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Annual Financial Report

Released 07:00 26-May-2017

Annual Financial Report

The Edinburgh Investment Trust plc

Annual Financial Report Announcement

For the Year Ended 31 March 2017


Year Ended Year Ended
Total Return(1)(3) (capital growth with income reinvested) 31 March 2017 31 March 2017
Net asset value(1) (NAV) – debt at par(2) +14.1% +4.5%
                                      – debt at market value(2) +14.4% +5.0%
Share price(2) +11.2% +4.0%
FTSE All-Share Index total return(2) +22.0% -3.9%
The Company’s benchmark is the FTSE All-Share Index


At 31 March At 31 March Change
2017 2016 %
Capital Return(1)
Net asset value – debt at par 783.88p 710.74p +10.3
                       – debt at market value 768.81p 695.30p +10.6
Share price(2) 713.5p 665.0p +7.3
FTSE All-Share Index(2) 3990.00 3995.19 +17.5
Discount(1)(3)   – debt at par 9.0% 6.4%
                       – debt at market value 7.2% 4.4%
Gearing(1)(3)   – gross gearing 13.7% 12.9%
                      – net gearing 13.4% 12.8%


Year Ended Year Ended Change
Revenue and Dividends(3) 31 March 2017 31 March 2016 %
Revenue return per share(3) 27.9p 26.7p +4.5
Dividends:   – first interim 5.40p 5.20p
                    – second interim 5.40p 5.20p
                    – third interim 5.40p 5.20p
                    – final proposed 9.15p 8.75p
                    – total dividends 25.35p 24.35p +4.1
Retail Price Index(2) 3.1% 1.6%
Ongoing Charges Ratio(1)(3) 0.60% 0.61%


Dividend Yield(3) – at year end 3.5% 3.7%


  1. The term is defined in the Glossary of Terms on page 71 in the Annual Financial Report.

  2. Source: Thomson Reuters Datastream.

  3. Key Performance Indicator.


Chairman’s Statement

Dear Shareholder

It has been an eventful year. Potential risks were highlighted in my Chairman’s Statement this time last year but to witness both the start of the process for the departure of the UK from the European Union and the election of President Trump in the US was probably long odds. Add to that the recently-announced UK General Election and you have all the evidence required to explain why you need to have high conviction and great confidence to be a long-term investor.

Whilst the expected “Trump Effect” has yet to be fully realised – several of his vote-winning initiatives are yet to see the light of day or will be somewhat diluted – this has not stopped the US market from rallying in the expectation that US real GDP will accelerate and inflation rise but, so far, there have been few signs of either.

It is Europe’s turn to see events dominated by political outcomes, with Macron’s victory in the French Presidential elections, the all-important German elections to come in September, all the while dealing with intensely complicated Brexit negotiations; this partly explains the expectations that the near-term economic outlook will remain subdued with inflation about half the target rate. The Board has considered any potential direct impact to the Company as a consequence of the Brexit negotiations and has concluded that it does not consider that this will be a principal risk for the Company.

The gloomy predictions about the implications of the vote for Brexit have not materialised with the UK stock market performing much better subsequently than expected. Against this background, the portfolio, whilst in positive territory, fared less well than the Company’s benchmark index (the FTSE All-Share Index) as explained in the Portfolio Manager’s Report.

Investment Strategy

One of the great strengths of the Company’s portfolio manager, Mark Barnett, has been his construction of a portfolio of stocks in which he has high conviction and believes will deliver capital and dividend growth over the medium-to-long term to the benefit of the Company’s shareholders. From time-to-time, his strategy will be out of kilter with trends in the UK and world markets, as has been witnessed over the last 12 or so months. However, it remains a testament to his skill and diligence that he will not be swayed by short-term market sentiment. Mark, who believes a fund manager is also a risk manager, remains focused on valuation and fundamentals when choosing stocks for his portfolio and your Board is wholly supportive of his approach.

The portfolio continues to be concentrated in a relatively small number of stocks (56 at the year end) as well as sectors, and its overweight or underweight positions in various sectors continue to be material drivers of the Company’s relative long-term investment performance.


For the year ended 31 March 2017, the Company’s net asset value (NAV) total return was +14.1% with debt at par whilst the Company’s benchmark index returned +22.0%. For the same period the NAV with debt at market returned +14.4% and the share price total return (with dividends reinvested) was +11.2%.

The Company’s share price ended the year at 713.5p, an increase of 7.3% from the previous year end price of 665p. With debt at market value, the discount moved out from 4.4% to 7.2%, reflecting the general widening of discounts in the Company’s peer group over the same period. At 24 May 2017, the latest practical date before signing this report, the NAV and share price were respectively 809.2p and 754.0p, and the resultant discount was 6.8% (debt at market value).

The longer term performance of the Company continues to be strong with three, five and ten year NAV total returns (debt at market value) of 39.7%, 96.1% and 124.6%, respectively, compared with 24.9%, 58.7% and 73.7% for the benchmark. Returns to shareholders were 33.9%, 73.8% and 131.8% respectively. In addition, the following graph shows total returns since the appointment of Invesco Perpetual in 2008.

Borrowings and Gearing

The Company has in place a mixture of fixed and floating rate debt. These comprise the Company’s £100 million 7¾% debenture 2022 and a £150 million, 364 day bank credit facility. By this means, Mark has the ability to vary the gearing level of the portfolio depending on his view of the market. During the year the aggregate borrowings ranged between £180.0 million and £247.2 million, and ended the year at £209.7 million – equivalent to gross gearing of 13.7% (debt at par).


The Board wishes to continue its aim to rebalance the interim and final dividends towards the interims whilst at least maintaining the final dividend. However, notwithstanding this medium term objective, the decision was taken this year to increase the final dividend by more than the percentage increase in the interim dividends to enable shareholders to benefit from the current year’s particularly buoyant net revenue return. Consequently, for the year to 31 March 2017 the Board had declared three interim dividends of 5.4p (2016: 5.2p) and recommends a final dividend of 9.15p (2016: 8.75p) per share. This increases the total dividend to 25.35p for the year, an increase of 1.0p on last year’s total dividend of 24.35p. The total dividend increase of 4.1% is in excess of the annual increase in the Retail Price Index of 3.1%, and demonstrates the Company’s commitment to its long-term objective of providing income growth which exceeds the rate of inflation. The final dividend, which is subject to approval by shareholders, will be paid on 21 July 2017 to shareholders on the Company’s register on 23 June 2017.

Dividends have been paid from revenue and the Company’s revenue return has increased consistently over the past four years. The increase in dividends over the years has been funded by the growth in dividend receipts as well as special dividends, with dividends receipts for this year also benefiting from the fall in sterling.


The General Election on 8 June 2017 will represent the third time in two years that the UK electorate has gone to the polls. This, coupled with further elections in the EU together with Brexit negotiations, gives rise to an ongoing background of continuing uncertainty. As shareholders are well aware, the Company’s portfolio is designed to generate capital and dividend growth from a relatively concentrated portfolio of stocks many of which generate their returns in dollars or euros; whilst a stable environment and continued underlying economic growth in the UK provides a solid base, an improving situation in the US and Europe would also be beneficial. To this end, although President Trump is finding the business of government harder than he thought, it is still likely that some of his election promises – increased infrastructure and military expenditure, reduced corporation tax – could stimulate the US economy and thus the world’s, at least in the short-term.

Whilst the future remains as difficult as ever to forecast, there is an element of confidence in predicting a continued low interest rate environment in developed economies with reasonable growth expectations. Mark remains resolute in his approach to portfolio construction and confident that his stock selections will provide the right balance of capital and dividend growth for shareholders over the medium-to-long term. As I stated in the outlook section of my Chairman’s Statement at the interim stage, Mark’s high conviction approach to investment will inevitably lead to portfolio performance that will diverge from the index and, as seen, may result in periods of underperformance. However, the focus remains on adding significant value over the long term and your Board continues to endorse Mark’s approach.

Jim Pettigrew


25 May 2017


Portfolio Manager’s Report

For the year ended 31 March 2017

Market Review

After a volatile start to 2016, the UK stock market rose strongly over the twelve month period under review. This was driven initially by rising commodity prices and a continued absence of inflationary pressures globally, and then, following the EU referendum, by the sharp fall in value of sterling. August 2016 also marked a low point in 10 year government bond yields. Investors became more convinced that the US Federal Reserve was intent on tightening monetary policy due to ongoing positive US economic momentum and further job creation. The UK equity market rose in response to this economic outlook, a trend which accelerated following the election of Donald Trump as US President. Sector performance was influenced in the second half of the year by a rotation towards industries that would benefit from more reflationary economic policy in the United States and a gradual rise in bond yields.

Portfolio Strategy and Review

The Company’s net asset value, including reinvested dividends, rose by 14.4% during the period under review, compared with a return of 22.0% (total return) by the FTSE All-Share index.

Against a strong market backdrop, the portfolio’s performance was held back by its zero weighting in the mining sector and by the absence of holdings in HSBC and Royal Dutch Shell. These share prices rose strongly, benefiting from weakened sterling and, in the case of Royal Dutch Shell, from the recovering oil price. The zero weighting in UK domestic banks was, however beneficial to portfolio performance.

The absence of mining stocks had benefited the portfolio’s performance over the previous two years, but the recovery across the sector in the past year meant that the portfolio missed out on one of the major positive trends of the past 12 months. While perhaps not a bubble, the valuation of the sector now looks extended and vulnerable to a pull-back in key commodity prices. Supply discipline has improved following the shock of the 2011-2015 downturn, but demand growth in China remains under pressure. I am not planning to change my position and expect some unwinding of the recent commodity share price gains.

The holdings in the tobacco sector again delivered a strongly positive contribution to performance – despite a lack of enthusiasm for “bond proxies” (companies offering low stable growth, steady dividends and low volatility) that prevailed for much of the period. The sector was boosted by M&A activity, with a proposed merger of two of the portfolio’s largest holdings. Reynolds American accepted a cash and shares offer from British American Tobacco, creating a combined entity which is well positioned to exploit next generation products, particularly the US e-cigarette market. The deal is expected to be concluded in Q3 2017. I expect Tobacco companies to continue delivering cash flow and dividend growth while valuations remain discounted relative to other staples and corporate activity is still very much on the agenda.

AstraZeneca also performed strongly over the period. Chief executive Pascal Soriot characterised 2017 as a potential “inflection point” for the company’s return to long-term growth, with the upcoming launch of several “life-changing” medicines for cancer, respiratory and metabolic diseases built on the “solid foundations of a science-led pipeline”. The European pharmaceutical sector as a whole did not perform well in 2016 as the market focused increasingly on the risks associated with new product trials, the overall pricing environment in the US and the challenge of replacing mature drug portfolios. My view on the long term outlook has not changed; the de-rating of the sector suggests that major companies succeeding in bringing genuinely innovative drugs to market could see a meaningful boost to their share prices and to the portfolio’s holdings across the sector.

Other significant positive contributions to portfolio performance came from the holdings in BP, Burford Capital, Compass, G4S, Homeserve, Raven Russia, RELX and Rentokil Initial.

The portfolio’s holdings in companies particularly exposed to the fall in sterling and perceived challenges to the UK economy performed poorly in the aftermath of the referendum. The stock market was also inclined to de-rate companies which warned of lower profits – delivering a “double-whammy” impact on the share price via a fall in both earnings and P/E ratios.

Notable amongst these was the holding in Capita, which fell sharply in value as it downgraded full-year earnings forecasts, blaming a slow-down in specific trading businesses, one-off costs and problems with a major contract with TFL, along with delayed client decision-making since the EU referendum. The company later confirmed the departure of its chief executive Andy Parker and expects 2017 to be a “transitional year” for the business, as it completes a number of disposals, embeds internal structural changes, and re-positions for a return to growth in 2018.

The holdings in the travel sector — easyJet and Thomas Cook — warned of the negative impact of weaker sterling and were additionally impacted over the period by concerns over terrorist activity and by air traffic control strikes. The share prices of both companies rose into period end, as they confirmed more positive trading updates than had been feared by the market and on the back of some renewed sterling strength.

BT detracted from performance – an update on accounting irregularities in the group’s Italian division prompted a sharp sell-off, which worsened after a profit warning from the company highlighted a more challenged outlook for domestic public services contracts. Towards the end of the period, the group was also hit by a record fine for cuts in broadband delay pay-outs.

The portfolio’s new holding in Next weighed on performance, following a disappointing Christmas trading update. Into the end of the period, however, Next’s share price rose as the company maintained its profit outlook for 2017, despite a challenging clothing market.

The share price of Circassia fell sharply on news that its cat allergy drug had failed to meet the primary end point of phase III trials. While this was very disappointing and surprising news – the drug had performed well in Phase 2 trials – it is noteworthy that Circassia retains significant cash on its balance sheet and that, over the past year, the company has also made significant diversification into respiratory drugs, devices and technologies. Confirming this, Circassia saw its share price rise in March as it confirmed a new strategic collaboration with AstraZeneca in combating respiratory disease.

Other domestically focused holdings to deliver negative share price performance included Derwent London, N. Brown, Game Digital, Secure Trust Bank and TalkTalk Telecom.

In terms of portfolio activity during period, I took advantage of the divergences in sector performance following the Brexit vote and the US election. My feeling at the time was that the sterling fall was excessive, the implications for sector performance were being over-simplified and that opportunities to go against consensus were arising. I was able to add to some of the less fashionable positions in domestic stocks – in real estate, retail, travel & leisure and financials – at much lower prices, while raising money and taking profits in the internationally focused companies that had received a short-term boost from the weakness of sterling. New investments were made in Aviva, Next, Secure Trust Bank and Hadrian’s Wall Secured Investments. The holdings in Reckitt Benckiser and Smith & Nephew were sold.


The steady rise in the UK stock market over the last 12 months has created an environment where the valuation and, by consequence, the index level are vulnerable to disappointment; there is a sense of complacency in several areas. The main driver of improved earnings growth has been a combination of a recovery in commodity prices and a collapse in sterling – in the absence of a continuation in these trends the underlying earnings growth of the market remains lacklustre. It is plausible to envisage an environment which is more positive towards sterling, given the consensus pessimism priced in over the last 12 months, and that factor alone may be sufficient to restrain further gains, particularly in the FTSE 100 index. In addition, the change in the US interest rate environment may act as a headwind for the time being, although given the continued low inflation outlook it is unlikely that the US Federal Reserve will raise rates more than four times this year.

The overall political backdrop remains the other major influence in equity markets. There are electoral cycles in many major economies, including the UK again, accompanied by a heightened threat from geopolitics which may yet prove disruptive for business confidence. For the foreseeable future it appears likely that the economic backdrop will remain more predictable than the political one.

In conclusion, it is anticipated that the stock market may struggle to make significant overall progress. The portfolio is well positioned, invested in a diversified range of companies which have the scope to increase in value, driven either by sustainable dividend growth or from companies that can improve or transform their financial prospects regardless of the wider economic environment. In addition, a number of holdings, having fallen temporarily out of favour, have significant recovery potential.

Mark Barnett

Portfolio Manager

James Goldstone

Deputy Portfolio Manager

25 May 2017


Business Review

Strategy and Business Model

The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.

The business model the Company has adopted to achieve its investment objective has been to contract the services of Invesco Fund Managers Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is Mark Barnett.

Investment Objective and Policy

Investment Objective

The Company invests primarily in UK securities with the long term objective of achieving:

1.   an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and

2.   growth in dividends per share in excess of the rate of UK inflation.

Investment Policy

The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company’s investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company’s overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company’s investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.

The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.

Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.

Results and Dividends

At the year end the share price was 713.50p per ordinary share (2016: 665p). The net asset value (debt at market value) per ordinary share was 768.81p (2016: 695.30p).

Subject to approval at the AGM, the final proposed dividend for the year ended 31 March 2017 of 9.15p (2016: 8.75p) per ordinary share will be payable on 21 July 2017 to shareholders on the register on 23 June 2017. The shares will be quoted ex-dividend on 22 June 2017. This will give total dividends for the year of 25.35p per share, an increase of 4.1% on the previous year’s dividends of 24.35p. The revenue return per share for the year was 27.9p, a 4.5% increase on the 2016 return of 26.7p.


The Board reviews the Company’s performance by reference to a number of key performance indicators (KPIs) which are shown above. Notwithstanding that some KPIs are beyond its control, they are measures of the Company’s absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.

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

Expenses are reviewed at each Board meeting enabling the Board, amongst other things, to review costs and consider any expenditure outside that of its normal operations. For the year being reported, all KPIs are considered satisfactory.

The Board also regularly reviews the performance of the Company in relation to the 22 investment trusts in the UK Equity Income sector. As at 31 March 2017, the Company was ranked 15th by NAV performance in this sector over one year and 2nd over three and 4th over five years (source: JPMorgan Cazenove).

Analysis of Performance
for year
31 March 2017
Total Return Basis
NAV (debt at market value) 14.4
Benchmark 22.0
Relative performance (7.6)
Analysis of Relative Performance
Portfolio total return 13.3
Less Benchmark total return 22.0
Portfolio underperformance (8.7)
  Net gearing effect 2.1
  Interest (0.6)
  Market value movement 0.3
Management fee (0.5)
Other expenses (0.1)
Tax (0.1)
Total (7.6)

Analysis of Performance – analyses the performance of the Company relative to its benchmark index.

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

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

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

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

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

Financial Position and Borrowings

The Company’s balance sheet on page 48 shows the assets and liabilities at the year end. Borrowings at the year end comprised the £100 million 73/4% debenture which matures in 2022 and £109.7 million (2016: £80 million) drawn down on the Company’s £150 million bank revolving credit facility. Details of this facility are contained in note 11 in the Annual Financial Report.

The Company also has a bank overdraft facility of up to 10% of assets held by the custodian, which is available to facilitate settlement of short-term cash timing differences. As at 31 March 2017, this was not drawn down (2016: nil).

Outlook, including the Future of the Company

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report. Details of the principal risks affecting the Company follow.

Principal Risks and Uncertainties

The Company’s key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the ‘benchmark’) and an increase in dividends in excess of the growth in RPI. 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 and the following sets out a description of those risks and how they are being managed or mitigated.

Market Risk

A great majority of the Company’s investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall, and/or a prolonged period of decline in those markets. The Company’s investments, and the income derived from them, are influenced by many factors such as general economic conditions, interest rates, inflation, political events, and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company’s shares and its earnings and dividends may consequently also experience volatility and may decline.

Investment Performance Risk

The Board sets performance objectives and delegates the investment management process to the Manager. The achievement of the Company’s performance objectives relative to the market requires active management of the portfolio of assets and securities. The Manager’s approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Manager is a long term investor, prepared to take substantial positions in securities and sectors which may well be out of fashion, but which the Manager believes will have potential for material increases in earnings and, in due course, dividends and share prices. Strategy, asset allocation and stock selection decisions by the Manager can lead to underperformance of the benchmark and/or income targets. The Manager’s style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently the Company’s performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Manager manages other portfolios holding many of the same stocks as the Company which reflects the Manager’s high conviction style of investment management. This could significantly increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Manager believe that the investment process and policy outlined above should, over the long term, meet the Company’s objectives of capital growth in excess of the benchmark and real dividend growth.

Investment selection is delegated to the Manager. The Board does not specify asset allocations. Information on the Company’s performance against the benchmark and peer group is provided to the Board 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 shown in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio. During the year, no forward currency contracts or derivatives were used for hedging or market exposure respectively.

Gearing and Borrowing Risk

The Company 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 £150 million facility. Details of all borrowing is given in Notes 11 and 12 in the Annual Financial Report. 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 facility can be renewed on terms acceptable to the Company.

The Manager has full discretion over the amount of the borrowing it uses to gear its portfolio, whilst the issuance, repurchase or restructuring of borrowing are for the Board to decide. Information related to borrowing and gearing is provided to the Directors as part of the Board papers. Additionally, the Board keeps under review the cost of buying back the debt.

Income/Dividend Risk

The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.

The Board monitors this risk through the review of detailed income forecasts and comparison against budget. These are contained within the Board papers. The Board considers the level of income at each meeting.

Share Price Risk

There is a risk that the Company’s prospects and NAV may not be fully reflected in the share price from time-to-time.

The share price is monitored on a daily basis. The Board is empowered to repurchase shares within agreed parameters. The discount at which the shares trade to NAV can be influenced by share repurchases. The Company has not repurchased any shares in the year.

Control Systems Risk

The Board delegates a number of specific risk control activities to the Manager including:

-     good practice industry standards in fund management operations;

-     financial controls;

-     meeting regulatory requirements;

-     the management of the relationship with the depositary;

-     via the depositary, the management of the custody and security of the Company’s assets; and

-     the management of the relationship with the registrar.

Consequently in respect of these activities the Company is dependent on the Manager’s control systems and those of its depositary and registrar, both of which are monitored by the Manager in the context of safeguarding the Company’s assets and interests. There is a risk that the Manager fails to ensure that these controls are operated in a satisfactory manner. In addition, the Company relies on the soundness and efficiency of the custodian for good title and timeliness of receipt and delivery of securities.

A risk-based programme of internal audits is carried out by the Manager regularly to test the controls environment. An internal controls report providing an assessment of these risks and operation of the controls is prepared by the Manager and considered by the Audit Committee, and is formally reported to and considered by the Board.

Reliance on the Manager and other Third Party Providers

The Company has no employees and the Directors are all appointed on a non-executive basis. The Company is reliant upon the performance of third party providers for its executive function and other service provisions. The Company’s most significant contract is with the Manager, to whom responsibility both for the Company’s portfolio and for the provision of company secretarial and administrative services is delegated. The Company has other contractual arrangements with third parties to act as auditor, registrar, depositary and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.

In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.

The Board seeks to manage these risks in a number of ways:

-     The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns are dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.

-     The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.

-     The day-to-day management of the portfolio is the responsibility of the named portfolio manager, Mark Barnett, Head of UK Equities at Invesco Perpetual. He has worked in equity markets since 1992 and has been part of the UK equities team at Invesco Perpetual for over 20 years.

-     The risk that the portfolio manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Invesco Perpetual UK Equity team. Moreover James Goldstone, as deputy portfolio manager, would be able to manage the portfolio if Mark Barnett was unable to for any reason.

-     The Board has set guidelines within which the portfolio manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.

Other Risks

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), and the perceived impact of the Manager ceasing to be involved with the Company.

The instruments in which the Company’s cash positions are invested are reviewed by the Board to ensure credit, liquidity and concentration risks are adequately managed. Where an Invesco Group vehicle is utilised, it is assessed for suitability against other similar investment options.

The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List. A breach of the conditions for approval as an investment trust could lead to the Company being subject to capital gains tax on the sale of the investments in the Company’s portfolio. A serious breach of other regulatory rules may lead to suspension from listing on the Stock Exchange.

The Manager is regulated by the Financial Conduct Authority and failure to comply with the relevant regulations could harm the Manager’s reputation with a potential detrimental effect on the Company.

The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all 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 and internal audit 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.

There is an ongoing process for the Board to consider these other risks. In addition, the composition of the Board is regularly reviewed to ensure the membership offers sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.

Viability Statement

The Company 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.

In assessing the viability of the Company, the Directors considered the principal risks to which it is exposed, as set out above, together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the business model of the Company, which has effectively been stress tested for many years through different and difficult market cycles; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company’s borrowings – both long and short term – and the ability of the Company to meet its liabilities as they fall due; and the Company’s annual operating costs.

Based on the above, and assuming there is no significant adverse change to the regulatory environment and tax treatment of UK investment trusts, 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.

Board Diversity

The Board considers diversity, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. As a norm the Board comprises either five or six non-executive directors of which, at present, one is female. Summary biographical details of the Directors are set out on page 22 in the Annual Financial Report. The Company has no employees.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to, or not to, make an investment on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.

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.

This Strategic Report was approved by the Board on 25 May 2017
Invesco Asset Management Limited

Company Secretary

Investments in Order of Valuation

At 31 March 2017

UK listed ordinary shares unless otherwise stated

Value % of
Investment Sector £’000 Portfolio
Reynolds American – US common stock Tobacco 119,608 6.9
British American Tobacco Tobacco 97,004 5.6
BP Oil & Gas Producers 78,903 4.6
Imperial Brands Tobacco 72,381 4.2
AstraZeneca Pharmaceuticals & Biotechnology 71,441 4.1
Altria – US common stock Tobacco 64,555 3.7
BAE Systems Aerospace & Defence 64,230 3.7
Provident Financial Financial Services 63,584 3.7
Legal & General Life Insurance 57,547 3.3
Roche – Swiss common stock Pharmaceuticals & Biotechnology 51,473 3.0
Ten Top Holdings 740,726 42.8
BT Fixed Line Telecommunications 50,478 2.9
RELX Media 46,283 2.7
Compass Travel & Leisure 40,155 2.3
Hiscox Non-life Insurance 39,187 2.3
London Stock Exchange Financial Services 37,823 2.2
Rentokil Initial Support Services 36,661 2.1
Babcock International Support Services 36,503 2.1
NewRiver REIT Real Estate Investment Trusts 35,938 2.1
G4S Support Services 35,354 2.0
Novartis – Swiss common stock Pharmaceuticals & Biotechnology 34,602 2.0
Twenty Top Holdings 1,133,710 65.5
Aviva Life Insurance 34,481 2.0
BTG Pharmaceuticals & Biotechnology 33,476 1.9
SSE Electricity 33,307 1.9
Burford CapitalAIM Financial Services 32,817 1.9
Shaftesbury Real Estate Investment Trusts 28,480 1.7
Capita Support Services 27,398 1.6
BCA Marketplace Financial Services 27,094 1.6
Beazley Non-life Insurance 26,563 1.5
Next General Retailers 26,012 1.5
Drax Electricity 25,905 1.5
Thirty Top Holdings 1,429,243 82.6
easyJet Travel & Leisure 25,837 1.5
Derwent London Real Estate Investment Trusts 24,921 1.4
Centrica Gas, Water & Multiutilities 23,753 1.4
HomeServe Support Services 20,567 1.2
Lancashire Non-life Insurance 18,880 1.1
TalkTalk Telecom Fixed Line Telecommunications 16,339 0.9
Secure Trust Bank Banks 15,574 0.9
Thomas Cook Travel & Leisure 14,895 0.8
CLS Real Estate Investment & Services 13,705 0.8
KCOM Fixed Line Telecommunications 13,355 0.8
Forty Top Holdings 1,617,069 93.4
IP Group Financial Services 13,240 0.8
Zegona Communications Non-Equity Investment Instruments 12,982 0.7
P2P Global Investments Equity Investment Instruments 12,352 0.7
Raven Russia – Ordinary
Raven Russia – Preference
Real Estate Investment & Services 7,560
4,086 0.7
Vectura Pharmaceuticals & Biotechnology 11,005 0.6
Honeycomb Investment Trust Equity Investment Instruments 10,739 0.6
ReddeAIM Financial Services 10,527 0.6
N Brown General Retailers 8,301 0.5
VPC Specialty Lending Investments Financial Services 5,970 0.4
Circassia Pharmaceuticals Pharmaceuticals & Biotechnology 5,670 0.3
Fifty Top Holdings 1,719,501 99.3
Hadrian’s Wall Secured Investments Equity Investment Instruments 4,141 0.3
GAME Digital General Retailers 3,842 0.2
Funding Circle SME Equity Investment Instruments 3,351 0.2
Eurovestech – Unquoted Financial Services 223
Proximagen – Rights 12 Sep 2017Unquoted Pharmaceuticals & Biotechnology 173
Barclays Bank – Nuclear Power Notes 28 Feb 2019 Non-Equity Investment Instruments 34
Total Holdings (56) 1,731,265 100.0

AIM Investments quoted on AIM

Statement of Directors’ Responsibilities

In respect of the preparation of the Annual Financial Report

The Directors are responsible for preparing the annual financial report and the 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 the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

–    select suitable accounting policies and then apply them consistently;

–    make judgements and estimates that are reasonable and prudent;

–    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

–    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, a Directors’ Remuneration Report and a Corporate Governance Statement that complies with that law and those regulations.

The Directors of the Company each confirm to the best of their knowledge, that:

–    the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company taken as a whole; and

–    this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

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

Signed on behalf of the Board of Directors

Jim Pettigrew


25 May 2017


Financial Statements

As at 31 March


2017 2016
Revenue Capital Total Revenue Capital Total
Notes £’000 £’000 £’000 £’000 £’000 £’000
Gains on investments 147,966 147,966 19,056 19,056
Foreign exchange losses (108) (108) (30) (30)
Income 2 61,938 522 62,460 58,971 58,971
Investment management fee 3 (2,262) (5,278) (7,540) (2,226) (5,194) (7,420)
Other expenses (893) (1) (894) (857) (1) (858)
Net return before finance costs and taxation 58,783 143,101 201,884 55,888 13,831 69,719
Finance costs (2,773) (6,473) (9,246) (2,689) (6,275) (8,964)
Return on ordinary activities before taxation 56,010 136,628 192,638 53,199 7,556 60,755
Tax on ordinary activities (1,346) (1,346) (1,132) (1,132)
Return on ordinary activities after taxation for the financial year 54,664 136,628 191,292 52,067 7,556 59,623
Return per ordinary share:
Basic 4 27.9p 69.9p 97.8p 26.7p 3.8p 30.5p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with accounting policies detailed in note 1 to the financial statements. The return on ordinary activities after taxation is the total comprehensive income 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. No operations were acquired or discontinued in the year.


Reconciliation of Movements in Shareholders’ Funds

Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
Notes £’000 £’000  £’000 £’000 £’000 £’000
Balance at 31 March 2015 48,779 6,639 24,676 1,232,291 63,566 1,375,951
Net proceeds from issue of new shares 138 3,755 3,893
Dividends paid 5 (47,150) (47,150)
Net return on ordinary activities 7,556 52,067 59,623
Balance at 31 March 2016 48,917 10,394 24,676 1,239,847 68,483 1,392,317
Dividends paid 5 (48,428) (48,428)
Net return on ordinary activities 136,628 54,664 191,292
Balance at 31 March 2017 48,917 10,394 24,676 1,376,475 74,719 1,535,181


Balance Sheet

2017  2016
Notes £’000 £’000
Fixed assets
Investments held at fair value through profit or loss 1,731,265 1,563,534
Current assets
Debtors 12,897 6,072
Cash and cash equivalents 3,230 1,981
16,127 8,053
Creditors: amounts falling due within one year (113,592) (80,902)
Net current liabilities (97,465) (72,849)
Total assets less current liabilities 1,633,800 1,490,685
Creditors: amounts falling due after more than one year (98,619) (98,368)
Net assets 1,535,181 1,392,317
Capital and reserves
Share capital 6 48,917 48,917
Share premium 10,394 10,394
Capital redemption reserve 24,676 24,676
Capital reserve 1,376,475 1,239,847
Revenue reserve 74,719 68,483
Shareholders’ funds 1,535,181 1,392,317
Net asset value per ordinary share
Basic 783.88p 710.74p

These financial statements were approved and authorised for issue by the Board of Directors on 25 May 2017.

Jim Pettigrew


Signed on behalf of the Board of Directors

Notes to the Financial Statements

1.   Principal Accounting Policies

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

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

A. Basis of Preparation

Accounting Standards Applied

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) 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 November 2014, as amended in January 2017. The financial statements are issued on a going concern basis.

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 (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds) is provided.

2.   Income

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

2017 2016
£’000 £’000
Income from listed investments
UK dividends
– Ordinary dividends 48,237 40,163
– Special dividends 1,784 5,039
Overseas dividends
– Ordinary dividends 10,205 9,610
– Special dividends 1,744
Scrip dividends 1,514
Unfranked investment income 1,707 737
Income from money market funds 4 7
61,937 58,814
Other income
Deposit interest 1 2
Underwriting commission 155
Total income 61,938 58,971

Special dividends of £522,000 were recognised in capital during the year (2016: £nil).

3.   Investment Management Fee

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

2017 2016
Revenue Capital Total Revenue Capital Total
 £’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 2,262 5,278 7,540 2,226 5,194 7,420

Details of the investment management agreement are disclosed on page 33 in the Directors’ Report in the Annual Financial report. At 31 March 2017 investment management fees of £640,000 (2016: £596,000) were accrued.

4.   Return per Ordinary Share

Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.

The basic, capital and total returns per ordinary share are based on each return on ordinary shares after tax and on 195,666,734 (2016: 195,275,887) ordinary shares, being the weighted average number of shares in issue during the year.

5.   Dividends on Ordinary Shares

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

2017 2016
Dividends paid and recognised in the year: pence £’000 pence £’000
– third interim paid in respect of previous year 5.20 10,175 5.15 10,049
– final paid in respect of previous year 8.75 17,121 8.60 16,780
– first interim paid 5.40 10,566 5.20 10,146
– second interim paid 5.40 10,566 5.20 10,175
24.75 48,428 24.15 47,150


2017 2016
Dividends on shares payable in respect of the year: pence £’000 pence £’000
– first interim 5.40 10,566 5.20 10,146
– second interim 5.40 10,566 5.20 10,175
– third interim 5.40 10,566 5.20 10,175
– proposed final 9.15 17,904 8.75 17,121
25.35 49,602 24.35 47,617

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

6.   Share Capital

Share capital represents the total number of shares in issue, on which dividends accrue.

2017 2016
number £’000 number £’000
Allotted 25p ordinary shares:
Brought forward  195,666,734  48,917 195,116,734 48,779
Issue of new shares 550,000 138
Carried forward  195,666,734  48,917 195,666,734 48,917

No shares have been issued or bought back subsequent to the year end.

The Directors’ Report on page 34 in the Annual Financial Report sets out the Company’s share capital structure, restrictions and voting rights.

7.   Net Asset Value per Ordinary Share

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into NAV per ordinary share by dividing by the number of shares in issue.

The NAV – debt at par is the NAV with the value of the £100 million debenture (the debt) at its nominal (equivalent to the par) value of £100 million. The NAV – debt at market value reflects the debenture stock at the value that a third party would be prepared to pay for the debt, and this amount fluctuates owing to various factors including changes in interest rates and the remaining life of the debt. The number of ordinary shares in issue at the year end was 195,666,734 (2016: 195,666,734).

(a)  NAV – debt at par

The shareholders’ funds in the balance sheet are accounted for in accordance with accounting standards; however, this does not reflect the rights of shareholders on a return of assets under the Articles of Association. These rights are reflected in the net assets with debt at par and the corresponding NAV per share. A reconciliation between the two sets of figures follows:

2017 2016
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
Shareholders’ funds  784.59 1,535,181 711.58 1,392,317
Unamortised discount and expenses arising from debenture issue (0.71) (1,381) (0.84) (1,632)
NAV – debt at par  783.88 1,533,800 710.74 1,390,685

(b) NAV – debt at market value

The market value of the debenture stock is determined by reference to the daily closing price, and is subject to review against various data providers to ensure consistency between data providers and against the reference gilt.

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

2017 2016
NAV Shareholders’ NAV Shareholders’
per share funds per share funds
pence £’000 pence £’000
NAV – debt at par  783.88 1,533,800 710.74 1,390,685
Debenture stock – debt at par  51.11 100,000 51.11 100,000
– debt at market value (66.18) (129,490) (66.55) (130,208)
NAV – debt at market value  768.81 1,504,310 695.30 1,360,477

8.   Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.

Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on page 39 with additional disclosure in note 4 in the Annual Financial Report. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 33 in the Annual Financial Report, and in note 3 above.

9.   This Annual Financial Report announcement is not the Company’s statutory accounts.  The statutory accounts for the year ended 31 March 2016 have been delivered to the Registrar of Companies.  The statutory accounts for the year ended 31 March 2016 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report, and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006.  The statutory accounts for the financial year ended 31 March 2017 have been approved and audited but have not yet been filed.

10. The Audited Annual Financial Report will be posted to shareholders shortly.  Copies may be obtained during normal business hours from the Company’s registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.  A copy of the Annual Financial Report will be available from Invesco Perpetual on the following website:

11. The Annual General Meeting of the Company will be held at 11.00 am on 20 July 2017 at The Merchants Hall, 22 Hanover Street, Edinburgh, EH2 2EP.

By order of the Board

Invesco Asset Management Limited - Company Secretary

25 May 2017


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Annual Financial Report - RNS