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INVESCO Asia Trust PLC   -  IAT   

Annual Financial Report

Released 07:00 11-Jul-2019

Annual Financial Report

 Invesco Asia Trust plc

Annual Financial Report Announcement

For the Financial Year Ended 30 April 2019

FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

The benchmark index of the Company is the MSCI AC Asia ex Japan Index (total return, in sterling terms)

Total Return Statistics(1) (dividends reinvested)
Change for the year 2019 2018
Net asset value (NAV)(2) 0.8% 14.5%
Share price 6.0% 13.0%
Benchmark index(2) 1.6% 16.8%
Capital Statistics
At 30 April 2019 2018 CHANGE %
NAV (£’000)(3) 227,375 233,252 –2.5
NAV per share(2)
  – cum income 322.7p 328.9p –1.9
  – ex income 319.9p 322.6p –0.8
Share price(1) 294.0p 286.0p +2.8
Benchmark index(2) 969.82 979.25 –1.0
Discount(2) per ordinary share:
  – cum income (8.9)% (13.0)%
  – ex income (8.1)% (11.4)%
Average discount over the year (ex income)(1) (10.4)% (10.2)%
Gearing:
  – net cash(2) 1.1% 1.6%
Revenue Statistics
Year Ended 30 April 2019 2018 CHANGE %
Income (£’000) 5,440 6,055 –10.2
Net revenue available for ordinary shares (£’000) 3,927 4,447 –11.7
Revenue return per ordinary share 5.55p 5.98p –7.2
Dividends per share(4):
  – interim 2.80p n/a
  – final 2.90p 5.50p
Total dividends 5.70p 5.50p +3.6
Ongoing charges ratio(2) 0.98 0.99

(1) Source: Refinitiv.

(2) The term is defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 73 to 76 of the Annual Financial Report.

(3) In 2018 this includes the tender offer of 15% of the Company’s shares in August 2017.

(4) During the year, the Board resolved to pay an interim and a final dividend effective from 2019 (previously only one final dividend was paid)

Items shaded in this colour are the Company’s Key Performance Indicators (which are detailed on page 15 of the Annual Financial Report).

CHAIRMAN’S STATEMENT

HIGHLIGHTS

•               Investment Case: a year of consolidation after previous strong performance.

•               Corporate Proposition: changes are underway to make the Company more attractive, with the aim of reducing the discount.

•               Net Asset Value (NAV) per share +0.8% over 1 year, benchmark index* +1.6%, both on a total return basis.

•               Share price total return +6.0% as discount closes from 11.4% to 8.1% over the year.

•               Final dividend of 2.90p takes full year dividend to 5.70p, +3.6% on previous year. Shares yielding 1.9% at 30 April 2019 closing price.

In our interim statement last December I set out the investment case and corporate proposition for Invesco Asia Trust plc. The Board believes that it is in shareholder’s best interests that we should simultaneously aim to be successful in both our investment case and corporate proposition.

Investment Case

The investment case rests on people, process and performance: our investment management is contracted to Invesco with Ian Hargreaves as our portfolio manager. Ian is Co-Head of Asian and Emerging Markets Equities at Invesco, has been our lead manager since 1 January 2015, our named co-manager from 2011 and was part of the investment team before that. The investment process, which Invesco has consistently applied over the long-term, is best described as a search for companies whose shares trade at a significant discount to fair value. The mandate is to invest predominantly in listed companies in Asia ex-Japan. Long-term performance remains strong with the Company returning 265% over the ten years to 30 April 2019 on a total return basis versus the 195% from our benchmark index*. Over five years the numbers are +93% and +72% respectively.

Over one year, NAV per share increased by 0.8% compared with the benchmark index* increase of 1.6%. Whilst it is always disappointing to be behind the index, the year is perhaps best viewed as a period of consolidation after previous strong performance. Ian reviews performance in more detail in the Portfolio Manager’s Report. Your Board continues to consider the investment case for Invesco Asia Trust plc to be as compelling and sustainable as it has been for the past ten years.

Corporate Proposition

Investment trusts offer an extra dimension not available with open-ended equivalents. We have adopted a series of measures intended to create additional demand for our shares, both from existing and new shareholders, and to reduce the discount. We have been careful to ensure that the measures chosen are in the best interests of all shareholders. The intention is that the gains from each will combine to make the corporate proposition as compelling as the investment case.

Access to Invesco Expertise

Ian Hargreaves is Invesco’s lead portfolio manager of Asian accounts for institutional investors and manages £7 billion of institutional assets. Invesco Asia Trust plc is the only vehicle available to UK retail investors who wish to access Ian’s track record. Ian manages it with a high degree of commonality to his institutional portfolios although he will continue to include some of the best smaller company opportunities.

Dividends

As announced in the Company’s half-yearly financial report, the Company plans to increase the dividend per share each year, utilising the Company’s revenue and capital reserves if necessary**. This is a distinguishing feature of investment trusts, allowing us to use first our revenue reserves then, if necessary, our capital reserves to smooth dividend payments in years when they are not covered by available revenue. The Company paid an interim dividend of 2.80p per share on 25 January 2019 to shareholders on the register on 28 December 2018.

The Board recommends a final dividend of 2.90p per ordinary share, making a total dividend for the year to 30 April 2019 of 5.70p per share (2018: 5.50p), an increase of 3.6%. This represents a dividend yield of 1.9% based on the 30 April 2019 closing share price. The full-year revenue return per share was 5.55p (2018: 5.98p) so this year’s dividend increase is partly funded by a small drawdown in revenue reserves.

The final dividend, which is subject to the approval by shareholders at the Annual General Meeting (‘AGM’), will be payable on 9 September 2019 to shareholders on the register on 9 August 2019. The shares will be marked ex-dividend on 8 August 2019.

We intend again to pay an interim dividend in the forthcoming year about half of the expected next year’s full year dividend**.

Gearing

The Company intends to use gearing (or borrowings) more actively to take advantage of its closed-end structure. Gearing was increased in Q4 2018 as valuations became cheap, but then reduced in Q1 as several stocks were sold once they reached the Portfolio Manager’s estimation of fair value. At the year end the Company had no borrowings and net cash of 1.1%, meaning that the equity exposure was 98.9% of NAV. The portfolio beta (the sensitivity of the overall portfolio to market movements) was 0.97%. Multiplying the two numbers together gives a beta-adjusted gearing measure of 95.9%, which means that for every 10% move in the market index, we would currently expect a 9.6% move in NAV.

Buy Back Authority

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 in normal market conditions. Until now this has been calculated on the basis of NAV excluding income but the Board, in consultation with the Company’s corporate broker, has decided to change this to NAV cum-income, a tougher basis for calculation, but one which is more commonly used. To help meet this target, 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 Company repurchased into treasury 445,000 shares (representing 0.6% of total shares outstanding at year-end) at an average price of 265.29p per share. The Company’s shares traded during the year at an average discount to NAV excluding income, marginally in excess of the target, at 10.4% (2018: 10.2%). The average for the second half of the year was 9.5%.

Share buy backs will only occur where and when we consider (in consultation with our broker) that such buy backs will be effective, taking into account market factors and the discounts of comparable funds. 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 13 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 31 in the annual financial report.

Board Composition

I took over from Carol Ferguson as Chairman after last year’s AGM on 31 July 2018. On 14 December 2018 we announced that Owen Jonathan was appointed Senior Independent Director and that Fleur Meijs became Chair of the Remuneration Committee. We intend to adopt fully the new AIC Corporate Governance Code in the year to 30 April 2020.

The Nomination Committee reviewed the composition of the Board and the Company’s succession plan during the year. The services of an external board evaluation consultant, Lintstock, were engaged to carry out a performance evaluation of the Chairman, Board and its Committees. The outcome of this evaluation is further detailed under the Nomination Committee section of the Corporate Governance Statement found on page 34 of the Annual Financial Report.

Under our new succession plan, Directors will normally retire from the Board on or shortly after their ninth anniversary. Tom Maier has served on the Board since 2009 but we asked Tom to stay on the Board beyond his nine years because both Fleur and I are relatively new to the Board and because, being only a four-strong Board, we want his replacement to be up and running before he leaves. The recruitment process to identify a suitable replacement is now underway with the Board having engaged Sapphire Partners, an external search consultant. An announcement will be made when an appointment has been agreed.

Ongoing Charges and Fees

As a Board we are responsible for managing the level of charges to shareholders. Our intention is to seek to reduce gradually the level on ongoing charges over time. The main component of the 0.98% p.a. ongoing charges is the investment management fee of 0.75%p.a. paid to Invesco. In the first half of the year we agreed with Invesco a new marginal fee rate of 0.65% p.a. for any assets over £250m.

Engaging more individual shareholders

We see that an increasing proportion of our shareholders are individuals, with the proportion of investors who hold shares of Invesco Asia Trust plc via platforms more than doubling in six years.

The Board aims to engage more directly with individual investors. In the meantime we are implementing some incremental improvements. Working closely with Invesco, we have begun to raise the profile of the Company through new direct investor events which will provide access to Ian, his team and the Directors. These activities complement the ongoing engagement with a broad range of professional investors.

Invesco have a project underway to completely refresh our website. While waiting, we have implemented some small improvements. We now have our own dedicated email address, IAT@invesco.com. On the Invesco Asia Trust plc website www.invesco.co.uk/invescoasia you can now register to receive printed copies of the interim and annual reports, register your interest in attending our AGM, watch a video from the portfolio manager and the Chairman and read an assessment of the Asian growth outlook from Invesco’s Chief Economist, John Greenwood. You can also see third party research (by Edison Investment Research and Kepler Partners) and register for monthly factsheet alerts. Otherwise search ‘Invesco Asia Trust’ or our ticker: IAT.LN on the internet.

Directors’ Shareholdings

Institutional investors often follow and ask for information on Directors’ holdings of shares in the Company. These are shown on page 42 of the annual financial report and we are obliged to notify any changes to the stock market by public announcement. We additionally disclose the fact that our manager Ian Hargreaves is also a shareholder in the Company and can confirm that his remuneration by Invesco is partly determined by the performance of Invesco Asia Trust plc.

Discount

It is encouraging that the share price discount to NAV has narrowed since we announced our corporate proposition last December. The discount ex-income moved from 11.4% at 30 April 2018 to 12.2% at 31 October 2018 to 8.1% at 30 April 2019. As stated earlier, we have targeted a discount averaging less than 10% of NAV calculated on an ex-income basis over the Company’s year. We have tightened this target by changing the calculation to a NAV cum-income basis for the current year. The difference between the two NAV calculations is the amount of undistributed income. On a cum-income basis the discount to NAV at 30 April 2019 was 8.9%.

The discount level is of course subject to demand for and supply of the Company’s shares and will be influenced by such factors as market sentiment and expectations of future Asian growth as well as our own investment case and corporate proposition. When we reach a situation where all of these factors are firing at once, we would hope to stand at a small premium. Our 10% discount target should be considered as the wider end of the range.

Continuation Vote

Every three years, shareholders are given the opportunity to vote on the future of the Company. At the forthcoming AGM an ordinary resolution is proposed that releases Directors from their obligation to convene a general meeting to propose a special resolution to wind up the Company on a voluntary basis. With a strong investment case and a new corporate proposition, the Directors firmly believe that continuation is in shareholders’ best interests. The Directors will all vote in favour of continuation and we recommend that all shareholders do likewise.

Annual General Meeting

How many times have you met one of your investment managers? With an open-ended fund the chances are remote, but one of the great attractions of investment trusts is that shareholders every year have the opportunity to meet and question the Directors and the Manager at the Company’s AGM.

Our AGM will be held at 12 noon on 5 September 2019 at 43-45 Portman Square, London W1H 6LY. Ian Hargreaves will give a presentation highlighting the events of the past year and the prospects for the year to come. The Directors and Ian will answer shareholders’ questions both in the formal part of the meeting and over a buffet lunch afterwards. 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 they 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.

All shareholders are welcome and may bring a guest with them. To register your interest in attending, please contact us at IAT@invesco.com.

Update

From 30 April 2019 to 8 July 2019, the latest practical date before the signing of this report, the NAV has increased 0.5% to 324.5p and the index has increased 0.6%. The share price has increased 0.2% to 294.5p, meaning that the discount to NAV on a cum-income basis has moved from 8.9% to 9.2%. All figures are on a total return basis.

Outlook

The long-term investment case for Asia remains strong, fuelled by rising living standards within Asia and the flexibility and low-cost base of its manufacturing sector. Valuations are below long-term averages but not exceptionally cheap. Corporate balance sheets are generally much stronger than in previous years. However, with tariffs now increasing and the fear of a trade war, earnings downgrades have started to emerge. It is not clear how much bad news is priced into markets. Politics is unusually important, not just within individual Asian countries, but also in the resolution of trade disputes with America. All this gives a mixed picture and explains why Ian is not deploying gearing at the moment. The investment picture globally is similarly uncertain. How the trade disputes with America are resolved in the run-up to the US Presidential election will probably determine the short-term direction.

Neil Rogan

Chairman

10 July 2019

*Benchmark index is the MSCI AC Asia ex-Japan Index from 1 May 2015 and was the MSCI AC Asia Pacific ex-Japan before then.

** Please be aware that the Board provides no guarantees of future dividends and that all future dividend payments will be at the Directors’ discretion.

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STRATEGIC REPORT

PORTFOLIO MANAGER’S REPORT

Market Review

Asian equity markets, as measured by the MSCI AC Asia ex Japan Index (total return, in sterling terms), rose 1.6% over the twelve months to 30 April 2019. It has been a challenging period for investors, with the past six months marked by heightened volatility and growing negative sentiment towards Asian equity markets due to concerns over US monetary policy tightening, dollar strength, the slowdown in China’s economy and escalating trade tensions. However, markets rebounded strongly from the start of 2019 on signs that the US and China were inching closer towards a trade agreement, combined with global central banks’ softer policy stance and a more pro-growth Chinese government position.

India’s equity market outperformed the broader region, aided in part by a pre-election rally on strengthened expectations that Prime Minister Modi would return to power with a convincing majority, as well as the Reserve Bank of India’s (RBI) surprise 0.25% cut in interest rates in the first quarter and a rise in foreign flows into Indian equities.

In China, equity markets reversed fourth-quarter declines to end the twelve months to 30 April 2019 higher in a period of marked volatility. Sentiment improved on hopes of improving trade relations as well as the central government’s supportive policy easing and some healthier macroeconomic indicators. News that global index provider MSCI will increase its weighting of China-A shares in the MSCI Emerging Markets Index to 3.3% from a current 0.7% by November of this year further supported market confidence. Looking elsewhere, South Korean equities lagged the broader market as corporate earnings disappointed while global macro uncertainty and domestic policy risk also weighed on several sectors.

Portfolio Review

For the year ended 30 April 2019, the Company’s net asset value increased by 0.8% (total return, in sterling terms). This performance was below that of the benchmark index (MSCI AC Asia ex Japan Index) which rose by 1.6% (total return, in sterling terms).

The Company’s stock selection in Indian equities contributed significantly to relative performance, particularly holdings in commercial banks. ICICI, for example, was the standout performer, thanks to an improvement in its earnings visibility and higher provisioning cover as it moves closer to recognising the bulk of its bad loans. The lender has also seen core profitability recover while benefiting from an improvement in the broader macroeconomic outlook. This more positive macro environment also benefited HDFC Bank which similarly contributed to performance, sporting steady earnings growth and improved cost controls.

We also hold a number of Indian companies that are less exposed to the domestic economy and which have been successful in the internationalisation of their business. Agrochemicals company UPL, for example, has continued to contribute positively supported by strong earnings results. The company also finalised its acquisition of Arysta LifeScience, which could help drive earnings growth over the medium term. Aurobindo Pharma also added value, a generic pharmaceuticals manufacturer which similarly derives much of its revenue from overseas sales. The company has won US FDA approval for many new products and recent acquisitions in the US and Europe have helped improve the visibility and sustainability of its earnings.

In the IT sector, Infosys contributed positively, with the Indian software services firm raising its full-year sales forecast on the back of its increased win rate of large outsourcing contracts and a recovery of its financial services business, while maintaining solid cash-flow generation. Meanwhile, MediaTek detracted as concerns over a slowdown in China’s smartphone market were compounded by trade tensions, although the share price has regained some lost territory through the first quarter of 2019 on positive earnings and market expectation of further product diversification. We believe the company looks strong from a medium-term perspective and that the market has focused too much on weaker smartphone demand. However, MediaTek has turned a corner in terms of product quality and in the 5G era we expect to see more value-added products which will expand average margins in its telecoms business. It is also incubating new areas which should deliver revenue in the coming years, including ASICS, Big Data, and Wifi. These areas have less competition which should help increase margins. With nearly a third of its market capitalisation in cash and investments, the company has significant unrecognised profits from investments in such subsidiary companies.

The performance of Chinese internet companies has been mixed, with general concerns surrounding a slowdown in consumer spending and increased competition in e-commerce. NetEase added value over the period, regaining territory lost in the fourth quarter to end the period higher as new content for its major games proved popular, while visibility improved for the launch of new online games in its pipeline following the regulator’s issuing of new rules for approvals. However, this was not enough to compensate for the impact of Baidu, which has faced lingering concerns over a weakening revenue growth outlook. Its spending on video content and promotions is also expected to weigh on profit margins though its core search business is likely to prove resilient. While we are conservative in our assumptions for near-term earnings growth, the medium-term outlook remains positive in our view, supported by news feed and growth potential in online video, voice search and autonomous driving. There is also significant value in its stakes in iQiyi and Ctrip, while it has a strong balance sheet with around 25% of its market capitalisation in cash.

Other contributors to relative performance included China Communications Services, which gained on expectations that China would launch pilot commercial 5G projects in the second half of 2019 as well as broader industry growth prospects. We decided to sell the holding in the first quarter, with the company trading close to our estimate of fair value. China BlueChemical contributed positively on expanding margins for its methanol and urea segments. CNOOC was buoyed by the strength of the oil price, with overseas ventures in Guyana, among others, expected to add to capacity expansion while management has been encouraging in terms of profitability and cost controls.

IMPACT OF INDIVIDUAL SECURITIES RELATIVE TO THE BENCHMARK INDEX

AVERAGE
PORTFOLIO
COMPANY INDUSTRY GROUP COUNTRY WEIGHT
Top five – addition to performance:
ICICI Banks India 2.5
Industrial & Commercial
 Bank of China Banks China 0.8
Infosys – ADR Software & Services India  2.2
UPL Materials India  2.1
HDFC Bank Banks India  3.8
Bottom five – detraction from performance:
Hyundai Motor – preference shares Automobiles & Components South Korea  2.6
Samsonite International Consumer Durables & Apparel Hong Kong  1.6
Baidu – ADR Media & Entertainment China  2.9
Finetex EnE Capital Goods South Korea  0.2
POSCO Materials South Korea  1.8

Source: Invesco.

Top 10 holdings (%)
STOCK COMPANY INDEX1 ACTIVE
Samsung Electronics (ordinary and preference shares) 5.7 4.5 1.2
Tencent 4.5 5.9 –1.4
Taiwan Semiconductor Manufacturing 4.4 4.3 0.1
HDFC Bank 4.2 4.2
AIA 3.6 2.6 1.0
United Overseas Bank 3.4 0.6 2.8
ICICI 3.3 0.3 3.0
Industrial & Commercial Bank of China 3.3 1.1 2.2
MediaTek 2.8 0.3 2.5
Aurobindo Pharma 2.7 0.1 2.6

Source: Invesco as at 30 April 2019.

(1) Index: MSCI AC Asia ex Japan. The Portfolio and Index weightings combine the weightings of the ordinary shares, preference shares and GDRs/ADRs when applicable.

Stock selection in South Korea negatively impacted performance. Hyundai Motor detracted amidst weaker sales, concerns over US tariffs on car imports, and product recalls there. However, the shares have been trading at close to trough valuation levels and we are positive on the company’s new product cycle which will help cut incentives and improve utilisation. Shareholder governance has also improved where cultural changes within Hyundai Motor have led to expectation of greater autonomy which should translate to improved company performance. The existence of an activist shareholder further applies pressure to move in a more positive direction, and this should sit well with other shareholders. Given its high cash balance, the company has committed to maintain dividends and to raise the payout ratio to 30% in the medium term.

Our holding in POSCO also weighed on performance as steel prices declined over the period amid concerns on the impact of US protectionist policies. Meanwhile, exposure to a number of Korean financials detracted from performance, including Korean Reinsurance and DGB Financial, as weak domestic economic conditions weighed on investor sentiment. Finally, Finetex EnE had its shares delisted from trading on the Korean stock exchange after its auditors qualified its accounts.

In China, the central government appears committed to stabilising economic growth and will continue to roll out accommodative policies as pledged during the National People’s Congress in March to ensure growth is set on a positive trajectory. The central government is conscious of the need to shore up growth while at the same time avoiding the largescale credit-fuelled stimulus that flooded the system in 2009. This balance between avoiding a sharp slowdown in growth and avoiding excessive stimulus is becoming more delicate. So far stimulus measures have been moderate, involving tax cuts for consumers and private enterprises most hurt by the slowdown in growth as well as the upstream impact of trade tariffs. Should trade conditions worsen, the US Federal Reserve has already indicated its dovish stance on rates and there still remains suitable scope for US policy makers to allow for further easing. In China, the central government has the ability to push through targeted fiscal and monetary stimulus measures in order to cushion growth in the event of a worsening trade outlook. However, the worsening trade situation also implies a fall in the Renminbi, and this is one of the reasons we are likely to remain underweight China relative to the index.

Elsewhere in the region, economies do not look particularly vulnerable. Current accounts are generally healthy and credit cycles are not extended. Where current account deficits do exist – Indonesia, Philippines and India – they are manageable and growth forecasts have already been lowered. Those economies more sensitive to global demand, such as South Korea and Taiwan, are likely to be impacted by ongoing trade and Chinese growth concerns, but their innovative companies have strong competitive advantages that should sustain them better than many fear.

Asia’s economic and corporate fundamentals remain solid, and its economies remain the biggest driver of global growth. In particular, we are encouraged by the capital discipline being displayed by companies across the region, with evidence of strong balance sheets and improving free cash flow generation. This is being reflected at the macro level too. Few countries are exhibiting signs of overheating – a far cry from the situation that prevailed in the run up to the global financial crisis in 2008. Given the modest outlook for growth, dividends as a component of total returns have become more important. This is what we try to take advantage of in the Company, which currently has a dividend yield of 1.9%.

Portfolio Strategy

The Company seeks to invest in undervalued companies from across the region. In terms of sectors, we increased our exposure in financials which remains the biggest overweight position, given what we consider to be improved fundamentals at selected banks and insurers, looking to take advantage of valuation weakness where we can find it. China Pacific Insurance is one such example. China Pacific Insurance is the third-largest life and non-life insurer in China with 6-7% and 10% market share, respectively. The industry still has quite a large protection gap, and, in our view, demand has crossed a threshold of consumer acceptance for higher value-added products. China Pacific Insurance is offering these higher-margin products and gradually expanding margins, but has seen its eighteen month share price de-rated, trading well below what we considered to be fair value.          

Continuing in China, we introduced Dongfeng Motor to the portfolio; a company which trades at a valuation that implies negative growth. The car manufacturer has grown its earnings at a 14% compound annual growth rate over the last decade and trades on a price earnings ratio of below 4x with a dividend yield in excess of 4%. The market is attributing a negative value to its 50% stake in its Chinese joint venture with Nissan, Honda and Peugeot if we extract the value of its stake in PSA Peugeot Group and net cash.

Meanwhile, we took advantage of a rebound in Shenzhen KSTAR Science and Technology’s share price and sold our holding, preferring to add a holding in another A-share, Jiangsu Yanghe Brewery. The liquor/spirits maker has seen its share price weaken given concerns over a slowdown in China consumption growth and a down-turn in the baijiu (Chinese spirits) cycle after two years of rapid growth. However, the share price looks to be reflecting an overly pessimistic outlook, with management proactively seeking to expand into new regions outside its home market supported by product premiumisation and leveraging on its strong in-house distribution network.

We continue to favour India as it has the best reform momentum in the region and is the only economy at the trough of its credit cycle which suggests there are fewer constraints to structural growth as compared to other economies. While valuations in some areas appear stretched, we are still able to find attractive bottom-up opportunities. Some of our biggest positions in India are in private banks. Compared to state-owned banks, which control about 70% of all banking assets, private banks such as ICICI are well capitalised, offer good digital and end-customer service. This allows them to be more competitive, gain market share and enter a virtuous cycle which allows for higher-grade lending and lower risk. This should lead to improved return on earnings and valuation rerating.     

We also see opportunity in South Korea, where valuations seem to be discounting for more than the cyclical nature of its economy and what is generally perceived to be poor corporate governance. We view this as a source of opportunity to own operationally solid companies, with good balance sheets, as well as an ability and desire to improve shareholder returns over time. Valuations across many sectors, such as banks and autos, are nearing historic lows signifying negative economic growth, which is not the case. Over the period we introduced KB Financial, whose valuation appears to be reflecting a far more pessimistic outlook than we think likely, particularly given the strength of its balance sheet and the potential for improvement in some of its non-bank subsidiaries.

We have maintained significant exposure to cash-backed Taiwanese technology companies. Over the period, we also introduced Delta Electronics, which had fallen from favour due to some weaker-than-expected results and near-term concerns over pricing and costs pressures, which had dampened the outlook for its operating margin. However, Delta’s components business has a number of long-term growth drivers, with products aimed at electric vehicles, industrial automation and cloud computing, which we believe will support attractive top-line revenue expansion and margin improvement.

Figure 4. Portfolio Characteristics

CURRENT FORWARD FORWARD FREE CASH FORWARD EPS
PRICE TO PRICE TO DIVIDEND FLOW YIELD GROWTH
BOOK EARNINGS YIELD % % %
Invesco Asia Trust 1.3x 13.0x 2.8 9.8 19.6
MSCI Asia ex Japan 1.7x 14.6x 2.6 7.5 13.1
MSCI World 2.4x 16.0x 2.6 5.8 9.3
S&P 500 3.5x 17.7x 2.0 5.0 8.6

Source: Style Research as at 30 April 2019.

Outlook

A resurgence in trade hostilities between the US and China has reduced hopes that exports will significantly recover from current weak levels. Given the strong rebound in valuations over Q1 2019, we remain cautious over the near-term outlook, particularly as this is unlikely to be accompanied by a significant improvement in earnings. Consensus expectations for 2019 have been steadily downgraded to a more reasonable level of around 4.5%, but expectations for 2020 and 2021 still seem too optimistic in our view.

Ian Hargreaves

Portfolio Manager

The Portfolio Manager

Ian Hargreaves was promoted to Co-Head of the Asian & Emerging Markets Equities team in September 2018. Ian manages pan-Asian portfolios and covers the entire Asian region in his remit. He started his investment career with Invesco Asia Pacific in Hong Kong in 1994 as an investment analyst where he was responsible for coverage of Indonesia, South Korea and the Indian sub-continent, as well as managing several regional institutional client accounts. Ian returned to the UK to join Invesco’s Asian Equities team in 2005, working on the portfolio as part of the investment team. He was appointed as joint portfolio manager in 2011 and became the sole portfolio manager on 1 January 2015.

Strategic REPORT

FOR THE YEAR ENDED 30 APRIL 2019

BUSINESS REVIEW

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 to act as registrar and the Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.

Investment Objective

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).

Investment Policy

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.

Investment Limits

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;

•               discount;

•               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 of the Annual Financial Report.

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 2019, in total return NAV terms the Company was ranked 8th over one year, 7th over three years and 4th 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 6.0% to 13.8% with an average discount of 10.4%. This is shown in the adjacent graph which plots the discount over the two years to 30 April 2019. At the year end the discount to the NAV (ex income) stood at 8.1%.

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. During the year, the Board introduced an interim dividend of 2.80p per share, which was paid in January 2019.

Results and Dividend

For the year ended 30 April 2019 the net asset value total return was +0.8% compared to the return on the benchmark index of +1.6%. The Portfolio Manager’s Report on pages 8 to 13 reviews the results.

As set out in the Company’s half-yearly financial report for the six months to 31 October 2018, the Board plans to increase the dividend per share each year, utilising the Company’s revenue and capital reserves if necessary.*

The Board announced the introduction of an interim dividend of 2.80p per share for the six months ended 31 October 2018 which it expected to represent approximately half of the total dividend for the year. In future years the Board intends to pay a similar proportion at the interim stage.

*Please be aware that the Board provides no guarantees of future dividends and that all future dividend payments will be at the Directors discretion.

Subject to approval at the AGM, the proposed final dividend for the year ended 30 April 2019 of 2.90p per share, which together with the interim dividend of 2.80p, gives a total of 5.70p per share for the year ended 30 April 2019 (2018: 5.50p). The final dividend will be payable on 9 September 2019 to shareholders on the register on 9 August 2019. Shares will be marked ex-dividend on 8 August 2019.

Financial Position and Borrowing

The Company’s balance sheet on page 52 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’.

Investment Process

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.

Strategic Risk

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 representatives. 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 service organisation 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 2019 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.

Strategic Risk

Market Risk

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 investmentsheld by the Company.

Investment Objectives

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.

Wide Discount

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.            

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.

Investment Management Risk

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 Co-Head of, Invesco’s Asian & Emerging Markets Equities team. He is supported by co-head, William Lam and the wider team.

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 16 and 17 of the Annual Financial Report.

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 and cyber security. The Board monitors TPPs’ business continuity plans and testing – including the TPPs and Manager’s 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.

In addition to these risks, the outcome and potential impact on the Company of the UK Government’s ongoing Brexit discussions with the European Union remain unclear at the time of writing. The Company’s investments are limited in their direct exposure to the UK market and a no-deal Brexit is not expected to pose a material risk. However, as the Company is priced in sterling, sharp movements in the Asian currency and sterling exchange rate, which may arise from Brexit, could affect the Company's net asset value. The exposure to foreign currency and sensitivity of foreign currency movements are shown on pages 62 and 63 of the Annual Financial Report. Separately, investor sentiment might lead to increased or reduced demand for the Company's shares, in light of Brexit uncertainty, which would be reflected in a narrowing or widening of the discount at which the Company's shares trade relative to their net asset value. Overall, the Board does not expect the Company's business model, over the longer term, to be affected by Brexit.

Viability Statement

The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets 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 at the forthcoming Annual General Meeting on 5 September 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 18 and 19 of the Annual Financial Report, 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 having been 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.

Board Responsibilities

As set out in the Corporate Governance Statement on pages 34 to 39 of the Annual Financial Report, the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment trust the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. The Board has a responsible governance culture and has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews its relationships with other service providers at least annually.

Board Diversity

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. The Board has considered the recommendations of the Davies and Hampton-Alexander review as well as the Parker review, but does not consider it appropriate to establish targets or quotas in this regard. The Board comprises four non-executive directors, three of whom are male and one of which is 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 25 of the Annual Financial Report. The Company has no employees.

Social and Environmental Matters

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

The Strategic Report was approved by the Board of Directors on 10 July 2019.

Invesco Asset Management Limited

Company Secretary

INVESTMENTS IN ORDER OF VALUATION

AT 30 April 2019

Ordinary shares unless stated otherwise

† The industry group is based on MSCI and Standard & Poor’s Global Industry Classification Standard.

AT MARKET % OF
VALUE PORTFOLIO
COMPANY INDUSTRY GROUP† COUNTRY£’000
Samsung Electronics
 – ordinary shares
 – preference shares
Technology Hardware & Equipment South Korea 7,657
5,276

5.7
TencentR Media & Entertainment China 10,137 4.5
Taiwan Semiconductor Semiconductors &
  Manufacturing   Semiconductor Equipment Taiwan 9,926 4.4
HDFC Bank Banks India 9,365 4.2
AIA Insurance Hong Kong 8,045 3.6
United Overseas Bank Banks Singapore 7,536 3.4
ICICI Banks India 7,487 3.3
Industrial & Commercial Bank Of ChinaH Banks China 7,459 3.3
MediaTek Semiconductors &
                Semiconductor Equipment
Taiwan 6,374 2.8
Aurobindo Pharma Pharmaceuticals, Biotechnology
                & Life Sciences
India 5,982 2.7
Ten Top Holdings 85,244 37.9
Hyundai Motor – preference shares Automobiles & Components South Korea 5,978 2.7
Alibaba – ADS Retailing China 5,915 2.6
CNOOCR Energy China 5,628 2.5
JD.com – ADR Retailing China 5,548 2.5
CK Hutchison Capital Goods Hong Kong 5,474 2.4
China Pacific Insurance Insurance China 5,470 2.4
Bangkok Bank Banks Thailand 5,180 2.3
NetEase – ADR Media & Entertainment China 5,080 2.3
Qingdao Port InternationalH Transportation China 4,545 2.0
UPL Materials India 4,338 1.9
Twenty Top Holdings 138,400 61.5
Infosys – ADR Software & Services India 4,333 1.9
Baidu – ADR Media & Entertainment China 4,194 1.9
KB Financial Banks South Korea 4,115 1.8
China BlueChemicalH Materials China 3,968 1.8
Inpex Energy Japan 3,828 1.7
China MobileR Telecommunication Services China 3,811 1.6
Sobha Real Estate India 3,576 1.6
PT Bank Negara Indonesia Persero Banks Indonesia 3,501 1.6
QBE Insurance Insurance Australia 3,499 1.6
Korean Reinsurance Insurance South Korea 3,416 1.5
Thirty Top Holdings 176,641 78.5
Shinhan Financial Banks South Korea 3,357 1.5
POSCO Materials South Korea 3,266 1.5
China Life Insurance (Taiwan) Insurance Taiwan 3,191 1.4
Kasikornbank Banks Thailand 3,104 1.4
Samsonite International Consumer Durables & Apparel Hong Kong 3,069 1.4
Delta Electronics Technology Hardware &
                Equipment
Taiwan 2,941 1.3
  
British American Tobacco (Malaysia) Food, Beverage & Tobacco Malaysia 2,808 1.2
ASUSTeK Computer Technology Hardware &
                Equipment
Taiwan 2,690 1.2
  
Filinvest Land Real Estate Philippines 2,645 1.2
Jiangsu Yanghe BreweryA Food, Beverage & Tobacco China 2,532 1.1
Forty Top Holdings 206,244 91.7
Pacific Basin Shipping Transportation Hong Kong 2,101 0.9
Hon Hai Precision Industry Technology Hardware &
Equipment
Taiwan 2,001 0.9
Dongfeng MotorH Automobiles & Components China 1,958 0.9
Korea Electric Power Utilities South Korea 1,947 0.9
EVA Precision Industrial Capital Goods Hong Kong 1,571 0.7
BitAuto – ADR Media & Entertainment China 1,505 0.7
HKR International Real Estate Hong Kong 1,457 0.6
Nexon Media & Entertainment Japan 1,364 0.6
Chroma ATE Technology Hardware &
                Equipment
Taiwan 1,223 0.5
Qingling MotorsH Automobiles & Components China 1,072 0.5
Fifty Top Holdings 222,443 98.9
Beijing Capital International
                AirportH
Transportation China 1,042 0.4
FIH Mobile Technology Hardware &
Equipment
Hong Kong 702 0.3
MINTH Automobiles & Components Hong Kong 625 0.3
Finetex EnEUQ Capital Goods South Korea 122 0.1
Total Holdings of 54 (2018: 53) 224,934 100.0

A: A-Shares – shares that are denominated in Renminbi and traded on the Shanghai and Shenzhen stock exchanges.

ADR/ADS: American Depositary Receipts/Shares – 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/INDUSTRY GROUP

AT 30 APRIL

2019 2018
AT % OF AT % OF
VALUATION PORTFOLIO VALUATION PORTFOLIO
£’000 £’000
Australia
Energy  1,297 0.6
Insurance  3,499 1.6  3,433 1.5
 3,499 1.6  4,730 2.1
China
Automobiles & Components  3,030 1.4  4,922 2.2
Banks  7,459 3.3  6,675 2.9
Capital Goods  2,378 1.1
Energy  5,628 2.5  6,987 3.1
Food, Beverage & Tobacco  2,532 1.1
Insurance  5,470 2.4
Materials  3,968 1.8  3,216 1.4
Media & Entertainment  20,916 9.4 19,358 8.5
Retailing  11,463 5.1  6,640 2.9
Telecommunication Services  3,811 1.6  8,139 3.6
Transportation  5,587 2.5  5,409 2.4
 69,864 31.1 63,724 28.1
Hong Kong
Automobiles & Components  625 0.3
Banks  4,564 2.0
Capital Goods  7,045 3.1  7,173 3.1
Consumer Durables & Apparel  3,069 1.4  4,243 1.9
Insurance  8,045 3.6  8,783 3.9
Real Estate  1,457 0.6  1,385 0.6
Technology Hardware & Equipment  702 0.3 763 0.4
Transportation  2,101 0.9  2,102 0.9
 23,044 10.2 29,013 12.8
India
Banks  16,852 7.5 15,108 6.7
Materials  4,338 1.9  4,296 1.9
Pharmaceuticals, Biotechnology & Life Sciences  5,982 2.7  4,127 1.8
Real Estate  3,576 1.6  3,666 1.6
Software & Services  4,333 1.9  4,699 2.1
 35,081 15.6 31,896  14.1
Indonesia
Banks  3,501 1.6  2,269 1.0
Japan
Energy  3,828 1.7  4,952 2.2
Media & Entertainment  1,364 0.6 1,264 0.5
 5,192 2.3  6,216 2.7

   

2019 2018
AT % OF AT % OF
VALUATION PORTFOLIO VALUATION PORTFOLIO
£’000 £’000
Malaysia
Food, Beverage & Tobacco  2,808 1.2  1,650 0.7
Philippines
Real Estate  2,645 1.2  2,738 1.2
Singapore
Banks  7,536 3.4  5,653 2.5
South Korea
Automobiles & Components  5,978 2.7  7,830 3.5
Banks  7,472 3.3  6,701 2.9
Capital Goods  122  1,361 0.6
Insurance  3,416 1.5  4,764 2.1
Materials  3,266 1.5  4,937 2.2
Retailing  2,371 1.0
Technology Hardware & Equipment  12,933 5.7 14,002 6.2
Utilities  1,947 0.9  4,438 2.0
 35,134 15.6 46,404  20.5
Taiwan
Insurance  3,191 1.4  4,892 2.2
Semiconductors & Semiconductor Equipment  16,300 7.2 15,065 6.6
Technology Hardware & Equipment  8,855 3.9  9,287 4.1
 28,346 12.5 29,244  12.9
Thailand
Banks  8,284 3.7  3,086 1.4
Total 224,934  100.0 226,623 100.0

INCOME STATEMENT

FOR THE YEAR ENDED 30 APRIL

2019 2018
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
RETURN RETURN RETURN RETURN RETURN RETURN
NOTES £’000 £’000 £’000 £’000 £’000 £’000
(Losses)/gains on investments held at fair value 9 (1,944) (1,944) 30,641 30,641
Gains/(losses) on foreign currency revaluation 480 480 (349) (349)
Income 2 5,440 5,440 6,055 6,055
Investment management fee 3 (408) (1,224) (1,632) (457) (1,371) (1,828)
Other expenses 4 (528) (4) (532) (550) (5) (555)
Net return before finance costs and taxation 4,504 (2,692) 1,812 5,048 28,916 33,964
Finance costs 5 (15) (47) (62) (10) (30) (40)
Return on ordinary activities before taxation 4,489 (2,739) 1,750 5,038 28,886 33,924
Tax on ordinary activities 6 (562) (562) (591) (591)
Return on ordinary activities after taxation for the financial year
3,927

(2,739)

1,188

4,447

28,886

33,333
Return per ordinary share:
Basic 7 5.55p (3.87p) 1.68p 5.98p 38.82p 44.80p

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 other 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.

.

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 APRIL

CAPITAL
SHARE REDEMPTION SPECIAL CAPITAL REVENUE
CAPITAL RESERVE RESERVE RESERVE RESERVE TOTAL
£’000 £’000 £’000 £’000 £’000 £’000
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
Dividends paid – 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
Return on ordinary activities (2,739)  3,927  1,188
Dividends paid – note 8 (5,877) (5,877)
Shares bought back into treasury – note 12 (1,188) (1,188)
At 30 April 2019  7,500  5,624 45,015  163,763  5,473  227,375

.

BALANCE SHEET

AT 30 APRIL

2019 2018
NOTES £’000 £’000
Fixed assets
  Investments held at fair value through profit or loss 9  224,934  226,623
Current assets
  Debtors 10 477  6,884
  Cash and cash equivalents  2,582  3,733
 3,059 10,617
Creditors: amounts falling due within one year 11 (618) (3,988)
Net current assets  2,441  6,629
Net assets  227,375  233,252
Capital and reserves
Share capital 12  7,500  7,500
Other reserves:
  Capital redemption reserve 13  5,624  5,624
  Special reserve 13 45,015 46,203
  Capital reserve 13  163,763  166,502
Revenue reserve 13  5,473  7,423
Shareholders’ funds  227,375  233,252
Net asset value per ordinary share
– Basic 14 322.7p 328.9p

These financial statements were approved and authorised for issue by the Board of Directors on 10 July 2019.

Signed on behalf of the Board of Directors

Neil Rogan

Chairman

NOTES TO THE FINANCIAL STATEMENTS

FOR THE YEAR ENDED 30 APRIL 2019

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 (‘UK GAAP’)), including FRS 102, 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 February 2018. 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.

(ii)               Going concern

The Company’s Articles of Association require that, unless the AGM of the Company to be held in 2019 approves an ordinary resolution releasing the Directors from the obligation, the Directors shall convene a general meeting in 2020 at which a special resolution will be proposed to wind up the Company. The Board intends to propose the necessary resolution at the AGM in 2019 to seek release from the obligation to wind up the Company, and the financial statements have therefore been drawn up on the going concern basis. Accordingly, the accounts do not include any adjustments which might arise from the reconstruction or liquidation of the Company.

(iii)              Significant Accounting Estimates and Judgements

The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. Except for the functional and presentation currency as noted below, there have been no other significant judgements, estimates or assumptions for the current or preceding year.

(b)        Foreign currency

(i)                Functional and presentation currency

The Company’s investments are made in several currencies, however, the financial statements are presented in sterling, which is the Company’s functional and presentational currency. In arriving at this conclusion, the Directors considered that the Company’s shares are listed and traded on the London Stock Exchange, the shareholder base is predominantly in the United Kingdom and the Company pays dividends and expenses in sterling.

(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

Financial assets

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

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.

(e)        Income

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.

(g)        Dividends

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.

(h)        Taxation

The liability to corporation tax is based on net revenue for the period. The tax charge is allocated between the revenue and capital accounts 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.

2.          Income

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

2019 2018
£’000 £’000
Income from investments
Overseas dividends  4,939  5,271
Scrip dividends  69 107
UK dividends 144 244
Special dividends – overseas 266 421
Total dividend income  5,418  6,043
Other income:
Deposit interest  22  12
Total income  5,440  6,055

No special dividends have been recognised in capital during the year (2018: nil).

3.          Investment Management Fee

This note shows the investment management fee due to the Manager which is calculated and paid quarterly.

2019 2018
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£’000 £’000 £’000 £’000 £’000 £’000
Investment management fee 408  1,224  1,632 457 1,371 1,828

Details of the investment management and secretarial agreement are given on page 28 of the Annual Financial Report in the Directors’ Report.

At 30 April 2019, £416,000 (2018: £427,000) was due for payment in respect of the management fee.

4.          Other Expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

2019 2018
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£’000 £’000 £’000 £’000 £’000 £’000
Directors’ remuneration (i) 122 122 132 132
Auditor’s fees (ii):
  – for audit of the financial
    statements  24  24 21 21
Other expenses (iii) 382 4 386 397 5 402
528 4 532 550 5 555

(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 £11,000 (2018: £12,000) of employer's national insurance payable on Directors' remuneration. As at 30 April 2019, the amounts outstanding on Directors’ remuneration and employer's national insurance was £10,000 (2018: £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 £93,000 (2018: £92,000) for these services. Custodian transaction charges of £4,000 (2018: £5,000) 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).

2019 2018
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£’000 £’000 £’000 £’000 £’000 £’000
Loan facility fee 9  28  37 10 30 40
Interest on loan facility 6  19  25
 15  47  62 10 30 40

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

2019 2018
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£’000 £’000 £’000 £’000 £’000 £’000
Overseas tax 562 562 591 591

The overseas tax charge consists of irrecoverable withholding tax.

(b)        Reconciliation of current tax charge

2019 2018
£’000 £’000
Return on ordinary activities before taxation  1,750 33,924
Theoretical tax at UK Corporation tax rate of 19%
  (2018: 19%) 332  6,446
Effects of:
  Non-taxable losses/(gains) on investments 369 (5,822)
  Non-taxable (gains)/losses on foreign currency revaluation (91)  66
  Non-taxable UK dividends (27) (46)
  Non-taxable scrip dividends (13) (20)
  Non-taxable overseas dividends (978) (1,073)
  Effect of overseas tax 562 591
  Expenses not allowed 1 1
  Expenses in excess of taxable income 407 448
562 591

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 £18,845,000 (2018: £16,693,000) that are available to offset future taxable revenue.

A deferred tax asset of £3,204,000 (2018: £2,838,000), measured at the prospective rate of corporation tax of 17% (2018: 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.

2019 2018
£’000 £’000
Return per ordinary share is based on the following:
Revenue return after taxation 3,927 4,447
Capital return after taxation (2,739) 28,886
Total return after taxation 1,188 33,333
2019 2018
Weighted average number of ordinary shares
  in issue during the year:
  – basic 70,798,406 74,411,605

8.          Dividends on Ordinary Shares

Dividends represent a return of income less expenses to shareholders. During the year, the Company introduced the payment of an interim and final dividend. In previous years only a final dividend was paid.

Dividends paid in the year:
2019 2018
pence £’000 pence £’000
Final dividend in respect of previous year 5.50  3,900 4.30 3,587
Interim dividend paid 2.80  1,986
8.30 5,886 4.30 3,587
Unclaimed dividends (9)
8.30 5,877 4.30 3,587
Dividends payable in respect of the year:
2019 2018
pence £’000 pence £’000
Interim dividend paid 2.80 1,986
Final dividend proposed 2.90 2,041 5.50 3,900
5.70 4,027 5.50 3,900

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.

(a)        Investments

2019 2018
£’000 £’000
Opening valuation  226,623  236,238
Movements in the year:
Purchases at cost 51,929 68,887
Sales – proceeds (51,674) (109,143)
Sales – gains on sales  9,259 47,282
Movement in investment holding gains during the year (11,203) (16,641)
Closing valuation  224,934  226,623
Closing book cost  175,322  165,808
Closing investment holding gains 49,612 60,815
Closing valuation  224,934  226,623

(b)        Gains on investments

2019 2018
£’000 £’000
Realised gains on sales  9,259 47,282
Movement in investment holding gains during the year (11,203) (16,641)
(Losses)/gains on investments (1,944) 30,641

(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 £50,000 (2018: £126,000) and on sales of £106,000 (2018: £254,000) are included in gains and losses on investments.

10.        Debtors

Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold, income which has been earned (accrued) but not yet received and any taxes that are recoverable.

2019 2018
£’000 £’000
Amounts due from brokers  6,410
Tax recoverable  91 135
VAT recoverable  21 9
Prepayments and accrued income 365 330
477  6,884

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.

2019 2018
£’000 £’000
Amounts due to brokers  3,382
Accruals 618 606
618  3,988

The committed unsecured 364 day multi-currency revolving credit facility with The Bank of New York Mellon, has 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 3 August 2019, and require total assets to not fall below £80 million. At the year end no loan position was drawn down (2018: 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

2019 2018
£’000 £’000
Ordinary shares of 10p each  7,047  7,092
Treasury shares of 10p each 453 408
 7,500  7,500

The Directors’ Report on pages 27 to 32 of the Annual Financial Report, sets out the share capital structure, restrictions and voting rights.

(b)        Share movements

2019 2018
ORDINARY TREASURY ORDINARY TREASURY
NUMBER NUMBER NUMBER NUMBER
Number at start of year 70,914,475  4,085,406 83,428,716  4,085,406
Shares bought back and cancelled (12,514,241)
Shares bought back and held in
  treasury (445,000)  445,000
70,469,475  4,530,406 70,914,475  4,085,406

During the year the Company bought back, into treasury, 445,000 ordinary shares at an average price of 265.29p.

A further 101,241 shares have been bought back into treasury, at an average price of 275.78p, since 30 April 2019.

(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 forthcoming AGM in 2019.

13.        Reserves

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.

2019 2018
Basic:
Ordinary shareholders’ funds £227,375,000 £233,252,000
Number of ordinary shares in issue, excluding treasury shares 70,469,475 70,914,475
Net asset value per ordinary share 322.7p 328.9p

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 14. 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 37 of the Annual Financial Report. 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 2019

FOREIGN INVESTMENTS
DEBTORS CREDITORS CURRENCY AT FAIR
(DUE FROM  (DUE TO EXPOSURE VALUE TOTAL NET
BROKERS CASH AND BROKERS ON NET THROUGH FOREIGN
AND CASH  AND MONETARY PROFIT CURRENCY
DIVIDENDS) EQUIVALENTS ACCRUALS) ITEMS OR LOSS EXPOSURE
CURRENCY £’000 £’000 £’000 £’000 £’000 £’000
Australian dollar 3,499  3,499
Chinese yuan 2,532  2,532
Hong Kong dollar 48 48  68,133 68,181
Indian rupee  475  475  30,748 31,223
Indonesian rupiah  4  4 3,501  3,505
Japanese yen 48 48 5,192  5,240
Malaysian ringgit 2,808  2,808
Philippine peso 2,645  2,645
Singapore dollar 7,536  7,536
South Korean won  100  100  35,134 35,234
Taiwan dollar 87  137  224  28,346 28,570
Thai baht  155  155 8,284  8,439
US dollar 1,726  1,726  26,576 28,302
 442 2,338  2,780 224,934  227,714

YEAR ENDED 30 APRIL 2018                                                                                              

FOREIGN INVESTMENTS
DEBTORS CREDITORS CURRENCY AT FAIR
(DUE FROM  (DUE TO EXPOSURE VALUE TOTAL NET
BROKERS CASH AND BROKERS ON NET THROUGH FOREIGN
AND CASH  AND MONETARY PROFIT CURRENCY
DIVIDENDS) EQUIVALENTS ACCRUALS) ITEMS OR LOSS EXPOSURE
CURRENCY £’000 £’000 £’000 £’000 £’000 £’000
Australian dollar  –  – (459) (459)   4,730  4,271
Chinese yuan  – 2,378  2,378
Hong Kong dollar   – (65) (65)  70,574   70,509
Indian rupee  4,466  4,466  27,198   31,664
Indonesian rupiah    4  4  2,269   2,273
Japanese yen   1,969 (1,446) (507)  16  6,216   6,232
Malaysian ringgit  1,650   1,650
Philippine peso  2,738   2,738
Singapore dollar  121  121  5,653   5,774
South Korean won  95  95  46,404   46,499
Taiwan dollar  135   88  223  29,244   29,467
Thai baht  65  65  3,086   3,151
US dollar  6  4,806 (2,361)   2,451  24,483   26,934
6,857    3,452 (3,392)   6,917   226,623 233,540

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:

2019 2018
TOTAL TOTAL
REVENUE CAPITAL LOSS REVENUE CAPITAL LOSS
RETURN RETURN AFTER TAX RETURN RETURN AFTER TAX
£’000 £’000 £’000 £’000 £’000 £’000
Australian dollar (2) (66) (68) (5) (145) (150)
Chinese yuan 1 (41) (40) (31) (31)
Hong Kong dollar (35) (1,226) (1,261) (76) (2,538) (2,614)
Indian rupee (5) (718) (723) (10) (1,172) (1,182)
Indonesian rupiah - (88) (88) (6) (100) (106)
Japanese yen (1) (93) (94) (1) (161) (162)
Malaysian ringgit (1) (31) (32) (1) (21) (22)
Philippine peso (2) (56) (58) (4) (126) (130)
Singapore dollar (2) (98) (100) (3) (96) (99)
South Korean won (17) (562) (579) (17) (882) (899)
Taiwan dollar (9) (342) (351) (26) (616) (642)
Thai baht (4) (182) (186) (1)  (37) (38)
US dollar (4) (481) (485) (4) (916) (920)
(81) (3,984) (4,065) (154) (6,841) (6,995)

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:

2019 2018
% %
£/Australian dollar +/–1.9 +/–3.4
£/Chinese yuan +/–1.6 +/–1.3
£/Hong Kong dollar +/–1.8 +/–3.6
£/Indian rupee +/–2.3 +/–3.7
£/Indonesian rupiah +/–2.5 +/–4.4
£/Japanese yen +/–1.8 +/–2.6
£/Malaysian ringgit +/–1.1 +/–1.3
£/Philippine peso +/–2.1 +/–4.6
£/Singapore dollar +/–1.3 +/–1.7
£/South Korean won +/–1.6 +/–1.9
£/Taiwan dollar +/–1.2 +/–2.1
£/Thai baht +/–2.2 +/–1.2
£/US dollar +/–1.7 +/–3.4

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 one standard deviation of currency fluctuations from the average exchange rate.

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 (2018: £nil).

The Company also has available a bank overdraft arrangement with the custodian for settlement purposes. At the year end there was no overdrawn amount (2018: £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 £22.5 million (2018: £22.7 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, externally audited, service organisation controls 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 £2,582,000 (2018: £2,715,000) was held at the custodian and £nil (2018: £1,018,000) 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 22 and 23. 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.

Level 3 investments are investments for which inputs are unobservable (i.e. for which market data is unavailable). Finetex EnE was the only Level 3 investment in the portfolio at the year end and was valued at £122,000 (2018: one investment: Finetex EnE valued at £1,361,000). This holding was suspended from the KOSDAQ market in South Korea and therefore categorised as Level 3.

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 30 April 2019 was £227,375,000 (2018: £233,252,000) comprising borrowings of £nil (2018: £nil) and equity share capital and other reserves of £227,375,000 (2018: £233,252,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and investment policy as set out on page 14. 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 18 and 19 of the Annual Financial Report. 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 (2018: 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 42 to 43 of the Annual Financial Report 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 27 of 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.

Except for the share buybacks as disclosed in note 12, there are no other 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 2019 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 2018 and 2019 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 2018 is derived from the statutory accounts for 2018 which have been delivered to the Registrar of Companies. The 2019 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, 43-45 Portman Square, London W1H 6LY. A copy of the Annual Financial Report will be available from Invesco on the following website: www.invesco.co.uk/invescoasia in due course.

The Annual General Meeting of the Company will be held at 12.00 noon on 5 September at 43-45 Portman Square, London, W1H 6LY.


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Annual Financial Report - RNS