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Fidelity Special Values PLC   -  FSV   

Annual Financial Report

Released 11:02 01-Nov-2019

Annual Financial Report

FIDELITY SPECIAL VALUES PLC

Final Results for the year ended 31 August 2019

Financial Highlights:

Contacts

For further information, please contact:

Bonita Guntrip

Senior Company Secretary

01737 837320

FIL Investments International

CHAIRMAN’S STATEMENT

Fidelity Special Values PLC aims to achieve long term capital growth for Shareholders by investing in special situations. It is an actively managed contrarian Investment Trust that seeks out undervalued opportunities and thrives on volatility and uncertainty.

The Portfolio Manager, Alex Wright’s, approach is very much in keeping with Fidelity Special Values PLC’s heritage and history – that of an actively managed, contrarian investment trust which the Board believes will be appealing to both existing and potential investors alike. Alex focuses on buying unloved companies with the prospect of positive change, rather than those companies which are merely cheap. He invests in companies of all sizes and, in doing so, hopes to position the Company as the investment of choice for those seeking exposure to UK listed companies but with the benefit of investing up to 20% of the portfolio in listed companies on overseas exchanges in order to enhance Shareholder returns.

Whilst performance in the reporting year has been more challenging, long term performance remains well ahead of the Benchmark Index over three and five years (the Company’s NAV total return has increased by 45.1% over five years and the share price total return by 54.5%, compared to a Benchmark Index return of 32.1%). The Company’s shares remain in demand and we continue to issue shares. We are also pleased to report that the Company has won several prestigious awards as can be seen from the logos in the Annual Report.

Performance
The net asset value (“NAV”) of the Company fell by 4.9% over the year and the share price by 6.9%, both below the 0.4% return of the Benchmark Index (all performance data on a total return basis).

Alex Wright completed his seventh year as the Portfolio Manager, and the NAV performance of the Company over his tenure continues to be impressive, having increased in absolute terms during this period at an annualised rate of 12.8%, well ahead of the Benchmark Index return of 8.1% per annum. On a cumulative basis over Alex’s tenure, this represents a NAV total return of 132.7% compared to an Index return of 72.1%. The share price total return was an even more impressive 175.3%.

The reporting period has been challenging for UK equities in many ways. Global trade tensions have intensified and economic activity appears to be weakening, with global manufacturing PMIs (Purchasing Manager’s Indices, which are a leading indicator of economic health) trending downwards. Uncertainty around Brexit has also led to a marked depreciation of the sterling exchange rate (see chart in the Annual Report) and a more unfavourable environment for financial markets. Further, underlying economic growth appears to have slowed since 2018 to a rate below potential, reflecting the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on trade.

Against this backdrop, the Company’s performance has fallen behind that of the FTSE All-Share over the year, but Alex has laid the groundwork for future performance. He has used market volatility to recycle capital from mature holdings into earlier stage ideas at distressed valuations and focused on value opportunities in the more defensive segments of the market. Alex talks about this in more detail in his Portfolio Manager’s Review. The Company’s long term performance clearly demonstrates Alex’s strong stock selection abilities. We feel confident that Alex’s current approach will identify more winners than losers regardless of the Brexit outcome.

The contrarian nature of the Company’s investment selection means that the Board does not expect a consistent outperformance against the Benchmark Index every single year, although it believes that the portfolio has the potential to outperform significantly over the longer term. As ever, the Board encourages Shareholders to take a similarly long term view of their investment in the Company’s shares.

Outlook
The good news for contrarian investors is that the negative sentiment towards the UK is creating an unforgiving environment where investors’ behavioural biases cause them to avoid companies in uncertain or complex situations, resulting in valuation discounts for certain stocks. Alex’s process is designed to identify the most attractive of these and build a portfolio driven by positive change in companies and industries. He will continue to focus on strong stock picking opportunities and risk management and aims to deliver a positive relative performance of the Company’s NAV. The Board feels that the strategy in place is well aligned with the long term interests of the Company’s Shareholders.

OTHER MATTERS

Investment Objective
As reported in last year’s Annual Report and effective from 31 October 2018, the Board amended the Company’s investment objective from:

“The investment objective of Fidelity Special Values PLC is to achieve long term capital growth predominantly through investment in UK listed companies“

to

“The Company aims to achieve long term capital growth primarily through investment in equities (and their related financial instruments) of UK companies which the Investment Manager believes to be undervalued or where the potential has not been recognised by the market.”

This change to the Company’s investment objective and the minor consequential changes to the investment policy are not material changes and were made to make the objective more consistent with the phraseology of the Key Information Document (KID), a new regulatory requirement since the start of 2018. The changes did not alter the way that the Portfolio Manager invests on your behalf but better reflects the Company’s investment process. A summary of the key aspects of the investment policy can be found on the “At a Glance” page inside the front cover of the Annual Report.

Management Fee
I am pleased to report that the Ongoing Charge (the costs of running the Company) has fallen to 0.97% of net assets in the reporting year. Ten years ago, this number was 1.32% and last year it was 1.04%. This reduction is because of two key factors. Firstly, the Company has issued more shares and therefore the total costs are spread over a larger pool of assets and secondly, the Company has benefited from a new reduced management fee which was introduced on 1 September 2018. The previous fee of 0.875% of net assets has been replaced by a tiered fee basis which is 0.85% on the first £700 million of net assets, reducing to 0.75% of net assets in excess of £700 million. In addition, the fixed annual fee of £600,000 for services other than portfolio management reduced to £100,000 per annum. The total fees paid for the year ended 31 August 2019 have resulted in a saving of £786,000 compared to the prior year. Further details are in Note 5 below. There is no change to the investment process as a result of the revised fee arrangement.

Discount/Premium and Share Repurchases/Issues
Under the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions and will repurchase shares to help stabilise the share price discount. As the Company’s shares have mostly traded at a premium, the Company did not carry out any share repurchases in the reporting year and up to the date of this Annual Report.

Issuing shares increases the size of the Company, making it more liquid and allowing costs to be spread out over larger assets. The Board will approve the issuance of shares if the Company’s shares are trading at a sufficient premium to ensure that the issue of shares is not dilutive.

I am pleased to say that in the reporting year, the Company issued 9,620,000 ordinary shares from a combination of shares held in Treasury and its block listing authorities. Since then and as at the date of this Annual Report, the Company has issued a further 3,300,000 shares in order to meet demand.

The level of premium narrowed from 1.5% at the start of the reporting year to a discount of 0.6% as at 31 August 2019. This change gave rise to a share price total return of -6.9% for the year, behind the NAV total return of -4.9%. Over the year to 31 August 2019, the Company’s shares traded within a range of a 2.9% premium and a 4.1% discount. Notably, our discount level five years ago was 6.3%, slightly above our peer group which was at 5.7%. At this year end, our discount had reduced to 0.6%, compared to 8.4% for the peer group.

The Board continues to monitor the discount/premium closely and will take action when it feels it will be effective.

Gearing
The Board has agreed with the Portfolio Manager that if he is able to find attractive opportunities in the market, then the Company’s gearing should be allowed to rise, and stay geared, as long as the opportunities remain. Combined with Alex’s contrarian and value-focused investment philosophy, and making good use of the Company’s structural advantages over its open-ended counterparts, this should continue to add value for Shareholders over the long term.

It is the current intention of the Board that, in normal market conditions, the Portfolio Manager will maintain net gearing in the range of 0% to 20%. The Company remained within these levels throughout the reporting year. The maximum level of gross gearing is 40%.

Dividend
The revenue generated from the investments held in the portfolio during the year ended 31 August 2019 has been considerably higher than in prior years. The Company’s revenue return was 8.65 pence per share compared to 5.70 pence per share in the prior year. In order to retain Investment Trust tax status, the Company must pay out the majority of its income as a dividend to Shareholders. As Shareholders will be aware, the Company is not driven by income, however it has paid an increased dividend year on year for the last ten years as can be seen from the Ten Year Record page in the Annual Report.

The Board is therefore recommending a final dividend of 3.65 pence per share for the year ended 31 August 2019 (2018: 3.15 pence). An interim dividend of 2.10 pence per share (2018: 1.85 pence) was paid on 26 June 2019 so the interim and final dividends (totalling 5.75 pence) represent a total increase of 15% over the 5.00 pence paid for the year ended 31 August 2018. 

As the income generated for the year to 31 August 2019 is substantially higher than in previous years, the Board also recommends the payment of a special dividend of 1.50 pence per share from this increased income. Shareholders should note that the Company is less likely to pay special dividends in future years unless there are special circumstances.

Subject to Shareholder approval at the Annual General Meeting (“AGM”) on 12 December 2019, both the final and special dividends, totalling 5.15 pence and representing an increase of 63% over the 3.15 pence paid last year, will be paid on 15 January 2020 to all Shareholders who are on the share register as at 6 December 2019 (ex-dividend date 5 December 2019).

Shareholders may choose to reinvest their dividends for additional shares in the Company. Details of the Dividend Reinvestment Plan are set out in the Annual Report.

Board of Directors
Sharon Brown, having served on the Board for over nine years as a Non-Executive Director and as Chair of the Audit Committee and over three years as the Senior Independent Director, will step down from the Board at the conclusion of the AGM on 12 December 2019. I would like to take this opportunity to thank her on behalf of the Board and all of the Company’s stakeholders for all that she has accomplished, for her unfailing dedication and attention to detail, her wisdom and good humour. She takes with her our very best wishes for the future.

I am pleased to welcome Claire Boyle as a Non-Executive Director who joined the Board on 24 June 2019. She will take over as Chair of the Audit Committee when Sharon steps down from the Board on 12 December 2019. Claire is a chartered accountant and has over 17 years’ experience working in finance and equity investment management running portfolios over a wide range of sectors for international corporate, Government, State and retail clients, including unit and investment trusts. Claire is a Non-Executive Director and Chair of the Audit Committee of Aberdeen Japan Investment Trust PLC. She was a Partner at Oxburgh Partners LLP with responsibility for their European Equity Hedge Fund. Prior to that, she was a European Equity Fund Manager at American Express Asset Management where her role included both portfolio management and business development. She started her investment career with Robert Fleming Investment Management.

Dean Buckley will succeed Sharon as Senior Independent Director with effect from 12 December 2019.

As part of the Board’s future succession plan, I am also pleased to announce the appointment of Alison McGregor as a Non-Executive Director of the Company with effect from 1 January 2020. Alison is a Non-Executive Director of the Confederation of British Industries (“CBI”), Scottish Power Energy Networks Holdings and Beatson Cancer Charity and is an Advisor to the Board at Glasgow University Adam Smith Business School. She is also Co-Chair of the Scottish Apprenticeship Advisory Board. In 2018, Alison received the Women in Banking and Finance UK award for Achievement and was recognised by Action for Children as Woman of Influence in Business. In 2017, she was awarded the Scotland Corporate Leader of the Year Award at The Scottish Women’s Awards. Previously, Alison was the CEO of HSBC Scotland from 2014 to December 2018, the Chair of CBI Scotland and a Non-Executive Director of Scottish Enterprise.

In accordance with the UK Corporate Governance Code for FTSE 350 companies, I together with Dean Buckley, Nigel Foster and Nicky McCabe are subject to annual re-election at the AGM on 12 December 2019. Claire Boyle, being newly appointed, is subject to election at the forthcoming AGM. Alison McGregor will be subject to election at the AGM in December 2020. Biographical details for all the Directors standing for election and re-election can be found in the Annual Report to assist Shareholders when considering their votes. The Directors, between them, have a wide range of appropriate skills and experience to form a balanced Board for the Company.

Continuation Vote
In accordance with the Company’s Articles of Association, the Company is subject to a continuation vote every three years. The next such vote is at this year’s AGM on 12 December 2019. The Company’s performance record has been strong since it launched on 17 November 1994. An investment of £1,000 at launch would be worth £19,000 as at 31 August 2019 (with dividends reinvested). Although the one year NAV and share price returns have underperformed the Benchmark Index, performance over three and five years remains well ahead of the Index. In addition, the prospects of the Company over a five year investment horizon can be found in the Viability Statement below. Therefore, your Board recommends that Shareholders vote in favour of the continuation. (All performance data is on a total returns basis.)

Annual General Meeting – Thursday, 12 December 2019
The AGM of the Company will be held at 11.30 am on Thursday, 12 December 2019 at Fidelity’s offices at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St. Paul’s or Mansion House). Shareholders should note that the AGM is in a new location and the new building is over the road from the building where previous AGMs were held. Full details of the meeting are given in the Annual Report.

It is the most important meeting that we, the Directors of your Company, have with our Shareholders each year. Alex Wright, the Portfolio Manager, will be making a presentation to Shareholders, highlighting the achievements and challenges of the year past and the prospects for the year to come. He will be very happy to answer any questions that Shareholders may have. We hope as many of you as possible are able to come and join us for this occasion.

ANDY IRVINE

Chairman

1 November 2019

PORTFOLIO MANAGER’S REVIEW

Question

How has the Company performed over the year under review?

Answer

In difficult market conditions for UK stocks in general, the Company recorded a share price return of -6.9% and a NAV return of -4.9% (both on a total return basis) for the year that were below the FTSE All-Share Index (Benchmark Index) which returned 0.4%. In an increasingly risk-averse environment, the portfolio’s holdings in selected financials and consumer-facing stocks weighed down performance, while industrials were among the main positive contributors to performance.

Question

And what about the market environment more broadly?

Answer

The UK stock market witnessed divergent trends over the year as investor sentiment was undermined by continuing political uncertainty and fear about a slowing global economy, partly due to ongoing trade friction between the US and China. The markets did witness some positive momentum in the first quarter, mainly driven by the accommodative monetary policy stance by central banks across developed markets, particularly the US Federal Reserve, while a delay in the implementation of Brexit also proved supportive.

Question

How has Brexit impacted the UK markets and the Company?

Answer

Political uncertainty has made UK shares unpopular both at home and abroad. Sentiment towards domestic UK businesses such as banks and retailers is particularly weak. There is a large contrarian opportunity set in the UK equity market. However, we must be selective and proceed with caution. Although there are some very attractive valuations on offer in the UK, the environment is a risky one, and the market is right to be sceptical in many cases.

Question

What were the drivers of performance?

Answer

Our value bias was a performance headwind over the period. Weaker growth, and expectations and guidance for interest rate cuts over the period, led to growth style outperforming value, with ‘quality’ global large cap companies being seen as something of a safe haven in the UK market. Our lack of exposure to these well-liked companies held back relative returns.

At a stock level, outsourcing group Serco Group was the biggest contributor to returns during the period, as the group saw continued strong earnings growth in the first half of 2019 following several years of decline. Within the health care sector, the holding in Roche Holdings advanced as investors focused on the more defensive sectors, while its shares also benefited from regulatory approvals for a couple of its drugs. Defense engineering group Ultra Electronics Holdings was another notable contributor after it reported strong profit growth in the first six months of the year and increased its interim dividend. The company, which derives a large proportion of its revenue from the US defence market, has started to reap the benefit of an increase in spending on the sector by the US government in the last two years. The allocation to peer group Meggitt also added value. However, financials were among the major detractors. Irish banking group AIB Group fell as its shares were weighed down by lower earnings forecasts, higher costs and lower interest rate expectations. The holding in sub-prime lender International Personal Finance also detracted after Poland proposed to reduce the cap on non-interest costs that lenders can charge consumers on loans.

Question

And what about your exposure to financials?

Answer

Financials account for almost 31% of the portfolio (compared to 25% in the Index), spread across banks, financial services and diversified financials. I have been trimming exposure to cyclicals, particularly banks, where fundamentals have deteriorated markedly. The significant move down in global bond yields will put major pressures on the net interest margin for banks. For most banks there are few avenues left to offset this margin pressure. Most have little room left to cut costs and provisions are already at record lows. Unlike in 2009, all banks are well capitalised. It is therefore not an option to simply raise borrowing rates to compensate. I have now sold out of Lloyds Banking Group. In line with our original thesis, the company was successful in cutting costs and driving efficiencies, but I saw limited upside. The bank has now become a bellwether for the UK economy with its future performance tightly linked to the performance of the UK mortgage market and interest rates. I look to own companies in control of their own fate, able to drive positive change from the inside. By contrast, I continue to hold Royal Bank of Scotland Group which is at an earlier stage of its recovery and still has room to go in its evolution towards becoming a high return bank with excess capital. I have also sold out of Bank of Ireland Group and Discover Financial Services and trimmed the Citigroup position.

Question

Where do you see value in the market?

Answer

Although I see a broad spread of value across the market, worsening fundamentals mean I am increasingly finding value in defensive stocks which I have increased to their highest overweight in history in the portfolio. I believe there is potential within an ever-changing universe of struggling/unloved companies. The UK market is a good source of defensive companies, both classically defensive and others with more hidden defensive qualities. Amongst the “classic” defensives, I have added to Imperial Brands. Tobacco companies have de-rated significantly with Imperial now trading at an attractive 7.2 times price/earnings multiple and offering a well-supported 9.1% dividend yield. I hold it in preference to British American Tobacco due to its stronger balance sheet and its promising new vapour innovations which are underappreciated by the market. ContourGlobal is another new classical defensive position in the utility space. Amongst the “hidden” defensives, I have added to Pearson which continues its transformation from print to digital and is countercyclical; it performs well in a US economic downturn as education enrolment picks up. I remain positive on some financials, and have increased exposure to life insurance names. The long term portfolio returns illustrate that actively managed and contrarian investing can yield material outperformance over the long term despite headwinds for the value style. A repeatable, risk-aware and detail-orientated research process underpins the strategy.

Question

How have you used gearing and derivatives over the year?

Answer

During parts of the year, the Company continued to use contracts for difference (“CFDs”) to gear portfolio long exposure: I increased gearing during the market falls in the last quarter of 2018 as valuations became more attractive. However, following the recovery that markets have witnessed since January this year, gearing has once again fallen. Short positions were contracted in the reporting year but were closed by the year end. In the medium term, I do not anticipate opening new stock specific short positions, as currently, my preference is to allocate time and research resources to long positions. The hedged position on the FTSE 250 Index Future was maintained. An index hedge allows us to increase the effect of stock selection on portfolio returns.

Question

Have there been any major changes to your investment process?

Answer

No. My process continues to target unloved stocks which are undergoing positive change that has not yet been recognised by the market. Given the sheer number of small and medium sized companies, and lower levels of scrutiny among other investors, I expect the portfolio will always have a significant weighting to small and medium sized companies. However, I am acutely aware of the uncertainty surrounding the UK and do not want to overemphasise any stocks in the portfolio exposed to whatever is the Brexit outcome.

Question

How do you manage liquidity in the portfolio?

Answer

Liquidity conditions are closely monitored as part of the day to day portfolio management process, with further oversight coming from Fidelity’s management structure and risk teams. Whilst the Company invests in companies of all sizes, these investments are almost exclusively in listed companies (only one holding at the year end was in an unlisted company). Further, the closed-ended structure of the Company ensures that portfolio activity is not disturbed by significant redemptions or inflows.

Question

What is your outlook for the next twelve months?

Answer

Ongoing political chaos, US-China trade tensions and weakening fundamentals have created a challenging environment for UK equities. A cautious approach is needed, but attractive valuation opportunities are out there. These sizeable risks and the uncertain outlook mean that the UK remains very much out of favour with both global and domestic investors. The valuation of the UK market reflects this with a price/earnings multiple that is low both relative to history and to other equity markets globally. The Company’s portfolio trades at a further 13% discount to an already cheap market making for a good valuation starting point for investments.

However, market averages do not tell the full story and hide a significant divergence in relative valuations between value and growth stocks. Despite value stocks having underperformed for a number of years, they have suffered further significant underperformance this year as interest rate expectations globally have fallen even further from already low levels. This has left long duration and steady growth stocks trading at high valuations, whilst stocks with uncertainty or without growth characteristics are very cheap. It is not clear what will trigger a reversal in this growth over value trade but it is clear that investors in growth equities are taking on much more risk than they have done in the past, given the prices they are paying. This increased dispersion in valuations together with a weak pound has driven increased mergers and acquisition activity in the UK and the portfolio has been a beneficiary of this.

As ever, I remain focused on building a portfolio of unloved stocks with potential for positive change. There is certainly a plentiful supply of unloved companies in the UK market today, and my task is to identify those with the strongest margin of safety and the best chances of positive change.

ALEX WRIGHT

Portfolio Manager

1 November 2019

STRATEGIC REPORT

PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provision C.2.1 of the 2016 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/ the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key risks that the Company faces. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports considered by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the following as the principal risks faced by the Company. There have been no changes to these since the prior year except for updating the “Market Risk” to include “Economic and Political Risk” and expanding on the “Cybercrime Risk”.

EXTERNAL RISKS

Principal Risks Description and Risk Mitigation
Market, Economic and Political Risk The Company’s assets consist mainly of listed securities and the principal risks are therefore market related such as market downturn, interest rate movements and deflation/inflation. The Company may also be impacted by concerns over global economic growth and Brexit related uncertainties affecting the UK market and economy.
Risks to which the Company is exposed to in the market risk category are included in Note 18 to the Financial Statements below together with summaries of the policies for managing these risks.
Share Price Risk Share prices are volatile and volatility is a risk for the short term shareholder likely to want to sell in the near future. The Board does not believe that volatility would be a significant risk for the long term Shareholder.
Discount Control Risk The price of the Company’s shares and its discount to NAV are factors which are not within the Company’s total control. However, the Board can influence this through its share repurchase policy and through creating demand for shares through good performance and an active investor relations program.
The Company’s share price, NAV and discount volatility are monitored daily by the Manager and considered by the Board regularly.
Regulatory Risk The Company may be impacted by changes in legislation, taxation or regulation. These are monitored at each Board meeting and managed through active engagement with regulators and trade bodies by the Manager.
Cybercrime Risk The risk from cybercrime is significant. Cybercrime threats evolve rapidly and consequently the risk is regularly re-assessed and the Board receives regular updates from the Manager in respect of the type and possible scale of cyberattacks. The Manager’s technology team has developed a number of initiatives and controls in order to provide enhanced mitigating protection to this ever increasing threat and the Board is updated on these as part of the reporting it receives from the Manager.

INTERNAL RISKS

Principal Risks Description and Risk Mitigation
Investment Management Risk The Board relies on the Portfolio Manager’s skills and judgement to make investment decisions based on research and analysis of individual stocks and sectors. The Board reviews the performance of the asset value of the portfolio against the Company’s Benchmark Index and its competitors and also considers the outlook for the market with the Portfolio Manager at each Board meeting. The emphasis is on long term investment performance as there is a risk for the Company of volatility of performance in the shorter term.
Operational Risks –Service Providers The Company relies on a number of third party service providers, principally the Manager, Registrar, Custodian and Depositary. It is dependent on the effective operation of the Manager’s control systems and those of its service providers with regard to the security of the Company’s assets, dealing procedures, accounting records and the maintenance of regulatory and legal requirements. The Registrar, Custodian and Depositary are all subject to a risk-based program of internal audits by the Manager. In addition, service providers’ own internal control reports are received by the Board on an annual basis and any concerns investigated. Risks associated with these services are generally rated as low, although the financial consequences could be serious, including reputational damage to the Company.

CONTINUATION VOTE
A continuation vote takes place every three years. There is a risk that Shareholders do not vote in favour of continuation during periods when performance of the Company’s NAV and share price is poor. At the AGM held on 13 December 2016, 99.97% of Shareholders voted in favour of the continuation of the Company. The next continuation vote will take place at this year’s AGM on 12 December 2019.

VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long term capital growth. The Board considers long term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment on the viability of the Company, the Board has considered the following:

·     The ongoing relevance of the investment objective in prevailing market conditions;

·     The Company’s NAV and share price performance;

·     The principal risks and uncertainties facing the Company, as set out above, and their potential impact;

·     The future demand for the Company’s shares;

·     The Company’s share price premium/discount to the NAV;

·     The liquidity of the Company’s portfolio;

·     The level of income generated by the Company; and

·     Future income and expenditure forecasts.

The Company’s performance has been strong over the five year reporting period to 31 August 2019, with a NAV total return of 45.1% and a share price total return of 54.5%, compared to a Benchmark Index total return of 31.2%. The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:

·     The Investment Manager’s compliance with the Company’s investment objective, its investment strategy and asset allocation;

·     The portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary;

·     The Board’s discount management policy; and

·     The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement below. The Company is also subject to a continuation vote at this year’s AGM on 12 December 2019 and the Board expect that Shareholders will vote in favour of continuation.

GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio (being mainly securities which are readily realisable) and its expenditure and cash flow projections and have concluded that the Company has adequate resources to continue to adopt the going concern basis for at least twelve months from the date of this Annual Report. The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

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 year. Under that law they have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice, including FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss for the period.

In preparing these Financial Statements the Directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable and prudent;

·      state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements; and

·      prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for ensuring that adequate accounting records are kept which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

The Directors have delegated the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelityinvestmenttrusts.com to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their jurisdictions.

The Directors confirm that to the best of their knowledge:

·      The Financial Statements, prepared in accordance with FRS 102, give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

·      The Annual Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties it faces.

The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company’s performance, business model and strategy.

Approved by the Board on 1 November 2019 and signed on its behalf by:

ANDY IRVINE
Chairman

Income Statement for the year ended 31 August 2019

year ended 31 August 2019 year ended 31 August 2018

Notes 
revenue 
£’000 
capital 
£’000 
total 
£’000 
revenue 
£’000 
capital 
£’000 
total 
£’000 
(Losses)/gains on investments 11    (40,929) (40,929) –  48,288  48,288 
Losses on long CFDs 12    (23,287) (23,287) –  (3,022) (3,022)
Gains/(losses) on short CFDs, futures and options 12    1,719  1,719  –  (2,718) (2,718)
Investment and derivative income 30,335  –  30,335  23,468  –  23,468 
Other interest 670    670  366  –  366 
Derivative expenses* (63)   (63) (860) –  (860)
Investment management fees (5,921)   (5,921) (6,707) –  (6,707)
Other expenses (684) (88) (772) (640) –  (640)
Foreign exchange gains 2,945  2,945  –  618  618 
========  ========  ========  ========  ========  ======== 
Net return/(loss) on ordinary activities before finance costs and taxation 24,337  (59,640) (35,303) 15,627  43,166  58,793 
Finance costs (386)   (386) (342) –  (342)
========  ========  ========  ========  ========  ======== 
Net return/(loss) on ordinary activities before taxation 23,951  (59,640) (35,689) 15,285  43,166  58,451 
Taxation on return/(loss) on ordinary activities (454) (454) (177) –  (177)
========  ========  ========  ========  ========  ======== 
Net return/(loss) on ordinary activities after taxation for the year 23,497  (59,640) (36,143) 15,108  43,166  58,274 
========  ========  ========  ========  ========  ======== 
Return/(loss) per ordinary share 8.65p  (21.95p) (13.30p) 5.70p  16.29p  21.99p 
========  ========  ========  ========  ========  ======== 

*    Derivative expenses in the prior period have been re-allocated from investment and derivative income. This has no effect on the net return on ordinary activities after taxation for the year.

The Company does not have any other comprehensive income. Accordingly the net return on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

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

The Notes below form an integral part of these Financial Statements.

Balance Sheet as at 31 August 2019 Company number 2972628


Notes 
2019 
£’000 
2018 
£’000 
Fixed assets
Investments 11  635,539  704,997 
----------------  ---------------- 
Current assets
Derivative instruments 12  3,028  4,939 
Debtors 13  11,685  4,043 
Amounts held at futures clearing houses and brokers 18,002  2,235 
Amounts held in Fidelity Institutional Liquidity Fund 46,881  14,588 
Cash at bank 2,207  2,303 
----------------  ---------------- 
81,803  28,108 
----------------  ---------------- 
Creditors
Derivative instruments 12  (17,879) (5,371)
Other creditors 14  (795) (2,764)
----------------  ---------------- 
(18,674) (8,135)
----------------  ---------------- 
Net current assets 63,129  19,973 
----------------  ---------------- 
Net assets 698,668  724,970 
=========  ========= 
Capital and reserves
Share capital 15  13,808  13,532 
Share premium account 16  109,897  95,940 
Capital redemption reserve 16  3,256  3,256 
Other non-distributable reserve 16  5,152  5,152 
Capital reserve 16  542,023  591,842 
Revenue reserve 16  24,532  15,248 
----------------  ---------------- 
Total Shareholders’ funds 698,668  724,970 
----------------  ---------------- 
Net asset value per ordinary share 17  252.99p  271.98p 
=========  ========= 

The Financial Statements above and below were approved by the Board of Directors on 1 November 2019 and were signed on its behalf by:

ANDY IRVINE
Chairman

The Notes below form an integral part of these Financial Statements.

Statement of Changes in Equity for the year ended 31 August 2019





Notes 


share 
capital 
£’000 

share 
premium 
account 
£’000 

capital 
redemption 
reserve 
£’000 
other 
non- 
distributable 
reserve 
£’000 


capital 
reserve 
£’000 


revenue 
reserve 
£’000 
total 
Share- 
holders’ 
funds 
£’000 
Total Shareholders’ funds at 31 August 2018 13,532  95,940  3,256  5,152  591,842  15,248  724,970 
Issue of ordinary shares from Treasury 15    65      9,821    9,886 
New ordinary shares issued 15  276  13,892          14,168 
Net (loss)/return on ordinary activities after taxation for the year         (59,640) 23,497  (36,143)
Dividends paid to Shareholders 10            (14,213) (14,213)
----------------  ----------------  ----------------  ----------------  ----------------  ----------------  ---------------- 
Total Shareholders’ funds at 31 August 2019 13,808  109,897  3,256  5,152  542,023  24,532  698,668 
=========  =========  =========  =========  =========  =========  ========= 
Total Shareholders' funds at 31 August 2017 13,532  95,896  3,256  5,152  543,218  12,448  673,502 
Issue of ordinary shares from Treasury 15  –  44  –  –  5,458  –  5,502 
Net return on ordinary activities after taxation for the year –  –  –  –  43,166  15,108  58,274 
Dividends paid to Shareholders 10  –  –  –  –  –  (12,308) (12,308)
----------------  ----------------  ----------------  ----------------  ----------------  ----------------  ---------------- 
Total Shareholders’ funds at 31 August 2018 13,532  95,940  3,256  5,152  591,842  15,248  724,970 
=========  =========  =========  =========  =========  =========  ========= 

The Notes below form an integral part of these Financial Statements.

Cash Flow Statement for the year ended 31 August 2019



Notes 
year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Operating activities
Investment income received 21,266  17,859 
Net derivative income 4,559  3,292 
Interest received 651  299 
Investment management fee paid (6,582) (6,592)
Directors’ fees paid (168) (133)
Other cash payments (528) (526)
----------------  ---------------- 
Cash flow from operating activities before finance costs and taxation 21 19,198  14,199 
----------------  ---------------- 
Finance costs paid (386) (342)
Overseas taxation suffered (778) (207)
----------------  ---------------- 
Cash flow from operating activities 18,034  13,650 
----------------  ---------------- 
Investing activities
Purchases of investments (305,329) (340,288)
Sales of investments 330,094  340,434 
Receipts on long CFDs 4,698  9,063 
Payments on long CFDs (16,093) (3,308)
Receipts on short CFDs, futures and options 8,915  12,889 
Payments on short CFDs, futures and options (4,669) (22,277)
Movement on amounts held at futures clearing houses and brokers (15,767) (849)
----------------  ---------------- 
Cash inflow/(outflow) from investing activities 1,849  (4,336)
----------------  ---------------- 
Cash flows before financing activities 19,883  9,314 
----------------  ---------------- 
Financing activities
Dividends paid 10 (14,213) (12,308)
Net proceeds from issue of shares 23,670  5,502 
Cost of the issue of new ordinary shares 6 (88) – 
----------------  ---------------- 
Cash inflow/(outflow) from financing activities 9,369  (6,806)
----------------  ---------------- 
Net movement in cash and cash equivalents 29,252  2,508 
Cash and cash equivalents at the beginning of the year 16,891  13,765 
Effect of movement in foreign exchange 2,945  618 
----------------  ---------------- 
Cash and cash equivalents at the end of the year 49,088  16,891 
----------------  ---------------- 
Represented by:
Cash at bank 2,207  2,303 
Amounts held in Fidelity Institutional Liquidity Fund 46,881  14,588 
----------------  ---------------- 
49,088  16,891 
----------------  ---------------- 

The Notes below form an integral part of these Financial Statements.

NOTES TO THE FINANCIAL STATEMENTS

1 PRINCIPAL ACTIVITY
Fidelity Special Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2972628, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey, KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”), in November 2014 and updated in February 2018 with consequential amendments.

a) Basis of accounting
The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments.

b) Significant accounting estimates and judgements
The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The judgements required in order to determine the appropriate valuation methodology of level 3 financial instruments have a risk of causing an adjustment to the carrying amounts of assets. These judgements include making assessments of the possible valuations in the event of a listing or other marketability related risks.

c) Segmental reporting
The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income Statement
In order to reflect better the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) Income
Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case. Debt security interest is accounted for on an accruals basis and is credited to the revenue column of the Income Statement.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) are accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

Interest received on CFDs, bank deposits and money market funds are accounted for on an accruals basis and credited to the revenue column of the Income Statement.

f) Derivative expenses
Derivative expenses comprises interest paid on short CFDs, which is accounted for on an accruals basis, and dividends paid on short CFDs, which are accounted for on the date on which the obligation to incur the cost is established, normally the ex-dividend date. Derivative expenses are charged in full to the revenue column of the Income Statement.

g) Investment management fees and other expenses
Investment management fees and other expenses are accounted for on an accruals basis and are charged as follows:

·      Investment management fees are allocated in full to revenue; and

·      All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital events.

h) Functional currency and foreign exchange
The functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

i) Finance costs
Finance costs comprise interest paid on long CFDs, which are accounted for on an accruals basis. Finance costs are charged in full to the revenue column of the Income Statement.

j) Taxation
The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

k) Dividend paid
Dividends payable to equity Shareholders are recognised when the Company’s obligation to make payment is established.

l) Investments
The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

·      Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed; and

·      Unlisted investments, are investments which are not quoted, or are not frequently traded, and are stated at the Directors’ best estimate of fair value. The Manager’s Fair Value Committee, which is independent of the portfolio management team, provides a recommendation of fair values to the Directors based on recognised valuation techniques that take account of the cost of the investment, recent arm’s length transactions in the same or similar investments and financial performance of the investment since purchase.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within gains on investments in the capital column of the Income Statement and has disclosed these costs in Note 11 below.

m) Derivative instruments
When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short CFDs, futures, options and warrants. Derivatives are classified as other financial instruments and are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

·      Long and short CFDs – the difference between the strike price and the value of the underlying shares in the contract;

·      Futures – the difference between the contract price and the quoted trade price; and

·      Options – valued based on similar instruments or the quoted trade price for the contract.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in net income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included: for long CFDs, as gains or losses on long CFDs, and for short CFDs, futures, and options as gains or losses on short CFDs, futures, and options in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within current assets or creditors.

n) Debtors
Debtors include securities sold for future settlement, accrued income, taxation recoverable and other debtors incurred in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not, they are presented as non-current assets. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

o) Amounts held at futures clearing houses and brokers
These are amounts held in segregated accounts as collateral on behalf of brokers and are carried at amortised cost.

p) Amounts held in Fidelity Institutional Liquidity Fund plc
The Company holds an investment in the Fidelity Liquidity Fund plc, a short term money market fund investing in a diversified range of short term instruments. It is a distributing fund and accordingly the interest earned is credited to the revenue column of the Income Statement.

q) Other creditors
Other creditors include securities purchased for future settlement, investment management fees and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

r) Capital reserve
The following are accounted for in the capital reserve:

·      Gains and losses on the disposal of investments and derivative instruments;

·      Changes in the fair value of investments and derivative instruments held at the year end;

·      Foreign exchange gains and losses of a capital nature;

·      Dividends receivable which are capital in nature; and

·      Costs of repurchasing or issuing ordinary shares.

As a result of technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/10: Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of: investments listed on a recognised stock exchange and derivative instruments, contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash, with the exception of the level 3 investments which had unrealised investment holding gains of £23,000 (2018: losses £594,000). See Note 18 below for further details on the level 3 investments.

3 INCOME

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Investment income
UK dividends 17,885  13,273 
UK scrip dividends 459  403 
Overseas dividends 6,255  4,282 
Overseas scrip dividends 748  990 
Debt security interest 224  299 
---------------  --------------- 
25,571  19,247 
=========  ========= 
Derivative income
Dividends received on long CFDs 4,764  4,221 
---------------  --------------- 
Investment and derivative income 30,335  23,468 
---------------  --------------- 
Other interest
Interest received on CFDs 19  79 
Interest received on bank deposits and money market funds 651  287 
---------------  --------------- 
670  366 
---------------  --------------- 
Total income* 31,005  23,834 
=========  ========= 

*    Derivative expenses have been reallocated to Note 4 below.

Special dividends of £6,265,000 (2018: £7,023,000) have been recognised in capital.

4 DERIVATIVE EXPENSES

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Dividends paid on short CFDs 695 
Interest paid on short CFDs 57  165 
---------------  --------------- 
63  860 
=========  ========= 

5 INVESTMENT MANAGEMENT FEES

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Portfolio management services 5,821  6,107 
Non-portfolio management services* 100  600 
---------------  --------------- 
Investment management fees 5,921  6,707 
=========  ========= 

*    Includes company secretarial, fund accounting, taxation, promotional and corporate advisory services.

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

From 1 September 2018, the Company adopted a new fee arrangement which reduced the previous fee of 0.875% of net assets to a new tiered fee basis of 0.85% on the first £700 million of net assets and 0.75% of net assets in excess of £700 million.

In addition, the fixed annual fee for services other than portfolio management was reduced from £600,000 to £100,000 per annum.

6 EXPENSES

year ended 31 August 2019  year ended 31 August 2018 
revenue 
£’000 
capital 
£’000 
revenue 
£’000 
capital 
£’000 
AIC fees 22  –  21  – 
Custody fees 19  –  18  – 
Depositary fees 56  –  57  – 
Directors’ expenses 19  –  20  – 
Directors’ fees1 159  –  137  – 
Legal and professional fees 28  –  73  – 
Marketing expenses 192  –  139  – 
Printing and publication expenses 96  –  86  – 
Registrars’ fees 41  –  45  – 
Fees payable to the Independent Auditor for the audit of the Financial Statements2 29  –  24  – 
Sundry other expenses 23  –  20  – 
Cost of the issue of new ordinary shares –  88  –  – 
---------------  ---------------  ---------------  --------------- 
Other expenses 684  88  640  – 
=========  =========  =========  ========= 

1   Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

2   The VAT payable on audit fees is included in sundry other expenses.

7 FINANCE COSTS

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Interest paid on long CFDs 386  342 
---------------  --------------- 

8 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
a) Analysis of the taxation charge for the year
Overseas taxation 454  177 
---------------  --------------- 
Total taxation charge for the year (see Note 8b) 454  177 
=========  ========= 

b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 19.00% (2018: 19.00%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Net (loss)/return on ordinary activities before taxation (35,689) 58,451 
---------------  --------------- 
Net (loss)/return on ordinary activities before taxation multiplied by the standard rate of UK corporation tax of 19.00% (2018: 19.00%) (6,781) 11,106 
Effects of:
Capital gains not taxable* 11,315  (8,202)
Income not taxable (4,816) (3,595)
Expenses not deductible 17  – 
Excess management expenses 265  691 
Overseas taxation 454  177 
---------------  --------------- 
Total taxation charge for the year (see Note 8a) 454  177 
=========  ========= 

*    The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxation
A deferred tax asset of £11,741,000 (2018: £11,509,000), in respect of excess expenses of £69,067,000 (2018: £67,703,000) available to be set off against future taxable profits has not been recognised as it is unlikely that there will be sufficient future profits to utilise these expenses.

9 RETURN/(LOSS) PER ORDINARY SHARE

year ended 31 August 2019  year ended 31 August 2018 
revenue  capital  total  revenue  capital  total 
Return/(loss) per ordinary share – basic and diluted 8.65p  (21.95p) (13.30p) 5.70p  16.29p  21.99p 
---------------  ---------------  ---------------  ---------------  ---------------  --------------- 

The return/(loss) per ordinary share are based on, respectively; the net revenue return on ordinary activities after taxation for the year of £23,497,000 (2018: £15,108,000), the net capital loss on ordinary activities after taxation for the year of £59,640,000 (2018: return of £43,166,000) and the net total loss on ordinary activities after taxation for the year of £36,143,000 (2018: return of £58,274,000), and on 271,723,836 ordinary shares (2018: 265,040,439), being the weighted average number of ordinary shares held outside Treasury during the year.

10 DIVIDENDS PAID TO SHAREHOLDERS

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Dividends paid
Interim dividend of 2.10 pence per ordinary share for the year ended 31 August 2019 5,780  – 
Final dividend of 3.15 pence per ordinary share for the year ended 31 August 2018 8,433  – 
Interim dividend of 1.85 pence per ordinary share paid for the year ended 31 August 2018 –  4,902 
Final dividend of 2.80 pence per ordinary share paid for the year ended 31 August 2017 –  7,406 
---------------  --------------- 
14,213  12,308 
=========  ========= 
Dividend proposed
Final divided proposed of 3.65 pence per ordinary share for the year ended 31 August 2019 10,201  – 
Special dividend proposed of 1.50 pence per ordinary share for the year ended 31 August 2019
Final dividend of 3.15 pence per ordinary share for the year ended 31 August 2018
4,192 

8,419 
---------------  --------------- 
14,393  8,419 
=========  ========= 

The Directors have proposed the payments of a final dividend of 3.65 pence per ordinary share and a special dividend of 1.50 pence per ordinary share for the year ended 31 August 2019 which are subject to approval by Shareholders at the Annual General Meeting on 12 December 2019 and have not been included as a liability in these Financial Statements. The dividend will be paid on 15 January 2020 to Shareholders on the register at the close of business on 6 December 2019 (ex-dividend date 5 December 2019).

11 INVESTMENTS

2019 
£’000 
2018 
£’000 
Listed investments 635,252  704,713 
Unlisted investments 287  284 
---------------  --------------- 
Total investments at fair value 635,539  704,997 
=========  ========= 
Opening book cost 611,877  555,668 
Opening investment holding gains 93,120  98,304 
---------------  --------------- 
Opening fair value 704,997  653,972 
Movements in the year
Purchases at cost 305,425  342,253 
Sales – proceeds (333,954) (339,516)
Sales – gains 16,784  53,472 
Movement in investment holding losses (57,713) (5,184)
---------------  --------------- 
Closing fair value 635,539  704,997 
=========  ========= 
Closing book cost 600,132  611,877 
Closing investment holding gains 35,407  93,120 
---------------  --------------- 
Closing fair value 635,539  704,997 
=========  ========= 

   

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
(Losses)/gains on investments
Gains on sales of investments 16,784  53,472 
Investment holding losses (57,713) (5,184)
---------------  --------------- 
(40,929) 48,288 
=========  ========= 

Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments, which are included in the (losses)/gains on investments above, were as follows:

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Purchases transaction costs 1,363  1,565 
Sales transaction costs 243  184 
---------------  --------------- 
1,606  1,749 
=========  ========= 

The portfolio turnover rate for the year was 48.1% (2018: 50.6%).

12 DERIVATIVE INSTRUMENTS

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Losses on long CFDs
(Losses)/gains on long CFD positions closed (11,395) 5,755 
Movement in investment holding losses (11,892) (8,777)
---------------  --------------- 
(23,287) (3,022)
=========  ========= 
Gains/(losses) on short CFDs, futures and options
Losses on short CFD positions closed (1,078) (4,027)
Movement in investment holding gains on short CFDs 62  4,835 
Gains/(losses) on futures contracts closed 3,718  (3,755)
Movement in investment holding (losses)/gains on futures (1,553) 799 
Movement in investment holding gains/(losses) on options 570  (570)
---------------  --------------- 
1,719  (2,718)
=========  ========= 

   

2019 
fair value 
£’000 
2018 
fair value 
£’000 
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 3,028  4,939 
Derivative instrument liabilities (17,879) (5,371)
---------------  --------------- 
(14,851) (432)
=========  ========= 
 
 
fair value 
£’000 
2019 
gross asset 
exposure 
£’000 
 
 
fair value 
£’000 
2018 
gross asset 
exposure 
£’000 
At the year end the Company held the following derivative instruments
Long CFDs (14,356) 115,375  (2,464) 123,269 
Short CFDs –  –  (62) 14,065 
Index futures – hedging exposures (495) (34,568) 1,058  (42,869)
Options –  –  1,036  1,036 
---------------  ---------------  ---------------  --------------- 
(14,851) 80,807  (432) 95,501 
=========  =========  =========  ========= 
13 DEBTORS
2019 
£’000 
2018 
£’000 
Securities sold for future settlement 4,523  667 
Accrued income 6,284  3,176 
Taxation recoverable 479  155 
Amounts receivable for issue of shares 384  – 
Other debtors and prepayments 15  45 
---------------  --------------- 
11,685  4,043 
=========  ========= 
14 OTHER CREDITORS
2019 
£’000 
2018 
£’000 
Securities purchased for future settlement 146  1,257 
Creditors and accruals 649  1,507 
---------------  --------------- 
795  2,764 
=========  ========= 

15 SHARE CAPITAL


number of 
shares 
2019 

£’000 

number of 
shares 
2018 

£’000 
Issued, allotted and fully paid ordinary shares of 5 pence each
Held outside Treasury
Beginning of the year 266,549,480  13,328  264,499,480  13,225 
Ordinary Shares issued out of Treasury 4,095,000  204  2,050,000  103 
New Ordinary Shares issued 5,525,000  276  –  – 
--------------------  --------------------  --------------------  -------------------- 
End of the year 276,169,480  13,808  266,549,480  13,328 
============  ============  ============  ============ 
Held in Treasury*
Beginning of the year 4,095,000  204  6,145,000  307 
Ordinary Shares issued out of Treasury (4,095,000) (204) (2,050,000) (103)
--------------------  --------------------  --------------------  -------------------- 
End of the year –  –  4,095,000  204 
============ ============  ============  ============ 
Total share capital 276,169,480  13,808  270,644,480  13,532 
============  ============  ============  ============ 

*    Ordinary Shares held in Treasury carry no rights to vote, to receive a dividend or to participate in a winding up of the Company.

During the year, 9,620,000 ordinary shares (2018: 2,050,000 shares) were issued. From the issue of ordinary shares out of Treasury, £9,821,000 (2018: £5,458,000) was credited to the capital reserve. The premium received in the year on the issue of new ordinary shares of £13,892,000 (2018: £nil) and on the issue of ordinary shares out of Treasury of £65,000 (2018: £44,000) was credited to the share premium account. No ordinary shares were repurchased into Treasury during the year (2018: nil).

16 RESERVES
The share premium account represents the amount by which the proceeds from the issue of ordinary shares has exceeded the cost of those ordinary shares. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital redemption reserve maintains the equity share capital of the Company and represents the nominal value of shares repurchased and cancelled. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The other non-distributable reserve represents amounts transferred from the warrant reserve. It is not distributable by way of dividend. It cannot be used to fund share repurchases.

The capital reserve represents realised gains or losses on investments and derivatives sold, unrealised increases and decreases in the fair value of investments and derivatives held and other income and costs recognised in the capital column of the Income Statement. It can be used to fund repurchases and issuance of shares from Treasury and it is distributable by way of dividend. See Note 2(r) above for further details. The Board has stated that it has no current intention to pay dividends out of capital.

The revenue reserve represents retained revenue surpluses recognised through the revenue column of the Income Statement. It is distributable by way of dividend.

17 NET ASSET VALUE PER ORDINARY SHARE
The net asset value per ordinary share is based on net assets of £698,668,000 (2018: £724,970,000) and on 276,169,480 (2018: 266,549,480) ordinary shares, being the number of ordinary shares of 5 pence each held outside of Treasury at the year end. It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

18 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Management of Risk

The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, economic and political, share price, discount control, regulatory, cybercrime, investment management and operational risks. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown above in the Strategic Report.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

·      Equity shares and bonds held in accordance with the Company’s investment objective and policies;

·      Derivative instruments which comprise CFDs, futures and options on listed stocks and equity indices; and

·      Cash, liquid resources and short term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

Market price risk
Interest rate risk

The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

2019 
£’000 
2018 
£’000 
Exposure to financial instruments that bear interest
Long CFDs – exposure less fair value 129,731  125,733 
---------------  --------------- 
Exposure to financial instruments that earn interest
Short CFDs – exposure plus fair value –  14,003 
Amounts held at futures clearing houses and brokers 18,002  2,235 
Amounts held in Fidelity Institutional Liquidity Fund 46,881  14,588 
Cash at bank 2,207  2,303 
---------------  --------------- 
67,090  33,129 
---------------  --------------- 
Net exposure to financial instruments that bear interest 62,641  92,604 
=========  ========= 

Foreign currency risk
The Company does not carry out currency speculation. The Company’s net return/loss on ordinary activities after taxation for the year and its net assets can be affected by foreign exchange movements because the Company has income and assets which are denominated in currencies other than the Company’s functional currency which is UK sterling. The Company can also be subject to short term exposure from exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs.

Three principal areas have been identified where foreign currency risk could impact the Company:

·      Movements in exchange rates affecting the value of investments and derivative instruments;

·      Movements in exchange rates affecting short term timing differences; and

·      Movements in exchange rates affecting income received.

The portfolio management team monitor foreign currency risk but it is not the Company’s policy to hedge against currency risk.

Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown below:

2019 




Currency
 
investments 
held at fair 
value 
£’000 
long 
exposure to 
derivative 
instruments1 
£’000 
 
 
 
debtors2 
£’000 
 
 
cash at 
bank 
£’000 
 
 
 
total 
£’000 
Euro 74,903  52,971  112  –  127,986 
US dollar 32,367  –  44,430  201  76,998 
Swiss franc 34,960  –  225  –  35,185 
Canadian dollar 8,001  –  –  –  8,001 
Australian dollar 3,459  –  –  –  3,459 
South African rand 2,699  81  –  –  2,780 
Danish krone –  –  74  –  74 
UK sterling 479,150  27,755  31,727  2,006  540,638 
---------------  ---------------  ---------------  ---------------  --------------- 
635,539  80,807  76,568  2,207  795,121 
=========  =========  =========  =========  ========= 
2018 




Currency
 
investments 
held at fair 
value 
£’000 
long 
exposure to 
derivative 
instruments1 
£’000 
 
 
 
debtors2 
£’000 
 
 
cash at 
bank 
£’000 
 
 
 
total 
£’000 
Euro 69,730  64,465  177  –  134,372 
US dollar 73,316  –  4,684  39  78,039 
Canadian dollar 8,390  –  –  –  8,390 
Swiss franc 7,563  –  –  –  7,563 
Other foreign currencies –  7,286  118  –  7,404 
UK sterling 545,998  9,685  15,887  2,264  573,834 
---------------  ---------------  ---------------  ---------------  --------------- 
704,997  81,436  20,866  2,303  809,602 
=========  =========  =========  =========  ========= 

1   The exposure to the market of long CFDs and options after the netting of hedging exposures.

2   Debtors comprise debtors, amounts held at futures clearing houses and brokers and amounts held in Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise short positions on derivative instruments and other creditors. The currency profile of these financial liabilities is shown below:

2019 




Currency
short 
exposure to 
derivative 
instruments* 
£’000 
 
 
other 
creditors 
£’000 
 
 
 
total 
£’000 
UK sterling –  795  795 
---------------  ---------------  --------------- 
2018 




Currency
short 
exposure to 
derivative 
instruments* 
£’000 
 
 
other 
creditors 
£’000 
 
 
 
total 
£’000 
Euro 5,597  –  5,597 
UK sterling 8,468  2,764  11,232 
---------------  ---------------  --------------- 
14,065  2,764  16,829 
=========  =========  ========= 

*    The exposure to the market of short CFDs.

Other price risk
Other price 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 Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from derivative positions, mainly due to the underlying exposures, are estimated using Value at Risk and Stress Tests as set out in the Company’s internal Derivative Risk Measurement and Management Document.

Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short term flexibility is achieved by the use of a bank overdraft, if required.

Liquidity risk exposure
At 31 August 2019, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £17,879,000 (2018: £5,371,000) and creditors of £795,000 (2018: £2,764,000).

Counterparty risk
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over The Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

For derivative transactions, collateral is used to reduce the risk of both parties to the contract. Collateral is managed on a daily basis for all relevant transactions. At 31 August 2019, £1,100,000 (2018: £8,451,000) was held by HSBC Bank plc in cash denominated in UK sterling in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company. At 31 August 2018, collateral comprised of: Deutsche Bank AG £1,270,000 held in cash denominated in Euros, HSBC Bank plc £185,000 held in cash denominated in UK sterling and UBS AG £6,996,000 held in cash denominated in US dollars. £18,002,000 (2018: £2,235,000), shown as amounts held at futures clearing houses and brokers on the Balance Sheet was held by the Company, in a segregated collateral account, on behalf of the brokers, to reduce the credit risk exposure of the brokers. This collateral comprised of: Goldman Sachs International Ltd £2,560,000 (2018: £1,600,000) in cash, Morgan Stanley & Co International plc £7,805,000 (2018: £nil) in cash and UBS AG £7,637,000 (2018: £635,000) in cash.

Credit risk
Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions, derivative instrument contracts and cash at bank.

Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in a documented Derivative Risk Measurement and Management Document. Derivative instruments are used by the Manager for the following purposes:

·      To gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial flow of capital;

·      To hedge equity market risk using derivatives with the intention of at least partially mitigating losses in the exposures of the Company’s portfolio as a result of falls in the equity market;

·      To position short exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Manager believes to be over valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis

Based on the financial instruments held and interest rates at 31 August 2019, an increase of 0.25% in interest rates throughout the year, with all other variables held constant, would have increased the Company’s net loss on ordinary activities after taxation for the year and decreased the net assets of the Company by £157,000 (2018: decreased the net return and net assets by £232,000). A decrease of 0.25% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31 August 2019, a 10% strengthening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have increased the Company’s net loss on ordinary activities after taxation for the year and decreased the net assets of the Company by £23,135,000 (2018: decreased the net return and net assets by £20,516,000). A 10% weakening of the UK sterling exchange rate against foreign currencies would have decreased the Company’s net loss on ordinary activities after taxation for the year and increased the Company’s net assets by £28,276,000 (2018: increased the net return and net assets by £25,076,000).

Other price risk – exposure to investments sensitivity analysis
Based on the investments held and prices at 31 August 2019, an increase of 10% in prices, with all other variables held constant, would have decreased the Company’s net loss on ordinary activities after taxation for the year and increased the net assets of the Company by £63,554,000 (2018: increased the net return and net assets by £70,500,000). A decrease of 10% in prices would have had an equal and opposite effect.

Other price risk – net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 August 2019, an increase of 10% in the share prices underlying the derivative instruments, with all other variables held constant, would have decreased the Company’s net loss on ordinary activities after taxation for the year and increased the net assets of the Company by £8,081,000 (2018: increased the net return and net assets by £6,737,000). A decrease of 10% in share prices would have had an equal and opposite effect. Details of the Company’s net exposure to derivative instruments are shown in Note 19 below.

Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values which are not materially different to their fair values. As explained in Note 2 (l) and (m) above, investments and derivative instruments are shown at fair value.

Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies its financial instruments measured at fair value at one of three levels, according to the relative reliability of the inputs used to estimate the fair values.

Classification Input
Level 1 Valued using quoted prices in active markets for identical assets
Level 2 Valued by reference to valuation techniques using observable inputs other than quoted prices included within level 1
Level 3 Valued by reference to valuation techniques using inputs that are not based on observable market data

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset. The valuation techniques used by the Company are explained in Note 2 (l) and (m) above. The table below sets out the Company’s fair value hierarchy:



Financial assets at fair value through profit or loss
 
level 1 
£’000 
 
level 2 
£’000 
 
level 3 
£’000 
2019 
total 
£’000 
Investments 630,634  3,482  1,423  635,539 
Derivative instrument assets –  3,028  –  3,028 
---------------  ---------------  ---------------  --------------- 
630,634  6,510  1,423  638,567 
=========  =========  =========  ========= 
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities (495) (17,384) –  (17,879)
---------------  ---------------  ---------------  --------------- 


Financial assets at fair value through profit or loss
 
level 1 
£’000 
 
level 2 
£’000 
 
level 3 
£’000 
2018 
total 
£’000 
Investments 699,052  4,489  1,456  704,997 
Derivative instrument assets 1,058  2,845  1,036  4,939 
---------------  ---------------  ---------------  --------------- 
700,110  7,334  2,492  709,936 
=========  =========  =========  ========= 
Financial liabilities at fair value through profit or loss
Derivative instrument liabilities –  (5,371) –  (5,371)
---------------  ---------------  ---------------  --------------- 

The table below sets out the movements in level 3 financial instruments during the year:

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Beginning of the year 2,492  8,347 
Purchases at cost –  144 
Sales – proceeds (163) (10,548)
Sales – (losses)/gains (97) 4,398 
Investments written off – GVC Holdings option (1,426) – 
Transfers into level 3* –  1,640 
Movement in investment holding gains/(losses) 617  (1,489)
---------------  --------------- 
End of the year 1,423  2,492 
=========  ========= 

*    Financial instruments are transferred into level 3 on the date they are suspended, delisted or when they have not traded for thirty days.

Marwyn Value Investors
Marwyn Value Investors is a closed-ended fund incorporated in the United Kingdom. The fund is highly illiquid and the valuation at 31st August 2019 is based on the indicative bid price in the absence of a last trade price. As at 31 August 2019, its fair value was £1,136,000 (2018: £1,172,000).

TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in Ireland. The valuation on 31 August 2019 is based on the last trade price. As at 31 August 2019, its fair value was £287,000 (2018: £284,000).

19 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The financial resources of the Company comprise its share capital and reserves, as disclosed in the Balance Sheet above, and any gearing, which is managed by the use of derivative instruments. Financial resources are managed in accordance with the Company’s investment policy and in pursuit of its investment objective, both of which are detailed in the Strategic Report in the Annual Report. The principal risks and their management are disclosed in the Strategic Report and in Note 18 above.

The Company’s gross gearing and net gearing at the year end is set out below:

2019 
gross asset exposure  net asset exposure 
£’000  %1  £’000  %1 
Investments 635,539  91.0  635,539  91.0 
Long CFDs 115,375  16.5  115,375  16.5 
---------------  ---------------  ---------------  --------------- 
Total long exposures before hedges 750,914  107.5  750,914  107.5 
Less: Index futures – hedging exposures2 (34,568) (5.0) (34,568) (5.0)
---------------  ---------------  ---------------  --------------- 
Exposure after the netting of hedges 716,346  102.5  716,346  102.5 
---------------  ---------------  ---------------  --------------- 
Shareholders’ funds 698,668  698,668 
---------------  --------------- 
gross gearing  net gearing 
Gearing3 2.5%  2.5% 
---------------  --------------- 
2018 
gross asset exposure  net asset exposure 
£’000  %1  £’000  %1 
Investments 704,997  97.3  704,997  97.3 
Options 1,036  0.1  1,036  0.1 
Long CFDs 123,269  17.0  123,269  17.0 
---------------  ---------------  ---------------  --------------- 
Total long exposures before hedges 829,302  114.4  829,302  114.4 
Less: Index futures – hedging exposures2 (42,869) (5.9) (42,869) (5.9)
---------------  ---------------  ---------------  --------------- 
Total long exposures after the netting of hedges 786,433  108.5  786,433  108.5 
Short exposures – short CFDs 14,065  1.9  (14,065) (1.9)
---------------  ---------------  ---------------  --------------- 
Exposure after the netting of hedges 800,498  110.4  772,368  106.6 
---------------  ---------------  ---------------  --------------- 
Shareholders’ funds 724,970  724,970 
---------------  --------------- 
gross gearing  net gearing 
Gearing3 10.4%  6.6% 
---------------  --------------- 

1   Exposure to the market expressed as a percentage of Shareholders’ funds.

2   Hedging exposures reduce exposure to market and gearing.

3   Gearing is the amount by which Asset Exposure exceeds Shareholders’ funds expressed as a percentage of Shareholders’ funds.

20 TRANSACTIONS WITH THE MANAGERS AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management and the role of company secretary to FIL Investments International (“FII”). Both companies are Fidelity group companies.

Details of the current fee arrangements are given in the Directors’ Report in the Annual Report and in Note 5 above. During the year, fees for portfolio management services of £5,821,000 (2018: £6,107,000) and fees for non-portfolio management services of £100,000 (2018: £600,000) were payable to FII. Non-portfolio management fees include company secretarial, fund accounting, taxation, promotional and corporate advisory services. At the Balance Sheet date, fees for portfolio management services of £505,000 (2018: £1,083,000) and fees for non-portfolio management services of £17,000 (2018: £100,000) were accrued and included in other creditors. FII also provides the Company with marketing services. The total amount payable for these services during the year was £192,000 (2018: £139,000). At the Balance Sheet date, marketing services of £nil (2018: £7,000) were accrued and included in other creditors.

Disclosures of the Directors’ interests in the ordinary shares of the Company and Directors’ fees and taxable expenses relating to reasonable travel expenses payable to the Directors are given in the Directors’ Remuneration Report in the Annual Report. In addition to the fees and taxable expenses disclosed in the Directors’ Remuneration Report, £18,000 (2018: £15,000) of Employers’ National Insurance contributions was also paid by the Company. As at 31 August 2019, Directors’ fees of £15,000 were accrued and payable.

21 RECONCILIATION OF NET (LOSS)/RETURN ON ORDINARY ACTIVITIES BEFORE FINANCE COSTS AND TAXATION TO CASH FLOW FROM OPERATING ACTIVITIES BEFORE FINANCE COSTS AND TAXATION

year ended 
31.08.19 
£’000 
year ended 
31.08.18 
£’000 
Net total (loss)/return before finance costs and taxation (35,303) 58,793 
Less: net capital loss/(return) before finance costs and taxation 59,640  (43,166)
---------------  --------------- 
Net revenue return before finance costs and taxation 24,337  15,627 
Scrip dividends (1,207) (1,393)
Increase in debtors (3,078) (181)
(Decrease)/increase in other creditors (854) 146 
---------------  --------------- 
Cash flow from operating activities before finance costs and taxation 19,198  14,199 
=========  ========= 

22 ALTERNATIVE PERFORMANCE MEASURES
Total return is considered to be an Alternative Performance Measure (as defined in the Glossary of Terms in the Annual Report). NAV total return includes reinvestment of the dividend in the NAV of the Company on the ex-dividend date. Share price total return includes the reinvestment of the net dividend in the month that the share price goes ex-dividend.

The tables below provide information relating to the NAVs and share prices of the Company, the impact of the dividend reinvestments and the total returns for the years ended 31 August 2019 and 31 August 2018.




2019
Net asset 
value per 
ordinary 
share 
 
 
Share 
price 
31 August 2018 271.98p  276.00p 
31 August 2019 252.99p  251.50p 
Change in year -7.0%  -8.9% 
Impact of dividend reinvestment +2.1%  +2.0% 
---------------  --------------- 
Total return for the year -4.9%  -6.9% 
=========  ========= 



2018
Net asset 
value per 
ordinary 
share 
 
 
Share 
price 
31 August 2017 254.63p  246.50p 
31 August 2018 271.98p  276.00p 
Change in year +6.8%  +12.0% 
Impact of dividend reinvestment +1.9%  +2.0% 
---------------  --------------- 
Total return for the year +8.7%  +14.0% 
=========  ========= 

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 August 2019 are an abridged version of the Company's full Annual Report and Financial Statements, which have been approved and audited with an unqualified report. The 2018 and 2019 statutory accounts received unqualified reports from the Company's Auditor and did not include any reference to matters to which the Auditor drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2018 is derived from the statutory accounts for 2018 which have been delivered to the Registrar of Companies. The 2019 Financial Statements will be filed with the Registrar of Companies in due course.

A copy of the Annual Report will shortly be submitted to the National Storage Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM

The Annual Report will be posted to shareholders later this month and additional copies will be available from the registered office of the Company and on the Company's website:

www.fidelityinvestmenttrusts.com where up to date information on the Company, including daily NAV and share prices, factsheets and other information can also be found.

The Annual General Meeting will be held at 11.30 am on 4 December 2019 at 4 Cannon Street, London EC4M 5AB.

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

ENDS


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Annual Financial Report - RNS