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Our additional responsibilities with respect to the corporate governance statement as other information are described in the Reporting on other information section of this report.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to:
Our review of the directors' statement regarding the longer-term viability of the group was substantially less in scope than an audit and only consisted of making inquiries and considering the directors' process supporting their statement; checking that the statement is in alignment with the relevant provisions of the UK Corporate Governance Code; and considering whether the statement is consistent with the financial statements and our knowledge and understanding of the company and its environment obtained in the course of the audit.
In addition, based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement is materially consistent with the financial statements and our knowledge obtained during the audit:
We have nothing to report in respect of our responsibility to report when the directors' statement relating to the company's compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.
As explained more fully in the Statement of Directors' Responsibilities, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the company and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of Chapter 4 of Part 24 of the Corporation Tax Act 2010, and we considered the extent to which non-compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements such as the Companies Act 2006. We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to posting inappropriate journal entries to increase revenue (investment income and capital gains) or to increase net asset value. Audit procedures performed by the engagement team included:
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of noncompliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
Our audit testing might include testing complete populations of certain transactions and balances, possibly using data auditing techniques. However, it typically involves selecting a limited number of items for testing, rather than testing complete populations. We will often seek to target particular items for testing based on their size or risk characteristics. In other cases, we will use audit sampling to enable us to draw a conclusion about the population from which the sample is selected.
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors' report.
This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report arising from this responsibility.
Following the recommendation of the Audit Committee, we were appointed by the directors on 25 July 2019 to audit the financial statements for the year ended 31 March 2020 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the years ended 31 March 2020 to 31 March 2021.
Jeremy Jensen (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 27 May 2021
For the year ended 31 March
| 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|
| Notes | Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
| Gains/(losses) on investments held at fair value |
9(b) | – | 247,596 | 247,596 | – | (377,639) | (377,639) |
| Gains on derivative instruments | – | – | – | – | 40 | 40 | |
| Losses on foreign exchange | – | (91) | (91) | – | (625) | (625) | |
| Income | 2 | 32,842 | 11,041 | 43,883 | 58,964 | 1,467 | 60,431 |
| Investment management fees | 3 | (1,016) | (2,371) | (3,387) | (1,778) | (4,148) | (5,926) |
| Other expenses | 4 | (814) | (13) | (827) | (1,635) | (6) | (1,641) |
| Return/(loss) before finance costs and taxation |
31,012 | 256,162 | 287,174 | 55,551 | (380,911) | (325,360) | |
| Finance costs | 5 | (2,438) | (5,690) | (8,128) | (2,490) | (5,810) | (8,300) |
| Return/(loss) before taxation | 28,574 | 250,472 | 279,046 | 53,061 | (386,721) | (333,660) | |
| Taxation | 6 | (495) | – | (495) | (1,440) | – | (1,440) |
| Return/(loss) on ordinary activities after taxation for the financial year |
28,079 | 250,472 | 278,551 | 51,621 | (386,721) | (335,100) | |
| Return/(loss) per ordinary share: | |||||||
| Basic | 7 | 16.21p | 144.58p | 160.79p | 27.83p | (208.52)p | (180.69)p |
The total column of this statement represents the Company's income statement, prepared in accordance with UK Accounting Standards. The return/(loss) after taxation is the total comprehensive income/(expense) and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.
| Notes | Share Capital £'000 |
Share Premium £'000 |
Capital Redemption Reserve £'000 |
Capital Reserve £'000(1) |
Revenue Reserve £'000(1) |
Total £'000 |
|
|---|---|---|---|---|---|---|---|
| Balance at 1 April 2019 | 48,917 | 10,394 | 24,676 | 1,215,237 | 83,213 | 1,382,437 | |
| (Loss)/Return on ordinary activities | – | – | – | (386,721) | 51,621 | (335,100) | |
| Dividends paid | 8 | – | – | – | – | (53,063) | (53,063) |
| Shares bought back and held in treasury | – | – | – | (121,790) | – | (121,790) | |
| Balance at 31 March 2020 | 48,917 | 10,394 | 24,676 | 706,726 | 81,771 | 872,484 | |
| Return on ordinary activities | – | – | – | 250,472 | 28,079 | 278,551 | |
| Dividends paid | 8 | – | – | – | – | (48,334) | (48,334) |
| Shares bought back and held in treasury | – | – | – | (11,470) | – | (11,470) | |
| Balance at 31 March 2021 | 48,917 | 10,394 | 24,676 | 945,728 | 61,516 | 1,091,231 |
(1) The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.
The accompanying notes are an integral part of these financial statements.
As at 31 March
| Notes | 2021 £'000 |
2020 £'000 |
|
|---|---|---|---|
| Fixed assets | |||
| Investments held at fair value through profit or loss | 9(a) | 1,151,008 | 922,433 |
| Current assets | |||
| Debtors | 10 | 7,974 | 7,399 |
| Cash and cash equivalents | 32,570 | 43,958 | |
| 40,544 | 51,357 | ||
| Creditors: amounts falling due within one year | |||
| Other payables | 11 | (698) | (1,934) |
| (698) | (1,934) | ||
| Net current assets | 39,846 | 49,423 | |
| Total assets less current liabilities | 1,190,854 | 971,856 | |
| Creditors: amounts falling due after more than one year | 12 | (99,623) | (99,372) |
| Net assets | 1,091,231 | 872,484 | |
| Capital and reserves | |||
| Called up share capital | 13 | 48,917 | 48,917 |
| Share premium account | 14 | 10,394 | 10,394 |
| Capital redemption reserve | 14 | 24,676 | 24,676 |
| Capital reserve | 14 | 945,728 | 706,726 |
| Revenue reserve | 14 | 61,516 | 81,771 |
| Total Shareholders' funds | 1,091,231 | 872,484 | |
| Net asset value per ordinary share: | |||
| Basic – debt at par value | 15 | 633.54p | 499.11p |
| Basic – debt at market value | 15 | 628.29p | 490.40p |
These financial statements were approved and authorised for issue by the Board of Directors on 27 May 2021.
Signed on behalf of the Board of Directors
The accompanying notes are an integral part of these financial statements.
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (SORP).
The revised SORP issued in April 2021 is applicable for accounting periods beginning on or after 1 January 2021. The SORP has no substantive changes but has been updated to reflect changes to IFRS standards and regulatory requirements. The Company has not early adopted the revised SORP in these financial statements and no accounting policies or disclosures have changed as a result of the revised SORP.
The financial statements are issued on a going concern basis. Details of the Directors assessment of the going concern status of the Company, which considered the adequacy of the Company's resources and the impacts of the COVID-19 Pandemic, are given on page 37.
As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a Statement of Changes in Equity is provided: all of which are satisfied.
The preparation of the financial statements may require the use of estimates, assumptions and judgements which may affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates. The directors do not believe that any accounting estimates, assumptions or judgements have been applied to these accounting statements that have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year. The Directors do apply judgement as to the allocation of expenses between capital and revenue in the income statement. The allocation and rationale is set out in Note 1G.
(i) Functional and presentational currency
The financial statements are presented in sterling, which is the Company's functional and presentational currency and the currency in which the Company's share capital and expenses, as well as its assets and liabilities, are denominated.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(iii) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the UK or other recognised stock exchanges.
The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or have expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
The Company's investments are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognized as fair value, which is taken to be their acquisition price, with transaction costs expensed in the income statement. These are subsequently valued at fair value.
Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.
– Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: short term in duration (typically three months or less from the date of acquisition), highly liquid investments held in the Company's base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.
Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and taken to capital reserves.
Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked 'ex-dividend'.
Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.
Deposit interest and underwriting commission receivable are taken into account on an accruals basis.
Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board's expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.
Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.
The liability to corporation tax is based on net revenue for the year, excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company's taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that it is probable that the Company will be able to recover them from future taxable revenue.
Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.
The Directors made one material accounting judgement during the year as set out in the paragraph below.
Further to the announcement on 18 December 2020 Tesco PLC had completed the disposal of the entirety of its shareholding in Tesco Stores (Thailand) Limited and Tesco Stores (Malaysia) Sdn Bhd. From the net proceeds of £7.8 billion an additional pension contribution of £2.5 billion was made and nearly £5 billion was distributed to Shareholders' via a Special Dividend of 50.93 pence per Ordinary Share in the capital of the Company.
This Special Dividend was treated as Capital in nature due to the source being covered by the proceeds of disposal. The Special Dividend was approved by Shareholders' at the Annual General Meeting on 25 January 2021 and went ex-dividend on 15 February 2021.This amount is disclosed as part of the amount in the footnote of Note 2 Income.
Apart from the above, the Directors do not believe that any other accounting judgements have been made. There are no estimates that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year.
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any dividends. The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Income from investments: | ||
| UK dividends | 26,028 | 44,556 |
| UK special dividends | 2,432 | 534 |
| UK unfranked income | – | 1,509 |
| Overseas dividends | 4,368 | 11,650 |
| Overseas special dividends | – | 475 |
| Income from money market funds | 11 | 237 |
| 32,839 | 58,961 | |
| Other income: | ||
| Deposit interest | 3 | 3 |
| 3 | 3 | |
| Total income | 32,842 | 58,964 |
Special dividends of £11,041,000 were recognised in capital during the year (2020: £1,467,000).
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
| Investment management fee | 1,016 | 2,371 | 3,387 | 1,778 | 4,148 | 5,926 |
Details of the investment management agreement is disclosed on page 37 in the Directors' Report. At 31 March 2021 investment management fees of £407,000 (2020: £385,000) were accrued.
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
| Other expenses | 814 | 13 | 827 | 1,635 | 6 | 1,641 |
| Other expenses include the following: | ||||||
| Directors' remuneration (i) | 187 | – | 187 | 193 | – | 193 |
| Auditors' fees (ii): | ||||||
| – for audit of the Company's annual financial statements | 33 | – | 33 | 30 | – | 30 |
| – additional fees in respect of COVID-19 audit procedures in prior year |
8 | – | 8 | - | – | – |
| – audit related assurance services in respect of the Debenture Stock |
3 | – | 3 | 3 | – | 3 |
The maximum Directors' fees authorised by the Articles of Association are £250,000 per annum.
Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £100 million debenture stock and a £50 million bank revolving credit facility.
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Revenue £'000 |
Capital £'000 |
Total £'000 |
Revenue £'000 |
Capital £'000 |
Total £'000 |
|
| Interest payable on borrowings repayable not by instalment: |
||||||
| – commitment fees due on bank facility | 38 | 89 | 127 | 67 | 156 | 223 |
| – interest on bank facility | – | – | – | 23 | 53 | 76 |
| – debenture stock repayable within 2 years | 2,325 | 5,425 | 7,750 | 2,325 | 5,425 | 7,750 |
| Amortised debenture stock discount and issue costs | 75 | 176 | 251 | 75 | 176 | 251 |
| 2,438 | 5,690 | 8,128 | 2,490 | 5,810 | 8,300 |
As an investment trust the Company pays no tax on capital gains. As the Company invests principally in UK equities, it has little overseas tax and the overseas tax charge is the result of withholding tax deducted at source. This note also clarifies the basis for the Company having no deferred tax asset or liability.
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Overseas taxation | 495 | 1,440 |
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Total return/(loss) before taxation | 279,046 | (333,660) |
| Theoretical tax at the current UK Corporation Tax rate of 19% (2020: 19%) | 53,019 | (63,395) |
| Effects of: | ||
| – Non-taxable UK dividends | (4,945) | (7,514) |
| – Non-taxable UK special dividends | (2,560) | (471) |
| – Non-taxable overseas dividends | (830) | (2,134) |
| – Non-taxable (gains)/loss on investments | (47,037) | 71,745 |
| – Non-taxable losses on foreign exchange | 11 | 118 |
| – Excess of allowable expenses over taxable income | 2,340 | 1,650 |
| – Disallowable expenses | 2 | 1 |
| – Overseas taxation | 495 | 1,440 |
| Tax charge for the year | 495 | 1,440 |
Owing to the Company's status as an investment company, and the Directors' intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.
The Company has cumulative excess management expenses of £477,190,000 (2020: £464,617,000) that are available to offset future taxable revenue.
The deferred tax asset of £90,666,112 (2020: £88,277,000) at 19% (2020: 19%) has not been recognised in respect of these expenses, since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.
The basic revenue, capital and total returns/(loss) per ordinary share is based on each of the returns on ordinary activities after taxation and on 173,236,905 (2020: 185,459,576) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.
| 2021 | 2020 | |||
|---|---|---|---|---|
| pence | £'000 | pence | £'000 | |
| Dividends paid and recognised in the year: | ||||
| – third interim paid in respect of previous year | 6.40 | 11,180 | 6.25 | 12,218 |
| – final paid in respect of previous year | 9.45 | 16,492 | 9.25 | 18,027 |
| – first interim paid | 6.00 | 10,331 | 6.40 | 11,535 |
| – second interim paid | 6.00 | 10,331 | 6.40 | 11,283 |
| 27.85 | 48,334 | 28.30 | 53,063 |
| 2021 | 2020 | |||
|---|---|---|---|---|
| pence | £'000 | pence | £'000 | |
| Dividends payable in respect of the year: | ||||
| – first interim | 6.00 | 10,331 | 6.40 | 11,535 |
| – second interim | 6.00 | 10,331 | 6.40 | 11,283 |
| – third interim | 6.00 | 10,331 | 6.40 | 11,180 |
| – proposed final | 6.00 | 10,331 | 9.45 | 16,492 |
| Total dividends (excl. special dividends) | 24.00 | 41,324 | 28.65 | 50,490 |
| – declared special dividend | 4.65 | 8,007 | – | – |
| Total dividends | 28.65 | 49,331 | 28.65 | 50,490 |
The proposed final dividend is subject to approval by ordinary shareholders at the AGM.
The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.
Gains or losses are either:
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Investments listed on a regulated stock exchange | 1,150,903 | 922,279 |
| Unquoted investments at Directors' valuation | 105 | 154 |
| 1,151,008 | 922,433 |
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Opening book cost | 1,068,853 | 1,390,495 |
| Opening investment holding (losses)/gains | (146,420) | 110,656 |
| Opening valuation | 922,433 | 1,501,151 |
| Movements in year: | ||
| – purchases at cost | 416,676 | 1,106,098 |
| – sales proceeds | (435,697) | (1,307,177) |
| Gains/(losses) on investments in the year | 247,596 | (377,639) |
| Closing valuation | 1,151,008 | 922,433 |
| Closing book cost | 1,026,675 | 1,068,853 |
| Closing investment holding gains/(losses) | 124,333 | (146,420) |
| Closing valuation | 1,151,008 | 922,433 |
The Company received £435,697,000 (2020: £1,307,177,000) from investments sold in the year. The book cost of these investments when they were purchased was £458,854,000 (2020: £1,427,740,000) realising a loss of £23,157,000 (2020: £120,563,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.
The transaction costs included in gains on investments amount to £1,917,000 (2020: £4,856,000) on purchases and £167,000 (2020: £444,000) for sales.
Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Amounts due from brokers | 1,489 | 3,217 |
| Overseas withholding tax recoverable | 1,592 | 2,621 |
| Prepayments and accrued income | 4,893 | 1,561 |
| 7,974 | 7,399 |
Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors are the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments or amounts owed to suppliers (accruals) such as the Manager and auditor.
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Amounts due to brokers | – | 996 |
| Share buybacks awaiting settlement | – | 68 |
| Accruals | 698 | 870 |
| 698 | 1,934 |
The Company has a 364 day committed revolving credit facility (the 'bank facility') of £50 million (2020: £150 million) with the lender, The Bank of New York Mellon. The bank facility was renewed on 17 June 2020 and matures on 16 June 2021. Interest is payable at 1.00% over LIBOR for drawn amounts, with a commitment fee of 0.20% per annum for undrawn amounts. Under the bank facility's covenants, the Company's total indebtedness must not exceed 25% of net assets and net assets must not be less than £500 million (2020: £700 million).
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Debenture Stock 7¾% redeemable 30 September 2022 | 100,000 | 100,000 |
| Unamortised discount and issue expenses on debenture stock | (377) | (628) |
| 99,623 | 99,372 |
The debenture is secured by a floating charge on the Company, under which borrowing must not exceed a sum equal to the Adjusted Total of Capital and Reserves. The interest on the 7¾% debenture is payable in half-yearly instalments, in March and September, each year.
The effect on the net asset value of deducting the debenture stock at market value, rather than at par, is disclosed in note 15.
| 2021 £'000 |
2020 £'000 |
|
|---|---|---|
| Share capital: | ||
| Ordinary shares of 25p each | 43,046 | 43,671 |
| Treasury shares of 25p each | 5,871 | 5,246 |
| 48,917 | 48,917 | |
| 2021 | 2020 | |
| Number of ordinary shares in issue: | ||
| Brought forward | 174,682,929 | 195,481,734 |
| Shares bought back and held in treasury | (2,500,000) | (20,798,805) |
| Carried forward | 172,182,929 | 174,682,929 |
| Number of treasury shares held: | ||
| Brought forward | 20,983,805 | 185,000 |
| Shares bought back into treasury | 2,500,000 | 20,798,805 |
| Carried forward | 23,483,805 | 20,983,805 |
| Total ordinary shares | 195,666,734 | 195,666,734 |
During the year the Company bought back, into treasury, 2,500,000 ordinary shares at an average price of 458.79p (including costs). Since the year end, no shares have been bought back into treasury.
The Directors' Report on pages 37 and 38 sets out the Company's share capital structure, restrictions and voting rights.
The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.
The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.
The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.
The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 172,182,929 (2020: 174,682,929).
The shareholders' funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par value and the corresponding NAV per share. A reconciliation between the two sets of figures follows:
| 2021 | 2020 | |||
|---|---|---|---|---|
| NAV per share pence |
Share holders' funds £'000 |
NAV per share pence |
Share holders' funds £'000 |
|
| Shareholders' funds | 633.76 | 1,091,231 | 499.47 | 872,484 |
| Less: | ||||
| Unamortised discount and expenses arising from debenture issue | (0.22) | (377) | (0.36) | (628) |
| NAV – debt at par | 633.54 | 1,090,854 | 499.11 | 871,856 |
The market value of the debenture stock is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilt.
The net asset value per share adjusted to include the debenture stock at market value rather than at par is as follows:
| 2021 | 2020 | |||
|---|---|---|---|---|
| NAV per share pence |
Share holders' funds £'000 |
NAV per share pence |
Share holders' funds £'000 |
|
| NAV – debt at par | 633.54 | 1,090,854 | 499.11 | 871,856 |
| Debenture stock – debt at par | 58.08 | 100,000 | 57.25 | 100,000 |
| – debt at market value | (63.33) | (109,041) | (65.96) | (115,209) |
| NAV – debt at market value | 628.29 | 1,081,813 | 490.40 | 856,647 |
Financial instruments comprise the Company's investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company's financial instruments and the risks related to them.
The Company's financial instruments mainly comprise its investment portfolio (as shown on pages 16 and 17), a debenture, a bank facility as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note 'cash' should be taken to comprise cash and cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.
The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:
Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.
The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors' Report.
As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company's investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for dividends. The associated risk management policies are summarised below and have remained substantially unchanged for the two years under review
The Company's Manager assesses the Company's exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on pages 33 and 34. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company's exposure to market risk and volatility. The Company has the ability to gear by using its £100 million debenture stock 2022 and its bank facility of £50 million (2020: £150 million). Debenture stock 2022 market value £109,041,000 (2020: £115,209,000).
The majority of the Company's assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.
The Manager monitors the Company's direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company's exposure to foreign currencies arising naturally from the Manager's choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No Forward currency contracts were used during the year (2020: none).
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.
The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of non-UK securities total £98.8 million (2020: £67.2 million) representing 8.6% (2020: 7.2%) of the portfolio.
The fair values of the Company's monetary items that had a material currency exposure at 31 March are shown below. Where the Company's equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| USD £'000 |
CHF £'000 |
EUR £'000 |
USD £'000 |
CHF £'000 |
EUR £'000 |
|
| Foreign currency exposure on net monetary items | 1,915 | 859 | 979 | 1,037 | 2,041 | 580 |
| Investments at fair value through profit or loss that are equities |
39,881 | 12,393 | 39,593 | 33,652 | – | 33,593 |
| Total net foreign currency exposure | 41,796 | 13,252 | 40,572 | 34,689 | 2,041 | 34,173 |
The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.
In respect of the Company's material direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 4.1% (2020: 2.8%) for the US dollar, 2.6% (2020: 3.3%) for the Swiss franc and 1.9% (2020: 2.7%) for the Euro during the year, capital return and net assets of the Company would have increased by £3.0 million (2020: £2.0 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling's fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company's investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.
Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian, The Bank of New York Mellon.
The Company has in place a revolving credit facility (the 'bank facility'), details of which are shown in note 11. The Company uses the bank facility when required at levels monitored by the Board. At the maximum possible bank facility gearing of £50 million (2020: £150 million), the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company's income of £500,000 (£2020: £1,500,000) per annum.
The Company also has an uncommitted bank overdraft facility which it uses for settlement purposes and the interest rate is dependent on the base rate as determined by the custodian. At the year end, no amounts were overdrawn (2020: none).
The Company's debt of £100 million (2020: £100 million) of debenture stock is fixed which exposes the Company to changes in market value in the event that the debt is repaid before maturity. Details of the debenture stock interest is shown in note 12, with details of its market value and the affect on net asset value in note 15(b).
The Company held one fixed income security during the year (2020: one), being a short-term zero coupon government bond which matured on the 22 June 2020. As at 31 March 2020 this government bond was recognised as a Cash and Cash Equivalent on the Balance Sheet.
At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
– floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be re-set; and
– fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
| 2021 | 2020 | |||||
|---|---|---|---|---|---|---|
| Within one year £'000 |
Between one and five years £'000 |
Total £'000 |
Within one year £'000 |
Between one and five years £'000 |
Total £'000 |
|
| Exposure to floating interest rates: | ||||||
| Cash and cash equivalents | 32,570 | – | 32,570 | 43,958 | – | 43,958 |
| Exposure to fixed interest rates: | ||||||
| Debenture stock - debt at par value | – | (100,000) | (100,000) | – | (100,000) | (100,000) |
| Total exposure to interest rates | 32,570 | (100,000) | (67,430) | 43,958 | (100,000) | (56,042) |
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the portfolio manager to manage the portfolio to achieve the best return that he can.
The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager's compliance with the Company's stated objectives and policies, and to review investment performance.
The Company's portfolio is the result of the Manager's investment process and need not be highly correlated with the Company's benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.
If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £115.1 million (2020: £92.2 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.
Liquidity risk is minimised as the majority of the Company's investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, the Company has a bank facility which it can use to provide short-term funding flexibility.
The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
| 2021 | Three months or less £'000 |
More than three months but less than one year £'000 |
More than one year £'000 |
Total £'000 |
|---|---|---|---|---|
| Debenture stock - debt at par value | – | – | 100,000 | 100,000 |
| Interest on debenture stock | – | 7,750 | 3,875 | 11,625 |
| Accruals | 698 | – | – | 698 |
| 698 | 7,750 | 103,875 | 112,323 | |
| 2020 | Three months or less £'000 |
More than three months but less than one year £'000 |
More than one year £'000 |
Total £'000 |
| Debenture stock - debt at par value | – | – | 100,000 | 100,000 |
Interest on debenture stock – 7,750 11,625 19,375 Amounts due to brokers 996 – – 996 Accruals 938 – – 938 1,934 7,750 111,625 121,309
Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company's ability to operate in the short-term may be adversely affected if the Company's custodian suffers insolvency or other financial difficulties. However, with the support of the depositary's restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian's annual controls report and the Manager's management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 6% of net assets in aggregate in liquidity funds with credit ratings of AAAm (or equivalent). These limits are at the discretion of the Board and are reviewed on a regular basis. The investment policy also allows for UK Government Treasuries to be held. Such holdings are recorded as cash equivalents if they meet the criteria set out in Note 1D on page 55.
The values of the financial assets and financial liabilities are carried either at their fair value (investments), or at a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facility) or at amortised cost (debenture).
All except one of the Company's portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow.
Level 1 – the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The valuation techniques used by the Company are explained in the accounting policies note.
| 2021 | |||||
|---|---|---|---|---|---|
| Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
||
| Financial assets designated at fair value through profit or loss: | |||||
| Quoted investments: | |||||
| Equities and preference shares | 1,150,903 | – | – | 1,150,903 | |
| Unquoted investments | – | – | 105 | 105 | |
| Total for financial assets | 1,150,903 | – | 105 | 1,151,008 |
| 2020 | ||||
|---|---|---|---|---|
| Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
| Financial assets designated at fair value through profit or loss: | ||||
| Quoted investments: | ||||
| Equities and preference shares | 922,279 | – | – | 922,279 |
| Unquoted investments | – | – | 154 | 154 |
| Total for financial assets | 922,279 | – | 154 | 922,433 |
The valuation techniques used by the Company are explained in the accounting policies note. At the end of the financial year there were no Level 2 investments. The investment in Level 3 is in the unquoted company Eurovestech. The holding in Eurovestech did not change during the year, but the fair value was reduced to £105,000 (2020: £154,000).
The book cost and fair value of the debenture stock, based on the offer value at the balance sheet date, are as follows:
| 2021 | 2020 | |||
|---|---|---|---|---|
| Book Value £'000 |
Fair Value £'000 |
Book Value £'000 |
Fair Value £'000 |
|
| Debenture stock repayable between one and five years: | ||||
| 7¾% Debenture Stock 2022 | 100,000 | 109,041 | 100,000 | 115,209 |
| Discount on issue of debenture stock | (377) | – | (628) | – |
| 99,623 | 109,041 | 99,372 | 115,209 |
Incorporating the fair value of the debenture, results in the reduction of the net asset value per ordinary share to 628.29p (2020: 490.40p).
The Company's total capital employed is managed to achieve the Company's objective and investment policy as set out on page 14, including that borrowings may be used to provide gearing of the equity portfolio up to the maximum authorised by shareholders, currently 25% of net assets. Net gearing was 7.1% (2020: 8.3%) at the balance sheet date. The Company's policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company's investments are shown in the Strategic Report under the 'Principal Risks and Uncertainties' section on pages 19 to 21. These also explain that the Company is able to use borrowings to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1158 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the bank facility by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise the debenture stock, details of which are contained in note 12, a bank facility and an uncommitted overdraft facility which may be used for short-term funding requirements.
There are no contingencies, guarantees or financial commitments of the Company at the year end (2020: £nil).
Under UK GAAP, the Company has identified the Directors as related parties. The Directors' remuneration and interests have been disclosed in pages 42 and 43 with additional disclosure in note 4. No other related parties have been identified.
Details of the Manager's services and fees are disclosed in the Directors' Report on page 37, and in note 3.
There are no significant events or adjustment to the financial statements after the end of the reporting year requiring disclosure.
THIS DOCUMENT 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 advisor authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your shares in The Edinburgh Investment 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 hereby given that the one hundred and thirty first Annual General Meeting of The Edinburgh Investment Trust plc will be held at The Hawthornden Lecture Theatre, The National Galleries of Scotland, Weston Link, The Mound, Edinburgh, EH2 2EL at 11am on the 22 July 2021.
Shareholders may attend the 2021 AGM virtually using a smartphone, tablet or computer. You will be able to view and listen to a live webcast of the 2021 AGM and submit questions to the Directors in writing, however, you will not be able to vote at the event and are encouraged to vote ahead of the meeting. To join the 2021 AGM virtually, you will need to visit www. edinburghinvestmenttrust.com. from your device. To log in to the 2021 AGM, you will be prompted to enter your unique Login Code (which is your full 11 digit Investor Code ("IVC") including any zeros) and your PIN number (which is the last 4 digits of your IVC). This will authenticate you as a Shareholder.
If you are not in receipt of your IVC this can be found on a share certificate or dividend tax voucher, or alternatively you can sign in to www.signalshares.com to obtain your IVC. If, however, you cannot find your IVC and do not have access to www.signalshares. com then please contact Link Group on +44 (0) 371 664 1020 before 11am on 19 July 2021 to obtain your IVC in order to log in to the Annual General Meeting.
Access to the Annual General Meeting will be available from 10.30 a.m. on 22 July 2021 although you will not be able to submit questions until the Annual General Meeting is declared open. If you wish to appoint a proxy and for them to attend the virtual Annual General Meeting on your behalf, please contact Link Group on telephone number +44 (0) 371 277 1020*.
If your shares are held by a nominee and you wish to access the virtual Annual General Meeting, you will need to contact your nominee immediately. Your nominee will need to have completed a letter of representation and presented this to Link Group, our Registrars, no later than 72 hours before the start of the Annual General Meeting in order obtain your unique Login Code and PIN number to access the virtual Annual General Meeting. If you are in any doubt about your shareholding, please contact our Registrars.
*Lines are open from 9.00 a.m. to 5.30 p.m. Monday to Friday, calls are charged at the standard geographic rate and will vary by provider. Calls outside the UK will be charged at the applicable international rate."
Shareholders are encouraged to vote by proxy and to appoint the "Chair of the Meeting" as their proxy rather than another person who may not be permitted to attend the meeting if gathering restrictions are not lifted as expected. Details of how to vote, either electronically, by proxy form or through CREST, can be found in the Notes to the Notice of AGM on pages 74 to 76.
The results of the AGM will be announced to the London Stock Exchange and placed on the Company's website, as soon as practicable after the conclusion of the AGM.
To consider and, if thought fit, to pass the following resolutions all of which will be proposed as Ordinary Resolutions.
To consider and, if thought fit, to pass the following resolutions of which resolution 11 will be proposed as an Ordinary Resolution and resolutions 12, 13 and 14 as Special Resolutions:
in substitution for any existing authority under section 551 of the Companies Act 2006 (the 'Act') but without prejudice to the exercise of any such authority prior to the date of this resolution the Directors of the Company be generally and unconditionally authorised in accordance with section 551 of the Act as amended from time to time prior to the date of the passing of this resolution, to exercise all powers of the Company to allot shares and grant rights to subscribe for, or convert any securities into, shares up to an aggregate nominal amount within the meaning of sections 551(3) and (6) of the Act) of £4,304,573, this being 10% of the Company's issued ordinary share capital as at 25 May 2021, such authority to expire at the conclusion of the next Annual General Meeting of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier unless the
authority is renewed or revoked at any other general meeting prior to such time, but so that this authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require shares to be allotted, or rights to be granted, after such expiry as if the authority conferred by this resolution had not expired.
subject to the passing of resolution number 11 set out in the notice of this meeting (the 'Section 551 Resolution') and in substitution for any existing authority under sections 570 and 573 of the Companies Act 2006 (the 'Act') but without prejudice to the exercise of any such authority prior to the date of this resolution, the Directors be and are hereby empowered, in accordance with sections 570 and 573 of the Act as amended from time to time prior to the date of the passing of this resolution to allot equity securities (within the meaning of section 560(1), (2) and (3) of the Act) for cash, either pursuant to the authority given by the Section 551 Resolution 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 Act did not apply to any such allotment, provided that this power shall be limited:
and this power shall expire at the conclusion of the next Annual General Meeting of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier, unless the authority is renewed or revoked at any other general meeting prior to such time, 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 Act shall bear the same meanings in this resolution.
the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 (the 'Act') to make market purchases (within the meaning of section 693(4) of the Act) of the issued ordinary shares of 25p each in the capital of the Company ('Shares')
the period of notice required for general meetings of the Company (other than AGMs) shall be not less than 14 days.
The resolutions are explained further in the Directors' Report on pages 38 and 39.
and in each case, to be received by the Company not less than 48 hours before the time of the meeting. Any amended proxy appointment must be received by this time.
If you are an institutional investor you may be able to appoint a proxy electronically via the Proxymity platform, a process which has been agreed by the Company and approved by the Registrar. For further information regarding Proxymity, please go to www.proxymity.io. Your proxy must be lodged by 11.30 am on 20 July 2021 in order to be considered valid. Before you can appoint a proxy via this process, you will need to have agreed to Proxymity's associated terms and conditions. It is important that you read these carefully as you will be bound by them and they will govern the electronic appointment of your proxy.
the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the issuer's agent (ID RA10) by the latest time(s) for receipt of proxy appointments specified in this document. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Applications Host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any changes of instructions to proxies through CREST should be communicate to the appointee through other means. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s), such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The CREST Manual can be reviewed at www.euroclear.com/CREST.
The statement of the above rights of the shareholders in relation to the appointment of proxies does not apply to Nominated Persons. Those rights can only be exercised by shareholders of the Company.
The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on a website under section 527 of the Companies Act 2006, it must forward the statement to the Company's auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the AGM includes any statement that the Company has been required under section 527 of the Companies Act 2006 to publish on a website.
The Company's shares are quoted on the London Stock Exchange. There are a variety of ways by which investors can buy the shares. Shares may be purchased through discretionary wealth managers, banks, independent financial advisors and via a large number of execution-only trading platforms. The Manager's website contains a list of some of the larger dealing platforms as well as a link to unbiased.co.uk, for those seeking financial advice, and to the AIC's website for detailed information on investment companies.
The price of your ordinary shares can be found in the Financial Times, Daily Telegraph, The Scotsman and The Times.
In addition, share price information can be found at the London Stock Exchange website using the EDIN ticker code, on the website of most sharedealing platforms and on the Company's own website www.edinburghinvestmenttrust.com
The NAV of the Company's ordinary shares is calculated by the Manager on a daily basis and is notified to the Stock Exchange on the next business day. It is published daily in the newspapers detailed above.
Information relating to the Company including investment objective, supporting philosophy and investment performance along with news, opinions, disclosures, results and key information documents can be found on the Company's website www.edinburghinvestmenttrust.com
The contents of websites referred to in this document, or accessible from links within those websites, are not incorporated in to, nor do they form part of this annual financial report.
In addition, the Company publishes information according to the following calendar:
Annual financial report May Half-yearly financial report November LONDON SHAREHOLDER PRESENTATION
The Company intends to invite Shareholders to a presentation by the portfolio manager, James de Uphaugh and to meet with Directors in September. However, if restrictions on gatherings are still in place at that time this will be an online event accessed via the Company's website https://www.edinburghinvestmentrust.com.
Please note this is a non-voting meeting.
1st interim November 2nd interim February 3rd interim May Final July
Interest payable on September and 7¾% 2022 March
July
31 March
The one hundred and thirty first Annual General Meeting of the Company will be held at The Hawthornden Lecture Theatre, The National Galleries of Scotland, Weston Link, The Mound, Edinburgh, EH2 2EL on 22 July 2021 at 11am.
UK GDPR is a positive step towards individuals knowing how their personal data is used and also having more control over how it is used. The Company has a privacy notice which sets out what personal data is collected, and how and why it is used. The latest privacy notice can be found at https://www. edinburghinvestmenttrust.com under the 'Other Documents' section, or a copy can be obtained from the Company Secretary whose correspondence address is shown on the next page.
Quartermile One 15 Lauriston Place Edinburgh EH3 9EP
Registered in Scotland. Number: SC1836
Majedie Asset Management Limited Majedie Asset Management 10 Old Bailey London EC4M 7NG 020 8126 0088
PraxisIFM Fund Services (UK) Limited 1st Floor, Senator House 85 Queen Victoria Street London EC4V 4AB 020 4513 9260
PricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT
The Bank of New York Mellon (International) Limited 1 Canada Square London E14 5AL
The Bank of New York Mellon 160 Queen Victoria Street London EC4V 4LA
Investec Bank plc 30 Gresham Street London EC2V 7QP
The Company is a member of the Association of Investment Companies. Contact details are as follows: 020 7282 5555 Email: [email protected] Website: www.theaic.co.uk
Dentons UK and Middle East LLP Quartermile One 15 Lauriston Place Edinburgh EH3 9EP
Link Group 10th Floor Central Square 29 Wellington Street Leeds LS1 4DL
If you hold your shares direct and not through a Savings Scheme or ISA and have queries relating to your shareholding, you should contact the Registrars on:
Calls are charged at the standard geographic rate and will vary by provider.
From outside the UK: +44 371 664 0300. Calls from outside the United Kingdom will be charged at the applicable international rate. Lines are open from 9.00am to 5.30pm, Monday to Friday (excluding UK Public Holidays).
Shareholders can also access their holding details via Link's website:
www.signalshares.com.
Link Group provide an on-line and telephone share dealing service to existing shareholders who are not seeking advice on buying or selling. This service is available at www.linksharedeal. com or
0371 664 0445.
Calls are charged at the standard geographic rate and will vary by provider.
From outside the UK: +44 371 664 0445. Calls from outside the UK will be charged at the applicable international rate. Lines are open from 8.00am to 5.30pm, Monday to Friday (excluding UK Public Holidays).
Link Group is the business name of Link Market Services Limited.
An APM is a measure of performance or financial position that is not defined in applicable accounting standards and cannot be directly derived from the financial statements. The calculations shown in the corresponding tables are for the years ended 31 March 2021 and 2020. The APMs listed here are widely used in reporting within the investment company sector and consequently aid comparability, providing useful additional information.
A standard against which performance can be measured, usually an index that averages the performance of companies in a stock market or a segment of the market. The benchmark most often referred to in this annual financial report is the FTSE All-Share Index.
Discount is a measure of the amount by which the mid-market price of an investment company share is lower than the underlying net asset value of that share. Conversely, Premium is a measure of the amount by which the mid-market price of an investment company share is higher than the underlying net asset value of that share. In this annual financial report the discount is expressed as a percentage of the net asset value per share with debt at market value (see reconciliation of net asset value per share with debt at market value in note 15 on page 64) and is calculated according to the formula set out below. If the shares are trading at a premium the result of the below calculation will be positive and if they are trading at a discount it will be negative.
| Page | 2021 | 2020 | ||
|---|---|---|---|---|
| Share price | 2 | a | 600.00p | 434.00p |
| Net asset value per share – debt at market value (note 15) | 64 | b | 628.29p | 490.29p |
| Discount | c = (a-b)/b | (4.5)% | (11.5)% |
The annual dividend payable expressed as a percentage of the year end share price.
| Page | 2021 | 2020 | ||
|---|---|---|---|---|
| Dividends per share payable in respect of the year (note 8) | 60 | a | 28.65p | 28.65p |
| Share price | 2 | b | 600.00p | 434.00p |
| Dividend yield | c = a/b | 4.8% | 6.6% |
The gearing percentage reflects the amount of borrowings that a company has invested. This figure indicates the extra amount by which net assets or shareholders' funds would move if the value of a company's investments were to rise or fall. A positive percentage indicates the extent to which net assets are geared; a nil gearing percentage, or 'nil', shows a company is ungeared. A negative percentage indicates that a company is not fully invested an is holding net cash as described below.
There are several methods of calculating gearing and the following has been used in this report:
This reflects the amount of gross borrowings in use by a company and takes no account of any cash balances. It is based on gross borrowings as a percentage of net assets.
| Page | 2021 £'000 |
2020 £'000 |
||
|---|---|---|---|---|
| Debenture stock – debt at market value (note 15) | 64 | 109,041 | 115,209 | |
| Gross borrowings | a | 109,041 | 115,209 | |
| Net asset value – debt at market value (note 15) | 64 | b | 1,081,813 | 856,647 |
| Gross gearing | c = a/b | 10.1% | 13.4% |
Net gearing reflects the amount of net borrowings invested, i.e. borrowings less cash and cash equivalents (incl. investments in money market funds). It is based on net borrowings as a percentage of net assets. Net cash reflects the net exposure to cash and cash equivalents, as a percentage of net assets, after any offset against total borrowings.
| Page | 2021 £'000 |
2020 £'000 |
||
|---|---|---|---|---|
| 62 | – | – | ||
| Debenture stock – debt at market value (note 15) | 64 | 109,041 | 115,209 | |
| Less cash and cash equivalents | 53 | (32,570) | (43,958) | |
| Net borrowings | a | 76,471 | 71,251 | |
| Net asset value – debt at market value (note 15) | 64 | b | 1,081,813 | 856,647 |
| Net gearing | c = a/b | 7.1% | 8.3% |
Leverage, for the purposes of the Alternative Investment Fund Managers Directive (AIFMD), is not synonymous with gearing as defined above. In addition to borrowings, it encompasses anything that increases the Company's exposure, including foreign currency and exposure gained through derivatives. Leverage expresses the Company's exposure as a ratio of the Company's net asset value. Accordingly, if a Company's exposure was equal to its net assets it would have leverage of 100%. Two methods of calculating such exposure are set out in the AIFMD, gross and commitment. Under the gross method, exposure represents the aggregate of all the Company's exposures other than cash balances held in base currency and without any offsetting. The commitment method takes into account hedging and other netting arrangements designed to limit risk, offsetting them against the underlying exposure.
Also described as shareholders' funds, the NAV is the value of total assets less liabilities. Liabilities for this purpose include current and long-term liabilities. The NAV per share is calculated by dividing the net asset value by the number of ordinary shares in issue. For accounting purposes assets are valued at fair (usually market) value and liabilities are valued at amortised cost (their repayment – often nominal – value). An alternative, NAV with debt at market value, values long term liabilities at their market (fair) value and is shown in note 15 on pages 63 and 64.
The ongoing administrative costs of operating the Company are encapsulated in the ongoing charges ratio, which is calculated in accordance with guidance issued by the AIC. The calculation incorporates charges allocated to capital in the financial statements as well as those allocated to revenue, but excludes non-recurring costs, transaction costs of investments, finance costs, taxation, and the costs of buying back or issuing shares. The ongoing charges ratio is the aggregate of these costs expressed as a percentage of the daily average net asset value (debt at market value) reported in the year. Majedie waived its investment management fee from 4 March 2020 to 3 June 2020, the first three months of its appointment. The Ongoing Charges Ratios disclosed below show the actual charges incurred during the year and the pro-forma charges had the investment management fees not been waived over this period.
| Page | 2021 £'000 |
2020 £'000 |
|
|---|---|---|---|
| Investment management fee | 57 | 3,387 | 5,926 |
| Other expenses | 58 | 827 | 1,641 |
| Less: non-recurring costs | (38) | (770) | |
| Total recurring expenses | a | 4,176 | 6,797 |
| Average daily net assets | b | 974,141 | 1,228,294 |
| Ongoing charges ratio % | c = a/b | 0.43% | 0.55% |
| Investment management fee waiver | d | 750 | 250 |
| Ongoing charges ratio (pro-forma) % | c = (a+d)/b | 0.51% | 0.58% |
The return generated in a period from the investments.
Reflects the return on NAV, excluding any dividends reinvested.
Total return is the theoretical return to shareholders that measures the combined effect of any dividends paid together with the rise or fall in the share price or NAV. In this annual financial report these return figures have been sourced from Refinitiv who calculate returns on an industry comparative basis.
Total return on net asset value per share, with debt at market value, assuming dividends paid by the Company were reinvested into the shares of the Company at the NAV per share at the time the shares were quoted ex-dividend.
Total return to shareholders, on a mid-market price basis, assuming all dividends received were re-invested, without transaction costs, into the shares of the Company at the time the shares were quoted ex-dividend.
| 2021 | Page | Net Asset Value |
Share Price |
|
|---|---|---|---|---|
| As at 31 March 2021 | 2 | 628.29p | 600.00p | |
| As at 31 March 2020 | 2 | 490.40p | 434.00p | |
| Change in year | a | 28.1% | 38.2% | |
| Impact of dividend reinvestments(1) | b | 6.7% | 8.2% | |
| Total return for the year | c = a+b | 34.8% | 46.4% | |
| 2020 | Page | Net Asset Value |
Share Price |
|
| As at 31 March 2020 | 2 | 490.40p | 434.00p | |
| As at 31 March 2019 | 3 | 696.91p | 644.00p | |
| Change in year | a | -29.6% | -32.6% | |
| Impact of dividend reinvestments(1) | b | 2.9% | 3.2% |
(1) Total dividends paid during the year of 27.85p (2020: 28.30p) reinvested at the NAV or share price on the ex-dividend date. NAV or share price falls subsequent to the reinvestment date consequently further reduce the returns, vice versa if NAV or share price rises.
Total return on the benchmark is on a mid-market value basis, assuming all dividends received were reinvested, without transaction costs, into the shares of the underlying companies at the time the shares were quoted ex-dividend.
The Edinburgh Investment Trust plc is registered at Companies House as The Edinburgh Investment Trust Public Limited Company.
The Company falls within the definition of an Alternative Investment Fund (AIF) under the Directive and, as such, is required to have (or be) an authorised AIFM. Majedie Asset Management Limited (Majedie) appointed by the Company with effect 4 March 2020, is authorised and regulated by the FCA as a full-scope AIFM.
Amongst other things, regulations implementing AIFMD require certain information to be provided to prospective investors. This information can be found in the Company's page of the Manager's website (www.majedie.com) in a downloadable document entitled 'AIFMD Investor Information'. There has been no material change to this document in the year except that relating to the change in Manager from Invesco Asset Management to Majedie. Any information requiring immediate disclosure pursuant to the Directive will be disclosed through a primary information provider.
In addition, the Directive requires information in relation to the Company's leverage (both 'gross' and 'commitment' – see the Glossary of Terms and Alternative Performance Measures on pages 79 to 81) and the remuneration of the Company's AIFM to be made available to investors.
Accordingly:
Majedie's Remuneration Policy describes the remuneration policies and practices that are adhered to by the Manager, whilst its Pillar 3 Disclosure sets out the remuneration awarded to its employees and AIFM Remuneration Code staff in its most recent financial year. Both are available at www.majedie.com and from the Company's company secretary on request.
The Remuneration Policy of the Manager is available at www.majedie.com.
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Quartermile One Edinburgh EH3 9EP
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