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RNS

Annual Financial Report

Released 07:30 24-Mar-2017

RNS Number : 3856A
North American Income Trust (The)
24 March 2017
 

THE NORTH AMERICAN INCOME TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JANUARY 2017

 

 

INVESTMENT OBJECTIVE

To provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities. 

 

 

STRATEGIC REPORT 

 

1.         FINANCIAL RESULTS

 

Financial Highlights and Summary

 

Net asset value total return 2017

+45.8%

Share price total return 2017

 +56.3%

2016

+3.2%

2016

-2.0%

 

 

 

 

Revenue return per share 2017

39.92p

Dividend per share 2017

 36.00p

2016

35.74p

2016

33.00p

 

 

 

 

Dividend yield{A}

2.9%

 

 

2016

4.0%

 

 

{A}Based on year end share price

 

 

 

 

 

31 January 2017

31 January 2016

% change

Total assets

£419,674,000

£323,679,000

+29.7

Equity shareholders' funds

£379,101,000

£280,644,000

+35.1

Share price (mid market)

1232.00p

815.00p

+51.2

Net asset value per share{A}

1323.45p

935.55p

+41.5

Discount (difference between share price and net asset value)

6.9%

12.9%

 

Net gearing{B}

7.4%

11.2%

 

 

 

 

 

Dividends and earnings

 

 

 

Revenue return per share

39.92p

35.74p

+11.7

Dividends per share (including proposed final dividend)

36.00p

33.00p

+9.1

Dividend yield (based on year end share price)

2.9%

4.0%

 

Dividend cover

1.11

1.08

 

Revenue reserves per share

 

 

 

Prior to payment of third interim dividend declared and proposed final dividend

43.17p

35.84p

 

After payment of third interim dividend declared and proposed final dividend

21.17p

15.84p

 

 

 

 

 

Operating costs

 

 

 

Ongoing charges{C}

1.05%

1.03%

 

 

 

 

 

{A}      Including undistributed revenue.

{B}      Calculated in accordance with AIC guidance "Gearing Disclosures post RDR" (see definition of "Net Gearing" on page 63 of the published 2017 Annual Report).

{C}      The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses divided by the average cum income net asset value throughout the year.

 

 

 

PERFORMANCE

 

 

 

 

 

 

 

 

1 year return

3 year return{A}

5 year return{A}

Total return (Capital return plus dividends reinvested)

%

%

%

Share price

+56.3

+76.9

+118.7

Net asset value per share

+45.8

+78.9

+119.5

S&P 500 Index (in sterling terms)

+35.3

+77.9

+142.4

Russell 1000 Value Index (in sterling terms)

+40.5

+74.6

+142.7

 

 

 

 

{A} Cumulative return

 

 

 

The Company's investment objective changed on 29 May 2012 from a S&P 500 index-tracker trust to being actively managed. The five year performance figures shown reflect periods of time when the Company ran with these two different objectives.

         

 

 

DIVIDENDS

 

 

Rate

xd date

Record date

Payment date

1st Interim dividend 2017

7.00p

14 July 2016

15 July 2016

5 August 2016

2nd Interim dividend 2017

7.00p

13 October 2016

14 October 2016

31 October 2016

3rd Interim dividend 2017

7.50p

 January 2017

20 January 2017

17 February 2017

Proposed final dividend 2017

14.50p

18 May 2017

19 May 2017

16 June 2017

 

_______

 

 

 

Total dividends 2017

36.00p

 

 

 

 

_______

 

 

 

 

 

 

 

 

1st Interim dividend 2016

6.50p

2 July 2015

3 July 2015

31 July 2015

2nd Interim dividend 2016

6.50p

1 October 2015

2 October 2015

30 October 2015

3rd Interim dividend 2016

7.00p

21 January 2016

22 January 2016

19 February 2016

Final dividend 2016

13.00p

12 May 2016

13 May 2016

7 June 2016

 

_______

 

 

 

Total dividends 2016

33.00p

 

 

 

 

_______

 

 

 

 

 

2.         CHAIRMAN'S STATEMENT

 

It is very pleasing to report that The North American Income Trust has produced a strong performance over the last year in both capital and revenue terms, on an absolute and relative basis.  The Company's net asset value per share rose by 45.8% on a total return basis, in sterling terms, and compares favourably with our reference benchmarks, the S&P 500 and Russell 1000 Value, which rose 35.3% and 40.5% respectively in sterling terms.

 

The Company has also performed strongly since the change in its mandate to active management in 2013.  For the three year period to 31 January 2017 the cumulative NAV return was 78.9% compared to 77.9% and 74.6% from the S&P 500 Index and Russell 1000 indices respectively and the Trust was ranked first in its AIC peer group over 1 and 3 years.  

 

Dividend

For the year to 31 January 2017, the revenue per Ordinary share rose by 11.7% from 35.74p to 39.92p. The Board is recommending a final dividend per Ordinary share of 14.5p, making total dividends for the year of 36.0p (2016 - 33.0p), an increase of 9.1%.  The total dividend represents a yield of 2.9%, using the share price of £12.32 at the year-end, compared to the 2.1% yield from the S&P 500 Index at that date

 

This leaves a balance of £1.2 million (equivalent to 4.3p per Ordinary share), which will be added to the revenue reserve, making a further increase in our reserve, providing the Company with added flexibility for future years.  Since 2012, the dividend has increased by over 280% from 9.4p and the revenue reserves have risen significantly from 5.5p per share to 21.17p.

 

The proposed final dividend will be payable on 16 June 2017, to shareholders on the register on 19 May 2017. The quarterly dividends are paid in August, November, February and June each year.

 

Portfolio

As of 31 January 2017, our portfolio had holdings in 46 equities with 3.3% of total assets in corporate bonds- the lowest level since the Company's change of investment objective - and which provide 5.8% of our total income earned (2016 - 7.3%). 

 

Total revenue from equity holdings in the portfolio over the financial year was £11.6 million (2016 - £11.0 million).  Most of the Trust's equity holdings continued their established record of dividend growth.   Approximately 80% of the equity holdings raised their dividends over the past year, with a weighted average increase of approximately 8.2%. Further details of the portfolio's equity income are provided in the Manager's Review. 

 

During the year, the Company received gross premiums totalling £3.0 million (2016 - £2.8 million) in exchange for entering into listed stock option transactions. This option income, the generation of which remains consistent with the Manager's company-focused investment process, represents 19.2% of total income (2016 - 18.8%). Bond income and option premiums will remain secondary sources of income for us in the belief that equity dividends should remain the overwhelming source of income available for distribution. Further details of the portfolio are shown below.

 

Discount

The Company's share price rose by 51.2% over the financial year to £12.32.  The Board seeks to manage the level of discount at which the shares trade and will exercise its discretion to repurchase shares. During the year, 1.35 million shares were repurchased at a cost of £12.2 million. Over the course of the last six months, the discount to net asset value narrowed and ended the year at a 6.9% compared with 12.9% at the end of the 2016 financial year.

 

Gearing

The Company continued to make use of its capacity to gear through the $71.0 million facility provided by State Street, of which $51.0 million is fixed and fully drawn down and $20 million is floating.  During the second half of the year, the amount drawn down under the uncommitted facility was repaid and the Company's gearing was £40.6 million at 31 January 2017 (31 January 2016 - £43.0 million), representing net gearing of 7.4%.  Over the coming months, the Board will undertake a review of the Company's gearing policy prior to the expiry of the current facility in July 2017 and seek competitive quotes from a range of banks. 

 

Market & Economic Review

The major North American equity market indices moved sharply higher over the 12-month period ended 31 January 2017, while the US dollar strengthened. This result was not without volatility and occurred as a result of Britain's vote to leave the European Union in June, and the unexpected victory of Donald Trump in the US presidential election in November.

 

All sectors within the US broader-market S&P 500 and Russell 1000 Values indices recorded double-digit gains for the reporting period. Unsurprisingly, financials and materials companies led the market higher amid prospects for higher interest rates and greater public and private capital investment.

 

Much of the Trust's price increase came in the latter months of the Trust's fiscal year, and centred squarely on the new administration's potential actions on corporate taxation, fiscal spending on infrastructure, and relaxation of regulations - all meant to stimulate the economy. While there remains much uncertainty around timing and implementation of each campaign promise, investors have certainly welcomed the prospects.

 

In contrast, the economy slowed modestly with 1.6% GDP growth for the 2016 calendar year-a percentage point below the 2.6% growth rate recorded in 2015, due to declines in private inventory investment and consumer spending. The Federal Reserve, however, still sees a tightening labour market and inflation on the horizon, which led the central bank to raise its benchmark interest rate by 0.25% to a range of 0.50% to 0.75% following its meeting in mid-December 2016-its first increase in a year-and subsequently left the rate unchanged in a statement issued on 1 February 2017.

 

Further details can be found in the Manager's Review.

 

Investment Manager

Shareholders will be aware of the proposals by Aberdeen Asset Management and Standard Life to bring together their investment businesses through an all-share merger.  This will be subject to the usual shareholder and regulatory approvals.  The Board will keep under review the effects of such a merger, if any, on the Trust and, in particular, the investment team which is based in Aberdeen's Philadelphia office. Their approach, with a strong emphasis on the fundamentals of individual companies, has served our Company well.   

 

Promotional Activity

The Board continues to promote the Company through the Manager's initiative which provides a series of savings schemes through which savers can invest in the Company in a low-cost and convenient manner (see page 59 of the published 2017 Annual Report).

 

Up-to-date information about the Company, including monthly factsheets, interviews with the Manager and the latest net asset value and price of the Ordinary shares, may be found on the Company's website at www.northamericanincome.co.uk.

 

Board

We are aware of the importance of the future composition of the Board and are currently in the process of establishing a plan for succession.

 

Outlook

Making predictions for 2017 is more difficult than usual, given the change in administration and the uncertainty surrounding the implementation of President Trump's policies and therefore some volatility is expected during the course of the year as these policies take shape.  On the positive side, corporate earnings continue to progress, with companies delivering positive sales and earnings growth. Macro indicators also continue to improve and the economy currently remains relatively healthy.

 

We remain content with the Trust's revenue account, which has continued its strong record of growth. As the Manager forecast last year, we have witnessed the pace of dividend growth moderating, although companies are still showing strong cash-flow generation and remain focused on dividend growth. Our Manager remains focused on investing in those companies which have disciplined and balanced capital allocation policies and good prospects for sustainable dividend growth.

 

Annual General Meeting ("AGM")

The Company's AGM will be held at 2.00 pm on 12 June 2017, at 40 Princes Street, Edinburgh.  I hope that we shall see as many shareholders as possible on the day.

 

 

James Ferguson

Chairman

23 March 2017

 

 

3.         INVESTMENT MANAGER'S REVIEW

 

Market review

Despite several bouts of volatility, major North American equity indices moved sharply higher in both sterling and US dollar terms during the 12-month period ended 31 January 2017, bolstered by generally positive economic data and corporate earnings reports. US large-cap stocks, as measured by the broader-market S&P 500 Index, climbed 35.3% in sterling terms over the period, with all 10 sectors garnering double-digit gains. The strongest performers within the index included materials, financials and industrials, as investors favoured sectors that may potentially benefit from the policies of the administration of Donald Trump, who rode a wave of populism to an unexpected US presidential election victory in November 2016. Soon after his inauguration on 20 January 2017, Trump issued a number of executive orders loosening government regulations for several major industries, including coal mining and financial services. The more interest rate-sensitive, relatively higher-dividend-paying consumer staples sector recorded the lowest return in the S&P 500 as US yields rose over the period. The healthcare sector also underperformed the overall market, held back by uncertainty regarding the status of the Affordable Care Act, a major healthcare program created under the administration of former President Barack Obama. Trump and the Republican-controlled US Congress are seeking to fulfill an election campaign pledge to repeal the law and replace it with a new healthcare plan.

 

The rising interest-rate environment had a negative impact on US Treasury securities, as yields climbed across the Treasury curve during the reporting period, particularly following the US presidential election. Yields on the two-, five- and ten-year notes rose by corresponding margins of 43, 57 and 51 basis points (bps) to 1.19%, 1.90% and 2.45%, respectively. Consequently, the two- to ten-year yield spread widened just 8 bps, ending the period at 126 bps.

 

Nonetheless, the overall US fixed-income market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, recorded a positive return for the reporting period. Investment-grade corporate bonds gained ground and significantly outperformed comparable-duration Treasuries for the period amid the risk-on market environment.

 

Regarding US monetary policy, the Federal Reserve raised its benchmark interest rate by 25 bps to a range of 0.50% to 0.75% following its meeting in mid-December 2016-its first increase in a year-and subsequently left the rate unchanged in a statement issued on 1 February 2017. On the economic front, fourth-quarter 2016 US GDP grew at an annualised rate of 1.9%, down sharply from the 3.5% acceleration in the third quarter. The slowdown was attributable to a reduction in exports and an increase in imports. The economy expanded by 1.6% year-over-year in 2016, a percentage point below the 2.6% growth rate recorded a year earlier, due to declines in private inventory investment and consumer spending. According to the Department of Commerce, US payrolls expanded by an average of roughly 195,000 per month over the 12-month reporting period, with the unemployment rate falling just 0.1 percentage point to 4.8% as more jobseekers entered the market. Average hourly earnings increased 2.5% year-over-year in January 2017, unchanged from the wage growth rate recorded in the previous 12-month period.

 

Performance

The Company's equity portfolio significantly outperformed the US broader-market S&P 500 Index over the reporting period. The equity portfolio gained 44.2% on a gross basis before expenses (in sterling terms) against the S&P 500's 35.3% return for the 12-month period ended 31 January 2017. Additionally, the revenue account remained in good shape, building upon the record established in prior years.

 

We are providing commentary on the Trust's equity portfolio performance relative to the Russell 1000 Value Index as a suitable reference benchmark. This reference benchmark more appropriately reflects the objectives of the Company and more closely aligns it with the index to which many of our peer funds are compared.

 

The Company's equity portfolio outperformed the Russell 1000 Value Index by 364 bps for the 12-month reporting period. The portfolio's relative performance was enhanced mainly by an overweight allocation to the strong-performing materials sector, overall positioning in financials, as well as stock selection in the consumer discretionary sector. The primary contributors among individual holdings included regional bank Regions Financial Corp., industrial automation power company Rockwell Automation, and diversified chemicals producer Dow Chemical Co.

 

Regions Financial Corp.'s stock price rallied along with those of its peers amid investors' optimism about higher interest rates and speculation that the Trump administration and the Republican-controlled U.S. Congress will loosen regulation of the financials sector. Additionally, the company benefited from strong consumer loan growth and effective cost controls over the reporting period. While Rockwell Automation posted generally mixed results over the reporting period, there was strong organic growth in its architecture and software segment, and some heavy industry markets appear to be stabilizing. Furthermore, the company increased its quarterly dividend by nearly 5% to US$0.76 per share. Dow Chemical benefited over the period from the continued restructuring of its portfolio of assets, as well as good operational performance. There was particular strength in Dow Chemical's agricultural science and consumer solutions segments for much of the reporting period.

 

Conversely, stock selection in materials and an overweight to the consumer discretionary sector weighed on the relative performance. The Trust's cash position also weighed on performance amid the strength in the US equity market over the reporting period. The largest individual stock detractors were oil and gas company National Oilwell Varco, pharmaceutical firm Pfizer, and diversified financial services company Wells Fargo & Co. We sold the holding in National Oilwell Varco in February 2016. Consequently, the portfolio's lack of exposure to the company hindered the relative performance as the stock price later rose along with the rally in oil prices for much of the 2016 calendar year. The significant overweight position in Pfizer had a negative impact on the portfolio's relative performance, as the company's shares underperformed those of its peers for the period. In April 2016, Pfizer's board voted to terminate its US$160 billion merger with Irish pharmaceutical Allergan following the US government's crackdown on tax-inversion deals. Pfizer subsequently paid Allergan a US$150 million breakup fee. The stock was also pressured by potential changes to healthcare regulations following the election. Wells Fargo's stock price declined sharply following allegations of deceptive sales practices by the company's employees. Wells Fargo agreed to pay the US government $185 million in fines to settle the charges. We exited the Trust's position in the company in November 2016.

 

Portfolio activity

Equity investments remained consistent with our bottom-up, management-focused stock selection process. We initiated equity positions in energy services provider Schlumberger; Canadian Western Bank; diversified healthcare company Abbott Laboratories; jeweller and specialty retailer Tiffany & Co.; North Carolina-based commercial bank BB&T Corp.; Coach Inc., a maker of luxury apparel accessories; multi-lines insurer American International Group; Montana-based Glacier Bancorp and biopharmaceutical firm Gilead Sciences. We introduced diversified financial services company M&T Bank Corp., and later sold the shares in an effort to consolidate the portfolio's holdings in the banking sector and seek higher-yielding opportunities elsewhere. In addition to the sales of National Oilwell Varco and Wells Fargo as previously noted, we exited the position in packaged foods distributor Sysco Corp. as its valuation had expanded following a run-up in the share price.

 

A sector analysis chart of the portfolio can be found on page 21 of the published 2017 Annual Report.

 

Within the Trust's corporate bond portfolio, we purchased Calpine Corp. 7.875% 15/01/23 and Northgroup Preferred Capital Corp. 6.378% FRN PERP. While both bonds are expected to be called in the near term, they currently provide the portfolio with attractive carry income relative to a limited degree of risk. We sold the holding in Seagate HDD Cayman 4.75% 01/06/23 for valuation reasons and reinvested the sales proceeds into Western Digital Corp. 7.375% 01/04/23, as we believe the company has solid fundamentals. We exited the position in Corrections Corp. of America 4.625% 01/05/23 given our credit concerns and sold the holding in OneMain Financial 6.75% 15/12/19 for valuation reasons. Finally, we exited the position in TransDigm Group 6.5% 15/07/24.

 

At the end of the reporting period on 31 January 2017, the bond portfolio's average credit quality was BBB-. The average current yield stood at 6.5%, with duration moving down from 4.3 to 4.0 years. The portfolio's allocation to corporate bonds declined from roughly 4.5% to 3.3% of total assets over the 12-month period, as we presently continue to favour a low allocation to bonds. We are working closely with Aberdeen's fixed income specialists to monitor credits and market conditions.

 

Dividend growth

The Trust's equity holdings continued to build upon an established track record of dividend growth over the reporting period. Approximately 80% of the holdings raised their dividends over the past year, with a weighted average increase of roughly 8.2%. There were noteworthy double-digit dividend increases among the portfolio's holdings. Included in this group were semiconductor manufacturer Texas Instruments, which boosted its payout by nearly 32% to US$0.50 per share, equivalent to an annualised yield of 2.6% at the stock's closing price at the end of the reporting period. Networking equipment maker Cisco Systems raised its dividend by nearly 24% as part of its goal to return 50% of free cash-flow to shareholders annually. Defence contractor Lockheed Martin Corp. increased its payment by 10.3% to US$1.82 per share-the fourteenth consecutive year that the defence contractor has provided a double-digit increase. Freight railroad operator Union Pacific Corp. raised its dividend by 10%, bringing the stock's annualised yield to 2.3% at its closing price on 31 January 2017. Among other notable dividend actions, asset manager BlackRock increased its quarterly payout by 9.2% to US$2.50 per share-equivalent to an annualised yield of 2.7% at the stock's closing price at the end of January. Microsoft Corp. announced an 8.3% hike in its dividend to US$0.39 per share, representing a 2.4% yield at its closing stock price on 31 January. Finally, Michigan-based utility company CMS Energy raised its dividend from US$0.31 to US$0.333, representing a 3.1% annualised yield at its share price at the end of the reporting period.

 

Outlook

President Trump's first several weeks in office were both busy and eventful, though his actions thus far have largely been in line with rhetoric and pledges from the campaign trail. The administration's initial moves have sought to ease the regulation across various industries, retool the Affordable Care Act, enhance border security, and revamp trade deals. Perhaps the biggest focus and question mark of investors remains the evolution and timing of a shift in tax policy.

 

Stepping back, while we indeed see many of the policies being as focused on accelerating GDP growth, the economy currently remains relatively healthy with regard to both employment and recent wage growth. Consumer spending remains the main driver of the domestic economy and, consequently, we have seen improved consumer confidence amid these improvements in labour markets. We expect that the economy will further strengthen over the balance of the year, with the Federal Reserve noting the tightening in labour markets and burgeoning inflation,  which is likely to cause the central bank to react with more hawkish interest-rate policy.  A potential consequence of this may be a strengthening US dollar, and the Fed will have to take this into consideration during the subsequent period of tightening.

 

There has been much discussion about the valuations of the US equity market. The forward P/E multiple of the S&P 500 Index sits higher than its historic averages. Nonetheless, we believe that current multiples reflect both an expectation that corporate earnings will accelerate over the next several years due to a combination of an improving economic backdrop with fewer burdensome regulations, as well as the likelihood of shifts to a more competitive tax policy, which will lead to higher after-tax profits and cash flows. More broadly, however, when looking at the earnings yields of the S&P 500 and Russell 1000 Value indices, we feel that absolute valuations remain supportive in contrast to 10-year US Treasury yields and other investment alternatives.

 

One of the risks of managing an equity-dominated income portfolio remains the path and pace of interest-rate shifts in what appears to be a rising-rate environment. We will continue to focus on selecting the most appropriate best ideas portfolio of high-quality, cash-generative companies that have pricing power and the ability to pass through inflation over the long run. We remain vigilant in looking for value while adhering to our investment process, which is unwavering in its focus on investing in and finding quality businesses, and we continue to believe that we are well-positioned to create value for shareholders.

 

Aberdeen Asset Managers Inc.*

23 March 2017

 

*on behalf of Aberdeen Fund Managers Limited.  Both companies are subsidiaries of Aberdeen Asset Management PLC

 

Aberdeen's Investment Team Senior Managers

Ralph Bassett

Head of North American Equities

Graduated with a BS in Finance, with honors, from Villanova University and is a CFA® Charterholder. Joined Aberdeen in 2006 from Navigant Consulting and is Aberdeen's Deputy Head of North American Equity.

 

Fran Radano

Senior Investment Manager - North American Equities

Graduated with a BA in Economics from Dickinson College and an MBA in Finance from Villanova University and is a CFA® Charterholder.  Joined Aberdeen in 2007 following the acquisition of Nationwide Financial Services.  Previously worked at Salomon Smith Barney and SEI Investments. 

 

 

 

Doug Burtnick

Deputy Head of North American Equities Graduated with a BS from Cornell University and is a CFA® Charterholder.  Joined Aberdeen in 2007 following the acquisition of Nationwide Financial Services. Previously worked at Brown Brothers Harriman & Barra, Inc.

 

 

Charles Tan

Head of North American Fixed Income

Graduated with a BA from University of International Business and Economics, Beijing and an MBA from Bucknell University, Pennsylvania.  Joined Aberdeen in 2005 from Moody's Investor Services where he was a senior analyst covering US high yield industrial companies as well as Asian financial institutions.  Previously worked for First Commercial Bank of Philadelphia as a credit officer.  Head of Aberdeen's Corporate Portfolios on the North American Fixed Income team.

 

 

4.         OVERVIEW OF STRATEGY

 

Introduction

The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long term private and institutional investors wanting to benefit from the income and growth prospects of North American companies.

 

The Directors do not envisage any change in the Company's activity in the foreseeable future. 

 

Investment Objective

To provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities.

 

Reference Index

The Board reviews performance against relevant factors, including the S&P 500 Index (in sterling terms) and the Russell Value Index 1000 (in sterling terms) as well as peer group comparisons. The aim is to provide investors with above average dividend income from predominantly US equities which means that investment performance can diverge, possibly quite materially in either direction, from these indices.

 

Investment Policy

The Company invests in a portfolio predominantly comprised of S&P 500 constituents. The Company may also invest in Canadian stocks and US mid and small capitalisation companies to provide for diversified sources of income. The Company may invest up to 20% of its gross assets in fixed income investments, which may include non-investment grade debt.  The Company's investment policy is flexible, enabling it to invest in all types of securities, including (but not limited to) equities, preference shares, debt, convertible securities, warrants, depositary receipts and other equity-related securities.

 

The maximum single investment will not exceed 10% of gross assets at the time of investment and it is expected that the portfolio will contain around 50 holdings (including fixed income investments), with an absolute minimum of 35 holdings.  The composition of the Company's portfolio is not restricted by minimum or maximum market capitalisation, sector or country weightings.

 

The Company may borrow up to an amount equal to 20% of its net assets.

 

Subject to the prior approval of the Board, the Company may also use derivative instruments for efficient portfolio management, hedging and investment purposes. The Company's aggregate exposure to such instruments for investment purposes (excluding collateral held in respect of any such derivatives) will not exceed 20% of the Company's net assets at the time of the relevant acquisition, trade or borrowing.

 

The Company does not generally intend to hedge its exposure to foreign currency.

 

The Company will not acquire securities that are unlisted or unquoted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be listed or quoted, if appropriate.

The Company may participate in the underwriting or sub-underwriting of investments where appropriate to do so.

 

The Company may invest in open-ended collective investment schemes and closed-ended funds that invest

in the North American region. However, the Company will not invest more than 10%, in aggregate, of the value of its gross assets in other listed investment companies (including listed investment trusts), provided that this restriction does not apply to investments in any such investment companies which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed investment companies.

 

The Company will normally be substantially fully invested in accordance with its investment objective but, during periods in which changes in economic conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash and money market instruments.

 

Management

The Board has appointed Aberdeen Fund Managers Limited ("AFML" or "Manager") to act as the alternative investment fund manager ("AIFM").

 

The Directors are responsible for determining the investment policy and the investment objective of the Company.  The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Inc. ("AAMI" or "Investment Manager") by way of a delegation agreement in place between AFML and AAMI.

 

The Investment Manager invests in a range of North American companies, following a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value, concentrating on quality first, then price. Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

 

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy.  The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

 

KPI

Description

Net asset value and share price performance against the reference indices

The Board reviews the Company's NAV and share price total return performance against the reference indices, the S&P 500 and the Russell 1000 Value (both in sterling terms).  Performance graphs and tables are provided on pages 11 to 12 of the published 2017 Annual Report. The Board also reviews the performance of the Company against its peer group of investment trusts with similar investment objectives.

Revenue return and dividend yield

The Board monitors the Company's net revenue return and dividend yield through the receipt of detailed income forecasts. A graph showing the dividends and yields over 5 years is provided on page 12 of the published 2017 Annual Report.

Discount/premium to net asset value

The discount/premium relative to the net asset value per share is closely monitored by the Board. A graph showing the share price discount/premium relative to the net asset value is shown on page 12 of the published 2017 Annual Report.

Ongoing charges

The Company's ongoing charges ratio (OCR) is provided above.  The Board reviews the OCR against its peer group of investment trusts with similar investment objectives.

 

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company at the current time in the table below together with a description of the mitigating actions it has taken. The Board has carried out a robust assessment of these risks, which includes those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly in the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website. The risks and uncertainties faced by the Company are reviewed annually by the Audit Committee in the form of a risk matrix and heat map and a summary of the principal risks is set out below.

 

Description

Mitigating Action

Market risk

The risks facing the Company relate to the Company's investment activities and include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. The Company is exposed to the effect of variations in share prices and movements in the US$/£ exchange rate due to the nature of its business.  A fall in the market value of its portfolio would have an adverse effect on shareholders' funds. Any debt securities that may be held by the Company will be affected by general changes in interest rates that will in turn result in increases or decreases in the market value of those instruments.

 

The day-to-day management of the Company's assets has been delegated to the Manager under investment guidelines determined by the Board. The Board monitors these guidelines and receives regular reports from the Manager which include performance reporting.  The Board regularly reviews these guidelines to ensure they remain appropriate.

 

Details on financial risks, including market price, liquidity and foreign currency risks and the controls in place to manage these risks are provided in note 17 to the financial statements.  

Gearing Risk

Gearing is used to leverage the Company's portfolio in order to enhance returns where and to the extent this is considered appropriate to do so. Gearing has the effect of accentuating market falls and market gains. The ability of the Company to meet its financial obligations, or an increase in the level of gearing, could result in the Company becoming over-geared or unable to take advantage of potential opportunities and result in a loss of value to the Company's shares.

 

In order to manage the level of gearing, the Board has set a maximum gearing ratio of 20% of net assets.  The Board receives regular updates from the Manager on the actual gearing levels the Company has reached together with the assets and liabilities of the Company, and reviews these as well as compliance with the principal loan covenants at each Board meeting.  As at 31 January 2017 the Company had £40.6 million of borrowings.

 

In addition, AFML, as alternative investment fund manager, has set an overall leverage limit of 2.0 X on a commitment basis (2.5 X on a gross notional basis) and includes updates in its reports to the Board. 

 

 

Discount volatility

Investment company shares can trade at discounts to their underlying net asset values, although they can also trade at premia.

 

In order to seek to minimise the impact of share price volatility, where the shares are trading at a significant discount, the Company has operated a share

buy-back programme for a number of years. The Board monitors the discount level of the Company's shares and will exercise discretion to undertake shares buybacks.

 

Income and Dividend Risk

The ability of the Company to pay dividends and any future dividend growth will depend primarily on the level of income received from its investments (which may be affected by currency movements, exchange controls or withholding taxes imposed by jurisdictions in which the Company invests) and the timing of receipt of such income by the Company. Accordingly, there is no guarantee that the Company's dividend income objective will continue to be met and the amount of the dividends paid to Ordinary Shareholders may fluctuate and may go down as well as up.

 

The Board monitors this risk through the regular review of detailed revenue forecasts and considers the level of income at each meeting.

 

Regulatory risk

The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as Section 1158 of the Corporation Tax Act 2010, the UKLA Listing Rules, Companies Act 2006 and the Alternative Investment Fund Managers Directive, could lead to a number of detrimental outcomes and reputational damage.

 

 

The Manager has implemented procedures to ensure that the provisions of the Corporation Tax Act 2010 are not breached and the results are reported to the Board.   

 

The Manager provides six-monthly reports to the Audit Committee on its internal control systems, which monitors compliance with relevant regulations.  In addition, the Board, when necessary will use the services of its professional advisers to monitor compliance with regulatory requirements.

 

The Manager and depositary provide reports to the Audit Committee on their operations to ensure that the regulations under the AIFM are complied with. 

 

Derivatives

The Company uses derivatives primarily to enhance the income generation of the Company.

 

The risks associated with derivatives contracts are managed within guidelines set by the Board. 

 

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group.  The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.

 

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

 

Duration

The Company does not have a fixed winding-up date, but shareholders are given the opportunity to vote on the continuation of the Company every three years at the Annual General Meeting.  The next continuation vote will be at the AGM in 2018.

 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfil its obligations.  At 31 January 2017 the Board consisted of three males and one female.  

 

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated day to day management and administrative functions to Aberdeen Fund Managers Limited. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined below.

 

Socially Responsible Investment Policy

The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a socially responsible manner and has noted the Aberdeen Group's policy on social responsibility. The Investment Manager considers social, environmental and ethical factors which may affect the performance or value of the Company's investments as part of its investment process.  In particular, the Investment Manager encourages companies in which investments are made to adhere to best practice in the area of corporate governance. It believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in this area. The Company's ultimate objective, however, is to deliver long term growth on its investments for its shareholders. Accordingly, whilst the Investment Manager will seek to favour companies which pursue best practice in the above areas, this must not be to the detriment of the return on the investment portfolio.

 

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

 

Viability Statement

The Company does not have a formal fixed period strategic plan but the Board does formally consider risks and strategy on at least an annual basis. The Board considers the Company to be a long term investment vehicle but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

 

In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

 

-      The principal risks detailed in the strategic report and the steps taken to mitigate these risks.

-      The ongoing relevance of the Company's investment objective in the current environment.

-      The Company is invested in readily realisable listed securities.

-      The level of revenue surplus generated by the Company and its ability to achieve the dividend policy.  The Company has continued to deliver dividend growth whilst building up revenue reserves which can be used to top up the dividend in tougher times. 

-      The level of gearing is closely monitored.  The Company has the ability to renew or repay its loan facility.

 

Accordingly, taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future.

 

Future

Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK.  These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included above.

 

 

James Ferguson

Chairman

23 March 2017

 

 

PORTFOLIO INVESTMENTS

 

Investment Portfolio - Ten Largest Equity Investments

As at 31 January 2017

 

 

 

Valuation

Total

Valuation

 

 

2017

assets

2016

Company

Industry classification

£'000

%

£'000

Pfizer

 

 

 

 

Pfizer Inc. discovers, develops, manufactures, and sells healthcare products worldwide.

Pharmaceuticals

16,393

3.9

8,598

BB&T

 

 

 

 

BB&T is a full service bank that operates in the Southeast and Mid-Atlantic regions of the United States.

Banks

16,154

3.9

-

Dow Chemical

 

 

 

 

The Dow Chemical Company is a diversified chemical company that provides chemical, plastic, and agricultural products and services to various consumer markets.

Chemicals

16,115

3.8

10,067

Chevron

 

 

 

 

Chevron is an integrated energy company. The company has operations drilling for crude oil and natural gas as well as refining and selling it.

Oil, Gas & Consumable Fuels

15,931

3.8

8,059

CME Group

 

 

 

 

CME Group Inc. operates a derivatives exchange that trades futures contracts and options on futures, interest rates, stock indexes, foreign exchange and commodities.

Diversified Financial Services

14,436

3.4

10,768

Microsoft

 

 

 

 

Microsoft manufactures and licenses software products for operating systems, applications, software development and internet services.

Software

12,847

3.1

10,884

Regions Financial

 

 

 

 

Regions Financial is a full service bank that operates in the Southern portion of the United States.

Banks

12,599

3.0

5,724

Verizon Communications

 

 

 

 

Verizon Communications Inc., through its subsidiaries, provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide.

Diversified Telecommunication Services

11,687

2.8

10,568

Philip Morris

 

 

 

 

Philip Morris International Inc., through its subsidiaries, manufactures and sells cigarettes and other tobacco products.

Tobacco

11,079

2.6

12,691

Telus

 

 

 

 

Telus provides communication services to businesses and consumers in Canada.

Diversified Telecommunication Services

10,594

2.5

7,887

Ten largest equity investments

 

137,835

32.8

 

 

 

Investment Portfolio - Other Equity Investments

As at 31 January 2017

 

 

 

 

 

 

 

 

 

 

 

Valuation

Total

Valuation

 

 

2017

assets

2016

Company

Industry classification

£'000

%

£'000

Cisco Systems

Communications Equipment

10,378

2.5

5,753

Intel

Semiconductors & Semiconductor Equipment

10,243

2.4

7,253

Johnson & Johnson

Pharmaceuticals

9,902

2.4

6,847

Glacier Bancorp

Banks

9,884

2.4

-

Molson Coors Brewing

Beverages

9,590

2.3

14,033

TransCanada

Oil, Gas & Consumable Fuels

9,357

2.2

6,580

Texas Instruments

Semiconductors & Semiconductor Equipment

9,006

2.2

5,164

Royal Bank of Canada

Banks

8,556

2.0

4,797

Union Pacific

Road & Rail

8,472

2.0

4,568

Ventas

Real Estate Investment Trusts (REITs)

8,333

2.0

6,825

Twenty largest equity investments

 

231,556

55.2

178,479

Pepsico

Beverages

8,249

2.0

9,801

Canadian Western Bank

Banks

8,118

1.9

-

Coach

Personal Goods

7,867

1.9

-

ConocoPhillips

Oil, Gas & Consumable Fuels

7,751

1.8

5,930

American International

Nonlife Insurance

7,662

1.8

-

Sonoco Products

Containers & Packaging

7,644

1.8

6,202

Blackrock

Capital Markets

7,431

1.8

5,539

Paychex

IT Services

7,188

1.7

5,365

WEC Energy

Multi-Utilities

7,040

1.7

6,584

Procter & Gamble

Household Products

6,963

1.7

4,319

Thirty largest equity investments

 

307,469

73.3

240,747

Meredith

Media

6,821

1.625

2,983

Potash Corporation of Saskatchewan

Chemicals

6,653

1.585

6,895

Abbott Laboratories

Pharmaceuticals

6,640

1.582

-

Schlumberger

Oil Equipment, Services & Distribution

6,321

1.506

-

Genuine Parts

Distributors

6,156

1.467

4,738

CMS Energy

Multi-Utilities

6,095

1.352

6,852

Lockheed Martin

Aerospace & Defense

5,993

1.428

-

Digital Realty Trust

Real Estate Investment Trusts (REITs)

5,989

1.427

5,645

Target

Multiline Retail

5,894

1.404

7,570

Gilead Sciences

Pharmaceuticals

5,759

1.372

-

Forty largest equity investments

 

369,790

88.1

291,147

Republic Services

Commercial Services & Supplies

5,701

1.4

6,701

Staples

Specialty Retail

4,753

1.1

4,223

Nucor

Metals & Mining

4,617

1.1

6,886

Rockwell Automation

Electrical Equipment

4,117

1.0

10,106

M&T Bank

Banks

3,877

0.9

7,379

Tiffany & Co

Specialty Retail

3,754

0.9

-

Total equity investments

 

396,609

94.5

298,353

 

 

Investment Portfolio - Other Investments

As at 31 January 2017

 

 

 

 

 

 

 

Valuation

Total

Valuation

 

 

2017

assets

2016

Company

Industry classification

£'000

%

£'000

Qwest 7.25% 15/10/35

Telecommunications

2,867

0.7

2,550

HSBC Finance 6.676% 15/01/21

Diversified Financial Services

2,418

0.6

2,149

International Lease Finance Corp 6.25% 15/05/19

Diversified Financial Services

2,062

0.5

1,777

Western Digital Corp 7.375% 01/04/23

Computer Hardware and Storage

1,753

0.4

-

Northgroup PFD  Cap Corp 6.378% FRN Perp

Banks

1,590

0.4

-

HCA 5.875% 15/02/26

Healthcare Services

1,243

0.3

1,081

Nationstar 6.5% 01/06/22

Diversified Financial Services

798

0.2

609

Calpine Corp 7.875 15/01/23

Utilities

653

0.1

-

First Data 6.75% 01/11/20

Software

351

0.1

1,117

Total other investments

 

13,735

3.3

 

Total equity investments

 

396,609

94.5

 

Total investments

 

410,344

97.8

 

Net current assets{A}

 

9,330

2.2

 

Total assets{A}

 

419,674

100.0

 

 

{A} Excluding bank loans of £40,573,000. 

           

 

 

Geographical Analysis

As at 31 January 2017

 

 

Equity

Fixed interest

Total

Country

%

%

%

Canada

8.0

0.4

8.4

USA

88.7

2.9

91.6

 

________

________

________

 

96.7

3.3

100.0

 

________

________

________

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual 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 they have elected 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.   

 

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 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, 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.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

Responsibility statement of the Directors in respect of the annual financial report

 

We confirm that to the best of our knowledge:

 

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

-         the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

 

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

 

For and on behalf of the The North American Income Trust plc

 

James Ferguson

Chairman

 

23 March 2017

 

 

GOING CONCERN

 

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Company has a credit facility in place which is available until July 2017. The Board considers that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

 

 

FINANCIAL STATEMENTS

 

STATEMENT OF COMPREHENSIVE INCOME

 

 

 

 

Year ended 31 January 2017

Year ended 31 January 2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

Notes

£'000

£'000

£'000

£'000

£'000

£'000

Net gains/(losses) on investments

11

-

115,514

115,514

-

(2,201)

(2,201)

Net currency losses

3

-

(4,359)

(4,359)

-

(1,515)

(1,515)

Income

4

15,563

-

15,563

14,902

-

14,902

Investment management fee

5

(819)

(1,910)

(2,729)

(687)

(1,603)

(2,290)

Administrative expenses

7

(725)

-

(725)

(671)

-

(671)

 

 

______

______

_____

______

______

_____

Return on ordinary activties before finance costs and taxation

 

14,019

109,245

123,264

13,544

(5,319)

8,225

 

 

 

 

 

 

 

 

Finance costs

6

(295)

(688)

(983)

(256)

(598)

(854)

 

 

______

______

_____

______

______

_____

Return on ordinary activities before taxation

 

13,724

108,557

122,281

13,288

(5,917)

7,371

 

 

 

 

 

 

 

 

Taxation

8

(2,173)

520

(1,653)

(2,058)

440

(1,618)

 

 

______

______

_____

______

______

_____

Return on ordinary activities after taxation

 

11,551

109,077

120,628

11,230

(5,477)

5,753

 

 

______

______

_____

______

______

_____

 

 

 

 

 

 

 

 

Return per share (pence)

10

39.92

376.92

416.84

35.74

(17.43)

18.31

 

 

______

______

_____

______

______

_____

 

 

 

 

 

 

 

 

The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

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

 

Proposed final dividend

The Board is proposing a final dividend of 14.50p per share (£4,154,000), making a total dividend of 36.00p per share (£10,327,000) for the year to 31 January 2017 which, if approved, will be payable on 16 June 2017 (see note 9).

 

For the year ended 31 January 2016, the final dividend was 13.00p per share (£3,789,000) making a total dividend of 33.00p per share (£9,982,000).

 

 

STATEMENT OF FINANCIAL POSITION

 

 

 

As at

As at

 

 

31 January 2017

31 January 2016

 

Notes

£'000

£'000

Fixed assets

 

 

 

Investments at fair value through profit or loss

11

410,344

312,983

 

 

________

________

Current assets

 

 

 

Debtors and prepayments

12

3,940

743

Cash and short term deposits

 

12,609

11,685

 

 

________

________

 

 

16,549

12,428

 

 

________

________

 

 

 

 

Creditors: amounts falling due within one year

 

 

 

Other payables

13

(7,219)

(1,732)

Bank loan

14

(40,573)

(7,050)

 

 

________

________

 

 

(47,792)

(7,050)

 

 

________

________

Net current (liabilities)/assets

 

(31,243)

5,378

 

 

________

________

Total assets less current liabilities

 

379,101

318,361

 

 

 

 

Creditors: amounts falling due after more than one year

 

 

Bank loan

14

-

(35,985)

 

 

________

________

Net assets

 

379,101

282,376

 

 

________

________

 

 

 

 

Capital and reserves

 

 

 

Called-up share capital

15

7,161

7,499

Share premium account

 

48,467

48,467

Capital redemption reserve

 

15,399

15,061

Capital reserve

 

295,709

198,866

Revenue reserve

 

12,365

10,751

 

 

________

________

Equity shareholders' funds

 

379,101

280,644

 

 

________

________

 

 

 

 

Net asset value per share (pence)

16

1,323.45

935.55

 

 

________

________

 

 

 

STATEMENT OF CHANGES IN EQUITY

 

For the year ended 31 January 2017

 

 

 

 

 

 

 

 

Share

Capital

 

 

 

 

Share

premium

redemption

Capital

Revenue

 

 

capital

account

reserve

reserve

reserve

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 January 2016

7,499

48,467

15,061

198,866

10,751

280,644

Buyback of Ordinary shares

(338)

-

338

(12,234)

-

(12,234)

Return on ordinary activities after taxation

-

-

-

109,077

11,551

120,628

Dividends paid (see note 9)

-

-

-

-

(9,937)

(9,937)

 

_____

______

______

______

______

______

Balance at 31 January 2017

7,161

48,467

15,399

295,709

12,365

379,101

 

_____

______

______

______

______

______

 

 

 

 

 

 

 

 For the year ended 31 January 2016

 

 

 

 

 

 

 

 

Share

Capital

 

 

 

 

Share

premium

redemption

Capital

Revenue

 

 

capital

account

reserve

reserve

reserve

Total

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 January 2015

8,235

48,467

14,325

228,822

9,424

309,273

Buyback of Ordinary shares

(736)

-

736

(24,479)

-

(24,479)

Return on ordinary activities after taxation

-

-

-

(5,477)

11,230

5,753

Dividends paid (see note 9)

-

-

-

-

(9,903)

(9,903)

 

_____

______

______

______

______

______

Balance at 31 January 2016

7,499

48,467

15,061

198,866

10,751

280,644

 

_____

______

______

______

______

______

 

 

 

 

 

 

 

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

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

 

 

 

STATEMENT OF CASHFLOWS

 

 

 

Year ended

Year ended

 

 

31 January 2017

31 January 2016

 

Notes

£'000

£'000

Operating activities

 

 

 

Net return before finance costs and taxation

 

123,264

8,225

Adjustments for:

 

 

 

Net (gains)/losses on investments

 

(115,514)

2,201

Net losses on foreign exchange transactions

 

4,359

1,515

Decrease/(increase) in dividend income receivable

 

58

(34)

(Increase) in deposit interest income receivable

 

-

(1)

Increase in fixed interest income receivable

 

(5)

-

(Decrease)/increase in derivatives

 

(36)

6

Decrease/(increase) in other debtors

 

7

(9)

Increase/(decrease) in other creditors

 

84

(148)

Tax on overseas income

 

(1,655)

(1,611)

Amortisation of fixed income book cost

 

54

49

 

 

______

______

Net cash flow from operating activities

 

10,616

10,193

 

 

 

 

Investing activities

 

 

 

Purchases of investments

 

(123,367)

(109,335)

Sales of investments

 

144,469

136,824

 

 

______

______

Net cash flow from investing activities

 

21,102

27,489

 

 

 

 

Financing activities

 

 

 

Interest paid

 

(986)

(1,037)

Equity dividends paid

9

(9,937)

(9,903)

Buyback of Ordinary shares

 

(13,050)

(23,663)

Repayment of loan

 

(8,133)

(1,500)

 

 

______

______

Net cash used in financing activities

 

(32,106)

(36,103)

 

 

______

______

(Decrease)/increase in cash and cash equivalents

 

(388)

1,579

 

 

______

______

 

 

 

 

Analysis of changes in cash and cash equivalents during the year

 

 

Opening balance

 

11,685

9,231

Effect of exchange rate fluctuation on cash held

 

1,312

875

(Decrease)/increase in cash as above

 

(388)

1,579

 

 

______

______

Closing balance

 

12,609

11,685

 

 

______

______

 

 

 

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 January 2017

 

1.

Principal activity

 

The Company is a closed-end investment company, registered in Scotland No SC005218, with its Ordinary shares being listed on the London Stock Exchange.

 

2.

Accounting policies

 

A summary of the principal accounting policies, all of which, unless otherwise stated, have been consistently applied throughout the year and the preceding year is set out below.

 

(a)

Basis of preparation and going concern

 

 

The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. The financial statements are prepared in sterling which is the functional currency of the Company and rounded to the nearest £'000. They have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.

 

 

 

 

 

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the Directors' Report (unaudited) on page 26 of the published 2017 Annual Report.

 

 

 

 

(b)

Income

 

 

Income from investments, including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex dividend. Special dividends are credited to capital or revenue, according to the circumstances. Fixed returns on debt securities are recognised on a time apportionment basis so as to reflect the effective yield on the debt securities.

 

 

 

 

 

Interest receivable from cash and short-term deposits and interest payable is accrued to the end of the year.

 

 

 

 

(c)

Expenses

 

 

All expenses are accounted for on an accruals basis and are charged to the Statement of Comprehensive Income. Expenses are charged against revenue except as follows:

 

 

transaction costs on the acquisition or disposal of investments are charged to the capital account in the Statement of Comprehensive Income;

 

 

expenses are charged to realised capital reserves where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the investment management fee is allocated 30% to revenue and 70% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth.

 

 

 

 

(d)

Taxation

 

 

The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the  Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 8 for a more detailed explanation). The Company has no liability for current tax.

 

 

 

 

 

Deferred taxation is provided on 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 or a right to pay less tax in future have occurred at the Balance Sheet date, measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

 

 

 

 

(e)

Investments

 

 

All purchases and sales of investments are recognised on the trade date, being the date the Company commits to purchase or sell the investment. Investments are initially recognised and subsequently re-measured at fair value in the Income Statement. Transaction costs on purchases and sales are expensed through the Statement of Comprehensive Income.

 

 

 

 

(f)

Borrowings

 

 

Monies borrowed to finance the investment objectives of the Company are stated at the amount of the net proceeds immediately after issue plus cumulative finance costs less cumulative payments made in respect of the debt. The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method and are charged 30% to revenue and 70% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth. 

 

 

 

 

(g)

Dividends payable

 

 

Interim and final dividends are recognised in the period in which they are paid.

 

 

 

 

(h)

Nature and purpose of reserves

 

 

Share premium account

 

 

The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity capital comprising ordinary shares of 25p.

 

 

 

 

 

Capital redemption reserve

 

 

The capital redemption reserve is used to record the amount equivalent to the nominal value of any of the Company's own shares purchased and cancelled in order to maintain the Company's capital.

 

 

 

 

 

Capital reserve

 

 

This reserve reflects any gains or losses on realisation of investments in the period along with any changes in fair values of investments held that have been recognised in the Statement of Comprehensive Income. The costs of share buybacks are also deducted from this reserve.

 

 

 

 

 

Revenue reserve

 

 

This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

 

 

 

 

(i)

Foreign currency

 

 

Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the realisation of foreign currencies are recognised in the Statement of Comprehensive Income and are then transferred to the capital reserve.

 

 

 

 

(j)

Traded options

 

 

The Company may enter into certain derivatives (e.g. options). Option contracts are accounted for as separate derivative contracts and are therefore shown in other assets or other liabilities at their fair value. The initial fair value is based on the initial premium, which is recognised upfront. The premium received and fair value changes in the open position which occur due to the movement in underlying securities are recognised in the revenue column, losses realised on the exercise of the contracts are recorded in the capital column of the Statement of Comprehensive Income as they arise.

 

 

 

 

 

In addition, the Company may enter into derivative contracts to manage market risk and gains or losses arising on such contracts are recorded in the capital column of the Statement of Comprehensive Income.

 

 

 

2017

2016

3.

Net currency losses

£'000

£'000

 

Gains on cash held

1,312

875

 

Losses on bank loans

(5,671)

(2,390)

 

 

______

______

 

 

(4,359)

(1,515)

 

 

______

______

 

 

 

2017

2016

4.

Income

£'000

£'000

 

Income from overseas listed investments

 

 

 

Dividend income

11,086

10,327

 

REIT income

575

680

 

Interest income from investments

902

1,093

 

 

______

______

 

 

12,563

12,100

 

 

______

______

 

Other income from investment activity

 

 

 

Traded option premiums

2,981

2,800

 

Deposit interest

19

2

 

 

______

______

 

 

3,000

2,802

 

 

______

______

 

Total income

15,563

14,902

 

 

______

______

 

 

 

 

 

During the year, the Company was entitled to premiums totalling £2,981,000 (2016 - £2,800,000) in exchange for entering into derivative transactions. This figure includes a mark to market on derivative contracts open at each year end. At the year end there was 1 open position, valued at a liability of £30,000 (2016 - liability of £66,000) as disclosed in note 13. Losses realised on the exercise of derivative transactions are disclosed in note 11.

 

 

 

2017

2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

5.

Investment management fee

£'000

£'000

£'000

£'000

£'000

£'000

 

Investment management fee

819

1,910

2,729

687

1,603

2,290

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

For the year ended 31 January 2017 management services were provided by Aberdeen Fund Managers Limited ("AFML"). The fee is at an annual rate of 0.8% of gross assets after deducting current liabilities and borrowings and excluding commonly managed funds, payable quarterly. The balance due at the year end was £762,000 (2016 - £566,000). The fee is allocated 30% (2016 - 30%) to revenue and 70% (2016 - 70%) to capital.

 

 

 

The management agreement between the Company and Aberdeen is terminable by either party on three months' notice. In the event of a resolution being passed at the AGM to wind up the Company the Manager shall be entitled to three months' notice from the date the resolution was passed. In the event of termination on not less than the agreed notice period, compensation is payable in lieu of the unexpired notice period.

 

 

 

2017

2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

6.

Finance costs

£'000

£'000

£'000

£'000

£'000

£'000

 

Bank loans

295

688

983

256

598

854

 

 

______

______

______

______

______

______

 

 

 

2017

2016

7.

Administrative expenses

£'000

£'000

 

Directors' fees

84

78

 

Registrar's fees

60

54

 

Custody and bank charges

31

29

 

Secretarial fees

105

104

 

Auditor's remuneration (excl. irrecoverable VAT):

 

 

 

fees payable to the Company's auditor for the audit of the annual accounts

16

16

 

Contribution to the Investment Trust Initiative

213

212

 

Printing, postage and stationery

29

25

 

Fees, subscriptions and publications

43

43

 

Professional fees

60

52

 

Depositary charges

44

38

 

Other expenses

40

20

 

 

______

______

 

 

725

671

 

 

______

______

 

 

 

 

 

For the year ended 31 January 2017 secretarial and administration services were provided by Aberdeen Fund Managers Limited ("AFML"). The fee is payable monthly in advance and based on an index-linked annual amount of £105,000 (2016 - £104,000) and there was an accrual of £18,000 (2016 - £17,000) at the year end. the agreement is terminable on three months' notice.

 

 

 

During the year £213,000 (2016 - £212,000) was paid to AFML in respect of promotional activities for the Company through Aberdeen's Investment Trust Initiative and the balance due at the year end was £18,000 (2016 - £71,000).

 

 

 

2017

2016

 

 

Revenue

Capital

Total

Revenue

Capital

Total

8.

Taxation

£'000

£'000

£'000

£'000

£'000

£'000

 

(a)

Analysis of charge for the year

 

 

 

 

 

 

 

 

UK corporation tax

520

(520)

-

676

(444)

232

 

 

Overseas tax suffered

1,653

-

1,653

1,382

4

1,386

 

 

 

______

______

______

______

______

______

 

 

Current tax charge for the year

2,173

(520)

1,653

2,058

(440)

1,618

 

 

Deferred taxation

-

-

-

-

-

-

 

 

 

______

______

______

______

______

______

 

 

Total tax

2,173

(520)

1,653

2,058

(440)

1,618

 

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

 

(b)

Factors affecting the tax charge for the year

 

 

The UK  corporation tax rate was 20% from 1 April 2015 giving an effective rate of 20.0% (2016 - effective rate of 20.17% - corporation tax rate was 21% until 31 March 2015). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:

 

 

 

 

 

 

2017

2016

 

 

 

Revenue

Capital

Total

Revenue

Capital

Total

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

 

 

Net profit on ordinary activities before taxation

13,724

108,557

122,281

13,288

(5,917)

7,371

 

 

 

______

______

______

______

______

______

 

 

Corporation tax at 20.0% (2016 - 20.17%)

2,745

21,711

24,456

2,680

(1,194)

1,486

 

 

Effects of:

 

 

 

 

 

 

 

 

Non taxable overseas dividends

(2,225)

-

(2,225)

(2,004)

-

(2,004)

 

 

Irrecoverable overseas withholding tax

1,653

-

1,653

1,382

-

1,382

 

 

Capital gains/(losses) not taxable

-

(23,103)

(23,103)

-

449

449

 

 

Non-taxable exchange losses

-

872

872

-

305

305

 

 

 

______

______

______

______

______

______

 

 

Current tax charge

2,173

(520)

1,653

2,058

(440)

1,618

 

 

 

______

______

______

______

______

______

 

 

 

 

 

 

 

 

 

 

(c)

Provision for deferred taxation

 

 

No provision for deferred taxation has been made in the current year due to the Company fully utilising the losses brought forward from the previous year (2016 - £nil). The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.

 

 

 

2017

2016

9.

Dividends

£'000

£'000

 

Amounts recognised as distributions to equity holders in the year:

 

 

 

3rd interim dividend for 2016 7.0p per share (2015 - 6.5p)

2,114

2,141

 

Final dividend for 2016 - 13.0p per share (2015 - 11.5p)

3,789

3,679

 

1st interim dividend for 2017 - 7.0p per share (2016 - 6.5p)

2,023

2,058

 

2nd interim dividend for 2017 - 7.0p per share (2016 - 6.5p)

2,002

2,025

 

Dividend refunds written off

9

-

 

 

______

______

 

 

9,937

9,903

 

 

______

______

 

 

 

 

 

The proposed third interim dividend was unpaid at the year end and the final dividend for 2017 is subject to approval by shareholders at the Annual General Meeting. Accordingly, neither has been included as a liability in these financial statements.

 

 

 

The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £11,551,000 (2016 - £11,230,000).

 

 

 

 

 

 

2017

2016

 

 

£'000

£'000

 

1st interim dividend for 2017 - 7.0p per share (2016 - 6.5p)

2,023

2,058

 

2nd interim dividend for 2017 - 7.0p per share (2016 - 6.5p)

2,002

2,025

 

3rd interim dividend for 2017 - 7.5p per share (2016 - 7.0p)

2,148

2,110

 

Proposed final dividend for 2017 - 14.5p per share (2016 - 13.0p)

4,154

3,789

 

 

______

______

 

 

10,327

9,982

 

 

______

______

 

 

 

The cost of the proposed final dividend for 2017 is based on 28,645,004 Ordinary shares in issue, being the number of Ordinary shares in issue at the date of this report.

 

 

 

2017

2016

10.

Return per Ordinary share

£'000

p

£'000

p

 

Based on the following figures:

 

 

 

 

 

Revenue return

11,551

39.92

11,230

35.74

 

Capital return

109,077

376.92

(5,477)

(17.43)

 

 

______

______

______

______

 

Total return

120,628

416.84

5,753

18.31

 

 

______

______

______

______

 

 

 

 

 

 

 

Weighted average number of Ordinary shares in issue

 

28,938,839

 

31,424,506

 

 

 

__________

 

__________

 

 

 

2017

2016

11.

Investments

£'000

£'000

 

Fair value through profit or loss:

 

 

 

Opening fair value

312,983

342,722

 

Opening investment holdings gains

(50,718)

(65,139)

 

 

______

______

 

Opening book cost

262,265

277,583

 

Purchases at cost

129,625

109,335

 

Sales - proceeds

(147,724)

(136,824)

 

Sales - realised gains{A}

34,223

12,220

 

Amortisation of fixed income book cost

(54)

(49)

 

 

______

______

 

Closing book cost

278,335

262,265

 

Closing investment holdings gains

132,009

50,718

 

 

______

______

 

Closing fair value

410,344

312,983

 

 

______

______

 

Listed on overseas stock exchanges

410,344

312,983

 

 

______

______

 

 

 

 

 

 

2017

2016

 

Gains/(losses) on investments

£'000

£'000

 

Realised gains on sales{A}

34,223

12,220

 

Movement in investment holdings gains

81,291

(14,421)

 

 

______

______

 

 

115,514

(2,201)

 

 

______

______

 

 

 

 

 

{A} Includes losses realised on the exercise of traded options of £873,000 (2016 - £2,319,000). Premiums received from traded options totalled £2,981,000 (2016 - £2,800,000) per note 4.

 

 

 

Transaction costs

 

During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:

 

 

 

 

 

 

2017

2016

 

 

£'000

£'000

 

Purchases

123

107

 

Sales

165

171

 

 

______

______

 

 

288

278

 

 

______

______

 

 

 

2017

2016

12.

Debtors: amounts falling due within one year

£'000

£'000

 

Amount due from brokers

3,255

-

 

Dividends receivable

416

474

 

Interest receivable

214

209

 

Taxation recoverable

6

4

 

Other debtors and prepayments

49

39

 

Overpayment of dividend

-

17

 

 

______

______

 

 

3,940

743

 

 

______

______

 

 

 

2017

2016

13.

Creditors

£'000

£'000

 

Amounts falling due within one year:

 

 

 

Investment management fee payable

762

566

 

Interest payable

40

43

 

Traded option contracts

30

66

 

Amounts due to brokers

6,258

-

 

Amounts due to brokers relating to share buybacks

-

816

 

UK corporation tax payable

-

55

 

Other creditors

129

186

 

 

______

______

 

 

7,219

1,732

 

 

______

______

 

 

 

2017

2016

14.

Bank loans

£'000

£'000

 

Repayable within one year:

 

 

 

- Uncommitted facility

-

7,050

 

- Fixed facility of US$51,045,000

40,573

-

 

Repayable in more than one year but no more than five years

 

 

 

- Fixed facility of US$51,045,000

-

35,985

 

 

______

______

 

Total

40,573

43,035

 

 

______

______

 

 

 

 

 

The Company agreed a three year loan facility with State Street on 17 July 2014. The amount of the total facility was $71.0 million, of which $51.0 million was at a fixed rate of 2.18% and fully drawn down. The remaining $20.0 million balance of the facility is uncommitted of which $nil was drawn down at the year end (2016 - $10.0 million). 

 

 

 

The terms of the loan facility contain covenants that gross borrowings should not exceed 25% of net assets and should not exceed 30% of adjusted assets.

 

 

 

2017

2016

15.

Called-up share capital

£'000

£'000

 

Allotted, called-up and fully paid:

 

 

 

Opening balance

7,499

8,235

 

Shares bought back during the year

(338)

(736)

 

 

______

______

 

28,645,004 (2016 - 29,997,734) Ordinary shares of 25p each

7,161

7,499

 

 

______

______

 

 

 

 

 

During the year the Company bought back 1,352,730 (2016 - bought back 2,941,348) Ordinary shares of 25p each for a total cost of £12,234,000 (2016 - total cost of £24,479,000).

 

16.

Net asset value per equity share 

 

The net asset value per share and the net assets attributable to the Ordinary shareholders at the year end were as follows:

 

 

2017

2016

 

Net assets attributable

£379,101,000

£280,644,000

 

Number of Ordinary shares in issue

28,645,004

29,997,734

 

Net asset value per share

1,323.45p

935.55p

 

17.

Financial instruments and risk management

 

The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments, other than derivatives, comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income.

 

 

 

Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 4, the premium received and fair value changes in respect of options written in the year was £2,981,000 (2016 - £2,800,000). Positions closed during the year realised a loss of £873,000 (2016 - £2,319,000). The largest position in derivative contracts held during the year at any given time was £758,000 (2016 - £456,000). The Company had 1 (2016 - 2) open position in derivative contracts at 31 January 2017 valued at a liability of £30,000 (2016 - £66,000) as disclosed in note 13.

 

 

 

The Board has delegated the risk management function to the Manager under the terms of its management agreement with AFML (further details which are included under note 5). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the manager's approach to the management of each type of risk, are summarised below. Such an approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors.

 

 

 

Risk management framework

 

The directors of AFML collectively assume responsibility for AFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year.

 

 

 

AFML is a fully integrated member of the Aberdeen Asset Management PLC ("Aberdeen") group of companies (referred to as "the Group"), which provides a variety of services and support to AFML in the conduct of its business activities, including in the oversight off the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to AAML, which is responsible for ensuring the  Company is managed within the terms of its investment guidelines and the limits set out in FUND 3.2.2R (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the company.

 

 

 

The Manager conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Chief Executive Officer of the Group. The Risk Division achieves its objective through embedding the Risk management Framework throughout the organisation using the Group's operational risk management system ("SWORD").

 

 

 

The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group CEO and the  Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment.

 

 

 

The  Group's corporate governance structure is supported by several committees to assist the board of directors of Aberdeen, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference.

 

 

 

Risk management

 

 

 

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and price risk), (ii) liquidity risk and (iii) credit risk.

 

 

 

The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.

 

 

 

(i)

Market risk

 

 

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. 

 

 

 

 

 

Interest rate risk

 

 

Interest rate movements may affect:

 

 

the fair value of the investments in fixed interest rate securities;

 

 

the level of income receivable on cash deposits;

 

 

interest payable on the Company's variable rate borrowings.

 

 

 

 

 

Management of the risk

 

 

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

 

 

 

 

 

The Board reviews on a regular basis the values of the fixed interest rate securities.

 

 

 

 

 

The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving, and uncommitted facilities. Details of borrowings at 31 January 2017 are shown in note 14.

 

 

 

 

 

Interest risk profile

 

 

The interest rate risk profile of the portfolio of financial instruments at the Balance Sheet date was as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

period for

Weighted

 

 

Non-

 

 

 

 

which

average

Fixed

Floating

interest

 

 

 

 

rate is fixed

interest rate

rate

rate

bearing

 

 

 

At 31 January 2017

Years

%

£'000

£'000

£'000

 

 

 

Assets

 

 

 

 

 

 

 

 

Sterling

-

-

-

132

-

 

 

 

US Dollar

5.74

3.55

12,145

12,374

363,925

 

 

 

Canadian Dollar

-

-

1,590

103

32,684

 

 

 

 

 

 

______

______

______

 

 

 

Total assets

 

 

13,735

12,609

396,609

 

 

 

 

 

 

______

______

______

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Bank loan - US$51,045,000

0.46

2.18

(40,573)

-

-

 

 

 

 

 

 

______

______

______

 

 

 

Total liabilities

 

 

(40,573)

-

-

 

 

 

 

 

 

______

______

______

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

average

 

 

 

 

 

 

 

 

period for

Weighted

 

 

Non-

 

 

 

 

which

average

Fixed

Floating

interest

 

 

 

 

rate is fixed

interest rate

rate

rate

bearing

 

 

 

At 31 January 2016

Years

%

£'000

£'000

£'000

 

 

 

Assets

 

 

 

 

 

 

 

 

Sterling

-

0.20

-

2

-

 

 

 

US Dollar

4.36

3.71

14,630

11,616

279,089

 

 

 

Canadian Dollar

-

-

-

67

19,624

 

 

 

 

 

 

______

______

______

 

 

 

Total assets

 

 

14,630

11,685

298,713

 

 

 

 

 

 

______

______

______

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Bank loan - US$10,000,000

0.07

1.33

(7,050)

-

-

 

 

 

Bank loan - US$51,045,000

1.46

2.18

(35,985)

-

-

 

 

 

 

 

 

______

______

______

 

 

 

Total liabilities

 

 

(43,035)

-

-

 

 

 

 

 

 

______

______

______

 

 

 

 

 

 

 

The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity date of the Company's loan is disclosed in note 14.

 

 

 

The floating rate assets consist of cash deposits at prevailing market rates.

 

 

 

The non-interest bearing assets represent the equity element of the portfolio.

 

 

 

Short-term debtors and creditors have been excluded from the above tables.

 

 

 

 

 

 

 

Interest rate sensitivity

 

 

 

The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Statement of Financial Position date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

 

 

 

 

 

 

 

The rate of interest on the loan is the percentage rate per annum which is the aggregate of the applicable margin, adjusted LIBOR Offered Rate and mandatory cost if any.

 

 

 

 

 

 

 

If interest rates had been 100 basis points higher or lower (based on current parameter used by Manager's Investment Risk Department on risk assessment) and all other variables were held constant, the Company's revenue return for the year ended 31 January 2017 would increase/decrease by £126,000 (2016 - increase/decrease by £117,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.

 

 

 

 

 

 

 

In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.

 

 

 

 

 

 

 

Foreign currency risk

 

 

 

The Company's portfolio is invested mainly in US quoted securities and the Statement of Financial Position can be significantly affected by movements in foreign exchange rates.

 

 

 

 

 

 

 

Management of the risk

 

 

 

 

 

 

 

The revenue account is subject to currency fluctuation arising on overseas income. The Company does not hedge this currency risk.

 

 

 

 

 

 

 

Foreign currency sensitivity

 

 

 

There is no sensitivity analysis included as the Company's significant foreign currency financial instruments are in the form of equity investments, and they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.

 

 

 

 

 

 

 

Price risk

 

 

 

Price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.

 

 

 

 

 

 

 

Management of the risk

 

 

 

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The allocation of assets to international markets and the stock selection process, as detailed on page 60 of the published 2017 Annual Report, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on various stock exchanges.

 

 

 

 

 

 

 

Price risk sensitivity

 

 

 

If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 January 2017 would have increased/decreased by £41,034,000 (2016 - increase/decrease of £31,298,000) and equity reserves would have increased/decreased by the same amount.

 

 

 

 

 

 

(ii)

Liquidity risk

 

 

 

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. 

 

 

 

 

 

 

 

Management of the risk

 

 

 

Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of the loan facility (note 14).

 

 

 

 

 

 

(iii)

Credit risk

 

 

 

This is failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

 

 

 

 

 

 

 

Management of the risk

 

 

 

where the Manager makes an investment in a bond, corporate or otherwise, the credit ratings of the issuer are taken into account so as to manage the risk to the Company of default;

 

 

 

investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;

 

 

 

transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;

 

 

 

investment transactions are carried out with a number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;

 

 

 

the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Manager's Compliance department carries out periodic reviews of the custodian's operations and reports its finding to the Manager's Risk Management Committee;

 

 

 

cash is held only with reputable banks with acceptable credit quality. It is the Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties.

 

 

 

 

 

 

 

Credit risk exposure

 

 

 

In summary, compared to the amounts in the Balance Sheet, the exposure to credit risk at 31 January 2017 was as follows:

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

Balance

Maximum

Balance

Maximum

 

 

 

 

Sheet

exposure

Sheet

exposure

 

 

 

 

£'000

£'000

£'000

£'000

 

 

 

Debtors

3,891

3,891

704

704

 

 

 

Cash and short term deposits

12,609

12,609

11,685

11,685

 

 

 

 

______

______

______

______

 

 

 

 

16,500

16,500

12,389

12,389

 

 

 

 

______

______

______

______

 

                           

 

18.

Capital management policies and procedures

 

The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings. The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the impact of share buybacks and the extent to which revenue should be retained. The Company is not subject to any externally imposed capital requirements.

 

19.

Fair value hierarchy

 

FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The Company has early adopted Amendments to FRS 102 - Fair value hierarchy disclosures issued by the Financial Reporting Council in March 2016. This has not resulted in any reclassifications in levelling and the prior year comparative has been disclosed under the new hierarchy. The fair value hierarchy has the following classifications:

 

 

 

Level 1: unadjusted quoted prices 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 (ie developed using market data) for the asset or liability, either directly or indirectly.

 

Level 3: inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

 

 

 

The financial assets and liabilities measured at fair value in the Statement of Financial Position are grouped into the fair value hierarchy at the reporting date as follows:

 

 

 

 

 

Level 1

Level 2

Level 3

Total

 

As at 31 January 2017

Note

£'000

£'000

£'000

£'000

 

Financial assets at fair value through profit or loss

 

 

 

 

 

 

Quoted equities

a)

396,609

-

-

396,609

 

Quoted bonds

b)

-

13,735

-

13,735

 

 

 

396,609

13,735

-

410,344

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit or loss

 

 

 

 

 

 

Derivatives

c)

-

(30)

-

(30)

 

 

 

______

______

______

______

 

 

 

-

13,705

-

(30)

 

 

 

______

______

______

______

 

 

 

 

 

 

 

 

 

 

Level 1

Level 2

Level 3

Total

 

As at 31 January 2016

Note

£'000

£'000

£'000

£'000

 

Financial assets at fair value through profit or loss

 

 

 

 

 

 

Quoted equities

a)

298,353

-

-

298,353

 

Quoted bonds

b)

-

14,630

-

14,630

 

 

 

298,353

14,630

-

312,983

 

 

 

 

 

 

 

 

Financial liabilities at fair value through profit or loss

 

 

 

 

 

 

Derivatives

c)

(66)

-

-

(66)

 

 

 

______

______

______

______

 

 

 

(66)

14,630

-

(66)

 

 

 

______

______

______

______

 

  

 

 

 

 

 

 

a)

Quoted equities and preference shares

 

 

The fair value of the Company's investments in quoted equities and preference shares has been determined by reference to their quoted bid prices at the reporting date. Quoted equities and preference shares included in Fair Value Level 1 are actively traded on recognised stock exchanges.

 

 

 

 

b)

Quoted bonds

 

 

The fair value of the Company's investments in quoted bonds has been determined by reference to their quoted bid prices at the reporting date. Investments categorised as Level 2 are not considered to trade in active markets.

 

 

 

 

c)

Derivatives

 

 

The Company's investment in over the counter options at 31 January 2017 has been fair valued using a marked-to-market model and has been classed as Level 2. At 31 January 2016 the Company held exchange traded options which were determined using quoted prices on an exchange traded basis and were therefore classed as Level 1.

               

 

20.

Related party transactions

 

Directors' fees and interests

 

Fees payable during the year to the Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report on page 33 of the published 2017 Annual Report.

 

 

 

Transactions with the Manager

 

The Company has agreements with the Manager for the provision of investment management, secretarial, accounting and administration and promotional activity services.

 

 

 

The management fee is calculated at a rate of 0.8% per annum of the total assets of the Company, after deducting current liabilities and borrowings and excluding the value of any commonly managed funds, payable quarterly. The balance due at the year end was £762,000 (2016 - £566,000). The fee is allocated 30% (2016 - 30%) to revenue and 70% (2016 - 70%) to capital.

 

 

 

The management agreement between the Company and AFML is terminable by either party on three months' notice. In the event of a resolution being passed at the AGM to wind up the Company the Manager shall be entitled to three months' notice from the date the resolution was passed. In the event of termination on not less than the agreed notice period, compensation is payable in lieu of the unexpired notice period.

 

 

 

The fee for secretarial and administrative services is payable monthly in advance and is based on an index-linked annual amount of £105,000 (2016 - £104,000) and there was a accrual of £18,000 (2016 - £17,000) at the year end.

 

 

 

During the year £213,000 (2016 - £212,000) was paid to AMFL in respect of promotional activites for the Company through Aberdeen's Investment Trust Initiative and the balance due at the year end was £18,000 (2016 - £71,000).

 

 

ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT

 

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 January 2017. The statutory accounts for the year ended 31 January 2017 received an audit report which was unqualified.

 

The statutory accounts for the financial year ended 31 January 2017 were approved by the Directors on 23 March 2017 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 2.00 pm on 12 June 2017 at 40 Princes Street, Edinburgh EH2 2BY.

 

The Annual Report will be posted to shareholders in April 2017 and additional copies will be available from the Manager (Investor Helpline - Tel. 0808 00 0040) or by download from the Company's webpage (www.northamericanincome.co.uk)

 

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

 

For The North American Income Trust plc

Aberdeen Asset Management PLC, Secretaries

 


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