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Invesco Asia Trust plc
Annual Financial Report Announcement
For the Financial Year Ended 30 April 2018
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
The benchmark index of the Company is the MSCI AC Asia ex Japan Index
|Total Return Statistics|
|Change for the year||2018||2017|
|Net asset value(1)(2) (NAV)||14.5%||40.4%|
|At 30 April||2018||2017||change %|
|Net assets (£’000)(3)||233,252||243,025||–4.0|
|– net cash||1.6%||2.6%|
|NAV per share(2)||328.9p||291.3p||+12.9|
|Discount(2) per ordinary share:|
|– cum income||13.0%||11.8%|
|– ex income||11.4%||10.3%|
|Average discount over the year (ex income)||10.2%||10.9%|
|Year Ended 30 April||2018||2017||change %|
|Net revenue available for ordinary shares (£’000)||4,447||3,978||+11.8|
|Revenue return per ordinary share||5.98p||4.74p||+26.2|
|Dividend per share||5.50p||4.30p||+27.9|
|Ongoing charges ratio(2)||0.99||1.02|
(1) Source: Thomson Reuters.
(2) The term is defined in the Glossary of Terms and Alternative Performance Measures on page 69of the Annual Financial Report.
(3) Includes the tender offer of 15% of the Company’s shares in August 2017.
Asian equity markets have made strong gains over the last twelve months, underpinned by improving earnings momentum and solid global economic expansion. Sentiment towards the region has benefited from stable economic growth in China and evidence that the authorities there are successfully decreasing excess supply across a variety of industries. This aided pricing power at a time when companies were exercising greater cost control in response to the more difficult business environment of recent years. However, there are growing uncertainties emerging from trade disputes between the US and China. By contrast there are some encouraging signs from developments on the Korean peninsula. These and other factors influencing the key markets in the region are discussed in more detail in the Portfolio Manager’s Report.
Although some indicators suggest a less favourable environment for Asian equities in the coming year, following a correction in markets since the start of the year, valuations now look reasonable. The Board therefore remains confident that Asia is an attractive place to invest, especially given our portfolio manager’s, Ian Hargreaves, long-term perspective and focus on valuations. The Company’s strategy continued to deliver solid performance in the year to 30 April 2018, albeit marginally behind the benchmark return. Over this period, the net asset value per ordinary share rose by 14.5% compared with the benchmark index, the MSCI All Countries Asia ex Japan index, which returned 16.8% and the Company’s share price rose 13.0% (all figures: total return, in sterling terms). However, the year end discount to net asset value, excluding income, at which our shares trade widened to 11.4%.
On a longer term view, the returns made by the Company have been excellent. I refer you to the table on page 3 which shows that over three years the NAV and share price have increased by 49.3% and 44.9% respectively, well ahead of the benchmark rise of 37.7% Over five years this outperformance increases with respective returns of 93.4% and 91.2% versus the benchmark return of 57.5% (all figures: total return, in sterling terms).
Visit to the Region
Every two years, the Board visits the region with the manager and meets representatives from a selection of portfolio and prospective companies. These visits are designed to give the Board greater insight into Ian’s investment processes and portfolio construction, while also giving fuller understanding of some of the companies in the portfolio. Our most recent visit was to China and Hong Kong. Companies visited included AIA, NetEase, Samsonite International and Pacific Basin Shipping all of which are all held in the portfolio.
This year, revenue return per share has increased to 5.98p, reflecting the rise in earnings of our portfolio companies combined with the weakness in sterling following the Brexit vote. As a result, the Board is pleased to recommend a final dividend of 5.50p per ordinary share (2017: 4.30p), an increase of 27.9%. The dividend, which is subject to the approval of shareholders at the Annual General Meeting, will be payable on 13 August 2018 to shareholders on the register on 13 July 2018. The shares will be marked ex-dividend on 12 July 2018.
The portfolio manager has the freedom to borrow within a working range set by the Board within the overall limit of the Company’s investment policy which permits gross gearing of up to 25% of net assets. For the first time in many years, Ian did not gear the portfolio during the year. Given the overall positive return of the portfolio, the low cash position will have created a small drag on performance. Borrowings will be drawn down at times when market conditions are judged to be advantageous, and cash may be held at other times. At the end of the year the cash level was 1.6% and at the time of writing this report the portfolio has 3% cash.
Discount Control, Share Buy Backs and the Tender Offer Provision
In the previous year to 30 April 2017, the average discount was 10.9%. In accordance with the Board’s previously announced intention to implement a 15% tender offer if the average discount was in excess of 10%, the Company repurchased and cancelled 12,514,241 shares at a price of 312.8857p per share on 11 August 2017. This followed shareholder approval at the 2017 AGM.
As explained in detail in my Chairman’s Statement last year, the Board has reconsidered its approach to discount control and concluded that the inclusion of a tender offer provision with such a specific trigger had not been effective in controlling the Company’s share price discount. I emphasise that the Board remains committed to seeking to control the discount. Managing the Company’s share price discount remains an important area of focus for the Board and we will actively monitor and evaluate the most appropriate means to address this.
In general, the Board considers it to be desirable that the Company’s shares should trade at a price which, on average, represents a discount of less than 10% to NAV excluding income in normal market conditions. In order to meet this, the Company will utilise the authority sought from shareholders annually at the AGM to buy back shares at its discretion having regard, amongst other matters to factors such as market conditions and the discounts of comparable investment companies.
During the year the Board liaised closely with its broker and I am pleased to report that even though no shares were bought back in the year, the Company’s shares traded at an average discount to NAV (ex income) just in excess of the target, at 10.2% (2017: 10.9%)
Nevertheless, shares may be bought back when there is an excess available in the market and the discount is higher than desired. By assisting in addressing any imbalance between supply and demand, the objective is to reduce the scale and volatility of the discount at which the shares trade in relation to the underlying net asset value. Such buy backs will benefit all continuing shareholders as it is the Board’s policy to undertake share buy backs only when they enhance net asset value. Accordingly, authority for the Board to buy back shares will be sought at the AGM and Special Resolution 10 seeks shareholders’ approval to renew the Company’s authority to purchase up to 14.99% of its share capital; this is explained in more detail on page 28 in the annual financial report.
No shares have been purchased under this authority since the year end, and the average share price discount to NAV has been 9.97%.
After serving on the Board for over nine years I will retire at the conclusion of the forthcoming annual general meeting. During the year the Nomination Committee continued its review of the composition of the Board and the Company’s succession plan. Consequently, Neil Rogan was appointed to the Board on 1 September 2017 and he will be appointed Chairman of the Board, and of the Nomination and Remuneration Committees, on my retirement. The Board believes that his broad experience of investment companies both as an investment manager and as a non-executive director provide him with the appropriate skills to lead the Company.
The Company’s AGM will be held at 12 noon on 31 July 2018 at 43-45 Portman Square, London W1H 6LY. Ian will give a presentation highlighting the events of the past year and the prospects for the year to come. He will also be available to answer shareholders’ questions.
I hope as many of you as possible will attend. The Board has considered all the resolutions proposed in the Notice of the AGM and believe all are in the interests of shareholders as a whole. The Directors recommend that you vote in favour of each resolution and confirm that they themselves will be voting in favour of each resolution.
27 June 2018
For the year ended 30 april 2018
Invesco Asia Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective has been to contract out investment management and administration to appropriate external service providers, which are overseen by the Board. The principal service provider is Invesco Fund Managers Limited, which throughout this report is referred to as ‘the Manager’. Invesco Asset Management Limited, an associate company of the Manager, manages the Company’s investments and acts as company secretary under delegated authority from the Manager.
The Manager provides company secretarial, marketing and general administration services including accounting and manages the portfolio in accordance with the Board’s strategy. Ian Hargreaves is the portfolio manager responsible for the day-to-day management of the portfolio.
The Company also has contractual arrangements with Link Asset Services (formerly Capita Asset Services) to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian. BNYMIL became the depositary following novation of the depositary agreement from BNY Mellon Trust & Depositary (UK) Limited, on 1 December 2017. This transfer has had no substantive effect on the services received by the Company.
The Company’s objective is to provide long-term capital growth by investing in a diversified portfolio of Asian and Australasian companies. The Company aims to achieve growth in its net asset value (NAV) in excess of the Benchmark Index, the MSCI AC Asia ex Japan Index (total return, in sterling terms).
Invesco Asia Trust plc invests primarily in the equity securities of companies listed on the stockmarkets of Asia (ex Japan) including Australasia. It may also invest in unquoted securities up to 10% of the value of the Company’s gross assets, and in warrants and options when it is considered the most economical means of achieving exposure to an asset.
The Company is actively managed and the Manager has broad discretion to invest the Company’s assets to achieve its investment objective. The Manager seeks to ensure that the portfolio is appropriately diversified having regard to individual stock weightings and the geographic and sector composition of the portfolio.
The Board has prescribed limits on the investment policy, including:
– exposure to any one company may not exceed 10% of total assets;
– exposure to group-related companies may not exceed 15% of total assets;
– the Company may not invest more than 10% of total assets in collective investment funds;
– the Company may not invest more than 10% in aggregate in unquoted investments;
– the Company may invest in warrants and options up to a maximum of 10% of total assets. Apart from these and currency hedges, other derivative instruments are not permitted; and
– the Company may use borrowings up to 25% of net assets.
With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so if considered appropriate.
All the above limits are applied at the time of acquisition, except gearing which is monitored on a daily basis.
Borrowing and Debt
The Company’s borrowing policy is determined by the Board. The level of borrowing may be varied in accordance with the portfolio manager’s assessment of risk and reward, subject to the overall limit of 25% of net assets and the availability of suitable finance.
Performance and Key Performance Indicators
The Board reviews performance by reference to a number of Key Performance Indicators which include the following:
• the net asset value (NAV) and share price;
• peer group performance;
• dividend; and
• ongoing charges ratio.
A chart showing the total return NAV and share price performance compared to the Company’s benchmark index can be found on page 3.
Peer group performance is monitored in relation to nine other investment trust companies that in the opinion of the Board form the peer group of the Company, being trusts that invest for growth in the Asia excluding Japan sector, as these most closely match the Company’s investment objective and capital structure. As at 30 April 2018, in total return NAV terms the Company was ranked 5th over one year, 4th over three years and 1st over five years.
The discount of the shares is monitored on a daily basis. During the year the shares traded at a discount to NAV (ex income) in a range of 7.4% to 12.2% with an average discount of 10.2%. At the year end the discount to the NAV (ex income) stood at 11.4%.
The Board considers it desirable that the Company’s shares do not trade at a significant discount to NAV and believes that, in normal market conditions, the shares should trade at a price which on average represents a discount of less than 10% to NAV. To enable the Board to take action to deal with any material overhang of shares in the market it seeks authority from shareholders annually to buy back shares. Shares may be repurchased when, in the opinion of the Board, the discount is wider than desired and shares are available in the market. The Board considers that the repurchase of shares at a discount will enhance net asset value for remaining shareholders and may also assist in addressing the imbalance between the supply of and demand for the Company’s shares and thereby reduce the scale and volatility of the discount at which the shares trade in relation to the underlying net asset value.
The ten year record for dividends can be found on page 3, and the ongoing charges ratio for the last two years on page 2 of the Annual Financial Report.
Results and Dividend
For the year ended 30 April 2018 the net asset value total return was 14.5% compared to the return on the benchmark index of 16.8%. The Portfolio Manager’s Report on pages 13 to 18 of the Annual Financial Report reviews the results.
Subject to approval at the AGM, the proposed final dividend for the year ended 30 April 2018 of 5.50p per share (2017: 4.30p) will be payable on 13 August 2018 to shareholders on the register on 13 July 2018. Shares will be marked ex-dividend on 12 July 2018.
Financial Position and Borrowing
The Company’s balance sheet on page 48 of the Annual Financial Report shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 11 to the financial statements, with interest paid (finance costs) shown in note 5.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Portfolio Manager’s Report of this Strategic Report. Further details of the principal risks affecting the Company are set out in the next section: ‘Principal Risks and Uncertainties’.
At the core of the Manager’s philosophy is a belief in active investment management. Fundamental principles drive an active investment approach, which aims to deliver attractive total returns over the long term. The investment process emphasises pragmatism and flexibility, active management, a focus on valuation and the combination of top-down and bottom-up fundamental analysis. Bottom-up analysis forms the basis of the investment process. It is the key driver of stock selection and is expected to be the main contributor to alpha generation within the portfolio. Portfolio construction at sector level is largely determined by this bottom-up process but is also influenced by top-down macro economic views.
Research provides a detailed understanding of a company’s key historical and future business drivers, such as demand for its products, pricing power, market share trends, cash flow and management strategy. This allows the Manager to form an opinion on a company’s competitive position, its strategic advantages/disadvantages and the quality of its management. Each member of the portfolio management team travels to the region between three and four times per year and therefore the team has contact with several hundred companies during each year. The Manager will also use valuation models selectively in order to understand the assumptions that brokers/analysts have incorporated into their valuation conclusions and as a structure into which the Manager can input its own scenarios.
Risk management is an integral part of the investment management process. Core to the process is that risks taken are not incidental but are understood and taken with conviction. The Manager controls stock-specific risk effectively by ensuring that the portfolio is appropriately diversified.
Also, in-depth and constant fundamental analysis of the portfolio’s holdings provide the Manager with a thorough understanding of the individual stock risk taken. The internal Performance & Risk Team, an independent team, ensures that the Manager adheres to the portfolio’s investment objectives, guidelines and parameters. There is also a culture of challenge and debate within the portfolio management team regarding portfolio construction and risk.
Internal Control and Risk Management
The Directors have overall responsibility for the Company’s system of internal controls and are responsible for reviewing the effectiveness of these controls. This includes safeguarding of the Company’s assets. The following sets out how the Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity.
The Audit Committee (the ‘Committee’), on behalf of the Board, has established an ongoing process for identifying and undertaking a robust assessment of the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place, and monitoring and reporting of relevant information to it.
As part of the process, the Committee has identified four risk categories: strategic; investment management; third party service providers; and regulation and corporate governance. An explanation of these categories follows.
The Board sets the strategy including objectives of the Company and how these should be achieved. The Board assesses the performance of the Company in the context of the market and macro issues, and gives direction, and monitors, the Manager and other third parties for the actions they take on behalf of the Company.
Investment Management Risk
Investment management covers management of the portfolio together with cash management, gearing and hedging i.e. the items which the portfolio manager has control of, and which generate the Company’s performance.
Third Party Service Providers Risk
The Company has no employees and its Directors are appointed on a non-executive basis. The Company is reliant on third party service providers (TPP) for its executive functions. The Company’s most significant TPP is the Manager – to which portfolio management, company secretarial and administrative services are delegated. Other significant TPPs are the broker, depositary, custodian, registrar and auditor.
Regulation and Corporate Governance Risk
The Company is required to comply with many regulations including the provisions of the Companies Act 2006, the UK Listing Rules, the Alternative Investment Fund Managers Directive, the Market Abuse Regulation, the FCA’s Disclosure Guidance and Transparency Rules, tax regulation as an investment trust, the UK Corporate Governance Code and Accounting Standards.
The resultant ratings of the mitigated risks, in the form of a risk control matrix, enable the Directors to concentrate on those risks that are most significant and also forms the basis of the list of principal risks and uncertainties.
The Company’s oversight and its control environment is based on the Company’s relationship with its third party service providers, all of which have clearly defined lines of responsibility, delegated authority, and control procedures and systems. The Company uses the three lines of defence model, which is also embedded into the Manager’s risk management systems.
The effectiveness of the Company’s internal control and risk management system is reviewed at least annually by the Committee. The Committee has received satisfactory reports on the operations and systems of internal control of the Manager, custodian and registrar from the Manager’s Compliance and Internal Audit Officers. Reports on the Manager encompassed all the areas the Manager is responsible for: investment management, company secretarial and general administration, including accounting. The Committee also received a comprehensive, and satisfactory, report from the depositary at the year end Committee meeting.
Due diligence is undertaken before any contracts are entered into with any third party service provider. The Manager regularly reviews, against agreed service standards, the performance of all third party providers through formal and informal meetings, and by reference to third party independently audited control reports. The results of the Manager’s reviews are reported to and reviewed by the Committee. These various reports did not identify any significant failings or weaknesses during the year and up to the date of this annual financial report. If any had been identified, the required remedial action would have been taken. In particular the Board formally reviews the performance of the Manager annually and informally at every Board meeting. No significant failings or weaknesses occurred throughout the year ended 30 April 2018 and up to the date of this annual financial report.
Reporting to the Board at each board meeting comprises, but is not limited to: financial reports, including any hedging and gearing; performance against the benchmark and the Company’s peer group; the portfolio manager’s review, including of the market, the portfolio, transactions and prospects; revenue forecasts; and investment monitoring against investment guidelines. The portfolio manager is permitted discretion within these guidelines, which are set by the Board. Compliance with the guidelines is monitored daily. Any proposed variation to these guidelines is referred to the Board.
Principal Risks and Uncertainties
The Board has carried out a robust assessment of the risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity. The principal risks that follow are those identified by the Board after consideration of mitigating factors. In carrying out this assessment, consideration is being given to the market and possible regulatory uncertainty arising from Brexit.
CATEGORY AND PRINCIPAL Risk Description Mitigating PROCEDURES AND CONTROLS
The Company’s investments are traded on Asian and Australasian stock markets as well as the UK. The principal risk for investors in the Company is a significant fall and/or a prolonged period of decline in these markets. This could be triggered by unfavourable developments within the region or events outside it.
There are few ways to mitigate market risk because it is influenced by factors which are outside the control of the Board and the Manager. These factors include the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, changes to legislation, and changing investor demand. Such factors may give rise to high levels of volatility in the prices of investments held by the Company.
The Company’s investment objectives and structure are no longer meeting investors’ demands.
The Board receives regular reports reviewing the Company’s investment performance against its stated objectives and peer group, and reports from discussions with its brokers and major shareholders. The Board also has a separate annual strategy meeting.
Lack of liquidity and lack of marketability of the Company’s shares leading to stagnant share price and wide discount.
Persistently high discount leads to continual buy backs of the Company’s shares and shrinkage of Company.
The Board receives regular reports from both the Manager and the Company’s broker on the Company’s share price performance and level of discount, together with regular reports on marketing and meetings with shareholders and prospective investors. The Board recognises the importance of a wide shareholder base and continues with efforts to broaden this, including active marketing and solid investment performance.
Portfolio manager consistently underperforms the benchmark and/or peer group over 3-5 years.
The Board regularly compares the Company’s NAV performance over both the short and long term to that of the benchmark and peer group as well as reviewing the portfolio’s performance against benchmark (attribution) and risk adjusted performance (volatility, beta, tracking error, Sharpe ratio) of the Company and its peers. The Board also receives reports on and reviews: the portfolio, transactions in the period, active positions, gearing position and, if applicable, hedging.
Key Person Dependency
The portfolio manager (Ian Hargreaves) ceases to be portfolio manager or is incapacitated or otherwise unavailable.
The portfolio manager works within, and is supported by, the wider Invesco Perpetual Asian Equities Team, including Stuart Parks – the Company’s previous portfolio manager.
Currency Fluctuation Risk
Exposure to currency fluctuation risk negatively impacts the Company’s NAV. The movement of exchange rates may have an unfavourable or favourable impact on returns as nearly all of the Company’s assets are non-sterling denominated.
With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so should the portfolio manager or the Board feel this was appropriate. Contracts are limited to currencies and amounts commensurate with the asset exposure. The foreign currency exposure of the Company is reviewed at Board meetings.
Third Party Service Providers Risk
Unsatisfactory Performance of Third Party Service Providers
Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operations of the Company and could affect the ability of the Company to successfully pursue its investment policy and expose the Company to reputational risk. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
Details of how the Board monitors the services provided by the Manager and other third party service providers, and the key elements designed to provide effective internal control, are included in the internal control and risk management section on pages 8 and 9.
Information Technology Resilience and Security
The Company’s operational structure means that all cyber risk (information and physical security) arises at its third party service providers (TPPs). This cyber risk includes fraud, sabotage or crime perpetrated against the Company or any of its TPPs.
As well as regular review of TPPs’ audited service organisation control reports by the Audit Committee, the Board receives regular updates on the Manager’s information security. The Board monitors TPPs’ business continuity plans and testing – including their regular ‘live’ testing of workplace recovery arrangements.
Regulation and Corporate Governance Risk
Failure to Comply With Relevant Law and Regulations
This could damage the Company and its ability to continue in business.
Adverse regulatory or fiscal changes.
The company secretary and the Company’s advisers will report any regulatory and fiscal changes to the Board. The Board and the Manager will monitor changes in government policy and legislation which may have an impact on the Company.
The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets out the long-term nature of the returns from the portfolio and this is the view taken by both the Directors and the Portfolio Manager in the running of the portfolio. The Company is required by its Articles to have a vote on its future every three years, the next vote being in 2019. The Directors have no reason to believe that shareholders will not vote to release the Directors from their obligation to propose a wind up resolution at that time. On this basis, the Directors consider that ‘long term’ for the purpose of this viability statement is three years, albeit that the life of the Company is not intended to be limited to this period.
In their assessment of the Company’s viability, the Directors considered the risks to which it is exposed, as set out on pages 10 and 11, together with mitigating factors. Their assessment considered these risks, as well as the Company’s investment objective, investment policy and strategy, the investment capabilities of the Manager and the business model of the Company, which has withstood several major market downcycles since the Company’s inception in 1995. Their assessment also covered the current outlook for the Asian economies and equity markets, demand for and buy backs of the Company’s shares, the Company’s borrowing structure, the liquidity of the portfolio and the Company’s future income and annual operating costs. Lastly, whilst past performance may not be indicative of performance in the future, the sustainability of the Company can be demonstrated to date by there being no material change in the Company’s investment objective since its launch in 1995.
The Directors confirm that they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for the three year period from the signing of the balance sheet.
The Board takes into account many factors, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises five non-executive directors, thee of whom are male and two of whom are female. There are no set targets in respect of diversity, including gender. However, diversity forms part of both the Nominations Committee and main Board’s deliberations when considering new appointments. The Company’s success depends on suitably qualified candidates who are willing, and have the time, to be a director of the Company. Summary biographical details of the Directors are set out on page 23. The Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not necessarily decide to make or not to make an investment on environmental and social grounds. The Manager applies the United Nations Principles for Responsible Investment.
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
PORTFOLIO MANAGER’S REPORT
Asian equity markets, as measured by the MSCI AC Asia ex Japan Index (total return, in sterling terms), rose 16.8% over the 12 months to 30 April 2018. The improvement in earnings momentum has been the key factor driving Asian markets over the review period. This came after a period of five years during which earnings were generally being revised down as each year progressed. Conversely, in 2017 earnings growth was forecast to be 13% at the beginning of the year but end up being over 20%. There are several explanations for this change in trend: a broad recovery in the global economy led by China helped revenue growth; capital discipline across a variety of industries aided pricing power; and there has been greater cost control as companies have adjusted to the more difficult business environment in recent years. Against this generally positive backdrop of positive earnings revisions, the Chinese and the Korean markets were among the best performers while India lagged.
In China, earnings improved most in the industrial, financial and internet sectors. Despite relatively weak demand, the industrial companies enjoyed improved pricing power as a result of state-sponsored capacity reduction in excess-supply sectors such as coal and steel. Within technology, the Chinese internet companies have been producing rapid earnings growth as they became more successful in deriving revenue from their large user bases. This has also led to record valuations being reached by some internet stocks. Elsewhere, the market reacted positively to the government’s determination to tackle the financial risks in the shadow banking sector. These changes led to greater created optimism that the Chinese economy can begin to deleverage, which is of particular benefit to the larger banks that have been losing deposit and loan market share to non-bank competitors.
In Korea, the technology and financial sectors were the key drivers of the market. In technology, companies in the semiconductor sector like Samsung Electronics were helped by robust demand from data centre customers at a time when supply growth has been limited by growing challenges in transitioning to new technologies. This has resulted in record margins in memory semiconductor divisions. In addition, the Korean banking sector benefited from firmer net interest margins, tighter cost control and continued good asset quality.
Finally, India’s equity market rose but underperformed the region. Average valuations in India are high in a regional context. This is the result of conviction in India’s long run economic potential and high domestic flows into equity mutual funds over the last 18 months. While there has been some recovery in economic indicators, policies such as demonetisation and the introduction of Goods and Services Tax (GST) have disrupted growth in the short term. As a result, earnings trends have been disappointing compared other countries in the region.
In the year ended 30 April 2018, the Company’s net asset value increased by 14.5% (total return, in sterling terms). This performance was behind that of the benchmark which rose by 16.8% (total return, in sterling terms).
Taiwanese hardware technology companies contributed significantly to performance. For example, MediaTek, a semiconductor design company, was one of the largest contributors to relative returns. In recent years, MediaTek has had a difficult time in its smartphone chip division as its technology and manufacturing costs were inferior to its competitor Qualcomm. We saw an opportunity early last year to invest at attractive valuation levels, and since then, margins have begun to improve as the company’s new products have begun to address these issues. Also, in Taiwan, the passive component manufacturer, Yageo, saw a dramatic improvement in profitability of its lower end products. Its Japanese competitors’ strategy to cease investing in new capacity at the low-end, choosing instead to focus on more advanced technologies has come at a time of surprisingly solid demand. We exited this position in November 2017 as we view current levels of profitability to be unsustainable and the earnings valuation to be too high in that context. Finally, Chroma ATE‘s shares also performed well as its earnings visibility increased. This company provides test equipment to some new growth areas in technology. It is exposed to areas such as electric vehicles, lithium batteries, laser diodes (used in facial recognition) and graphics processing units (used in advance computing). It is only in the last 12 months that we have seen signs of acceleration in revenue growth related to the new technologies.
The Chinese internet companies’ contribution to relative returns was mixed. The Company’s underweight in Tencent and lack of exposure to Alibaba had a negative impact, accounting for most of the Company’s underperformance relative to the index. Both companies delivered an unexpected acceleration in earnings growth. The Company’s lower weighting in Tencent was partly offset by Nexon, a company that developed one of the most successful PC games distributed by Tencent in China. A resurgence in the popularity of this game in 2017 led to Nexon’s share price almost doubling over the review period. The Company also owns other internet related investments such as NetEase, JD.com and Baidu. NetEase performed well until the end of 2017 but recently the market has become concerned about the slowing of its game revenues and the need to spend more on marketing. We took advantage of periods of the share price strength earlier in the year to reduce this holding. However, we are comfortable in retaining our position because we see signs that the gaming business will recover. JD.com also saw a correction towards the end of the reporting period. The investment in JD.com is predicated on a gradual improvement in profitability of its e-commerce business as it gradually gains scale and tilts its revenue mix towards higher margin areas such as third party market places and advertising. However, JD.com has decided that it wants to take advantage of leadership in logistics to offer this capability to more outside customers. While this strategy makes sense to us, it means a delay to the profit turnaround expected for the company. Finally, Baidu recovered well this year. The market rewarded a revenue growth recovery in its search business combined with an increase in margins as it re-focused on its core operations.
Impact of Individual Securities Relative to the Benchmark Index
|Top five – addition to performance:|
|Chroma ATE||Technology Hardware & Equipment||Taiwan||1.9|
|Yageo||Technology Hardware & Equipment||Taiwan||0.8|
|MediaTek||Semiconductors & Semiconductors Equipment||Taiwan||2.6|
|Qingdao Port International||Transportation||China||1.8|
|Bottom five – detraction from performance:|
|Alibaba(1)||Software & Services||China||–|
|Tencent||Software & Services||Hong Kong||2.6|
|Finetex ENE||Capital Goods||South Korea||0.8|
|Korea Electric Power||Utilities||South Korea||2.0|
(1) Alibaba was not held by the portfolio during the year.
Elsewhere, Korea Electric Power’s (Kepco) share price performed poorly due to a lower-than–expected utilisation of its nuclear plants and the absence of tariff increases despite the high cost of coal. The shares are now trading close to their historical low valuation but we believe the market is underestimating how important it is for the company to generate a reasonable return on capital. Kepco is central to the government’s commitment to change the power generation mix away from coal and nuclear towards renewables. Without reasonable profitability, Kepco will not have the cashflow to make the necessary investments. Our investment in Finetex EnE has also disappointed, with the discovery of accounting issues resulting in the stock being suspended from trading on the KOSDAQ market in Korea.
In aggregate our stock selection in Indian equities added value this year. For example, residential developer, Sobha, outperformed as it achieved volume growth in a declining market. The stronger developers with better brands gained market share as regulatory changes made it harder for weaker players to operate. Elsewhere, we took profits by selling our position in Tata Consultancy Services (TCS) to purchase Infosys. The valuation premium for TCS was too high, in our view, while the two businesses offer similar exposure to the software outsourcing industry. We wished to retain exposure to this industry, particularly as we anticipated a reacceleration in revenue growth as banks’ spending on software development finally begins to recover. One detractor from performance was our holding in UPL, an agrochemicals company, although this was mitigated by a partial disposal in the year at a profit.
There were several other positive contributors across a range of industries. These included China Conch Venture, CNOOC and MINTH. The investment case for China Conch Venture was based on the market ascribing little worth to its core environmental businesses over the value of its shareholding in Conch Cement. China Conch’s share price rose as the growth potential of its hazardous waste incineration business became more evident. This holding was sold prior to the year end in order to take profits. Elsewhere, we sought to increase exposure to oil companies that could be cash flow positive even at the low oil prices that prevailed earlier in 2017. CNOOC fitted this criteria. We also believed that the market was underestimating the quality of CNOOC’s management, the life of its oil reserves and its cash generation ability. This led us to the view that there was the chance for a re-rating of the business in addition to the potential gain from a rebound in the oil price. Finally, MINTH, a Chinese auto-parts manufacturer, performed strongly thanks to robust order growth and product upgrades which have driven sales and margin growth.
As we look ahead to this year, it seems less likely that Asia can repeat the positive earnings surprise which have occurred over the last 12 months. At the macro level, global lead indicators of economic activity have peaked and, with further interest rate rises in the pipeline and the prospect of quantitative tightening in the US, further deceleration appears the probable outcome. This in turn suggests that we have seen the best of the export recovery in Asia which has been an important driver of the better growth trends in the region. In addition, China is expected to see slower growth as 2018 progresses. The key targets of current Chinese economic policy are a reduction in financial risk by shrinking the shadow banking system, the imposition of greater fiscal discipline on local governments and improved environmental protection through the closure of industrial plants that do not meet tighter pollution standards. While these initiatives are positive for the sustainability of growth in the long term, they are not compatible with sustaining GDP growth at close to 7%. Putting these factors together suggests a less supportive environment for corporate revenue growth and, in turn, a reduced probability of positive earnings surprises, particularly now that sell-side analysts forecasts are more optimistic than they were 12 months ago. The more recent lowering of earnings expectations supports this view.
After a correction in markets since the start of the year, Asian market valuations look reasonable in a historical context. Both the trailing price-to-book and the forward price-to-earnings (see figure 1) ratios are in line with their averages over the last 15 years. Asia remains on an attractive discount of 25% on an earnings basis compared to the MSCI World. This suggests that investors are being offered an attractive equity risk premium for investing in Asia relative to other equity markets. Moreover, our back-testing of historical returns from the current price-to-book level suggest mid-to-high single digit compound returns are possible over a five year view. Realistically, however, the combination of greater earnings uncertainty, tighter monetary policy in key geographies and higher geopolitical ambiguity seem to make a valuation re-rating in Asia more difficult in the short term. The recent worsening of trade tensions between the US and China provides a good example of this. While it is to be hoped that this situation does not escalate to the point of seriously disrupting global supply chains, it is understandable that equity markets should begin to price in this risk.
One of the most encouraging factors for Asia in the medium-term is the continued capital spending discipline being shown by companies (see chart below). While this does in part reflect lower structural growth in the region, it also demonstrates that Asian companies are more cautious, focused and better managed than they were historically. This means that better returns on capital are more sustainable. Importantly, Asian companies are generating greater levels of free cashflow post investment. The abundance of cash, and how to utilise it, is an increasing challenge for companies and there is growing pressure from shareholders to increase capital returns. This has become an important theme in the Company. Approaching a third of the non-financial holdings have more than 30% cash-backing for their market capitalisations. These holdings have the potential to give strong dividend growth over time. Nowhere is this more applicable than in Korea where low valuations reflect the miserly dividend pay-out ratio which is still less than half the regional average of 40%. In general, Korean companies struggle with the notion that excess cash should belong to shareholders rather than the company itself. Fortunately, this is gradually beginning to change thanks to a more shareholder friendly government, a more active domestic institutional investor base and a growing number of large Korean companies with net cash balance sheets. Samsung Electronics’ clear shareholder return policy and the recent withdrawal of the Hyundai Motor restructuring plan provide examples of where minority shareholders are beginning to have a greater say in Korea. Over the long term, Korea has the potential to offer a re-rating and strong dividend growth. If the recent meeting between Trump and Kim Jong Un was to lead to a genuine diffusion of tensions on the Korean peninsula, the case for a re-rating of Korean equities would be strengthened further.
The Company has seen greater portfolio activity over the last 12 months as we have sought to reduce exposure to investments where valuations are full or, where in our judgement, earnings are close to their cyclical peak, and increase weightings to areas where the opposite is the case. The biggest changes at the sector level have been the reduction in technology weighting and an increase in financials. Technology, both tech hardware and internet, led the market last year in both earning surprises and share price performance. For example, Samsung Electronics has been achieving record high margins in its semiconductor division and history suggests that profitability will adjust downwards at some stage. While Samsung Electronics remains a large holding of the Company, approximately 40% of the holding have been sold.
Conversely, there are several themes we are playing in financials. Firstly, in India evidence is building that the economy is at the bottom of its credit cycle. Banks, encouraged by the Reserve Bank of India, are finally coming clean on their non-performing corporate loans and making the necessary provisions. Credit growth is running close to all-time lows and credit to GDP has not increased for 10 years. As a result, we have added to our holding in ICICI Bank. This is a bank that has been negatively impacted by the corporate loan problem in India but the creation of new problem loans peaked two years ago. ICICI has the necessary capital and core profitability to earn its way out of its problems without recourse to new equity. It is trading too cheaply for a bank that ought to be able to earn a mid-teen return on equity as its business recovers. Secondly, the exposure to general insurance has been increased through Korean Reinsurance and QBE Insurance. Insurance companies make money through a combination of underwriting and investment. Due to the high incidence of catastrophes in 2017 and continued low fixed income yields, companies’ profitability in both areas has come under pressure which has led to it derating. This has opened up an investment opportunity as little is reflected in the companies’ share prices for the mild upturn in global insurance pricing that is unfolding, or the increase in yields in some regions. Thirdly, banks generally are benefiting from a firming in interest rates that helps their net interest margins and benign asset quality trends and from an historic perspective banks remain one of the cheapest sectors in the region.
From a geographical perspective, China and Hong Kong taken together as a block form the largest proportion of the portfolio at 40%, albeit at a lower weight than the index. Together with Thailand, China has been the best performing market over the last 12 months and there is a concern that the outlook for slowing economic growth means that we have seen the best of earnings improvement in China for now. However, we have still been able to find new investments that appear significantly undervalued and are relatively insulated from a growth slowdown in China. First, China Communication Services is an outsourced service provider in the telecom sector that will benefit from the roll-out of 5G networks in China starting in 2019. It trades on 9x price earnings (PE) with 50% of its market capitalisation in cash. Second, China BlueChemical is a gas-based producer of methanol and urea. This is a good example of an industry that is profiting from supply-side reform. In the case of China BlueChemical, it is not yet reflected in the share price with the stock still offering close to a 20% free cashflow yield. Third, Qingdao Port International is growing primarily through market share gains in the logistics business associated with the port. It also has a rapidly growing oil importation and transportation business. Qingdao trades on 7x PE and offers a 5% yield, much below ports of comparable scale and profitability. Lastly, Shenzhen KSTAR Science and Technology is a provider of power-related components used by the Chinese data centre, solar and electric vehicle charging sectors. It is available on a mid-teens earnings multiple despite rapid earnings growth potential.
In conclusion, our analysis of the outlook for earnings and valuations in the region leads us to expect more modest equity returns for Asia in the near term. We have sought to orient the portfolio towards areas of relatively low valuation where there is still scope for earnings trends and dividend payments to improve. As the table below shows, this results in a portfolio that trades at a lower valuation than the broader Asian market but that offers a better dividend yield, free cashflow yield and earnings growth.
Figure 2. Portfolio Characteristics
|Current||Forward||Forward||Free Cash||Forward EPS|
|Price to||Price to||Dividend||Flow Yield||growth|
|Invesco Asia Trust||1.32x||12.20x||2.76||8.16||23.74|
|MSCI Asia ex Japan||1.79x||13.04x||2.62||7.54||17.55|
Source: Style Research as at 30 April 2018.
The Strategic Report was approved by the Board of Directors on 27 June 2018.
Invesco Asset Management Limited
INVESTMENTS IN ORDER OF VALUATION
at 30 April 2018
Ordinary shares unless stated otherwise
† The industry group is based on MSCI and Standard & Poor’s Global Industry Classification Standard.
– ordinary shares
– preference shares
|Technology Hardware & Equipment||South Korea|| 8,897
|Baidu – ADR||Software & Services||China||7,944||3.5|
|Hyundai Motor - preference shares||Automobiles & Components||South Korea||7,830||3.5|
|Taiwan Semiconductor Manufacturing||Semiconductors & Semiconductor Equipment||Taiwan||7,738||3.4|
|MediaTek||Semiconductors & Semiconductor Equipment||Taiwan||7,327||3.2|
|Industrial & Commercial Bank Of ChinaH||Banks||China||6,675||2.9|
|JD.com – ADR||Retailing||China||6,640||2.9|
|Top Ten Holdings||81,948||36.1|
|Tencent||Software & Services||Hong Kong||6,214||2.7|
|United Overseas Bank||Banks||Singapore||5,653||2.5|
|Qingdao Port InternationalH||Transportation||China||5,409||2.4|
|China MobileR||Telecommunication Services||China||5,219||2.3|
|CK Hutchison||Capital Goods||Hong Kong||5,022||2.2|
|China Life Insurance (Taiwan)||Insurance||Taiwan||4,892||2.2|
|Korean Reinsurance||Insurance||South Korea||4,764||2.1|
|Infosys – ADR||Software & Services||India||4,699||2.1|
|Top Twenty Holdings||133,709||59.0|
|Korea Electric Power||Utilities||South Korea||4,438||2.0|
|Samsonite International||Consumer Durables & Apparel||Hong Kong||4,242||1.9|
|NetEase – ADR||Software & Services||China||4,215||1.9|
|Aurobindo Pharma||Pharmaceuticals, Biotechnology & Life Sciences||India||4,127||1.8|
|MINTH||Automobiles & Components||China||3,828||1.7|
|Shinhan Financial||Banks||South Korea||3,697||1.6|
|Top Thirty Holdings||175,170||77.4|
|Chroma ATE||Technology Hardware & Equipment||Taiwan||3,351||1.5|
|ASUSTeK Computer||Technology Hardware & Equipment||Taiwan||3,126||1.4|
|DGB Financial||Banks||South Korea||3,004||1.3|
|China Communications ServicesH||Telecommunication Services||China||2,920||1.3|
|Hon Hai Precision Industry||Technology Hardware & Equipment||Taiwan||2,810||1.2|
|Filinvest Land||Real Estate||Philippines||2,738||1.2|
|Housing Development Finance||Banks||India||2,698||1.2|
|Top Forty Holdings||205,552||90.8|
|Shenzhen KSTAR Science and Technology||Capital Goods||China||2,378||1.1|
|Hyundai Home Shopping Network||Retailing||South Korea||2,371||1.0|
|PT Bank Negara Indonesia Persero||Banks||Indonesia||2,269||1.0|
|EVA Precision Industrial||Capital Goods||Hong Kong||2,152||0.9|
|Pacific Basin Shipping||Transportation||Hong Kong||2,102||0.9|
|British American Tobacco||Food, Beverage & Tobacco||Malaysia||1,650||0.7|
|HKR International||Real Estate||Hong Kong||1,385||0.6|
|Finetex EnEUQ||Capital Goods||South Korea||1,361||0.6|
|Nexon||Software & Services||Japan||1,264||0.5|
|Top Fifty Holdings||223,781||98.7|
|Qingling MotorsH||Automobiles & Components||China||1,094||0.5|
|BitAuto – ADR||Software & Services||China||985||0.4|
|FIH Mobile||Technology Hardware & Equipment||Hong Kong||763||0.4|
|Total holdings of 53 (2017: 51)||226,623||100.0|
ADR: American Depositary Receipts – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.
H: H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
UQ: Unquoted investment.
Classification of Investments by Country/Sector
at 30 April
|AT||% of||AT||% of|
|Household & Personal Products||–||–||3,180||1.3|
|Automobiles & Components||4,922||2.2||9,115||3.9|
|Commercial & Professional Services||–||–||2,445||1.1|
|Software & Services||13,144||5.8||17,895||7.5|
|Consumer Durables & Apparel||4,243||1.9||5,836||2.5|
|Software & Services||6,214||2.7||5,075||2.1|
|Technology Hardware & Equipment||763||0.4||2,867||1.2|
|Pharmaceuticals, Biotechnology & Life Sciences||4,127||1.8||3,495||1.5|
|Software & Services||4,699||2.1||3,372||1.4|
|Software & Services||1,264||0.5||2,418||1.0|
|Food, Beverage & Tobacco||1,650||0.7||–||–|
|Automobiles & Components||7,830||3.5||8,009||3.4|
|Technology Hardware & Equipment||14,002||6.2||19,405||8.2|
|Semiconductors & Semiconductor Equipment||15,065||6.6||13,463||5.7|
|Technology Hardware & Equipment||9,287||4.1||18,044||7.6|
for the year ended 30 April
|Gains on investments at fair value||9||–||30,641||30,641||–||68,112||68,112|
|Losses on foreign currency revaluation||–||(349)||(349)||–||(539)||(539)|
|Investment management fee||3||(457)||(1,371)||(1,828)||(420)||(1,261)||(1,681)|
|Net return before finance costs and taxation||5,048||28,916||33,964||4,515||66,309||70,824|
|Return on ordinary activities before taxation||5,038||28,886||33,924||4,501||66,268||70,769|
|Tax on ordinary activities||6||(591)||–||(591)||(523)||–||(523)|
|Return on ordinary activities after taxation for the financial year||4,447||28,886||33,333||3,978||66,268||70,246|
|Return per ordinary share:|
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return on ordinary activities after taxation is the total comprehensive income and therefore no statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
for the year ended 30 April
|At 30 April 2016||8,874||4,250||89,965||71,348||5,671||180,108|
|Return on ordinary activities||–||–||–||66,268||3,978||70,246|
|Final dividend – note 8||–||–||–||–||(3,086)||(3,086)|
|Shares bought back and cancelled – note 12||(123)||123||(2,375)||–||–||(2,375)|
|Shares bought back and held in treasury – note 12||–||–||(1,868)||–||–||(1,868)|
|At 30 April 2017||8,751||4,373||85,722||137,616||6,563||243,025|
|Return on ordinary activities||–||–||–||28,886||4,447||33,333|
|Final dividend – note 8||–||–||–||–||(3,587)||(3,587)|
|Tendered shares bought back and cancelled – note 12||(1,251)||1,251||(39,519)||–||–||(39,519)|
|At 30 April 2018||7,500||5,624||46,203||166,502||7,423||233,252|
at 30 April
|Investments held at fair value through profit or loss||9||226,623||236,238|
|Cash and cash equivalents||3,733||6,236|
|Creditors: amounts falling due within one year||11||(3,988)||(856)|
|Net current assets||6,629||6,787|
|Capital and reserves|
|Capital redemption reserve||13||5,624||4,373|
|Net asset value per ordinary share|
These financial statements were approved and authorised for issue by the Board of Directors on 27 June 2018.
Signed on behalf of the Board of Directors
NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 April 2018
1. Accounting Policies
Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.
A summary of the principal accounting policies, all of which have been consistently applied throughout this and the preceding year is set out below:
(a) Basis of Preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS102, and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014, as updated in January 2017. The financial statements are issued on a going concern basis.
As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets the following conditions:
• substantially all investments are highly liquid;
• substantially all investments are carried at market value, and
• a statement of changes in equity is provided (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds).
(ii) Going concern
The financial statements have been drawn up on the going concern basis.
(b) Foreign currency
(i) Functional and presentation currency
The financial statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency of the Company’s share capital and the predominant currency in which the Company’s shares are traded.
(ii) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(c) Financial instruments
The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments, which is explained below.
(i) Recognition of financial assets and financial liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company offsets financial assets and financial liabilities in the financial statements if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.
(ii) Derecognition of financial assets
The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of financial liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired.
(iv) Trade date accounting
Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.
(v) Classification and measurement of financial assets and financial liabilities
The Company’s investments are held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with documented investment strategy and this is also the basis on which information about the investments is provided internally to the Board. Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments that are actively traded in organised financial markets, is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded and where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including last traded price, broker quotes and price modelling.
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.
(d) Cash and cash equivalents
Cash and cash equivalents may comprise short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.
All dividends are taken into account on the date investments are marked ex-dividend, and UK dividends are shown net of any associated tax credit. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent of the cash dividend is recognised as income in the revenue account and any excess in value of the shares received over the amount of the cash dividend is recognised in capital. Interest income and expenses are accounted for on an accruals basis. Other income from investments is accounted for on an accruals basis. Deposit interest receivable is accounted for on an accruals basis.
(f) Expenses and finance costs
Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.
The investment management fee and finance costs are allocated 75% to capital and 25% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio.
Investment transaction costs are recognised in capital in the income statement. All other expenses are allocated to revenue in the income statement.
Dividends are not recognised in the accounts unless there is an obligation to pay at the balance sheet date. Proposed final dividends are recognised in the period in which they are either approved by or paid to shareholders.
The liability to corporation tax is based on net revenue for the period. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.
This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.
|Income from investments|
|Special dividends – overseas||421||194|
|Total dividend income||6,043||5,462|
No special dividends have been recognised in capital during the year (2017: nil).
3. Investment Management Fee
This note shows the investment management fee due to the Manager which is calculated and paid quarterly.
|Investment management fee||457||1,371||1,828||420||1,261||1,681|
Details of the investment management and secretarial agreement are given on page 24 of the Annual Financial Report in the Directors’ Report.
At 30 April 2018, £427,000 was due for payment in respect of the management fee (2017: £444,000).
4. Other Expenses
The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.
|Directors’ remuneration (i)||132||–||132||119||–||119|
|Auditor’s fees (ii):|
|– for audit of the financial statements||21||–||21||21||–||21|
|Other expenses (iii)||397||5||402||389||3||392|
(i) Directors’ fees authorised by the Articles of Association are £150,000 per annum. The Directors’ Remuneration Report provides further information on Directors’ remuneration for the year. Included within other expenses is £12,000 (2017: £11,000) of employer's national insurance payable on Directors' remuneration. As at 30 April 2018, the amounts outstanding on Directors' remuneration and employer's national insurance was £12,000 (2017: £12,000).
(ii) Auditor’s fees are shown excluding VAT.
(iii) Other expenses also include a separate fee paid to the Manager for secretarial and administrative services which is subject to annual adjustment in line with the UK Retail Price Index. During the year the Company paid £92,000 (2017: £87,000) for these services. Custodian transaction charges of £5,000 (2017: £3,000) have been charged to capital.
5. Finance Costs
Finance costs arise on any borrowing the Company has which for this Company is a committed £20 million revolving credit facility (see more in note 11).
|Loan facility fee||10||30||40||10||29||39|
|Interest on term loan||–||–||–||4||12||16|
6. Tax on Ordinary Activities
As an investment trust the Company pays no tax on capital gains. The Company suffers no tax on income arising on UK and certain overseas dividends. The Company’s tax charge arises solely from irrecoverable tax on overseas (generally non-EU) dividends. This note also clarifies the basis for the Company having no deferred tax liability.
(a) Current tax charge
The overseas tax charge consists of irrecoverable withholding tax.
(b) Reconciliation of current tax charge
|Return on ordinary activities before taxation||33,924||70,769|
|Theoretical tax at UK Corporation tax rate of 19.0% (2017: 19.9%)||6,446||14,097|
|Non-taxable gains on investments||(5,822)||(13,568)|
|Non-taxable losses on foreign currency revaluation||66||107|
|Non-taxable UK dividends||(46)||(58)|
|Non-taxable scrip dividends||(20)||(21)|
|Non-taxable overseas dividends||(1,073)||(999)|
|Effect of overseas tax||591||523|
|Expenses not allowed||1||1|
|Expenses in excess of taxable income||448||441|
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to obtain the necessary approval in the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax changes
The Company has excess management expenses and loan relationship deficits of £16,693,000 (2017: £14,335,000) that are available to offset future taxable revenue.
A deferred tax asset of £2,838,000 (2017: £2,437,000), measured at the prospective rate of corporation tax of 17% (2017: 17%), has not been recognised in respect of these expenses since they are recoverable only to the extent that the Company has sufficient future taxable revenue which they may be set against. This is considered unlikely.
7. Return per Ordinary Share
Return per share is the amount of gain or loss generated for the financial year divided by the weighted average number of ordinary shares in issue.
|Return per ordinary share is based on the following:|
|Revenue return after taxation||4,447||3,978|
|Capital return after taxation||28,886||66,268|
|Total return after taxation||33,333||70,246|
|Weighted average number of ordinary shares|
|in issue during the year:|
8. Dividends on Ordinary Shares
Dividends represent a return of income less expenses to shareholders. The Company pays one dividend a year.
|Final dividend in respect of previous year||4.30||3,587||3.65||3,086|
|Final dividend proposed||5.50||3,900||4.30||3,587|
9. Investments at Fair Value
The portfolio comprises investments which are listed and traded on regulated stock exchanges.
Gains and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost on those investments still held at the year end.
All investments are listed.
|Movements in the year:|
|Purchases at cost||68,887||45,886|
|Sales – proceeds||(109,143)||(61,105)|
|Sales – gains on sales||47,282||14,746|
|Movement in investment holding gains during the year||(16,641)||53,366|
|Closing book cost||165,808||158,782|
|Closing investment holding gains||60,815||77,456|
(b) Gains on investments
|Realised gains on sales||47,282||14,746|
|Movement in investment holding gains during the year||(16,641)||53,366|
|Gains on investments||30,641||68,112|
(c) Registration of investments
The investments of the Company are registered in the name of the Company or in the name of nominees and held to the order of the Company.
(d) Transaction costs
Transaction costs on purchases of £126,000 (2017: £110,000) and on sales of £254,000 (2017: £198,000) are included in gains and losses on investments.
Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
|Amounts due from brokers||6,410||917|
|Prepayments and accrued income||330||308|
11. Creditors: amounts falling due within one year
Creditors are amounts which must be paid by the Company and they are all due within 12 months of the balance sheet date.
The bank loan facility provides a specific amount of capital, up to £20 million, over a specified period of time (364 days). Unlike a term loan, the revolving nature of the facility allows the Company to drawdown, repay and re-draw loans.
|Amounts due to brokers||3,382||240|
The committed unsecured 364 day multi-currency revolving credit facility with The Bank of New York Mellon, had an interest rate based on LIBOR plus a margin of 0.85%. Any undrawn amounts under the facility attract a commitment fee of 0.2%. The facility covenants are based on the lower of 25% of net asset value and £20 million, renewable on 4 August 2018, and require total assets to not fall below £80 million. At the year end no loan position was drawn down (2017: nil). The Company also has an overdraft facility with the custodian that is available for settlement purposes and is limited to 10% of net assets; this was unused at the year end (2017: nil).
12. Share Capital
Share capital represents the total number of shares in issue. Any dividends declared will be paid on the shares in issue on the record date.
(a) Allotted, called-up and fully paid
|Ordinary shares of 10p each||7,092||8,343|
|Treasury shares of 10p each||408||408|
The Directors’ Report on page 26 sets out the share capital structure, restrictions and voting rights.
(b) Share movements
|Number at start of year||83,428,716||4,085,406||85,462,391||3,277,224|
|Shares bought back and cancelled||(12,514,241)||–||(1,225,493)||–|
|Shares bought back and held in treasury||–||–||(808,182)||808,182|
As announced on 11 August 2017 the Company undertook a tender offer of 15% of its shares in issue at 312.8857p per share. Fixed costs and expenses of the tender offer amounted to £363,000, giving a total cost of £39,519,000. No shares, except for the tender offer shares, were bought back in the year or subsequent to the year end.
The total cost of shares bought back in the previous year was £4,243,000 and the average price (excluding costs) was 207.18p.
(c) Winding-up provisions
The Directors are obliged to convene an Extraordinary General Meeting (‘EGM’) to consider a special resolution to wind up the Company every third year from the date of the AGM at which the Directors were released from such obligation. At the AGM in 2016 the Directors were released from their obligation to convene an EGM and a resolution to release the Directors from their obligation to convene an EGM will be put to shareholders at the AGM in 2019.
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The capital redemption reserve maintains the equity share capital arising from the buy-back and cancellation of shares and is non-distributable. The special reserve arose from the cancellation of the share premium account and is available as a distributable reserve to fund any future tender offers and share buy backs.
Capital investment gains and losses, both unrealised and realised, are shown in note 9(a) and form part of the capital reserve. The revenue reserve shows the net revenue retained after payment of any dividends. The capital and revenue reserves are distributable by way of dividend.
14. Net Asset Value
The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.
The net asset values attributable to each share in accordance with the Company's Articles are set out below.
|Ordinary shareholders’ funds||£233,252,000||£243,025,000|
|Number of ordinary shares in issue, excluding treasury shares||70,914,475||83,428,716|
|Net asset value per ordinary share||328.9p||291.3p|
There is no dilution in this or the previous year.
15. Financial Instruments
Financial instruments comprise the Company’s investment portfolio, derivative financial instruments (if the Company had any), as well as any cash, borrowings, debtors and creditors. This note sets out the risks arising from the Company’s financial instruments in terms of the Company’s exposure and sensitivity, and any mitigation that the Manager or Board can take.
Risk Management Policies and Procedures
The Company’s portfolio is managed in accordance with its investment objective, which is set out in the Strategic Report on page 6. The Strategic Report then proceeds to set out the Manager’s investment process and the Company’s internal control and risk management systems as well as the Company’s principal risks and uncertainties. Risk management is an integral part of the investment management process and this note expands on certain of those risks in relation to the Company’s financial instruments, including market risk.
The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured. The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Strategic Report.
As an investment trust the Company invests in equities and other investments for the long-term so as to meet its investment objective and policies. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the policies the Company used to manage these are summarised below and have remained substantially unchanged for the two years under review.
15.1 Market Risk
Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (15.1.1), interest rate risk (15.1.2) and other price risk (15.1.3).
The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed in the Board Responsibilities on page 30. Borrowing is used to enhance returns, however, this will also increase the Company’s exposure to market risk and volatility.
15.1.1 Currency Risk
As nearly all of the Company’s assets, liabilities and income are denominated in currencies other than sterling, movements in exchange rates will affect the sterling value of those items.
Management of the Currency Risk
The Manager monitors the Company’s exposure to foreign currencies on a daily basis and reports to the Board on a regular basis. With the exception of borrowings in foreign currency, the Company does not normally hedge its currency positions but may do so should the portfolio manager or the Board feel this was appropriate. Contracts are limited to currencies and amounts commensurate with the asset exposure.
Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and received.
Foreign Currency Exposure
The fair values of the Company’s monetary items that have currency exposure at 30 April are shown below. Where the Company’s investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis so as to show the overall level of exposure.
year ended 30 april 2018
|(due from||(due to||exposure||value||total net|
|brokers||Cash and||brokers||on net||through||foreign|
|Hong Kong dollar||–||–||(65)||(65)||70,574||70,509|
|South Korean won||95||–||–||95||46,404||46,499|
year ended 30 april 2017
|(due from||(due to||exposure||value||total net|
|brokers||Cash and||brokers||on net||through||foreign|
|Hong Kong dollar||–||–||–||–||64,705||64,705|
|South Korean won||211||–||–||211||50,029||50,240|
The amounts shown are not representative of the exposure to risk during the year, because the levels of foreign currency exposure change significantly throughout the year.
Foreign Currency Sensitivity
The following table illustrates the sensitivity of the returns after taxation for the year with respect to the Company’s financial assets and liabilities.
If sterling had strengthened by the amounts shown in the second table below, the effect on the assets and liabilities held in non-sterling currency would have been as follows:
|Return||Return||after tax||Return||return||after tax|
|Hong Kong dollar||(76)||(2,538)||(2,614)||(116)||(3,688)||(3,804)|
|South Korean won||(17)||(882)||(899)||(22)||(1,151)||(1,173)|
If sterling had weakened by the same amounts, the effect would have been the converse.
The following movements in the assumed exchange rates are used in the above sensitivity analysis:
|£/Hong Kong dollar||+/–3.6||+/–5.7|
|£/South Korean won||+/–1.9||+/–2.3|
These percentages have been determined based on the market volatility in exchange rates during the year. The sensitivity analysis is based on the Company’s foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts that offset the effects of changes in currency exchange rates. The effect of the strengthening or weakening of sterling against foreign currencies is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean.
In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole since the level of foreign currency exposure varies.
15.1.2 Interest Rate Risk
The Company is exposed to interest rate risk through income receivable on cash deposits and interest payable on variable rate borrowings. When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian, Bank of New York Mellon (International) Limited.
The Company has a credit facility (the ‘facility’) for which details and year end drawn down amounts are shown in note 11. The Company uses the facility when required at levels approved and monitored by the Board. At the maximum possible gearing of £20 million, the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s total income of £200,000. At the year end no loan amounts were drawn down (2017: £nil).
The Company also has an uncommitted bank overdraft facility of 10% of assets held by the custodian which it uses for settlement purposes. At the year end there was no overdrawn amount (2017: £nil). Interest on the bank overdraft is payable at the custodian’s variable rate.
The Company’s portfolio is not directly exposed to interest rate risk.
15.1.3 Other Price Risk
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the Manager to manage the portfolio to achieve the best possible return.
The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies and to review investment performance.
The Company’s portfolio is the result of the Manager’s investment process and as a result is not wholly correlated with the Company’s benchmark or the markets in which the Company invests. The value of the portfolio will not move in line with the markets but will move as a result of the performance of the shares within the portfolio.
If the value of the portfolio rose or fell by 10% at the balance sheet date, the profit after tax for the year would increase or decrease by £22.7 million (2017: £23.6 million) respectively.
15.2 Liquidity Risk
This is the risk that the Company may encounter difficulty in meeting its obligations associated with financial liabilities i.e. when realising assets or raising finance to meet financial commitments.
A lack of liquidity in the portfolio may make it difficult for the Company to realise assets at or near their purported value in the event of a forced sale. This is minimised as the majority of the Company’s investments comprise a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary, and the loan and overdraft facilities provide for additional funding flexibility. The financial liabilities of the Company at the balance sheet date are shown in note 11.
15.3 Credit Risk
Credit risk comprises the potential failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered; it includes, but is not limited to: lost principal and interest, disruption to cash flows or the failure to pay interest.
Credit risk is minimised by using:
(a) only approved counterparties, covering both brokers and deposit takers;
(b) a custodian that operates under BASEL III guidelines. The Board reviews the custodian’s annual independent controls assurance report and the Manager’s management of the relationship with the custodian. Following the appointment of a depositary, assets and cash held at the custodian are covered by the depositary’s restitution obligation, accordingly the risk of loss is remote; and
(c) the Short Term Investment Companies (Global Series) plc (‘STIC’) money market fund, which is rated AAAm by Standard & Poor’s and AAAmmf by Fitch.
In addition, cash balances are limited to a maximum of 2.5% of net assets with any one deposit taker and a maximum of 6% of net assets in STIC. These limits are at the discretion of the Board and are reviewed on a regular basis. As at the year end, the sterling equivalent of £2,715,000 (2017: £2,394,000) was held at the custodian and £1,018,000 (2017: £3,842,000) was held in STIC.
16. Fair Value of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. Under accounting standards there are three levels of fair value based on whether there is an active market (Level 1) or, if not, Levels 2 and 3 where other methods have been employed to establish a fair value. This note sets out the aggregate amount of the portfolio in each level, and why.
Financial assets and financial liabilities are either carried at their fair value (investments), or at a reasonable approximation of their fair value. The valuation techniques used by the Company are explained in the accounting policy note. FRS102 as amended for fair value hierarchy disclosures (March 2016) sets out three fair value levels. Categorisation into a level is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.
The investments held by the Company at the year end are shown on pages 19 and 20. Except for one Level 3 investment described below, all of the Company’s investments at the year end were deemed to be Level 1 with fair values for all based on unadjusted quoted prices in active markets for identical assets.
Finetex EnE was the only Level 3 investment in the portfolio at the year end (2017: none) and was valued at £1,361,000. Level 3 investments are investments for which inputs are unobservable (i.e. for which market data is unavailable). Finetex EnE was a Level 1 security but was transferred to Level 3 following its suspension from trading on the KOSDAQ market in Korea. It has been valued at a 25% discount to its last trading price recognising both the lack of information and liquidity for this security.
17. Capital Management
This note is designed to set out the Company’s objectives, policies and processes for managing its capital. This capital being funded by monies invested in the Company by shareholders (both initial investment and retained amount) and any borrowings by the Company.
The Company’s total capital employed at the balance sheet date was £233,252,000 (2017: £243,025,000) comprising borrowings of £nil (2017: £nil) and equity share capital and other reserves of £233,252,000 (2017: £243,025,000).
The Company’s total capital employed is managed to achieve the Company’s investment objective and investment policy as set out on page 6. Borrowings may be used to provide gearing up to the lower of £20 million or 25% of net asset value. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.
The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 10 and 11. These also explain that the Company is able to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.
The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy-back shares and it also determines dividend payments.
The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1159 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the credit facility, by the terms imposed by the lender, details of which are given in note 11. The Board regularly monitors, and the Company has complied with, these externally imposed capital requirements.
18. Contingencies, Guarantees and Financial Commitments
Any liabilities the Company is committed to honour, and which are dependent on future circumstances or events occurring, would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments of the Company at the year end (2017: £nil).
19. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on pages 38 to 40 with additional disclosure in note 4. No other related parties have been identified.
Details of the Manager's services and fees are disclosed in the Director’s Report on page 24 in the annual financial report and note 3.
20. Post Balance Sheet Events
Any significant events that occurred after the balance sheet date but before the signing of the balance sheet will be shown here.
There are no significant events after the end of the reporting year requiring disclosure.
This Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 30 April 2018 have been agreed with the auditors and are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2017 and 2018 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s498 of the Companies Act 2006. The financial information for 2017 is derived from the statutory accounts for 2017 which have been delivered to the Registrar of Companies. The 2018 accounts will be filed with the Registrar of Companies in due course.
The Audited Annual Financial Report will be posted to shareholders shortly. Copies may be obtained during normal business hours from the offices of Invesco Perpetual, 6th Floor, 125 London Wall, EC2Y 5AS. A copy of the Annual Financial Report will be available from Invesco Perpetual on the following website: www.invescoperpetual.co.uk/invescoasia in due course.
The Annual General Meeting of the Company will be held at 12.00 noon on 31 July 2018 at 43-45 Portman Square, London, W1H 6LY.
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