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Annual Financial Report

Released 07:00 13-Mar-2019

Annual Financial Report

EP GLOBAL OPPORTUNITIES TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2018

The full Annual Report and Financial Statements can be accessed via the Company’s website at www.epgot.com or by contacting the Company Secretary by telephone on 0131 270 3800.

HIGHLIGHTS

FINANCIAL SUMMARY

Results for year 31 December 2018                   31 December 2017 Change   

Shareholders’ funds

£131,799,000

£148,818,000

(11.4)%
Net asset value per ordinary share (“NAV”)1
308.8p

337.7p

(8.6)%
NAV total return1,2 (7.1)% 14.4% 
Share price 301.5p    320.0p    (5.8)%
Share price discount to NAV1 2.3%  5.2%  
Revenue return per ordinary share1 6.9p   5.3p    30.2% 
Final dividend per ordinary share 5.5p3   5.3p   
Special dividend per ordinary share 1.0p 0.0p   
Total dividend per ordinary share 6.5p 5.3p    22.6%

   

1 For definitions, see Glossary in the full Annual Report and Financial Statements.
2 The NAV total returns are sourced from Edinburgh Partners and include dividends reinvested.
3 Proposed final dividend for the year.

   

Year to     
31 December 2018     
Ordinary share     
Year to    
31 December 2017    
Ordinary share    
Year’s high/low
Share price - high 330.0p    320.0p   
- low 289.0p    283.5p   
NAV - high 349.1p    338.1p   
- low 306.3p    299.4p   
Share price discount to NAV
- low 1.1%   1.8% 
- high 9.6%   7.8% 
Cost of running the Company
Ongoing charges1 0.9%   0.9% 

   

1 Based on total expenses, excluding finance costs, transaction costs and certain non-recurring items for the year as a percentage of the average monthly net asset value.

Past performance is not a guide to future performance.
 

PORTFOLIO OF INVESTMENTS
as at 31 December 2018



Company


Sector


Country


Valuation
£’000

% of
Net Assets
Equity investments
20 largest equity investments
Roche1 Health Care Switzerland 5,245 4.0
AstraZeneca Health Care United Kingdom 4,408 3.3
Novartis Health Care Switzerland 3,942 3.0
Verizon Telecommunications United States 3,693 2.8
China Mobile Telecommunications China 3,523 2.7
Sanofi Health Care France 3,521 2.7
Vodafone Telecommunications United Kingdom 3,450 2.6
Royal Dutch Shell A Oil & Gas Netherlands 3,444 2.6
Nokia Technology Finland 3,382 2.6
Swire Pacific A Industrials Hong Kong 3,347 2.5
Sumitomo Mitsui Trust Financials Japan 3,332 2.5
Singapore Telecommunications Telecommunications Singapore 3,237 2.5
Total Oil & Gas France 3,213 2.4
Bangkok Bank² Financials Thailand 3,182 2.4
East Japan Railway Consumer Services Japan 3,151 2.4
Sumitomo Mitsui Financial Financials Japan 3,150 2.4
Galaxy Entertainment Consumer Services Hong Kong 3,141 2.4
ENI Oil & Gas Italy 3,139 2.4
Edinburgh Partners Emerging
Opportunities Fund

Financials

Other

3,070

2.3
BP Oil & Gas United Kingdom 3,066 2.3

Total – 20 largest equity investments

69,636

52.8
Other equity investments
ING Financials Netherlands 2,907 2.2
Tesco Consumer Services United Kingdom 2,851 2.2
Telefonica Telecommunications Spain 2,803 2.1
Panasonic Consumer Goods Japan 2,774 2.1
Ahold Delhaize Consumer Services Netherlands 2,762 2.1
Japan Tobacco Consumer Goods Japan 2,560 1.9
Bank Mandiri Financials Indonesia 2,513 1.9
Synchrony Financial Financials United States 2,508 1.9
Cirrus Logic Technology United States 2,481 1.9
Alps Alpine Industrials Japan 2,476 1.9
Shanghai Fosun Pharmaceutical H Health Care China 2,380 1.8
DNB Financials Norway 2,282 1.7
Commerzbank Financials Germany 2,251 1.7
CK Hutchison Industrials Hong Kong 2,234 1.7
Mitsubishi Industrials Japan 2,208 1.7
Nomura Financials Japan 2,103 1.6
Halliburton Oil & Gas United States 2,028 1.5
PostNL Industrials Netherlands 1,810 1.4
Bayer Health Care Germany 1,803 1.4
Apache Oil & Gas United States 1,599 1.2
Total – 40 equity investments 116,969 88.7
Cash and other net assets 14,830 11.3
Net assets 131,799 100.0

   

1 The investment is in non-voting shares.
2 The investment is in non-voting depositary receipts.

Of the ten largest portfolio investments as at 31 December 2018, the valuations at the previous year end, 31 December 2017, were Roche £3,696,000, AstraZeneca £4,610,000, Novartis £5,194,000, Sanofi £3,314,000, Royal Dutch Shell A £6,555,000, Nokia £2,357,000 and Swire Pacific £2,763,000. Verizon, China Mobile and Vodafone were purchased during the year.
 

 DISTRIBUTION OF INVESTMENTS
 as at 31 December 2018 (% of net assets)

Sector distribution
% of
Net assets
Financials 20.6
Health Care 16.2
Telecommunications 12.7
Oil & Gas 12.4
Industrials 9.2
Consumer Services 9.1
Technology 4.5
Consumer Goods 4.0
Cash and other net assets 11.3
100.0

The figures detailed in the sector distribution table represent the Company’s exposure to those sectors.


Geographical distribution
% of
Net assets
Europe 32.3
Asia Pacific 17.9
Japan 16.5
United Kingdom 10.4
United States 9.3
Other 2.3
Cash and other net assets 11.3
100.0

The figures detailed in the geographical distribution table represent the Company’s exposure to these countries or regional areas.

The geographical distribution is based on each investment’s principal stock exchange listing, except in instances where this would not give a proper indication of where its activities predominate.
 

STRATEGIC REPORT

CHAIRMAN’S STATEMENT

Results
At 31 December 2018, our NAV was 308.8p, a reduction of 8.6 per cent in the year. With dividends re-invested, this resulted in a total return of minus 7.1 per cent for the year. Although your Company has no official benchmark, it was behind the total return from the FTSE All-World Index of minus 3.4 per cent and ahead of the FTSE All-Share Index of minus 9.5 per cent.

The share price at the end of the year was 301.5p, a decrease of 5.8 per cent from the share price at the end of 2017 of 320.0p. With dividends re-invested, this resulted in a total return of minus 4.2 per cent for the year. At 31 December 2018, the share price stood at a discount of 2.3 per cent to the NAV, an improvement on the 5.2 per cent at the prior year-end.

Stock market review and investment performance
It was a challenging year for equity investors with all major markets suffering significant declines. When adjusted into sterling, part of these losses was mitigated by the weakness of the pound. Total returns in sterling terms for many stock markets were typically in the order of magnitude of between minus 8 and 10 per cent. The prime exception was the US equity market where the S&P 500 Composite index total return was minus 4.4 per cent but the total return in sterling terms was a positive 1.6 per cent.

The strong stock markets of 2017 continued briefly into early 2018. However, rising US interest rates began to cause a change in sentiment towards equities. In general, Asian and European markets peaked in the first quarter of the year and share prices began to trend lower. The more cautious mood in Asia was reinforced by a marked slowdown in China’s rate of economic growth as the Chinese government took restrictive measures to reduce excessive levels of debt and by concerns of a trade war between the US and China. In Europe uncertainty surrounding the UK negotiations on leaving the European Union, and growing friction within the European Union itself created an unhelpful climate for confidence and hence for economic growth and for share prices. With many shares priced for perfection, stock markets became increasingly unforgiving and the share prices of companies whose earnings came in below expectations were hit hard. The US stock market held up better with strong growth in corporate profits as the economy benefitted from the fiscal stimulus of tax cuts introduced by President Trump. Reacting to a firm US economy and falling unemployment rates, the US Federal Reserve continued to raise interest rates as well as making hawkish statements about the future outlook for interest rates. Finally, in late September, the US stock market succumbed and declined sharply into late December dragging other markets with it. The fall was global and so fast that the Federal Reserve reacted dramatically, announcing a pause in their tighter monetary policy to help halt the rout.

We do not have an official benchmark so that our investment manager can fully apply its highly disciplined value approach to investing and will not hold shares that have become market favourites and as a result become excessively valued. 2018 was not a good year to be out of the highly rated US growth stocks, as the US stock market and, in particular, growth stocks outperformed. The risks to such highly priced shares became visible in the last couple of months of the year. With little warning their share prices fell violently. However, despite the sharp set-back the share price of many such companies were still up over the year. Our relatively low weighting in the USA held back performance in 2018, as did our significant investment in bank shares. However, we benefitted from the more defensive strategy of our Investment Manager including an increased investment in telecom shares. We also enjoyed an uplift from our holding in Edinburgh Partners which was taken over by Franklin Resources, Inc. The Investment Manager’s Report below gives a more detailed analysis of the changes made to the portfolio during the year. 

Revenue account and dividend
The revenue per share for the year ended 31 December 2018 was 6.9p, an increase of 30.2 per cent on the prior year figure of 5.3p. The very substantial increase in the revenue per share benefitted from a move into higher yielding shares, particularly in the telecommunications sector, as well as from the continued weakness of sterling.

As a consequence of this increase in revenue, the Board has decided to recommend a final dividend of 5.5p per share and a special dividend of 1.0p per share, a total of 6.5p per share, subject to Shareholders’ approval at the Annual General Meeting to be held on 24 April 2019. The dividends will be payable on 24 May 2019.

As we have stated in previous years’ Annual Reports, the level of revenue generated from the portfolio will vary from year to year and as a consequence any dividend paid to shareholders is likely to fluctuate from year to year. Our Investment Manager selects stocks on the basis of where it considers it will find the best value, rather than on achieving a dividend that will grow steadily over time. The Board continues to believe that this investment strategy will produce a superior long-term investment performance, particularly given that our Investment Manager is able to fully implement its value-based investment philosophy without any restrictions being imposed on having to achieve a specific income and dividend target.

Shares held in treasury
The Company continued with its policy of buying back shares with a view to maintaining the share price at close to the NAV. During the year, we purchased 1,375,000 shares to be held in treasury, at a total cost of £4,290,000. This represented 3.1 per cent of shares in circulation at the start of the year. Shares that have been bought back under the Company's buy back policy are retained by the Company as treasury shares rather than cancelled.

At the most recent Annual General Meeting of the Company, which was held in April 2018, Shareholders passed a resolution permitting the Company to sell shares held in treasury at a weighted average discount of not more than 2.0 per cent to the prevailing NAV and providing that any sale of treasury shares would not result in a dilution greater than 0.2 per cent in aggregate in the period between annual general meetings. While no shares were sold from treasury during the year under review, the Board is recommending that Shareholders approve a similar resolution at this year’s Annual General Meeting. The Board believes that having the ability to sell shares from treasury at a small discount should help improve the liquidity in the Company’s shares when demand for our shares is once again sufficient for sales to be made. In 2015, a total of 2,035,000 shares were sold from treasury.

Investment Manager
As detailed in both last year’s Annual Report and this year’s Half-Yearly report, in January 2018, Franklin Resources, Inc. announced the acquisition of Edinburgh Partners Limited, our Investment Manager. An adjustment was made to the carrying value of the Company’s investment in Edinburgh Partners Limited and incorporated in the financial statements in the 2017 Annual Report. The acquisition completed on 1 May 2018 and, following receipt of the initial proceeds of the sale, further proceeds were received in August 2018.

Your Board considered that the acquisition is a positive move for Edinburgh Partners, particularly given the complementary investment styles based on value investing. Importantly, the individuals responsible for the investment management of your Company remain the same.

Annual General Meeting
The Annual General Meeting will be held at 12.00 noon at The Bonham Hotel, 35 Drumsheugh Gardens, Edinburgh EH3 7RN on Wednesday, 24 April 2019. The Board looks forward to meeting Shareholders who are able to attend.

The Board
Giles Weaver will be retiring from the Board at the Annual General Meeting on 24 April 2019. He became a Director of the Company in March 2011 when it merged with Anglo & Overseas plc, having served as a director of that company since its launch in 2005. Mr. Weaver became Chairman of the Audit and Management Engagement Committee of the Company in April 2014.

The Board wishes to thank Giles for his wise counsel, experience and commitment to the Company over his eight years of service. His investment experience and his knowledge of investment trusts have been of great benefit to the Board and I personally have greatly appreciated his input and advice. Following the retirement of Giles Weaver from the Board, David Ross will become Chairman of the Audit and Management Engagement Committee.

Following an extensive review process, in conjunction with an experienced independent external search consultancy, a number of potential candidates were interviewed and the Board is delighted to welcome Tom Walker as a new non-executive Director and member of the Audit and Management Engagement Committee, with effect from 1 April 2019.

Tom Walker has recently retired as a portfolio manager from Martin Currie Investment Management Limited where latterly, he headed up their Global Long Term Unconstrained equity team. As part of his responsibilities, he managed an investment trust, Martin Currie Global Portfolio Trust plc, as well as other global segregated portfolios. He joined Martin Currie in 1996, initially to lead their Pacific Basin investment team, subsequently moving to head their North America team. Tom Walker qualified as a chartered accountant with Thomson McLintock, now KPMG, then moved into investment management with Edinburgh Fund Managers and subsequently worked in Hong Kong with Baring Asset Management, before joining Martin Currie. Given his extensive investment management experience and detailed knowledge of the investment trust sector, the Board is delighted that Tom Walker has agreed to become a Director of the Company.

Outlook
While there continues to be positive growth within the global economy there has been a recent revision downwards in forecasts for 2019, as a consequence of a number of factors, including the imposition of trade tariffs, particularly between the US and China, and possibly between the US and Europe, a slowing in the Chinese economy and uncertainty relating to the potential UK exit from the European Union.

Given the increasing uncertainty within the global equity market and the relatively high valuations of equity markets, our Investment Manager has taken a more cautious investment stance, gradually reducing the exposure to equities and increasing cash balances. This process started during the third quarter of 2018 and by the end of the year under review cash balances were 11 per cent of net assets. These cash balances will provide the resources to purchase new stocks or add to existing investments when opportunities arise.

The interest rate environment is beginning to change, with the era of low interest rates slowly coming to an end. The dramatic halt to the US Federal Reserve’s policy of tightening monetary conditions announced in December as stock markets appeared to be in virtual freefall has put the plan to continue to raise rates, at least temporarily, on hold. Stock markets rallied enthusiastically. China has also been moving to a more accommodating monetary stance.

The ever increasing level of debt in the US, as well as globally, has increased financial risks. This makes it difficult for central banks to set the correct level of interest rates to maintain the economic expansion as well as keep inflation under control at a time of rising wage rates. The sudden change to US policy demonstrates how challenging this is. In this environment, it is prudent of our Investment Manager to have a more cautious investment approach. Their value-based philosophy should lead to participation in any further gains in equity markets as well as provide defensive characteristics in market sell-offs.

Teddy Tulloch
Chairman
12 March 2019

Past performance is not a guide to future performance.
 

INVESTMENT MANAGER’S REPORT

The Company’s NAV total return for the year ended 31 December 2018 was minus 7.1 per cent in a year where some of the returns achieved in the prior year were given back. Much of this occurred during the fourth quarter as markets begin to work through the implications of interest rates potentially returning to more normal levels. This is highly significant and marks a sea change from the environment which has persisted since the Global Financial Crisis.

To give a brief recap, the banking excesses in the run up to 2007 were such that the financial system was on the verge of implosion making a rerun of the Great Depression a highly plausible outcome. Having learned from the lessons of history the central banks and policy makers avoided the mistakes which led to the environment of the 1930s. There were no trade wars or tariffs, liquidity was injected into the system and banks were recapitalised. As a consequence, the global economy has recovered to the point where throughout the world there are signs of labour market tightness and rising wages. For the central banks the key will be ensuring that the distorting effects of suppressed interest rates are ended by the return to a more normal structure. This is possible because the systemic risks associated with the banking sector have been minimised by new regulations which mandate much higher levels of reserves and risk-bearing capital. It does not mean that banks cannot make losses in the future, simply that such losses should not bring down the financial system. For the investor it is important to note that there continues to be a high level of indebtedness within the economic system of many countries. This has been made possible because there has been such an extended period of suppressed interest rates. This cannot continue when inflation begins to ripple through from the effects of rising wages. The importance of all of this is that we expect to see more normal interest rates, i.e. positive real interest rates and that this will cause a repricing of asset prices that have been inflated by the low cost of money. We believe the fourth quarter of 2018 gave an indication of the types of moves that are possible.

As a consequence, our caution has been rising for some time and this explains why there were significant cash balances, 11 per cent of net assets, at the year end. We view these as reserves that can be deployed to take advantage of the opportunities that are likely to arise.

In terms of the portfolio holdings analysed by sector, one of the most significant changes has been the increase in exposure to telecoms companies, with exposure increasing from 1.7 per cent to 12.7 per cent of net assets. Over the course of the year we added to our position in the Spanish group, Telefonica, and we bought new holdings in China Mobile, Singapore Telecommunications, Vodafone and Verizon. In each of these investments we identified that the companies were paying reasonable dividends which we believe are sustainable. The dividend payouts are supported by robust operating models, where labour cost inflation is unlikely to cause issues and where revenues are anticipated to be relatively resilient in the face of moderating economic growth.

The financial sector exposure reduced from 31.8 per cent to 20.6 per cent of net assets, as the exposure to banking stocks was partly reduced and adjusted during the year following the very strong returns of 2017. The French banking group, BNP Paribas, was sold reflecting our concerns over the price of financial assets and the bank’s exposure to capital markets. The other sales were largely reducing position sizes following share price appreciation. The Dutch bank, ING, was purchased reflecting our views on the robustness of retail banking and the technological leadership ING has achieved through its past investment programme. It has to be said that the market paid little attention to this differentiation during 2018 with the shares performing poorly. In general European banks are now priced for a severe recession and we believe that within the sector there are now increasing opportunities for additional investment. Outside Europe and particularly in Asia, the valuations are not as compelling, reflecting stronger share price performance, and hence we have reduced the position sizes of a number of holdings, including Bank Mandiri in Indonesia and Bangkok Bank in Thailand.

In terms of sales over the year much of what was done was in response to share price appreciation, either through trimming positions or the outright sale of stocks such as Baidu, the Chinese-based internet search provider and Ubisoft Entertainment, the French based video game company. There were some holdings where our view on the prospects changed and a sale ensued as a consequence. The first of these was Celgene, the US based global biopharmaceutical company, where we became increasingly concerned that the company was unlikely to repeat its previous successful drug acquisitions and there was a high probability of dilutive/destructive use of free cash-flow. The shares were therefore sold. Subsequently the company was bid for, but at a price below where we had exited. The second share where our view changed was the Chinese car seat manufacturer Goodbaby International. We had owned these shares in anticipation of both revenue growth and margin improvement and there were signs that this was unfolding. Following a very sharp upwards move in the share price we began selling the shares. Subsequently the share price fell and we became increasingly concerned that the purchase by the company of retail assets owned by the Chairman might lie behind some softer trading numbers. In such cases caution is the order of the day and we sold our remaining holding.

As a result of these changes the portfolio now has a much more defensive orientation and we expect this to continue through 2019. Whilst the valuation of the portfolio looks reasonable, we still see capital preservation as the over-riding priority. We are therefore comfortable holding and even potentially increasing cash reserves. We are not in the ‘recessionary’ camp, but we are concerned about how asset markets will react to refinancing in an environment of reduced liquidity and rising costs. We want to be sure that we can take advantage of any fallout that might occur as this unfolds.

Dr Sandy Nairn
Edinburgh Partners
12 March 2019

Past performance is not a guide to future performance.
 

OTHER STATUTORY INFORMATION

Objective
The investment objective of the Company is to provide Shareholders with an attractive real long-term total return by investing globally in undervalued securities. The portfolio is managed without reference to the composition of any stock market index.

Strategy and business model
Investment policy
The Company’s investment policy is set out in the full Annual Report and Financial Statements.

The Investment Manager's compliance with the limits set out in the investment policy is monitored by the Board and the AIFM.

Investment strategy
The Company’s portfolio is managed without reference to any stock market index. Investments are selected for the portfolio only after extensive research by the Investment Manager. The process through which an equity must pass in order to be included in the portfolio is rigorous. Only a security where the Investment Manager believes that the price will be significantly higher in the future will pass the selection process. The key to successful stock selection is to identify the long-term value of a company’s shares and to have the patience to hold the shares until that value is appreciated by other investors. Identifying long-term value involves detailed analysis of a company’s earning prospects over a five-year time horizon. Further details of the investment strategy can be found in the Chairman’s Statement and the Investment Manager’s Report above.

Business and status of the Company
The principal activity of the Company is to carry on business as an investment trust.

The Company is registered as a public limited company and is an investment company within the terms of section 833 of the Companies Act 2006 (the “Act”). The Company has been approved by HM Revenue & Customs as an authorised investment trust under sections 1158 and 1159 of the Corporation Tax Act 2010 (the “CTA”), subject to there being no subsequent serious breaches of the regulations. In the opinion of the Directors, the Company is directing its affairs so as to enable it to continue to qualify for such approval.

The Company's shares are listed on the premium segment of the Official List of the UK Listing Authority and traded on the main market of the London Stock Exchange.

The Company is a member of the AIC, a trade body which promotes investment companies and also develops best practice for its members.

Portfolio analysis
A detailed review of how the Company’s assets have been invested is contained in the Chairman’s Statement and the Investment Manager’s Report above. A list of all the Company’s investments is contained in the Portfolio of Investments above. The portfolio consisted of 40 investments, excluding cash and other net assets, as at 31 December 2018, thus ensuring that the Company has a suitable spread of investment risk. A sector and geographical distribution of investments is shown above.

Results and dividends
The results for the year are set out in the Income Statement and in the Reconciliation of Movements in Shareholders’ Funds below.

For the year ended 31 December 2018, the net revenue return attributable to Shareholders was £3.0 million (2017: £2.5 million) and the net capital return attributable to Shareholders was a minus £13.4 million (2017: a positive £16.8 million). Total Shareholders’ funds, after taking account of those returns, the dividend payment relating to the prior year of £2.3 million, and share buybacks of £4.3 million, decreased by 11.4 per cent to £131.8 million (2017: £148.8 million).

A final dividend of 5.5p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 6.5p per ordinary share, for the year ended 31 December 2018 (2017: final dividend of 5.3p), has been recommended by the Board. Subject to the approval of Shareholders at the Annual General Meeting to be held on 24 April 2019, the final dividend will be payable on 24 May 2019 to Shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019.

Key performance indicators
At each Board meeting, the Directors consider a number of performance measures to assess how the Company is achieving its objective. The key performance indicators used to measure the progress and performance of the Company over time are established industry measures and are as follows:

Net asset value
In the year to 31 December 2018, the NAV decreased by 8.6 per cent from 337.7p to 308.8p. After taking account of the 5.3p final dividend paid in 2018, relating to the year ended 31 December 2017, the NAV total return was minus 7.1 per cent (2017: 14.4 per cent). This compares with the total return of minus 3.4 per cent (2017: 13.8 per cent) from the FTSE All-World Index, adjusted to sterling.

The NAV total return since the launch of the Company on 15 December 2003 to 31 December 2018 was 275.3 per cent. The total return from the FTSE All-World Index, adjusted to sterling, was 288.9 per cent for the same period.

Share price
In the year to 31 December 2018, the Company’s share price decreased by 5.8 per cent from 320.0p to 301.5p. The share price total return was minus 4.2 per cent, after taking account of the 5.3p dividend paid in 2018 relating to the year ended 31 December 2017.

The share price total return since the launch of the Company on 15 December 2003 to 31 December 2018 was 270.0 per cent. This compares with the total return of 288.9 per cent from the FTSE All-World Index, adjusted to sterling.

Share price discount to NAV
The share price discount to NAV narrowed from 5.2 per cent to 2.3 per cent in the year to 31 December 2018.

Revenue return per ordinary share
In the year to 31 December, the revenue per ordinary share increased by 30.2 per cent from 5.3p to 6.9p.

Dividends per ordinary share
The Directors are recommending a final dividend of 5.5p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 6.5p per ordinary share. This compares to a prior year final dividend of 5.3p.

Subject to approval by Shareholders at the Annual General Meeting to be held on 24 April 2019, the final and special dividends will be payable on Friday, 24 May 2019 to all Shareholders on the register at the close of business on Friday, 3 May 2019. The ex-dividend date will be Thursday, 2 May 2019.

Ongoing charges
In the year to 31 December 2018, the ongoing charges ratio was unchanged at 0.9 per cent. The ongoing charges ratio is based on total expenses, excluding finance costs and certain non-recurring items for the year as a percentage of the monthly net asset value.

The longer-term records of the key performance indicators are shown in the Performance Record below.

Management Agreement
In order to comply with the Alternative Investment Fund Managers’ Directive (“AIFMD”), the Company appointed Edinburgh Partners AIFM Limited as its Alternative Investment Fund Manager with effect from 16 July 2014. Edinburgh Partners AIFM Limited has been approved as an Alternative Investment Fund Manager by the UK’s Financial Conduct Authority (“FCA”). With the approval of the Directors, the AIFM appointed Edinburgh Partners as Investment Manager to the Company pursuant to a delegation agreement.

The AIFM receives a management fee of 0.75 per cent per annum (payable monthly in arrears) of the month-end market capitalisation of the issued ordinary shares (excluding treasury shares) up to £100 million and 0.65 per cent above £100 million. No performance fee is payable. The AIFM receives an administration and secretarial fee of £135,000 per annum (payable monthly in arrears), which is adjusted annually in line with changes in the Retail Price Index. The Company also pays the Investment Manager £25,000 per annum in respect of marketing-related services.

The revised Markets in Financial Instruments Directive (“MiFID II”) came into effect on 3 January 2018. As a consequence of the revised rules under MiFID II, research costs were required to be unbundled from trading commission on the purchase and sale of investments with effect from 3 January 2018. During the year ended 31 December 2018, the Company agreed to pay £8,000 as a contribution to research costs incurred by the Investment Manager (2017: £nil). This cost has been included in other expenses as detailed in note 4 to the Financial Statements below. The Investment Manager has agreed to cover the research costs from 1 January 2019.

The Company has a holding in the Edinburgh Partners Emerging Opportunities Fund, which is managed by Edinburgh Partners, as detailed in notes 8 and 9 of the Financial Statements below. No management fee was charged by the AIFM to the Company in relation to its investment in the Edinburgh Partners Emerging Opportunities Fund during the year ended 31 December 2018 (2017: £nil).

The Management Agreement may be terminated by either party giving 12 months’ written notice. No additional compensation is payable to the AIFM on the termination of this agreement other than the fees payable during the notice period. Further details relating to the Management Agreement are detailed in note 3 of the Financial Statements below.

Continuing appointment of the AIFM
The Board keeps the performance of the AIFM under continual review. As the AIFM has delegated the investment management function to Edinburgh Partners, the performance of the Investment Manager is also regularly reviewed. The Board, through delegation to the Audit and Management Engagement Committee (the “Committee”), has considered the performance of the AIFM and the terms of its engagement. It is the opinion of the Directors that the continuing appointment of the AIFM on the terms agreed is in the interests of Shareholders as a whole. The reasons are that the long-term real return has been satisfactory and the investment strategy remains convincing. The remuneration of the AIFM is fair both in absolute terms and compared to that of managers of comparable investment companies. The Directors believe that by paying the management fee calculated on a market capitalisation basis, rather than a percentage of assets basis, the interests of the AIFM are more closely aligned with those of Shareholders.

AIFM remuneration disclosures
In accordance with the AIFMD, information in relation to the remuneration of the Company’s AIFM, Edinburgh Partners AIFM Limited, is made available to investors as part of a group policy which is available at www.edinburghpartners.com. The disclosure also includes those remuneration disclosures in respect of the AIFM’s staff and ‘Identified Staff’ for the reporting period.

Risk management by the AIFM
As required under the AIFMD, the AIFM has established and maintains a permanent and independent risk management function to ensure that there is a comprehensive and effective risk management policy in place and to monitor compliance with risk limits. This risk policy covers the risks associated with the management of the investment portfolio, and the AIFM reviews and approves the adequacy and effectiveness of the policy on at least an annual basis, including the risk management processes and controls and limits for each risk area.

The AIFM sets risk limits that take into account the risk profile of the Company’s investment portfolio, as well as its investment objectives and strategy. The AIFM monitors the risk limits, including leverage, and periodically assesses the portfolio’s sensitivity to key risks on a regular basis.

Leverage
Leverage is defined in the AIFMD as any method by which the Company increases its exposure, whether through borrowing of cash or securities, or leverage embedded in derivative positions or by any other means. The Company did not have any borrowings and did not use derivative instruments for currency hedging during the year ended 31 December 2018.

In accordance with the detailed requirements of the AIFMD, leverage has been measured in terms of the Company’s exposure, and is expressed as a ratio of net asset value. The AIFMD requires this ratio to be calculated in accordance with both the Gross Method and the Commitment Method. Details of these methods of calculation can be found by referring to the AIFMD. In summary, these methods express leverage as a ratio of the exposure of debt, non-sterling currency, equity or currency hedging and derivatives exposure against the net asset value. The principal difference between the two methods is that the Commitment Method enables derivative instruments to be netted off to reflect hedging arrangements and the exposure is effectively reduced, while the Gross Method aggregates the exposure.

The AIFMD introduced a requirement for the AIFM to set maximum levels of leverage for the Company. The Company’s AIFM has set a maximum limit of 1.25 for both the Gross and Commitment Methods of calculating leverage. However, the AIFM anticipates that the figures are likely to be lower than this under normal market conditions. At 31 December 2018, the Company’s Gross ratio was 1.00 and its Commitment ratio was 1.00. In accordance with the AIFMD, any changes to the maximum level of leverage set by the Company will be communicated to Shareholders.

Principal risks and uncertainties
The Board considers that the following are the principal risks associated with investing in the Company: investment and strategy risk, key manager risk, discount volatility risk, market risk, foreign currency risk and regulatory risk. Other risks associated with investing in the Company include, but are not limited to, liquidity risk, credit risk, interest rate risk, gearing risk, operational risk and financial risk. An explanation of these risks and how they are managed and the policy and practice with regards to financial instruments are contained in note 16 of the Financial Statements below.

The Board, through delegation to the Committee, has undertaken a robust annual assessment and review of all the risks stated above, together with a review of any new risks which may have arisen during the year, including those that would threaten the Company’s business model, future performance, solvency or liquidity. These risks are formalised within the Company’s risk assessment matrix.

Those risks identified by the Board are not exhaustive and various other risks may apply to an investment in the Company. Potential investors may wish to obtain independent financial advice.

Internal financial control
In accordance with guidance issued to directors of listed companies by the Financial Reporting Council (“FRC”), the Directors confirm that they have carried out a review of the effectiveness of the systems of internal financial control during the year ended 31 December 2018, as set out in the Corporate Governance Statement in the full Annual Report and Financial Statements. There were no matters arising from this review that required further investigation and no significant failings or weaknesses were identified.

Depositary agreement
The Board has appointed Northern Trust Global Services Limited to act as its depositary (the “Depositary”). The Depositary is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the FCA and the PRA. Custody services are provided by The Northern Trust Company (as a delegate of the Depositary). A fee of 0.01 per cent per annum of the net assets of the Company, plus fees in relation to safekeeping and other activities undertaken to facilitate the investment activity of the Company, are payable to the Depositary. The Company and the Depositary may terminate the Depositary Agreement at any time by giving six months’ written notice. The Depositary may only be removed from office when a new depositary is appointed by the Company.

Main trends and future development
A review of the main features of the year ended 31 December 2018 and the outlook for the current year can be found in the Chairman’s Statement and the Investment Manager’s Report above. The Board’s main focus is on the investment return and strategy, with attention paid to the integrity and success of the investment approach and on the factors which may have an impact on this.

Forward-looking statements
This Strategic Report contains “forward-looking statements” with respect to the Company’s plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events that are beyond the Company’s control. Factors that could cause actual results to differ materially from those estimated by the forward-looking statements include, but are not limited to:

• global economic conditions and equity market performance and prices;

• changes in government policies and monetary and interest rate policies worldwide;

• changes to regulations and taxes worldwide;

• currency exchange rates;

• use of gearing; and

• the Company’s success in managing its assets and business to mitigate the impact of the above factors.

As a result, the Company’s actual future condition, performance and results may differ materially from the plans set out in the Company’s forward-looking statements. The Company undertakes no obligation to update the forward-looking statements contained within the Strategic Report or any other forward-looking statements it makes.

Employees, human rights and community issues

The Board recognises the requirement under the Act to detail information about human rights, employees and community issues, including information about any policies it has in relation to these matters and the effectiveness of these policies. These requirements do not apply to the Company as it has no employees, all the Directors are non-executive and it has outsourced all its functions to third party service providers. The Company has therefore not reported further in respect of these provisions.

The Company is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and therefore, no further disclosure is required in this regard.

Gender diversity
As at 31 December 2018, the Board of Directors of the Company comprised four male Directors. The appointment of any new Director is made on the basis of merit, with the aid of an experienced external consultant.

As detailed in the Chairman’s Statement above, following the retirement of Giles Weaver and subject to the election of Tom Walker at the forthcoming Annual General Meeting of the Company to be held on 24 April 2019, the Board will comprise four male Directors.

Social, environmental and ethical policy
The Company seeks to invest in companies that are well managed with high standards of corporate governance. The Board believes this creates the proper conditions to enhance long-term value for Shareholders. The Company adopts a positive approach to corporate governance and engagement with companies in which it invests.

In pursuit of the above objective, the Board believes that proxy voting is an important part of the corporate governance process and considers seriously its obligation to manage the voting rights of companies in which it is invested. It is the policy of the Company to vote, as far as is practicable, at all shareholder meetings of investee companies. The Company follows the relevant applicable regulatory and legislative requirements in the UK, with the guiding principles being to make proxy voting decisions which favour proposals that will lead to maximising shareholder value while avoiding any conflicts of interest. To this end, voting decisions are taken on a case-by-case basis, with the key issues on which the AIFM focuses being corporate governance, including disclosure and transparency, board composition and independence, control structures, remuneration and social and environmental issues.

The day-to-day management of the Company’s investment portfolio has been delegated by the AIFM to the Company’s Investment Manager, Edinburgh Partners, which has an Environmental, Socially Responsible Investing and Corporate Governance (“ESG”) policy in place. The ESG policy statement, which can be found on the website at www.edinburghpartners.com, describes the manner in which the principles of the UK Stewardship Code are incorporated within the investment process.

The assessment of the quality of investee companies in relation to environmental considerations, socially responsible investment and corporate governance is embedded in the Investment Manager’s stock selection process.

Approval
This Strategic Report has been approved by the Board and signed on its behalf by:

Teddy Tulloch
Chairman
12 March 2019

Past performance is not a guide to future performance.
 

EXTRACTS FROM THE DIRECTORS’ REPORT

Share capital
At 31 December 2018, the Company’s issued share capital comprised 64,509,642 ordinary shares of one pence each, of which 21,821,917 ordinary shares were held in treasury.

At general meetings of the Company, on a show of hands every Shareholder who is present in person or by proxy shall have one vote and on a poll every Shareholder present in person shall have one vote for every ordinary share held. Shares held in treasury do not carry voting rights. The total voting rights of the Company at 31 December 2018 were 42,687,725.

Issue of shares
On 11 October 2005, the Company applied for a block listing of 1,300,000 ordinary shares on the main market of the London Stock Exchange. As at 31 December 2018, and at the date of signing this report, a balance of 745,830 shares may be issued under this block listing.

No shares were issued during the year or since the year end.

Purchase of shares
During the year ended 31 December 2018, the Company purchased in the stock market 1,375,000 ordinary shares (with a nominal value of £13,750) to be held in treasury, at a total cost of £4,290,000. This represented 2.1 per cent of the issued share capital at 31 December 2017. During the year ended 31 December 2018, no shares were purchased for cancellation.

Subsequent to the year end of 31 December 2018 and up to 12 March 2019, the date of signing this report, the Company purchased in the stock market 450,000 ordinary shares (with a nominal value of £4,500) for treasury, at a total cost of £1,371,000, representing 0.7 per cent of the issued share capital as at 31 December 2018.

The share purchases were made with a view to reducing discount volatility and maintaining the middle market price at which the shares traded at close to the NAV.

Sale of shares from treasury
No shares were sold from treasury during the year ended 31 December 2018 or since the year end.

Shares held in treasury
Holding shares in treasury enables a company to cost effectively issue shares that might otherwise have been cancelled. The total number of own shares held in treasury as at 31 December 2018, including those shares bought back in prior accounting periods, was 21,821,917 ordinary shares. The Board has not set a limit on the number of shares that can be held in treasury at any one time. The maximum number of own shares held in treasury during the year was 21,821,917 ordinary shares (with a nominal value of £218,219.17) representing 33.8 per cent of the issued share capital at the time they were held in treasury.

Going concern
The Company’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic Report above. In addition, notes 16 and 17 of the Financial Statements below include the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments; and its risk exposure. The Company’s principal risks are set out in the Strategic Report above. The Company’s assets consist principally of a diversified portfolio of listed equity shares, which in most circumstances are realisable within a short period of time and exceed its liabilities by a significant amount.

After due consideration, the Directors have concluded that the Company has adequate resources to continue in operational existence for the next year. For this reason, they have adopted the going concern basis in preparing the Financial Statements.

Long-term viability statement
The Directors have assessed the prospects of the Company over a period longer than one year. The Board considers that, for a company with an investment objective to provide Shareholders with an attractive real long-term return by investing globally in undervalued securities, a period of five years is an appropriate period to consider for the purpose of the Long-term Viability Statement. Furthermore, five years is the time period used for identifying long-term value, as detailed in the Strategic Report in the investment strategy section above.

In making its assessment, the Board considered a number of factors, including those detailed below:

The Board’s assessment was based on the following assumptions:

The Board considers that, following its assessment, there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial period. Under that law, they have elected to prepare the Financial Statements in accordance with UK Accounting Standards (United Kingdom Generally Accepted Accounting Practice), 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:

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Act and include the information required by the Listing Rules of the FCA. 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 comply with that law and those regulations.

The Directors, to the best of their knowledge, state that:

The Annual Report and Financial Statements, taken as a whole, are considered by the Board to be fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company’s position and performance, business model and strategy.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. The work carried out by the Auditor does not include consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the Financial Statements since they were initially presented on the website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

On behalf of the Board
Teddy Tulloch
Chairman
12 March 2019
 

NON-STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company’s statutory accounts for the years ended 31 December 2017 and 31 December 2018 but is derived from those accounts. Statutory accounts for the year ended 31 December 2017 have been delivered to the Registrar of Companies, and those for the year ended 31 December 2018 will be delivered in due course. The Auditor has reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Act. The text of the Auditor’s report can be found in the Company’s full Annual Report and Financial Statements at www.epgot.com.
 

INCOME STATEMENT
for the year ended 31 December 2018



Note

Revenue 
£’000 
2018 
Capital 
£’000 

Total
£’000 

Revenue 
£’000 
2017 
Capital
£’000

Total 
£’000 
(Losses)/gains on investments at fair value
8


(13,994)

(13,994)


17,318 

17,318 
Foreign exchange gains/(losses) on capital items

576 

576 


(551)

(551)
Income 2 4,676  4,676  4,014  4,014 
Management fee 3 (950) (950) (982) (982)
Other expenses 4 (406) (406) (376) (376)
Net return before finance costs and taxation
3,320 

(13,418)

(10,098)

2,656 

16,767 

19,423 
Finance costs
Interest payable and related charges





Net return before taxation 3,320  (13,418) (10,098) 2,656  16,767  19,423 
Taxation 5 (330) (330) (202) (202)
Net return after taxation 2,990  (13,418) (10,428) 2,454  16,767  19,221 
pence  pence  pence pence  pence pence 
Return per ordinary share 7 6.9  (31.0) (24.1) 5.3  36.3  41.6 

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

The total column of this statement is the profit and loss account of the Company. The revenue and capital columns are prepared under guidance published by the AIC.

There were no items of other comprehensive income in the year and therefore the return for the year is also the total comprehensive income for the year.

Dividend information

A final dividend for the year ended 31 December 2018 of 5.5p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 6.5p per ordinary share (2017: final dividend of 5.3p) has been recommended by the Board. Subject to Shareholders’ approval, this dividend will be payable on 24 May 2019 to Shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019. Based on 42,237,725 ordinary shares, being the number of ordinary shares in issue (excluding shares held in treasury) on 12 March 2019, the date of signing this report, the total dividend payment will amount to £2,745,000. Dividends are accounted for in the period in which they are paid. Further information on dividend distributions can be found in note 6 of these Financial Statements.

The notes form part of these Financial Statements.
 

BALANCE SHEET
as at 31 December 2018


Note
2018
£’000
2017
£’000
Fixed asset investments
Investments at fair value through profit or loss 8 116,969 144,663
Current assets
     Debtors 10 503 513
     Cash at bank and short-term deposits 14,473 4,298
14,976 4,811
Current liabilities
     Creditors 11 146 656
146 656
Net current assets 14,830 4,155
Net assets 131,799 148,818
Capital and reserves
Called-up share capital 12 645 645
Share premium 1,597 1,597
Capital redemption reserve 14 14
Special reserve 50,662 54,952
Capital reserve 74,017 87,435
Revenue reserve 4,864 4,175
Total Shareholders’ funds 131,799 148,818
pence pence
Net asset value per ordinary share 14 308.8 337.7

These Financial Statements were approved and authorised for issue by the Board of Directors of EP Global Opportunities Trust plc on 12 March 2019 and were signed on its behalf by:

Teddy Tulloch
Chairman

Registered in Scotland No. 259207

The notes form part of these Financial Statements.
 

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
for the year ended 31 December 2018




Note

Share
capital
£’000

Share
premium
£’000
Capital
redemption
reserve
£’000

Special 
reserve 
£’000 

Capital
reserve
£’000

Revenue 
reserve 
£’000 


Total  
£’000 
Year to 31 December 2018
At 31 December 2017 645 1,597 14 54,952  87,435  4,175  148,818 
Net return after taxation - - - (13,418) 2,990  (10,428)
Dividends paid 6 - - - (2,301) (2,301)
Share purchases for treasury 13 - - - (4,290) (4,290)
At 31 December 2018 645 1,597 14 50,662  74,017  4,864  131,799 
Year to 31 December 2017
At 31 December 2016 645 1,597 14 66,630  70,668 4,203  143,757 
Net return after taxation - - - 16,767 2,454  19,221 
Dividends paid 6 - - - - (2,482) (2,482)
Share purchases for treasury 13 - - - (11,678) - (11,678)
At 31 December 2017 645 1,597 14 54,952  87,435 4,175  148,818 

The notes form part of these Financial Statements.
 

NOTES TO THE FINANCIAL STATEMENTS
at 31 December 2018

1. Accounting policies

Statement of compliance
EP Global Opportunities Trust plc is a company incorporated in Scotland. The Company is registered as a public limited company and is an investment company within the terms of section 833 of the Act. The registered office is detailed below. The nature of the Company’s operations and its principal activities are set out in the Strategic Report above.

The Company’s Financial Statements have been prepared under FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” and in accordance with the Act and with the Statement of Recommended Practice issued by the AIC in November 2014 (the “AIC SORP”). The Company meets the requirements of section 7.1A of FRS 102 and therefore has elected not to present the Statement of Cash Flows for the year ended 31 December 2018.

The comparative figures for the Financial Statements are for the year ended 31 December 2017.

Going concern
As detailed in the Directors’ Report above, the Financial Statements are prepared on a going concern basis, being a period of at least 12 months from the date this Annual Report is approved and on the basis that approval as an investment company continues to be met. All of the Company’s activities are continuing.

Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business. The Company primarily invests in listed companies.

Income recognition
Dividend and other investment income is included as revenue on the ex-dividend date, the date the Company’s right to receive payment is established. Dividends from overseas companies are shown gross of withholding tax. Deposit interest receivable is included on an accruals basis.

Expenses and finance costs
All management expenses and finance costs are accounted for on an accruals basis. All operating expenses and finance costs are charged through the revenue account in the Income Statement except costs that are incidental to the acquisition or disposal of investments, which are charged to the capital account in the Income Statement. Finance costs are debited using the effective interest rate method. Transaction costs are included within the gains and losses on investments, as disclosed in the Income Statement. Research costs are included within other expenses, as disclosed in the Income Statement.

Investments
In accordance with FRS 102, Sections 11 and 12, all investments held by the Company are designated as held at fair value upon initial recognition and are measured at fair value through profit or loss in subsequent accounting periods. Investments are initially recognised at cost, being the fair value of the consideration given.

After initial recognition, investments are measured at fair value, with changes in the fair value of investments recognised in the Income Statement and allocated to capital. Realised gains and losses on investments sold are calculated as the difference between sales proceeds and cost.

For investments actively traded in organised financial markets, fair value is generally determined by reference to Stock Exchange quoted market bid prices at the close of business on the Balance Sheet date, without adjustment for transaction costs necessary to realise the asset. Unlisted investments will be valued by the Directors at fair value, using the guidelines on valuation published by the International Private Equity and Venture Capital Association (“IPEVC Valuation Guidelines”). This represents the Directors’ view of the amount for which an asset could be exchanged between knowledgeable willing parties in an arm’s length transaction.

Foreign currency
The Financial Statements have been prepared in sterling, rounded to the nearest £’000, which is the functional and reporting currency of the Company. Sterling is the currency of the primary economic environment in which the Company operates.

Transactions denominated in foreign currencies are converted to sterling at the actual exchange rate as at the date of the transaction. Assets and liabilities denominated in foreign currencies at the year end are reported at the rate of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in the income statement in the capital or the revenue column, depending on whether the gain or loss is of a capital or revenue nature.

Taxation
The charge for taxation is based on the net revenue for the year and takes into account taxation deferred or accelerated because of timing differences between the treatment of certain items for accounting and taxation purposes. Full provision for deferred taxation is made under the liability method, without discounting, on all timing differences between taxable profits and total comprehensive income that have arisen but not been reversed by the Balance Sheet date, unless such provision is not permitted by FRS 102. Deferred tax assets are only 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 Financial Statements which are capable of reversal in one or more subsequent periods.

Cash at bank and short-term deposits
Cash at bank and short-term deposits comprise cash at bank and short-term deposits with an original maturity date of three months or less.

Short-term debtors and creditors
Debtors and creditors with no stated interest rate and receivable within one year are recorded at transaction price. Any losses arising from impairment are recognised in the Income Statement in other operating expenses.

Dividends payable to Shareholders
Final dividends are recognised as a liability in the period in which they have been approved by Shareholders in a general meeting. Interim dividends are recognised as a liability in the period in which they have been declared and paid.

Loans
All interest-bearing loans and borrowings which are basic financial instruments are initially recognised at the sterling present value of cash payable to the bank (including interest). After initial recognition, they are measured at amortised cost using the effective interest rate method. The effective interest rate amortisation is included in finance costs in the Income Statement. Loans are revalued to the sterling equivalent using exchange rates at the appropriate date, with the gain or loss being charged through the revenue account in the Income Statement.

Borrowings that are payable within one year shall be measured at the undiscounted amount of the cash or other consideration expected to be paid.

Own shares held in treasury
From time to time, the Company buys back shares and holds them in treasury for potential sale at a later date or for cancellation. The consideration paid and received for these shares is accounted for in Shareholders’ funds and, in accordance with the AIC SORP, the cost has been allocated to the Company’s special reserve. The cost of shares sold from treasury is calculated by taking the average cost of shares held in treasury at the time of sale. Any difference between the proceeds from shares sold from treasury and the average cost is taken to share premium.

Judgements and key sources of estimation uncertainty
The preparation of the Financial Statements requires the Company to make judgements, estimates and assumptions that affect amounts reported for assets and liabilities as at the Balance Sheet date and the amounts reported for revenues and expenses during the year. The nature of estimation means that the actual outcomes could differ from those estimates, possibly significantly. The judgements related to the Company’s previous unlisted investment in Edinburgh Partners Limited, which was acquired by Franklin Resources Inc. in May 2018, as detailed in note 8.

Reserves

Capital reserve
The following are accounted for in this reserve:

Share premium
This reserve records the amount above the nominal value received for shares sold, less transaction costs.

Special reserve
The special reserve was created by a reduction in the share premium account by order of the High Court. It can be used for the repurchase of the Company’s ordinary shares.

In accordance with the AIC SORP, the consideration paid for shares bought into and held in treasury is shown as a deduction from the special reserve. The average cost of shares sold from treasury is shown as an increase to the special reserve, with any consideration in excess of average cost being held in the share premium reserve.

Capital redemption reserve
The capital redemption reserve accounts for amounts by which the issued capital is diminished through the repurchase and cancellation of the Company’s own shares.

Revenue reserve
The revenue reserve represents the balance of revenue retained within the Company after the payment of any dividends.

2. Income

2018
£’000
2017
£’000
Income from investments
UK net dividend income 649 695
Overseas dividend income 4,004 3,294
 Income from investments 4,653 3,989
Total income comprises
Dividends 4,653 3,989
Bank interest 23 7
Interest on withholding tax reclaim - 18
4,676 4,014

3. Management fee

2018
£’000
2017
£’000
Management fee 950 982
950 982

With effect from 16 July 2014, the Company appointed Edinburgh Partners AIFM Limited as the Company’s AIFM. Under the Management Agreement, the AIFM is entitled to a fee paid monthly in arrears at the rate of 0.75 per cent per annum of the equity market capitalisation of the Company to £100,000,000 and at a rate of 0.65 per cent per annum of the equity market capitalisation which exceeds this amount. The equity market capitalisation is based on shares in circulation which excludes shares held in treasury. No performance fee will be paid.

No management fee is payable in relation to the Company’s investment in Edinburgh Partners Emerging Opportunities Fund, which is managed by Edinburgh Partners. Details relating to this investment are set out in notes 8 and 9.

During the year ended 31 December 2018, the management fees payable to the AIFM totalled £950,000 (2017: £982,000). At 31 December 2018, there was £78,000 outstanding payable to the AIFM (2017: £164,000) in relation to management fees.

During the year ended 31 December 2018, the administration fees payable to the AIFM, as detailed in note 4, totalled £135,000 (2017: £130,000). At 31 December 2018, there was £11,000 outstanding payable to the AIFM (2017: £22,000) in relation to administration fees.

During the year ended 31 December 2018, the Company paid Edinburgh Partners £25,000 (2017: £25,000) for marketing-related services. At 31 December 2018, there was £6,000 outstanding to Edinburgh Partners (2017: £6,000) in relation to marketing-related services. The fees for marketing-related services are included within other expenses as detailed in note 4.

As a consequence of the new MiFID II regulations which became effective on 3 January 2018, research costs must be unbundled from trading commission on the purchase and sale of investments and charged in accordance with MiFID II. During the year ended 31 December 2018, the Company agreed to pay £8,000 as a contribution to research costs incurred by the Investment Manager (2017: £nil). The cost has been included in other expenses as detailed in note 4.

4. Other expenses

2018
£’000
2017
£’000
Administration fee 135 130
Auditor’s remuneration (excluding VAT) for:
        Audit 20 20
        Non-audit services - -
Directors’ remuneration 91 83
Other 160 143
406 376

Directors’ remuneration and outstanding amounts are shown in the Directors’ Remuneration Report in the full Annual Report and Financial Statements.

5. Taxation

a) Analysis of charge in year
Revenue
£’000
2018
Capital
£’000

Total
£’000

Revenue
£’000
2017
Capital
£’000

Total
£’000
Current tax
Overseas tax suffered 330 - 330 202 - 202
330 - 330 202 - 202

b) The current taxation charge for the year ended 31 December 2018 is higher than the standard rate of corporation tax in the UK of 19 per cent (NB The standard rate of corporation tax has been 19 per cent from 1 April 2017. Previously it had been 20 per cent from 1 April 2015). The differences are explained below:


Revenue 
£’000 
2018 
Capital 
£’000 

Total 
£’000 

Revenue 
£’000 
2017 
Capital 
£’000 

Total 
£’000 
Net return before taxation 3,320  (13,418) (10,098) 2,656  16,767  19,423 
Theoretical tax at UK corporation tax rate of 19 per cent (2017: 19.25 per cent)

631 


(2,549)


(1,918)


511 


3,228 


3,739 
Effects of:
- UK dividends that are not taxable
(123)


(123)

(133)


(133)
- Foreign dividends that are not taxable
(761)


(761)

(634)

 - 

(634)
- Non-taxable investment losses/(gains)

2,549 

2,549 

-

(3,228)

(3,228)
- Unrelieved excess expenses 253  253  256  256 
- Overseas tax suffered 330  330  202  202 
330  330  202  202 

At 31 December 2018, the Company had no unprovided deferred tax liabilities (2017: £nil). At that date, based on current estimates and including the accumulation of net allowable losses, the Company had unrelieved losses of £8,722,000 (2017: £7,389,000) that are available to offset future taxable revenue. A deferred tax asset of £1,483,000 (2017: £1,256,000), based on the corporation tax rate of 17 per cent effective from 1 April 2020, has not been recognised because the Company is not expected to generate sufficient taxable income in future periods in excess of the available deductible expenses and accordingly, the Company is unlikely to be able to reduce future tax liabilities through the use of existing surplus losses.

Deferred tax is not provided on capital gains and losses arising on the revaluation or disposal of investments because the Company meets (and intends to continue for the foreseeable future to meet) the conditions for approval as an investment trust company, pursuant to sections 1158 and 1159 of the CTA.

6. Dividends

2018 
£’000 
2017
£’000
Declared and paid
2017 final dividend of 5.3p per ordinary share paid in May 2018 (2016: final dividend of 4.3p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 5.3p per ordinary share paid, in May 2017) 2,301 2,482 
Net revenue return after taxation 2,990 2,454 
Proposed
2018 final dividend of 5.5p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 6.5p per ordinary share (2017: final dividend of 5.3p) per ordinary share
2,745

2,310 

The Directors recommend a final dividend of 5.5p per ordinary share and a special dividend of 1.0p per ordinary share, a total of 6.5p per ordinary share, for the year ended 31 December 2018 (2017: final dividend of 5.3p). Subject to shareholder approval at the Annual General Meeting to be held on 24 April 2019, this dividend will be payable on 24 May 2019 to Shareholders on the register at the close of business on 3 May 2019. The ex-dividend date will be 2 May 2019. Based on 42,237,725 ordinary shares, being the number of ordinary shares in issue (excluding shares held in treasury) at 12 March 2019, the date of signing this report, the total dividend payment will amount to £2,745,000.

7. Return per ordinary share


Net 
return 
£’000 

2018
Ordinary
Shares1

Per 
share 
pence 

Net
return
£’000

2017
Ordinary
Shares1

Per
share
pence
Revenue return after taxation
2,990 

43,335,274

6.9 

2,454

46,234,011

5.3
Capital return after taxation
(13,418)

43,335,274

(31.0)

16,767

46,234,011

36.3
Total return after taxation (10,428) 43,335,274 (24.1) 19,221 46,234,011 41.6

1 Weighted average number of ordinary shares, excluding shares held in treasury, in issue during the year.  

8. Investments

2018 
£’000 
2017 
£’000 
Listed investments 116,969  142,881 
Unlisted investments 1,782 
116,969  144,663 

Unlisted 
£’000 

Listed 
£’000 
2018 
Total  
£’000 
2017 
Total 
£’000 
Analysis of investment portfolio movements
Opening bookcost 214  112,884  113,098  112,079 
Opening investment holdings gains 1,568  29,997  31,565  27,387 
Opening valuation 1,782  142,881  144,663  139,466 
Movements in the year:
Purchases at cost 40,091  40,091  24,373 
Sales - proceeds (2,329) (51,462) (53,791) (36,494)
          - realised gains on sales 2,115  12,238  14,353  13,140 
Increase in investment holding gains (1,568) (26,779) (28,347) 4,178 
Closing valuation 116,969  116,969  144,663 
Closing bookcost 113,751  113,751  113,098 
Closing investment holding gains 3,218  3,218  31,565 
Closing valuation 116,969  116,969  144,663 

Within the listed investments detailed above, there is included the Company’s investment in the Edinburgh Partners Emerging Opportunities Fund, a sub-fund of Edinburgh Partners Opportunities Fund plc, an Irish domiciled open-ended investment company listed on the Dublin Stock Exchange as detailed in note 9, which was valued at £3,070,000 at 31 December 2018 (2017: £3,474,000). As at 30 September 2018, the most recent year end of the Edinburgh Partners Emerging Opportunities Fund, the aggregate amount of capital and reserves was US$11,440,000. For the year to 30 September 2018 the profit for the year after tax and distributions was US$1,098,000.

The unlisted investment detailed in the table above related to 71,294 (2017: 71,294) shares in Edinburgh Partners Limited, which was acquired by Franklin Resources Inc. in May 2018. In addition to the proceeds detailed in the table above, the Company may receive further proceeds, the maximum amount of which will not exceed 0.25% of the Company’s net assets as at 31 December 2018. Additional information on the acquisition is detailed in the Chairman’s Statement above.


Unlisted 
£’000 

Listed 
£’000 
2018 
Total 
£’000 
2017
Total
£’000
Analysis of capital gains and losses
Realised gains on sales 2,115  12,238  14,353  13,140
Changes in fair value of investments (1,568) (26,779) (28,347) 4,178
547  (14,541) (13,994) 17,318

Fair value hierarchy
In accordance with FRS 102, the Company must disclose the fair value hierarchy of financial instruments.

The different levels of the fair value hierarchy are as follows:

  1. The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.
  2. Inputs other than quoted prices included within Level 1 that are observable (developed using market data) for the asset or liability, either directly or indirectly.
  3. Inputs are unobservable (for which market data is unavailable) for the asset or liability.

All of the Company’s financial instruments fall into level 1. The Company’s previous investment in Edinburgh Partners Limited, which was acquired by Franklin Resources Inc. in May 2018 fell into level 3 and was fair valued using an unquoted price that is derived from significant assumptions underlying any valuation models and techniques used where the fair value has been determined using generally accepted valuation techniques and models. A reconciliation of the fair value movements of level 3 investments is shown in the unlisted column of the table above.

Transaction costs
During the year, the Company incurred transaction costs of £61,000 (2017: £45,000) and £46,000 (2017: £43,000) on purchases and sales of investments respectively. These amounts are included in (losses)/gains on investments at fair value, as disclosed above in the Income Statement of these Financial Statements.

Research costs
As a consequence of the new MiFID II regulations which became effective on 3 January 2018, research costs must be unbundled from trading commission on the purchase and sale of investments and charged in accordance with MiFID II. During the year ended 31 December 2018, the Company agreed to pay £8,000 as a contribution to research costs incurred by the Investment Manager (2017: £nil). The cost has been included in other expenses as detailed in note 4.

9. Significant holdings
As detailed in the Strategic Report above and in note 8, as at 31 December 2018, the Company owned 36.9 per cent (2017: 36.5 per cent) of the net assets of the Edinburgh Partners Emerging Opportunities Fund, a sub-fund of Edinburgh Partners Opportunities Fund plc, which is an Irish domiciled open-ended investment company listed on the Dublin Stock Exchange. The registered office of Edinburgh Partners Opportunities Fund plc is 25/28 North Wall Quay, International Financial Services Centre, Dublin 1, Ireland.

The Company had no other holdings of 3.0 per cent or more of the share capital of any portfolio companies.

10. Debtors

2018
£’000
2017
£’000
Dividends receivable 204 96
Due from brokers on sales - 190
Prepayments and accrued income 29 20
Taxation recoverable 270 207
503 513

11. Creditors: amounts falling due within one year

2018
£’000
2017
£’000
Due to brokers on shares purchased for treasury - 404
Other creditors and accruals 146 252
146 656

   

12. Share capital Number
of shares
Ordinary 1p

2018
£’000
Number 
of shares 
Ordinary 1p

2017
£’000
Allotted, called-up and fully paid:
At 1 January 64,509,642 645 64,509,642  645
At 31 December 64,509,642 645 64,509,642  645

The voting rights attached to the Company’s shares are detailed in the extracts from the Directors’ Report above.

Duration of the Company
The Company does not have a termination date or the requirement for any periodic continuation vote.
 

13. Own shares held in treasury
Details of own shares purchased for and sold from treasury are shown below:

2018
Number of
shares
2017
Number of
shares
At 1 January 20,446,917 16,621,917
Shares purchased for treasury 1,375,000 3,825,000
At 31 December 21,821,917 20,446,917

During the year ended 31 December 2018, 1,375,000 shares (2017: 3,825,000) were purchased for treasury at a total cost of £4,290,000 (2017: £11,678,000) and no shares were sold from treasury (2017: none). Please see the Chairman’s Statement and Directors’ Report above for details of share buy backs.

14. Net asset value per ordinary share
The NAV, calculated in accordance with the Articles of Association, is as follows:

2018
pence
2017
pence
Ordinary share 308.8 337.7

The NAV is based on net assets of £131,799,000 (2017: £148,818,000) and on 42,687,725 (2017: 44,062,725) ordinary shares, being the number of ordinary shares, excluding shares held in treasury, in issue at the year end.

15. Analysis of financial assets and liabilities

Interest rate and currency profile
The interest rate and currency profile of the Company’s financial assets and liabilities were:




No 
interest 
rate 
exposure 
£’000 
2018

Cash
flow
interest
rate risk
exposure
£’000






Total 
£’000 



No 
interest 
rate 
exposure 
£’000 
2017

Cash
flow
interest
rate risk
exposure
£’000






Total 
£’000 
Equity shares
Euro 30,759  - 30,759  33,015  - 33,015 
Japanese yen 21,754  - 21,754  29,268  - 29,268 
US dollar 15,379  - 15,379  22,976  - 22,976 
Hong Kong dollar 14,625  - 14,625  17,014  - 17,014 
Sterling 14,051  - 14,051  22,123  - 22,123 
Swiss franc 9,187  - 9,187  8,890  - 8,890 
Singapore dollar 3,237  - 3,237  - - -
Thailand baht 3,182  - 3,182  3,863  - 3,863 
Indonesian rupee 2,513  - 2,513  4,412  - 4,412 
Norwegian Krone 2,282  - 2,282  3,102  - 3,102 
Cash at bank and short-term deposits
US dollar 14,423 14,423  4,230 4,230 
Sterling 50 50  68 68 
Debtors
Euro 96  - 96  100  - 100 
Japanese yen - 57  - 57 
Sterling 113  - 113  210  - 210 
Swiss franc 219  - 219  146  - 146 
Singapore dollar 75  - 75  -
Short-term creditors
Euro - - (190) - (190)
Sterling (146) - (146) (466) - (466)
117,326  14,473 131,799  144,520  4,298 148,818 

At 31 December 2018, the Company had no financial liabilities other than the short-term creditors as stated above (2017: £nil). The carrying amount on the Balance Sheet approximates the fair value of all financial assets and liabilities.

The following exchange rates were used to convert investments, assets and liabilities to the functional currency of the Company which is sterling.

Foreign Exchange rates against sterling 2018 2017 Change   
Euro 1.11 1.13 (2)%
Japanese yen 139.90 152.39 (8)%
US dollar 1.27 1.35 (6)%
Hong Kong dollar 9.98 10.57 (6)%
Swiss franc 1.25 1.32 (5)%
Singapore dollar 1.74 1.81 (4)%
Indonesian rupee 18,325.88 18,353.44 -    
Thailand baht 41.27 44.09 (6)%
Norwegian krone 11.03 11.06 -    

16. Risk analysis

Principal risks
The principal risks the Company faces are:

The Board undertakes an annual assessment and review of all the risks stated above together with a review of any new risks which may have arisen during the year. These risks are formalised within the Company’s risk assessment matrix.

The Investment Manager monitors the financial risks affecting the Company on an ongoing basis within the policies and guidelines determined by the Board. The Directors receive financial information, which is used to identify and monitor risk, quarterly. The Company may enter into derivative contracts to manage risk. A description of the principal risks the Company faces is set out below.

Investment and strategy risk
There can be no guarantee that the investment objective of the Company, to provide Shareholders with an attractive real long-term total return by investing globally in undervalued securities, will be achieved.

The Investment Manager meets regularly with the Board to discuss the portfolio performance and strategy. The Board receives quarterly reports from the Investment Manager detailing all portfolio transactions and any other significant changes in the market or stock outlooks.

Key manager risk
A change in key investment management personnel who are involved in the management of the Company’s portfolio could impact on future performance and the Company’s ability to deliver on its investment strategy.

The Investment Manager frequently considers succession planning. The Board is in regular contact with the Investment Manager and would be informed of any proposed change in the lead manager.

Discount volatility risk
The Board recognises that it is in the long-term interests of Shareholders to reduce discount volatility and believes that the prime driver of discounts over the longer term is investment performance. The Company is permitted to employ gearing, a process whereby funds are borrowed principally for the purpose of purchasing securities, should the Board feel that it is appropriate to do so. The use of gearing can magnify discount volatility.

The Board actively monitors the discount at which the Company’s shares trade, and is committed to using its powers to allot or repurchase the Company’s ordinary shares with a view to maintaining the middle market price at which the shares trade at close to the net asset value most recently published by the Company (taking into account the effect on the NAV of any rights to which the shares are trading ex-dividend).

The Board’s commitment to allot or repurchase ordinary shares is subject to it being satisfied that any offer to allot or purchase shares is in the best interests of Shareholders of the Company as a whole, the Board having the requisite authority pursuant to the Articles of Association and relevant legislation to allot or purchase shares, and all other applicable legislative and regulatory provisions.

Details of the shares purchased into treasury during the year are set out in note 13.

Market risk
The Company is exposed to market risk due to fluctuations in the market prices of its investments. Market risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Investment Manager monitors the prices of financial instruments held by the Company on an ongoing basis.

The Investment Manager actively monitors market and economic data and reports to the Board, which considers investment policy on a regular basis. The NAV of the Company is issued daily to the London Stock Exchange and is also available on the Company’s website at www.epgot.com.

Details of the Company’s investment portfolio as at 31 December 2018 are disclosed in the Portfolio of Investments above.

If the investment portfolio valuation fell by 1.0 per cent from the amount detailed in the Financial Statements as at 31 December 2018, it would have the effect, with all other variables held constant, of reducing the total return before taxation and therefore net assets by £1,170,000 (2017: £1,447,000). An increase of 1.0 per cent in the investment portfolio valuation would have an equal and opposite effect on the total return before taxation and net assets.

Foreign currency risk
The functional currency of the Company is sterling. The international nature of the Company’s investment activities gives rise to a currency risk which is inherent in the performance of its overseas investments. The Company’s overseas income is also subject to currency fluctuations.

It is not the Company’s policy to hedge this risk on a continuous basis.

Details of the Company’s foreign currency risk exposure as at 31 December 2018 are disclosed in note 15.

If sterling had strengthened by 1.0 per cent against all other currencies on 31 December 2018, with all other variables held constant, it would have the effect of reducing the total return before taxation and net assets by £1,177,000 (2017: £1,269,000). If sterling had weakened by 1.0 per cent against all other currencies, there would have been an equal and opposite effect on the total return before taxation and net assets.

Regulatory risk
The Company operates in an evolving regulatory environment and faces a number of regulatory risks.

Relevant legislation and regulations which apply to the Company include the Act, the CTA, the Listing Rules and the Disclosure Guidance and Transparency Rules of the FCA, the AIFMD, the GDPR, the Foreign Account Tax Compliance Act and the Common Reporting Standard. In accordance with the Packaged Retail and Insurance-based Investment Products Regulation, a Key Information Document was made available on the Company’s website from January 2019.

Failure to qualify under the terms of sections 1158 and 1159 of the CTA may lead to the Company being subject to capital gains tax. A breach of the rules of the UK Listing Authority may result in censure by the FCA and/or the suspension of the Company’s shares from listing.

The Directors note the new corporate offence of failure to prevent tax evasion and believe all necessary steps have been taken to prevent facilitation of tax evasion.

The implementation of GDPR provides for greater data privacy. While the risk to the Company is deemed to be low, the impact of fines should they occur could be significant. The Directors are satisfied that all necessary steps have been taken to prevent any breach of GDPR, including ensuring that all third party service providers have appropriate GDPR policies in place.

If all price sensitive issues are not disclosed in a timely manner, this could create a misleading market in the Company’s shares. The Directors are aware of their responsibilities relating to price sensitive information and would consult with their advisers if any potential issues arose. This includes ensuring compliance with the Market Abuse Regulation which came into effect in the UK on 3 July 2016. The AIFM would notify the Board immediately if it became aware of any disclosure issues.

The Investment Manager has a comprehensive market abuse policy and any potential breaches of this policy would be promptly reported to the Board.

Although not considered to be a principal risk for the Company, the Board continues to monitor developments around the UK’s departure from the European Union. Many of the Company’s holdings, particularly those in European and UK equities, will be exposed to the outcome of the Brexit negotiation, positively or negatively. We believe that overall the Company’s portfolio has a relatively modest exposure to the UK economy, but the Board and Investment Manager remain alert to developments at both macro-economic level and a stock-specific level.

The Board has agreed service levels with the Company Secretary and Investment Manager which include active and regular review of compliance with these requirements.

Other risks
Other risks the Company faces are:

A description of these other risks is set out below.

Liquidity risk
The Company’s policy with regard to liquidity is to ensure continuity of funding. Short-term flexibility is achieved through cash management.

The Company’s assets comprise mainly of readily realisable securities which can be sold freely to meet funding requirements if necessary. Securities listed on a recognised stock exchange have been valued at bid prices and exchange rates ruling at the close of business on 31 December 2018. In certain circumstances, the market prices at which investments are valued may not represent the realisable value of those investments, taking into account both the size of the Company’s holding and the frequency with which such investments are traded.

The maturity profile of the Company’s financial liabilities, including creditors, is as follows:

As at
31 December
2018
£’000
As at
31 December
 2017
£’000
In one year or less 146 656
146 656


Credit risk
Credit risk is the risk of financial loss to the Company if the contractual party to a financial instrument fails to meet its contractual obligations.

The carrying amounts of financial assets best represent the maximum credit risk exposure at the Balance Sheet date.

Investment transactions are carried out with a large number of brokers whose creditworthiness is reviewed by the Investment Manager. Transactions are ordinarily undertaken on a delivery versus payment basis whereby the Company’s custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

Cash is only held at banks and in liquidity funds that have been identified by the Board as reputable and of high credit quality. As at 31 December 2018, The Northern Trust Company London Branch had a long-term rating from Standard and Poors of AA-.

The maximum exposure to credit risk as at 31 December 2018 was £14,976,000 (2017: £4,811,000). The calculation is based on the Company’s credit risk exposure, being cash and debtors, as at 31 December 2018 and this may not be representative of the year as a whole.

None of the Company’s assets are past due or impaired.

Interest rate risk
The Company’s assets and liabilities, excluding short-term debtors and creditors, may comprise financial instruments which include investments in fixed interest securities.

Details of the Company’s interest rate exposure as at 31 December 2018 are disclosed in note 15.

The majority of the Company’s assets were non-interest bearing as at 31 December 2018. Surplus cash is invested in liquidity funds.

If interest rates had reduced by 0.25 per cent (2017: 0.25 per cent) from those obtained as at 31 December 2018 it would have the effect, with all other variables held constant, of decreasing the total return before taxation and therefore net assets on an annualised basis by £36,000 (2017: £11,000). If there had been an increase in interest rates of 0.25 per cent (2017: 0.25 per cent) there would have been an equal and opposite effect in the total return before taxation and net assets. The calculations are based on cash at bank and short-term deposits as at 31 December 2018 and these may not be representative of the year as a whole.

Gearing risk
Gearing can be used to enhance long-term returns to Shareholders. The Company is permitted to employ gearing should the Board feel it appropriate to do so up to a maximum of 25 per cent of total assets.

The use of gearing is likely to lead to volatility in the NAV, meaning that a relatively small movement either down or up in the value of the Company’s total investments may result in a magnified movement in the same direction of the NAV. The greater the level of gearing, the greater the level of risk and likely fluctuation in the share price.

At the year end, the Company had no gearing (2017: nil).

Operational risk
There are a number of operational risks associated with the fact that third parties undertake the Company’s administration and custody. The main risk is that third parties may fail to ensure that statutory requirements, such as Companies Act and the UK Listing Authority requirements, are met.

The Board regularly receives and reviews management information on third parties which the Company Secretary compiles. In addition, each of the third parties provides a copy of its report on internal controls (ISAE 3402, SSAE 16 or equivalent) to the Board each year.

Other financial risk
If the Company utilises inappropriate accounting policies or fails to comply with current or new accounting standards, the main risk is that this may lead to a breach of regulations.

The AIFM employs Link Alternative Fund Administrators Limited to prepare all financial statements of the Company and meets with the Auditor at least once a year to discuss all financial matters including appropriate accounting policies.

The Company is a member of the AIC, a trade body which promotes investment trusts and also develops best practice for its members.

17. Capital management policies
The Company’s investment objective is to provide Shareholders with an attractive real long-term total return by investing globally in undervalued securities. The portfolio is managed without reference to the composition of any stock market index. In pursuing this objective, the Board has a responsibility for ensuring the Company’s ability to continue as a going concern. This involves the ability to: issue and buy back share capital within limits set by the Shareholders in general meeting; borrow monies in the short and long term; and pay dividends to Shareholders out of current year revenue earnings as well as out of brought-forward revenue reserves.

The Company’s capital comprises:

2018
£’000
2017
£’000
Called-up share capital 645 645
Share premium 1,597 1,597
Capital redemption reserve 14 14
Special reserve 50,662 54,952
Capital reserve 74,017 87,435
Revenue reserve 4,864 4,175
Total Shareholders’ funds 131,799 148,818

The Company’s objectives for managing capital are the same as the previous year and have been complied with throughout the year.

18. Transactions with the AIFM and the Investment Manager
Information with respect to transactions with the AIFM and the Investment Manager is detailed in note 3 and in the Strategic Report above.

19. Related party transactions
Details in respect of the Directors’ remuneration are set out in note 4 and in the Directors’ Remuneration Report in the full Annual Report and Financial Statements. Under the AIC SORP, an investment manager is not considered to be a related party of the Company. There were no other transactions with related parties in the year ended 31 December 2018.

20. Post Balance Sheet events
As disclosed in the Extracts from the Directors’ Report above, subsequent to the year end and up to 12 March 2019, the date of signing this report, the Company bought back 450,000 ordinary shares into treasury at a total cost of £1,371,000.

As detailed in the Chairman's Statement above, Tom Walker will be appointed as a Director on 1 April 2019 and will be subject to election by Shareholders at the Annual General Meeting of the Company on 24 April 2019.

PERFORMANCE RECORD


Shareholders’  
funds   
Net asset 
value per 
ordinary 
share 
Share 
price per 
ordinary 
share 
Share price   
discount to   
net asset   
value   
Revenue  
return per  
ordinary  
share  

Dividend   
per ordinary   
share   

Ongoing       
charges       
ratio4         
Year ended
31 December
20041 £26.1m 116.4p 110.5p 5.1% 0.6p              0.4p    1.7%5    
2005 £52.2m 156.2p 154.5p 1.1% 1.1p 0.8p    1.5%5    
2006 £58.8m 172.8p 170.0p 1.6% 2.1p 1.8p    1.2%5    
2007 £57.7m 177.2p 160.0p 9.7% 2.7p 2.3p    1.1%5    
2008 £46.4m 150.4p 132.5p 11.9% 3.9p 3.1p    1.1%5    
2009 £50.7m 175.9p 172.0p 2.2% 2.7p 2.4p    1.0%5, 6
2010 £51.6m 188.2p 186.8p 0.7% 3.2p 2.8p    1.3%5    
2011 £95.1m 169.9p 167.0p 1.7% 5.0p 4.2p    0.8%7    
2012 £91.8m 183.1p 175.5p 4.2% 3.9p                 3.9p  1.1%    
2013 £112.6m 233.6p 230.0p 1.5% 2.7p   2.7p    1.1%    
2014 £112.1m 236.0p 234.6p 0.6% 3.7p 3.3p    1.1%    
2015 £118.4m 239.8p 234.5p 2.2% 3.1p 3.1p    1.0%    
2016 £143.8m 300.2p 293.0p 2.4% 5.3p 5.3p2         1.0%    
2017 £148.8m 337.7p 320.0p 5.2% 5.3p 5.3p          0.9%    
2018 £131.8m 308.8p 301.5p 2.3% 6.9p 6.5p2,3       0.9%    

1 Period 13 November 2003 to 31 December 2004. The Company commenced operations on the admission of its shares to trading on the London Stock Exchange on 15 December 2003.
2Includes a special dividend of 1.0p.
3Proposed dividend for the year.
4Ongoing charges ratio based on total expenses, excluding finance costs, transaction costs and certain non-recurring items for the year as a percentage of the average monthly net asset value.
5Total expense ratio based on total expenses for the year as a percentage of the average monthly net asset value.
6Total expense ratio 1.3 per cent excluding VAT refund.
7The total expense ratio would have been 1.0 per cent if investment management fees of £236,000 had not been waived as a consequence of the merger with Anglo & Overseas Plc.

Past performance is not a guide to future performance.
 

ANNUAL GENERAL MEETING

The Company’s Annual General Meeting will be held at The Bonham Hotel, 35 Drumsheugh Gardens, Edinburgh EH3 7RN on Wednesday, 24 April 2019 at 12.00 noon.

DIRECTORS

Teddy Tulloch (Chairman)
David Hough
David Ross
Giles Weaver

All of the Directors are non-executive and independent of the AIFM and the Investment Manager.

ALTERNATIVE INVESTMENT FUND MANAGER

Edinburgh Partners AIFM Limited
27-31 Melville Street
Edinburgh
EH3 7JF

INVESTMENT MANAGER

Edinburgh Partners Limited
27-31 Melville Street
Edinburgh
EH3 7JF

National Storage Mechanism
A copy of the full Annual Report and Financial Statements will shortly be submitted to the National Storage Mechanism (“NSM”) and will be available for inspection at the NSM, which is situated at: www.morningstar.co.uk/uk/NSM

Enquiries:

Dr Sandy Nairn
Kenneth J Greig

Edinburgh Partners AIFM Limited
Tel: 0131 270 3800

The Company’s registered office address is:

27-31 Melville Street
Edinburgh
EH3 7JF

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

LEI: 2138005T5CT5ITZ7ZX58

END


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Annual Financial Report - RNS