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RNS

Annual Financial Report

Released 07:00 11-Apr-2019

RNS Number : 8223V
North American Income Trust (The)
11 April 2019
 

THE NORTH AMERICAN INCOME TRUST PLC

 

ANNUAL FINANCIAL REPORT ANNOUNCEMENT FOR THE YEAR ENDED 31 JANUARY 2019

 

 

INVESTMENT OBJECTIVE

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

 

 

 

FINANCIAL RESULTS AND PERFORMANCE

 

Financial Highlights

Net asset value total return{A}

+4.8%


Share price total return{A}

+6.3%

2018

+7.1%


2018

+8.8%






Revenue return per share

50.19p


Dividends per share

 42.50p

2018

42.12p


2018

39.00p






Dividend yield{B}

3.2%


Ongoing charges{A}

0.95%

2018

3.0%


2018

0.98%


{A}         Considered to be an Alternative Performance Measure. See pages 12, 64 and 65 of the published 2019 Annual Report for more information.

{B}        Calculated as the dividend for the year divided by the year end share price.

 

Results Summary


31 January 2019

31 January 2018

% change

Total assets

£436,667,000

£423,293,000

+3.2

Equity shareholders' funds

£398,657,000

£391,649,000

+1.8

Share price (mid market)

1340.00p

1300.00p

+3.1

Net asset value per share{A}

1402.22p

1377.57p

+1.8

Discount (difference between share price and net asset value)

4.4%

5.6%


Net gearing{B}

5.7%

3.6%






Dividends and earnings




Revenue return per share

50.19p

42.12p

+19.2

Dividends per share (including proposed final dividend)

42.50p

39.00p

+9.0

Dividend yield (based on year end share price)

3.2%

3.0%


Dividend cover{B}

1.18

1.08


Revenue reserves per share




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

58.77p

48.59p


After payment of third interim dividend declared and proposed final dividend

32.27p

24.59p






Operating costs




Ongoing charges{B}

0.95%

0.98%






{A}        Including undistributed revenue

{B}         Considered to be an Alternative Performance Measure. See pages 64 and 65 of published 2019 Annual Report for further information.

 

 

Performance





1 year return

3 year return{A}

5 year return{A}

Total return (Capital return plus dividends reinvested)

%

%

%

Share price{B}

+6.3

+80.8

+104.6

Net asset value per share{B}

+4.8

+63.6

+100.7

Russell 1000 Value Index (in sterling terms)

+2.9

+49.9

+86.4

S&P 500 Index (in sterling terms)

+5.6

+59.8

+110.1


{A}        Cumulative return

{B}        Considered to be an Alternative Performance Measure. See page 64 of published 2019 Annual Report for more information.

 

 

Dividends


Rate

xd date

Record date

Payment date

1st Interim dividend 2019

8.00p

19 July 2018

20 July 2018

3 August 2018

2nd Interim dividend 2019

8.00p

4 October 2018

05 October 2018

26 October 2018

3rd Interim dividend 2019

8.50p

24 January 2019

25 January 2019

15 February 2019

Proposed final dividend 2019

18.00p

19 May 2019

10 May 2019

7 June 2019


_______




Total dividends 2019

42.50p





_______




1st Interim dividend 2018

7.50p

13 July 2017

14 July 2017

4 August 2017

2nd Interim dividend 2018

7.50p

12 October 2017

13 October 2017

31 October 2017

3rd Interim dividend 2018

8.00p

25 January 2018

26 January 2018

16 February 2018

Final dividend 2018

16.00p

10 May 2018

11 May 2018

8 June 2018


_______




Total dividends 2018

39.00p





_______




 

 

CHAIRMAN'S STATEMENT

 

Performance

Over the year to 31 January 2019, the Company's net asset value per share rose by 4.8% on a total return basis in sterling terms. This outperformed the 2.9% return from the Russell 1000 Value Index, the Company's primary reference index, but underperformed the 5.6% return from the S&P 500 Index.

 

The longer term performance of the Company has been strong.   Over the three and five year periods to 31 January 2019, the Company's NAV rose by 63.6% and 100.7% respectively, compared to three and five year returns of 49.9% and 86.4% respectively from the Russell 1000 Value and  59.8% and 110.1% returns respectively from the S&P 500 indices. 

 

Dividend

For the year ended 31 January 2019, the revenue return per Ordinary share rose by 19.2% from 42.1p to 50.2p. The Board is recommending a final dividend per Ordinary share of 18.0p, which will take the total dividends for the year to 42.5p (2018 - 39.0p), an increase of 9.0%.  The total dividend represents a yield of 3.2%, using the share price of £13.40 at the year end, compared to the 2.0% yield from the S&P 500 Index at that date.

 

This leaves a balance of £2.19 million (equivalent to 7.7p per Ordinary share), which will be added to the revenue reserve, making a further increase in this reserve and providing the Company with added flexibility for future years.  Since the change of mandate in 2012, the dividend has increased more than fourfold from 9.4p to 42.5p and the revenue reserves have risen significantly from 5.5p per share to 32.3p which will provide some cushion against adverse economic circumstances.

 

The proposed final dividend will be payable on 7 June 2019, to shareholders on the register on 10 May 2019. The quarterly dividends are paid in August, November, February and June each year.

 

Portfolio

As of 31 January 2019, the portfolio was composed of 40 equity holdings and 11 corporate bonds, with equities representing 94% of total assets.

 

Total revenue from equity holdings in the portfolio over the financial year was £14.3 million (2018 - £12.9 million).  Most of the Company's equity holdings continued their established record of dividend growth. Approximately 85% of the equity holdings raised their dividends over the past year, with a weighted average increase of approximately 9.9%. Further details of the portfolio's equity income are provided in the Manager's Review. 

 

During the financial year, the Company received premiums totalling £3.9 million (2018 - £2.4 million) in exchange for entering into listed stock option transactions. This option income, the generation of which remains consistent with the Manager's investment process which is focused on individual companies, represented 20.5% of total income (2018 - 14.9%). As the Company's exposure to corporate bonds has decreased over recent years, interest income from investments was lower and represented 3.3% of total income (2018 - 4.3%). Bond coupons and option premiums continue to remain secondary sources of income in the belief that dividends must remain the overwhelming source of income available for distribution. Further details of the portfolio are shown below.

 

Market & Economic Review

Despite several periods of volatility, particularly during December 2018, major North American equity market indices recovered and moved higher over the 12-month period ended 31 January 2019, buoyed by generally upbeat economic data reports and positive corporate earnings news. This offset investors' concerns regarding rising interest rates and the trade policy of the Trump administration.

 

US trade policy took centre stage in the markets several times during the period under review. In mid-2018, investors began to fear that several US trading partners would impose retaliatory tariffs on imports from the US in response to the Trump administration's levies on imported steel and aluminium from Canada, Mexico, and member nations of the European Union. However, the US and Europe subsequently agreed to avert a trade war, easing worries about possible US tariffs on European car imports. At the beginning of December, the US and China announced a temporary truce in their trade war. At the date of this report, negotiations between the US and Chinese governments had not produced a permanent trade agreement.

 

On the economic front, the US government's estimate of gross domestic product (GDP) growth for the third quarter of 2018 was revised down 0.1% to 3.4% due to modest markdowns to consumer spending and exports. This remains above normalised growth rates for the economy, but showed a deceleration from the prior quarter where growth moved above 4%. The US Department of Labour reported that US payrolls expanded by a monthly average of roughly 232,000 over the six-month period, while the unemployment rate moved up 0.1 percentage point to 4.0% as more jobseekers entered the market. Furthermore, average hourly earnings increased 3.2% over the period.

 

Discount

The Company's share price rose by 3.1% to £13.40 and ended the year at a 4.4% discount to the net asset value, compared with a 5.6% discount at the end of the 2018 financial year. The discount had largely traded in the range of 4-8% during the financial year and there were no share buybacks either during the year or since the end of it.

 

Gearing

The Board believes that sensible use of modest financial gearing should enhance returns to our shareholders over the longer term. The total amount available under the Company's loan facility agreement with Scotiabank (Ireland) Designated Activity Company is $75 million, of which $50 million is drawn down.  Net gearing at 31 January 2019 was £19.4 million (31 January 2018 - £12.0 million), representing 5.7% of net assets (31 January 2018 - 3.6%), which includes the offset of cash held which is used as collateral against open option positions.

 

Promotional Activity

The Board continues to support the Manager's investment trust promotional and investor relations programme which helps to attract and engage investors.  One of the main aims of this initiative is to provide a series of savings schemes through which savers can invest in the Company in a low-cost and convenient manner and is supported by customer service and call centre teams (see pages 69 to 71 of the published 2019 Annual Report).  Other areas covered by the programme include promotional campaigns, website hosting, and roadshows with the Manager, fund research and digital marketing.

 

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

 

Board Composition

As reported in the 2018 Half Yearly Report, Guy Crawford and Archie Hunter retired from the Board on 18 September 2018. Both served this Company over many years and I thank them on behalf of shareholders for their wise counsel and the expertise that they both brought to bear in their roles as non-executive directors.

 

Karyn Lamont and Susannah Nicklin were appointed as non-executive directors of the Company with effect from 18 September 2018; both bring with them a wealth of experience.  Karyn, a chartered accountant and a former partner of PwC, joined as Audit Committee Chairman.  She has been involved with auditing for over 25 years, specialising in the financial services sector across the UK. Susannah is an investment and financial services professional with over 20 years of international experience.

 

Outlook

The price reactions in equity markets witnessed in 2018 appeared to be an adjustment of investor expectations, with fundamentals remaining broadly healthy, although decelerating. This slowing is not unexpected given where we are in the economic cycle. Market sentiment has improved since the beginning of this year but remains volatile and, whilst risks remain, there are positive developments worth highlighting. It appears that there has been some progress in US-China trade talks, and the consensus of opinion points to a compromise between the two countries being reached, though that is far from certain. Additionally, while it is still early in the year, US corporate earnings have been strong overall thus far, and the outlook for dividend growth in 2019 is encouraging.

 

Following market strength in January, valuations in general are no longer definitively inexpensive relative to growth expectations. However, our Manager believes that given the growth in earnings and cash flow expected from our stocks, the portfolio provides reasonably good value.

 

Annual General Meeting ("AGM")

At the forthcoming AGM, the Board will propose an ordinary resolution to sub-divide the existing Ordinary shares (currently with a nominal value of 25p each) into new Ordinary shares of 5p each.  The Company has a large number of private investors who invest through regular savings plans and this sub-division, which will result in a lower price per share, will enable small sums to be invested regularly in a more efficient manner. Each Shareholder will hold the same proportionate interest in the Company following the completion of the share split as before.  Further details of this resolution as well as the other resolutions being proposed are provided in the Directors' Report on pages 25 to 28 of the published 2019 Annual Report.

 

The Company's AGM will be held at 2.00 pm on 4 June 2019 at the Manager's office at 1 George Street, Edinburgh.  I hope that we shall see as many shareholders as possible then.

 

James Ferguson

Chairman

 

10 April 2019

 

 

INVESTMENT MANAGER'S REVIEW

 

Market review

Despite numerous periods of volatility, major North American equity market indices moved higher over the 12-month period ended 31 January 2019, buoyed by generally upbeat economic data reports and positive corporate earnings news. This offset investors' concerns regarding rising interest rates and US trade policy under the administration of President Donald Trump. The Russell 1000 Value Index, the Trust's equity portfolio reference index, returned 2.9% in sterling terms over the period. Two relatively higher dividend paying sectors, utilities and real estate, posted double-digit gains and were the top performers within the index for the review period. In contrast, the more cyclical materials and industrials sectors recorded losses as the market factored in the potential for a slowing of GDP growth, which was an acute concern in late 2018. The energy sector also underperformed.

 

Throughout the year the markets were dominated by investors' fears over US trading partners imposing retaliatory tariffs on the US, but cooler heads have prevailed as the US and Europe agreed to avert a trade war, and at the beginning of December, the US and China announced a truce in their trade war given progress in negotiations. At this point it appears that the two countries have made progress towards reaching a trade agreement - which is in their both best interests - but given the actors involved the path to trade policy may not be a straight one.

 

Regarding monetary policy, the US Federal Reserve (Fed) raised its benchmark interest rate in four 25-basis point increments to a range of 2.25% to 2.50% following its policy meetings in March, June, September and December 2018. The Fed subsequently left the rate unchanged after its meeting in late January 2019. Fed Chair Jerome Powell appeared to strike a more dovish tone during a news conference following the central bank's meeting in January, stating that "the case for raising rates has weakened somewhat". The market viewed these comments positively, as Powell also noted that economic growth remained "solid". Many believe that the rate-hiking process for this cycle is now complete. Nevertheless, the Fed did refer to several risks of which we remain mindful, including sluggish inflation, slowing global growth, and the possibility of more political gridlock in Washington, DC. The Fed even left the door open for interest rate cuts should conditions warrant. This is a far cry from the more hawkish tone that the central bank had struck at the end of 2018. 

 

Performance

The Company's portfolio outperformed its reference index, the Russell 1000 Value Index, over the 12-month period ended 31 January 2019. The net asset value in sterling total return terms gained 4.8% versus the 2.9% and 5.6% returns of the Russell 1000 Value and S&P 500 indices, respectively. The strength in the US dollar boosted sterling returns  as the net asset value fell by 3.1% in local currency compared to falls of 4.8% and 2.3%  from the Russell 1000 Value and S&P 500 indices, respectively.  The revenue account remained in good shape, building upon the surplus established in prior years.

 

The outperformance of the Trust's equity portfolio relative to the Russell 1000 Value Index was due primarily to strong stock selection in the information technology, materials, financials and industrials sectors. The most notable contributors to performance among individual holdings were derivatives exchange operator CME Group, freight railway operator Union Pacific Corp., and specialty agricultural products maker Nutrien.

 

CME Group's results over the review period were bolstered by strength in its market data and information services unit, as well as higher access and communication fees. The company also benefited from the expansion of its international business, which generated substantial volume growth in both Europe and Asia. Union Pacific saw healthy increases in revenue and earnings for its 2018 fiscal year. The company benefited from higher freight revenue and an upturn in carloads bolstered by notable growth in industrial and premium shipments. These positive factors counterbalanced the negative impact of higher diesel fuel prices.  Nutrien delivered strong results over the review period that benefited from the merger of Potash Corp. and Agrium, which formed the current company in January 2018. Consequently, management raised its earnings guidance for the full 2018 fiscal year.

 

Fund performance for the review period was hindered by an overweight allocation versus the reference index to the materials sector, as well as underweights to the utilities and healthcare sectors. The largest individual stock detractors included energy services provider Schlumberger Ltd., specialty apparel retailer L Brands, and commercial bank Umpqua Holdings.

 

Schlumberger posted generally positive quarterly results during the review period, benefiting mainly from strength in its drilling and production business units. However, shares of the company declined as oil prices dipped during the review period. Additionally, the company's business was hampered by transitory issues, with pipelines needed in the Permian Basin in western Texas and southeastern New Mexico. This has led to a slowdown for onshore oil service vendors. L Brands' quarterly results over the reporting period were hampered by weakness in its Victoria's Secret business, which offset the strong performance of its Bath & Body Works segment. Furthermore, management lowered its earnings guidance for the 2018 fiscal year. We subsequently sold the position in L Brands in December 2018. Umpqua Holdings posted a modest decline in revenue for its 2018 fiscal year attributable mainly to lower volumes in its mortgage banking business. This offset the positive impact of double-digit net interest growth for the period.

 

Portfolio activity

The Trust's equity investments remained consistent with our bottom-up, management-focused stock selection process. During the 12-month review period, we initiated equity positions in specialty carbon products maker Orion Engineered Carbons; commercial banks Huntington Bancshares and Umpqua Holdings; food and beverage maker Coca-Cola; paper and packaging products maker International Paper; jewellry and luxury goods retailer Tiffany & Co., pharmaceutical firm Bristol-Myers Squibb Co.; and we initiated a holding in medical device maker Medtronic.

 

Conversely, in addition to L Brands as previously noted, we sold our positions in Helmerich & Payne, a provider of oil and gas drilling services; Sonoco Products, a manufacturer of industrial and consumer packaging products; payroll services provider Paychex; oil and gas company ConocoPhillips; Montana-based commercial bank Glacier Bancorp; industrial gases supplier Praxair; diversified healthcare company Abbott Laboratories; and Ventas Corp., a healthcare-focused REIT.

 

A sector analysis chart of the portfolio can be found on page 22 of published 2019 Annual Report.

 

Within the Trust's corporate bond portfolio over the reporting period, we initiated positions in Continental Resources 3.80% 2024; CCO Holdings Capital Corp. 5.50% 2026; Symantec Corp. 5.00% 2025; Cheniere Corpus Christi Holdings 5.875% 2025; Conduent Finance/Xerox Business Services 10.50% 2024; Graham Holdings 5.75% 2026; Parsley Energy 5.375% 2025; Harland Clarke 6.875% 2020; Lennar 4.5% 2024; Exela Intermediate LLC 10% 2023; Centene Corp. 6.125% 2024; NRG Energy 6.25% 2024; and Diamond 6.0% 2026.

 

Conversely, we sold the positions in International Lease Finance Corp. 5.25% 2019; Western Digital Corp. 7.375% 2023; Prestige Brands Holdings 6.375% 2024; Continental Resources 3.8% 2024; Symantec 5% 2025; and Nationstar Mortgage LLC/Capital Corp 6.5% 2022.

 

We continue to work closely with Aberdeen Standard Investment's fixed income specialists to monitor credits and market conditions.

 

Dividend growth

The Company's holdings continue to build upon an established track record of dividend growth. In aggregate, our holdings raised their dividends by just under 10% with those that increased their dividends during the year averaging increases of 11%. There were several standouts over the 12-month review period including agricultural products maker Nutrien (formerly Potash Corp), which now has a 27% higher payout level given increased diversification and earnings stability post its merger in January 2018 with Agrium. Ohio-based bank Huntington Bancshares boosted its quarterly dividend by 27%, soft-drink and snack foods maker PepsiCo boosted its distributions by 15%, networking equipment maker Cisco Systems increased its payout by roughly 14% and diversified financial services company BB&T Corp. boosted its quarterly dividend by nearly 14%. BB&T management indicated that the increase was an initiative to pass along the benefits of the recent US tax reform legislation to shareholders.

 

Additionally, derivatives exchange operator CME Group declared an annual variable dividend of US$1.75 per share on top of the regular dividend of $2.80. The company uses this approach to facilitate paying out all cash that it generates during the year beyond a minimum threshold.

 

Outlook

We remain of the view that the price reactions in equity markets last year were a recalibration of expectations; growth rates were decelerating but fundamentals remained healthy. We view this slowing as normal and expected given where we are in the economic cycle, and indeed markets had become overly optimistic about the pace and duration of economic growth. From here we should expect only modest incremental fiscal stimulus and importantly very little monetary tightening beyond some additional balance sheet run-off. Thus as we become more pragmatic in our views for economic growth in 2019 and beyond, we are being selective with what we own as we compare the ability of companies to grow earnings and cash flow with current valuations being paid in the market.

 

The fourth-quarter earnings season proved to be more robust than expectations, although corporate managements seemingly erred on the side of caution for the 2019 outlook which is prudent given increased volatility globally. Exogenous risks continue to remain, with global trade negotiations at the forefront at this time. Conversely, there are some fiscal stimulus measures arising globally that may have the wherewithal to improve foreign economies and we will be watching these actions closely. The net effect of these market moves are valuations that are modestly below long-term averages while the interest rate and inflation backdrop is much more benign that it had been at the end of 2018. We will continue to manage a portfolio of high quality, cash generative companies and seek to deliver a combination of both growth and income for shareholders.

 

Aberdeen Asset Management Inc.**

10 April 2019

 

 

**     on behalf of Aberdeen Standard Fund Managers Limited.  Both companies are subsidiaries of Standard Life Aberdeen plc.

 

 

OVERVIEW OF STRATEGY

 

Introduction

The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long term private and institutional investors wanting to benefit from the income and growth prospects of North American companies. The Directors do not envisage any change in the Company's activity in the foreseeable future. 

 

Investment Objective

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

 

Reference Index

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

 

Investment Policy

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

Management

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

 

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

 

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

 

Key Performance Indicators ("KPIs")

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

 

KPI

Description

Net asset value and share price performance against the reference indices

The Board reviews the Company's NAV and share price total return performance against the reference indices, the Russell 1000 Value and the S&P 500 (both in sterling terms).  Performance graphs and tables are provided on pages 12 to 13 of the published 2019 Annual Report. The Board also reviews the performance of the Company against its peer group of investment trusts with similar investment objectives.

Revenue return and dividend yield

The Board monitors the Company's net revenue return and dividend yield through the receipt of detailed income forecasts. A graph showing the dividends and yields over 5 years is provided on page 14 of the published 2019 Annual Report.

Discount/premium to net asset value

The discount/premium relative to the net asset value per share is closely monitored by the Board. A graph showing the share price discount/premium relative to the net asset value is shown on page 13 of the published 2019 Annual Report.

Ongoing charges

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

 

Principal Risks and Uncertainties

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

 

Description

Mitigating Action

Market Risk

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

 

 

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

 

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

Gearing Risk

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

 

In order to manage the level of gearing, the Board has set a maximum gearing ratio of 20% of net assets.  The Board receives regular updates from the Manager on the actual gearing levels the Company has reached together with the assets and liabilities of the Company, and reviews these as well as compliance with the principal loan covenants at each Board meeting.  As at 31 January 2019 the Company had £38.0 million of borrowings and net gearing was 5.7% at the year end.

 

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

 

Discount volatility

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

 

In order to seek to minimise the impact of share price volatility, where the shares are trading at a significant discount, the Company has operated a share buy back programme for a number of years. The Board monitors the discount level of the Company's shares and will exercise discretion to undertake shares buy backs.

 

Income and Dividend Risk

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

 

 

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

 

Regulatory Risk

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

 

 

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

 

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

 

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

Derivatives

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

 

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

 

In addition to these risks, the outcome and potential impact of the UK Government's negotiations with the European Union on Brexit is still unclear at the date of this report.  This remains an economic risk for the Company, principally in relation to the potential impact of Brexit on currency volatility and the Manager's operations.  Aberdeen Standard Investments has a significant Brexit program in place aimed at ensuring that they can continue to satisfy their clients' investment needs post Brexit. 

 

In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.

 

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Manager on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Manager and regular reports are provided to the Board on promotional activities as well as an analysis of the shareholder register.

 

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

 

Duration

The Company does not have a fixed winding-up date, but shareholders are given the opportunity to vote on the continuation of the Company every three years at the Annual General Meeting.  The next continuation vote will be at the AGM in June 2021.

 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfil its obligations.  At 31 January 2019 the Board consisted of two males and three females.  

 

Environmental, Social and Human Rights Issues

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

 

Socially Responsible Investment Policy

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

 

Global Greenhouse Gas Emissions

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

 

Viability Statement

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

 

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

 

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

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

-         The Company is invested in readily realisable listed securities;

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

-         The level of gearing is closely monitored; 

-         The availability of loan facilities.  The Company has a loan facility of $75 million in place until December 2020; and

-         The liquidity of the Company's portfolio and the impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values.

 

As an investment trust with a North American mandate, the Company's portfolio is unlikely to be adversely impacted as a direct result of Brexit although some currency volatility could arise.

 

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

 

James Ferguson

Chairman

10 April 2019

 

 

PORTFOLIO INVESTMENTS

 

Investment Portfolio - Ten Largest Equity Investments

As at 31 January 2019



Valuation

Total

Valuation



2019

assets

2018

Company

Industry classification

£'000

%

£'000

Chevron





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

Oil, Gas & Consumable Fuels

21,789

5.0

15,867

Cisco Systems





Cisco Systems Inc. designs, manufactures, and sells Internet Protocol (IP)- based networking and other products related to the communications and information technology industry and provides services associated with these products and their use.

Communications Equipment

17,975

4.1

14,606

BB&T





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

Banks

16,694

3.8

17,853

Johnson & Johnson





Johnson & Johnson manufactures health care products and provides related services for the consumer, pharmaceutical, and medical devices and diagnostics markets.

Pharmaceuticals

15,175

3.5

7,774

Procter & Gamble





Procter & Gamble company manufactures and markets consumer products globally.

Household Products

14,667

3.4

13,964

Philip Morris





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

Tobacco

13,997

3.2

14,327

Regions Financial





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

Banks

12,685

2.9

11,494

Verizon Communication





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

Diversified Telecommunication Services

12,557

2.9

7,605

Texas Instruments





Texas Instruments operates as a semiconductor design and manufacturing company. The Company develops analog ICs and embedded processors, serving customers worldwide.

Semiconductors & Semiconductor Equipment

11,481

2.6

7,712

Umpqua





Umpqua Holdings Corp is the holding company for Umpqua Bank, an Oregon state-chartered Bank. Umpqua Bank is engaged primarily in the business of commercial and retail banking and the delivery of retail brokerage services. The bank provides asset management, mortgage banking and other financial services to corporate, institutional and individual customers.

Banks

11,424

2.6

-

Ten largest equity investments


148,444

34.0


 

 

Investment Portfolio - Other Equity Investments

As at 31 January 2019







Valuation

Total

Valuation



2019

assets

2018

Company

Industry classification

£'000

%

£'000

Genuine Parts

Distributors

11,382

2.6

8,050

CME Group

Capital Markets

11,086

2.5

16,189

Union Pacific

Road and Rail

10,883

2.5

9,388

Telus

Diversified Telecommunication Services

10,655

2.5

10,618

Pfizer

Pharmaceuticals

10,327

2.4

16,930

DowDuPont

Chemicals

10,227

2.3

14,350

Molson Coors Brewing

Beverages

10,127

2.3

11,817

Schlumberger

Energy Equipment & Services

10,082

2.3

5,950

Huntington Bancshares

Banks

10,065

2.3

-

Bristol-Myers Squib

Pharmaceuticals

9,946

2.3

-

Twenty largest equity investments


253,224

58.0


Nutrien

Chemicals

9,848

2.3

11,042

TransCanada

Oil, Gas & Consumable Fuels

9,704

2.2

10,549

Gilead Sciences

Biotechnology

9,580

2.2

5,893

Provident Financial

Thrifts & Mortgage Finance

9,392

2.2

9,251

Coca-Cola

Beverages

9,147

2.1

                  -  

Lockheed Martin

Aerospace & Defense

8,809

2.0

6,238

Royal Bank of Canada

Banks

8,684

2.0

8,150

Iron Mountain

Equity Real Estate Investment Trusts (REITs)

8,484

1.9

7,390

Orion Engineered Carbons

Chemicals

8,390

1.9

-

Nucor

Metals and Mining

8,380

1.9

6,592

Thirty largest equity investments


343,642

78.7


Meredith

Media

8,251

1.9

9,302

Microsoft

Software

7,939

1.8

13,362

CMS Energy

Multi-Utilities

7,927

1.8

8,182

American International

Insurance

7,723

1.8

6,742

Tapestry

Textiles, Apparel & Luxury Goods

7,357

1.7

8,270

Tiffany & Co

Specialty Retail

6,745

1.5

-

Medtronic

Health Care Equipment & Supplies

6,719

1.5

-

Intl Paper Co

Containers & Packaging

5,409

1.2

-

Pepsico

Beverages

4,283

1.0

8,460

Canadian Western Bank

Banks

4,257

1.0

11,091

Forty largest equity investments


410,252

93.9


Total equity investments


410,252

93.9


 

 

Other Investments

As at 31 January 2019

 

 

Valuation

Total

Valuation

2019

assets

2018

Company

Industry classification

£'000

%

£'000

CCO Holdings Capital 5.5% 01/05/26

Media

1,513

0.3

-

HCA 5.875% 15/02/26

Healthcare Services

1,475

0.3

1,110

Cheniere Corpus Christi 5.875%  31/03/25

Oil, Gas & Consumable Fuels

1,192

0.3

-

Parsley Energy Finance 5.375% 15/01/25

Exploration & Production

1,138

0.3

-

Lennar 4.5% 30/04/24

Construction

973

0.2

-

NRG Energy 6.25% 01/05/24

Electric

908

0.2

-

Graham Holdings 5.75% 01/06/26

Diversified Consumer Services

851

0.2

-

Harland Clarke Holdings 6.875% 01/03/20

IT Services

830

0.2

-

Centene Corp 6.125% 15/02/24

Health Insurance

798

0.2

-

Diamond 1 Fin Diamond 2 6.02% 15/06/26

Technology

776

0.2

-

Exela Intermed 10% 15/07/23

Technology

763

0.2

-

Total other investments

11,217

2.6

Total equity investments

410,252

93.9

Total investments

421,469

96.5

Net current assetsA

15,198

3.5

Total assetsA

436,667

100.0

A Excluding bank loans of £38,010,000.

 

 

Geographical Analysis

As at 31 January 2019

 


Equity

Fixed interest

Total

Country

%

%

%

Canada

7.9

-

7.9

USA

89.4

2.7

92.1


_______

_______

_______


97.3

2.7

100.0


_______

_______

_______

 

 

 

GOING CONCERN

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Company has a credit facility in place which is available until December 2020. The Board considers that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

 

 

FINANCIAL STATEMENTS

 

Statement of Comprehensive Income

 



Year ended 31 January 2019

Year ended 31 January 2018



Revenue

Capital

Total

Revenue

Capital

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Net gains on investments

11

-

7,901

7,901

-

13,851

13,851

Net currency (losses)/gains

3

-

(1,603)

(1,603)

-

2,243

2,243

Income

4

19,033

-

19,033

16,137

-

16,137

Investment management fee

5

(875)

(2,038)

(2,913)

(910)

(2,126)

(3,036)

Administrative expenses

7

(852)

-

(852)

(739)

-

(739)



______

______

_____

______

______

_____

Return before finance costs and taxation


17,306

4,260

21,566

14,488

13,968

28,456









Finance costs

6

(345)

(806)

(280)

(652)

(932)



______

______

_____

______

______

_____

Return before taxation


16,961

3,454

20,415

14,208

13,316

27,524









Taxation

8

(2,692)

657

(2,035)

(2,196)

359

(1,837)



______

______

_____

______

______

_____

Return after taxation


14,269

4,111

18,380

12,012

13,675

25,687



______

______

_____

______

______

_____









Return per share (pence)

10

50.19

14.46

64.65

42.12

47.96

90.08



______

______

_____

______

______

_____









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

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

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

 

Proposed final dividend

The Board is proposing a final dividend of 18.00p per share (£5,117,000), making a total dividend of 42.50p per share (£12,225,000) for the year to 31 January 2019 which, if approved, will be payable on 7 June 2019 (see note 9).


For the year ended 31 January 2018, the final dividend was 16.00p per share (£4,549,000) making a total dividend of 39.00p per share (£11,092,000).

 

 

 

 

 

Statement of Financial Position

 



As at

As at



31 January 2019

31 January 2018


Notes

£'000

£'000

Non-current assets




Investments at fair value through profit or loss

11

421,469

406,593



______

______

Current assets




Debtors and prepayments

12

2,772

620

Cash and short term deposits


18,593

19,636



______

______



21,365

20,256



______

______

Creditors: amounts falling due within one year




Other creditors

13

(6,167)

(3,556)

Bank loan

14

(38,010)

(31,644)



______

______



(44,177)

(35,200)



______

______

Net current liabilities


(22,812)

(14,944)

Net assets


398,657

391,649



______

______

Capital and reserves




Called-up share capital

15

7,108

7,108

Share premium account


48,467

48,467

Capital redemption reserve


15,452

15,452

Capital reserve


310,920

306,809

Revenue reserve


16,710

13,813



______

______

Equity shareholders' funds


398,657

391,649



______

______





Net asset value per share (pence)

16

1,402.22

1,377.57



______

______

 

Statement of Changes in Equity

 

For the year ended 31 January 2019









Share

Capital





Share

premium

redemption

Capital

Revenue



capital

account

reserve

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 January 2019

7,108

48,467

15,452

306,809

13,813

391,649

Return after taxation

-

-

-

4,111

14,269

18,380

Dividends paid (see note 9)

-

-

-

-

(11,372)

(11,372)


_____

______

______

______

______

______

Balance at 31 January 2019

7,108

48,467

15,452

310,920

16,710

398,657


_____

______

______

______

______

______








 For the year ended 31 January 2018









Share

Capital





Share

premium

redemption

Capital

Revenue



capital

account

reserve

reserve

reserve

Total


£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 January 2018

7,161

48,467

15,399

295,709

12,365

379,101

Buyback of Ordinary shares for cancellation

(53)

-

53

(2,575)

-

(2,575)

Return after taxation

-

-

-

13,675

12,012

25,687

Dividends paid (see note 9)

-

-

-

-

(10,564)

(10,564)


_____

______

______

______

______

______

Balance at 31 January 2018

7,108

48,467

15,452

306,809

13,813

391,649


_____

______

______

______

______

______








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

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

 

 

Statement of Cashflows

 



Year ended

Year ended



31 January 2019

31 January 2018


Notes

£'000

£'000

Operating activities




Net return before taxation


20,415

27,524

Adjustments for:




Net gains on investments


(7,901)

(13,851)

Net losses/(gains) on foreign exchange transactions


1,603

(2,243)

Increase/(decrease) in dividend income receivable


(214)

25

Decrease in fixed interest income receivable


11

31

(Decrease)/increase in derivatives


(443)

531

(Increase)/decrease in other debtors


(7)

3

(Decrease)/increase in other creditors


(65)

17

Tax on overseas income


(2,132)

(1,831)

Amortisation of fixed income book cost


26

22



_______

______

Net cash inflow from operating activities


11,293

10,228





Investing activities




Purchases of investments


(164,763)

(111,969)

Sales of investments


159,036

128,593



_______

______

Net cash flow from investing activities


(5,727)

16,624





Financing activities




Equity dividends paid

9

(11,372)

(10,564)

Buyback of Ordinary shares for cancellation


-

(2,575)

Drawdown/(repayment) of loan


3,510

(4,394)



_______

______

Net cash used in financing activities


(7,862)

(17,533)



_______

______

(Decrease)/increase in cash and cash equivalents


(2,296)

9,319



_______

______

Analysis of changes in cash and cash equivalents during the year



Opening balance


19,636

12,609

Effect of exchange rate fluctuation on cash held

3

1,253

(2,292)

(Decrease)/increase in cash as above


(2,296)

9,319



_______

______

Closing balance


18,593

19,636



_______

______

 

 

Notes to the Financial Statements

For the year ended 31 January 2019

 

1.

Principal activity


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

 

2.

Accounting policies


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





(a)

Basis of preparation and going concern



The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued in November 2014 and updated in February 2018 with consequential amendments. The financial statements are prepared in sterling which is the functional currency of the Company and rounded to the nearest £'000. They have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.






The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the Directors' Report (unaudited) on page 26 of the published 2019 Annual Report.





(b)

Income



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






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





(c)

Expenses



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



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



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





(d)

Taxation



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






Deferred taxation is provided on all timing differences, that have originated but not reversed at the Statement of Financial Position date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Statement of Financial Position date, measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods.






Owing to the Company's status as an investment trust company, and the intention to continue to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.





(e)

Investments



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





(f)

Borrowings



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





(g)

Dividends payable



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





(h)

Nature and purpose of reserves



Share premium account



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






Capital redemption reserve



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






Capital reserve



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






Revenue reserve



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





(i)

Foreign currency



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





(j)

Traded options



The Company may enter into certain derivative contracts (e.g. options). Option contracts are accounted for as separate derivative contracts and are therefore shown in other assets or other liabilities at their fair value. The initial fair value is based on the initial premium which is received/paid on inception. The premium is recognised in the revenue column over the life of the contract period. Losses realised on the exercise of the contracts are recorded in the capital column of the Statement of Comprehensive Income.






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





(k)

Cash and cash equivalents



Cash and cash equivalents comprise cash at banks.





(l)

Significant estimates and judgements



Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. There are no significant estimates of judgement which impact these financial statements.

 



2019

2018

3.

Net currency gains/(losses)

£'000

£'000


Gains/(losses) on cash held

1,253

(2,292)


(Losses)/gains on bank loans

(2,856)

4,535



_______

______



(1,603)

2,243



_______

______

 



2019

2018

4.

Income

£'000

£'000


Income from overseas listed investments




Dividend income

13,374

12,225


REIT income

895

723


Interest income from investments

619

688



_______

______



14,888

13,636



_______

______


Other income from investment activity




Traded option premiums

3,909

2,402


Deposit interest

236

99



_______

______



4,145

2,501


Total income

19,033

16,137



_______

______






During the year, the Company was entitled to premiums totalling £3,909,000 (2018 - £2,402,000) in exchange for entering into option contracts. At the year end there were 8 (2018 - 8) open positions, valued at a liability of £118,000 (2018 - liability of £561,000) as disclosed in note 13. Losses realised on the exercise of derivative transactions are disclosed in note 11.

 



2019

2018



Revenue

Capital

Total

Revenue

Capital

Total

5.

Investment management fee

£'000

£'000

£'000

£'000

£'000

£'000


Investment management fee

875

2,038

2,913

910

2,126

3,036



_______

______

_______

______

_______

______










Management services are provided by Aberdeen Standard Fund Managers Limited ("ASFML"). With effect from 1 February 2018, the annual management fee has been charged at 0.75% of net assets up to £350 million, 0.6% between £350 million and £500 million, and 0.5% over £500 million, payable quarterly. Previously, the fee was calculated at an annual rate of 0.8% of gross assets after deducting current liabilities and borrowings and excluding commonly managed funds, payable quarterly. Net assets equals gross assets after deducting current liabilities and borrowings and excluding commonly managed funds. The balance due to ASFML at the year end was £735,000 (2018 - £790,000). The fee is allocated 30% to revenue and 70% to capital (2018 - same).




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

 



2019

2018



Revenue

Capital

Total

Revenue

Capital

Total

6.

Finance costs

£'000

£'000

£'000

£'000

£'000

£'000


Interest on bank loans

345

806

1,151

280

652

932



_______

______

_______

______

_______

______

 



2019

2018

7.

Administrative expenses

£'000

£'000


Directors' fees

113

100


Registrar's fees

60

60


Custody and bank charges

26

25


Secretarial fees

112

108


Auditor's remuneration (excluding irrecoverable VAT):




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

17

16


Promotional activities

211

213


Printing, postage and stationery

26

28


Fees, subscriptions and publications

47

45


Professional fees

127

77


Depositary charges

50

48


Other expenses

63

19



_______

______



852

739



_______

______






Secretarial and administration services are provided by Aberdeen Standard Fund Managers Limited ("ASFML") under an agreement which is terminable on three months' notice. The fee is payable monthly in advance and based on an index-linked annual amount of £112,000 (2018 - £108,000). The balance due at the year end was £28,000 (2018 - £18,000).




During the year £211,000 (2018 - £213,000) was paid to ASFML in respect of promotional activities for the Company and the balance due at the year end was £18,000 (2018 - £18,000).

 



2019

2018



Revenue

Capital

Total

Revenue

Capital

Total

8.

Taxation

£'000

£'000

£'000

£'000

£'000

£'000


(a)

Analysis of charge for the year









UK corporation tax

657

(657)

-

359

(359)

-



Overseas tax suffered

2,035

-

2,035

1,831

-

1,831



Prior year adjustment

-

-

-

6

-

6




_______

______

_______

______

_______

______



Total tax charge for the year

2,692

(657)

2,035

2,196

(359)

1,837




_______

______

_______

______

_______

______











(b)

Factors affecting the tax charge for the year



The UK corporation tax rate is 19.00% (2018 - effective rate of 19.17%).  The tax charge for the year is lower than the corporation tax rate. The differences are explained below:







2019

2018




Revenue

Capital

Total

Revenue

Capital

Total




£'000

£'000

£'000

£'000

£'000

£'000



Net profit before taxation

16,961

3,454

20,415

14,208

13,316

27,524




_______

______

_______

______

_______

______



Corporation tax at 19.00% (2018 - 19.17%)

3,223

656

3,879

2,724

2,553

5,277



Effects of:









Non-taxable overseas dividends

(2,541)

-

(2,541)

(2,344)

-

(2,344)



Irrecoverable overseas withholding tax

2,035

-

2,035

1,831

-

1,831



Other non-taxable income

-

(47)

(47)

-

-

-



Expenses not deductible for tax purposes

1

-

1

-

-

-



Tax effect of expenses double taxation relief

(26)

-

(26)

(21)

-

(21)



Excess management expenses

-

(116)

(116)

-

173

173



Non-taxable gains on investments

-

(1,454)

(1,454)

-

(2,655)

(2,655)



Non-taxable currency gains/(losses)

-

304

304

-

(430)

(430)



Prior year adjustment

-

-

-

6

-

6




_______

______

_______

______

_______

______



Total tax charge

2,692

(657)

2,035

2,196

(359)

1,837




_______

______

_______

______

_______

______











(c)

Provision for deferred taxation



No provision for deferred tax has been made in the current or prior accounting year. The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.






At the period end, after offset against income taxable on receipt, there is a potential deferred tax asset of £65,000 (2018 - £169,000) in relation to surplus management expenses. It is unlikely that the fund will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised.

 



2019

2018

9.

Dividends

£'000

£'000


Amounts recognised as distributions to equity holders in the year:




3rd interim dividend for 2018 - 8.0p per share (2017 - 7.5p)

2,274

2,149


Final dividend for 2018 - 16.0p per share (2017 - 14.5p)

4,550

4,146


1st interim dividend for 2019 - 8.0p per share (2018 - 7.5p)

2,274

2,137


2nd interim dividend for 2019 - 8.0p per share (2018 - 7.5p)

2,274

2,132



_______

______



11,372

10,564



_______

______






The proposed third interim dividend was unpaid at the year end and the final dividend for 2019 is subject to approval by shareholders at the Annual General Meeting. Accordingly, neither has been included as a liability in these financial statements.




The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £14,269,000 (2018 - £12,012,000).







2019

2018



£'000

£'000


1st interim dividend for 2019 - 8.0p per share (2018 - 7.5p)

2,274

2,137


2nd interim dividend for 2019 - 8.0p per share (2018 - 7.5p)

2,274

2,132


3rd interim dividend for 2019 - 8.5p per share (2018 - 8.0p)

2,417

2,274


Proposed final dividend for 2019 - 18.0p per share (2018 - 16.0p)

5,117

4,549



_______

______



12,082

11,092



_______

______




The cost of the proposed final dividend for 2019 is based on 28,430,504 Ordinary shares in issue, being the number of Ordinary shares in issue at the date of this report.

 



2019

2018

10.

Return per Ordinary share

£'000

p

£'000

p


Based on the following figures:






Revenue return

14,269

50.19

12,012

42.12


Capital return

4,111

14.46

13,675

47.96



_______

______

_______

______


Total return

18,380

64.65

25,687

90.08



_______

______

_______

______


Weighted average number of Ordinary shares in issue


28,430,504


28,514,542




_________


_________

 



2019

2018

11.

Investments

£'000

£'000


Fair value through profit or loss:




Opening fair value

406,593

410,344


Opening investment holdings gains

(101,386)

(132,009)



_______

______


Opening book cost

305,207

278,335


Purchases at cost

167,882

107,758


Sales - proceeds

(160,881)

(125,338)


Sales - realised gains{A}

49,394

44,474


Amortisation of fixed income book cost

(26)

(22)



_______

______


Closing book cost

361,576

305,207


Closing investment holdings gains

59,893

101,386



_______

______


Closing fair value

421,469

406,593



_______

______


Listed on overseas stock exchanges

421,469

406,593



_______

______







2019

2018


Gains/(losses) on investments

£'000

£'000


Realised gains on sales{A}

49,394

44,474


Movement in investment holdings gains

(41,493)

(30,623)



_______

______



7,901

13,851



_______

______






{A}        Includes losses realised on the exercise of traded options of £2,518,000 (2018 - £2,492,000) which are reflected in the capital column of the Statement of Comprehensive Income in accordance with accounting policy 2(j). Premiums received from traded options totalled £3,909,000 (2018 - £2,402,000) per note 4.




Transaction costs


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







2019

2018



£'000

£'000


Purchases

68

68


Sales

122

130



_______

______



190

198



_______

______






The above transaction costs are calculated in line with the AIC SORP. The transaction costs in the Company's Key Information Document are calculated on a different basis and in line with the PRIIPs regulations.

 



2019

2018

12.

Debtors: amounts falling due within one year

£'000

£'000


Dividends receivable

605

391


Interest receivable

172

183


Other debtors and prepayments

53

46


Amount due from brokers

1,845

-


Taxation recoverable

97

-



_______

______



2,772

620



_______

______

 



2019

2018

13.

Creditors: amounts falling due within one year

£'000

£'000


Amounts due to brokers

5,166

2,047


Investment management fee payable

735

790


Traded option contracts

118

561


Interest payable

33

36


Other creditors

115

122



_______

______



6,167

3,556



_______

______

 



2019

2018

14.

Bank loan

£'000

£'000


Repayable within one year:




Bank loan

38,010

31,644



_______

______






The Company agreed a US$75 million three year uncommitted multi-currency revolving loan facility with Scotiabank on 21 December 2017. US$50 million was drawn down at 31 January 2019 at an all-in interest rate of 3.4780% and matured on 22 February 2019. At the date of this Report the Company had drawn down US$50 million at an all-in interest rate of 3.46563%.




The terms of the loan facility contain covenants that gross borrowings should not exceed 35% of adjusted net assets and the net asset value shall not at any time be less than US$200 million.




At 31 January 2018 the Company had a US$75 million three year loan facility with Scotiabank, of which US$45 million was drawn down at an all-in interest rate of 2.5325% and matured on 20 February 2018.

 



2019

2018

15.

Called-up share capital

£'000

£'000


Allotted, called-up and fully paid:




Opening balance

7,108

7,161


Shares bought back for cancellation during the year

-

(53)



_______

______


28,430,504 (2018 - 28,430,504) Ordinary shares of 25p each

7,108

7,108



_______

______






During the year no Ordinary shares were bought back (2018 - 214,500 bought back for cancellation at a total cost of £2,575,000).

 

16.

Net asset value per equity share 


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



2019

2018


Net assets attributable

£398,657,000

£391,649,000


Number of Ordinary shares in issue

28,430,504

28,430,504


Net asset value per share

1,402.22p

1,377.57p

 

17.

Financial instruments and risk management


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




Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 4, the premium received in respect of options written in the year was £3,909,000 (2018 - £2,402,000). Positions closed during the year realised a loss of £2,518,000 (2018 - £2,492,000). The largest position in derivative contracts held during the year at any given time was £440,000 (2018 - £561,000). The Company had 8 (2018 - 8) open positions in derivative contracts at 31 January 2019 valued at a liability of £118,000 (2018 - £561,000) as disclosed in note 13.




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




Risk management framework


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




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




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




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




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




Risk management


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




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




(i)

Market risk



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






Interest rate risk



Interest rate movements may affect:



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



- the level of income receivable on cash deposits;



- interest payable on the Company's variable rate borrowings.






Management of the risk



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






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






The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving and uncommitted facilities. Details of borrowings at 31 January 2019 are shown in note 14.






Interest risk profile



The interest rate risk profile of the portfolio of financial instruments at the Statement of Financial Position date was as follows:












Weighted








average








period for

Weighted



Non-




which

average

Fixed

Floating

interest




rate is fixed

interest rate

rate

rate

bearing



At 31 January 2019

Years

%

£'000

£'000

£'000



Assets








Sterling

-

-

-

2,110

-



US Dollar

5.87

6.07

11,217

13,863

376,951



Canadian Dollar

-

-

-

2,620

33,301






_______

______

_______



Total assets



11,217

18,593

410,252






_______

______

_______











Liabilities








Bank loan - US$50,000,000

0.06

3.48

-

(38,010)

-






_______

______

_______



Total liabilities



-

(38,010)

-






_______

______

_______












Weighted








average








period for

Weighted



Non-




which

average

Fixed

Floating

interest




rate is fixed

interest rate

rate

rate

bearing



At 31 January 2018

Years

%

£'000

£'000

£'000



Assets








Sterling

-

-

-

61

-



US Dollar

8.47

6.78

8,649

18,105

346,494



Canadian Dollar

-

-

-

1,470

51,450






_______

______

_______



Total assets



8,649

19,636

397,944






_______

______

_______



Liabilities








Bank loan - US$45,000,000

0.05

2.53

-

(31,644)

-






_______

______

_______



Total liabilities



-

(31,644)

-






_______

______

_______











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



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



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



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






Interest rate sensitivity



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






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






If interest rates had been 100 basis points higher or lower (based on current parameter used by Manager's Investment Risk Department on risk assessment) and all other variables were held constant, the Company's revenue return for the year ended 31 January 2019 would decrease/increase by £194,000 (2018 - decrease/increase by £120,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash and loan balances.






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






Foreign currency risk



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






Management of the risk



It is not the Company's policy to hedge this risk on a continuing basis but the Company may, from time to time, match specific overseas investment with foreign currency borrowings. A significant proportion of the Company's borrowings, as detailed in note 14, are denominated in foreign currency. Foreign currency risk exposure by currency denomination is detailed under Interest Risk Profile.






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






Foreign currency sensitivity



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






Price risk



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






Management of the risk



It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The allocation of assets to international markets and the stock selection process, as detailed on page 68 of the published 2019 Annual Report, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on various stock exchanges.






Price risk sensitivity



If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 January 2019 would have increased/decreased by £42,147,000 (2018 - increase/decrease of £40,659,000) and equity reserves would have increased/decreased by the same amount.





(ii)

Liquidity risk



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






Management of the risk



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





(iii)

Credit risk



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






Management of the risk



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



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



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



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



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



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






Credit risk exposure



In summary, compared to the amounts in the Statement of Financial Position, the exposure to credit risk at 31 January 2019 was as follows:











2019


2018





Statement of


Statement of





Financial

Maximum

Financial

Maximum




Position

exposure

Position

exposure




£'000

£'000

£'000

£'000



Non-current assets







Quoted bonds

11,217

11,217

8,649

8,649










Current assets







Amount due from brokers

1,845

1,845

-

-



Dividends receivable

605

605

391

391



Interest receivable

172

172

183

183



Taxation recoverable

97

97

-

-



Other debtors and prepayments

53

53

46

46



Cash and short term deposits

18,593

18,593

19,636

19,636




_______

______

_______

______




32,582

32,582

28,905

28,905




_______

______

_______

______






None of the Company's financial assets is secured by collateral or other credit enhancements.






Credit ratings



The table below provides a credit rating profile using Standard and Poors credit ratings for the quoted preference shares and bonds at 31 January 2019 and 31 January 2018:









2019

2018




£'000

£'000



B+

830

1,824



B

763

817



BB+

2,622

153



BB

2,421

-



BB-

3,805

-



BBB-

776

5,855




_______

______




11,217

8,649




_______

______








Fair values of financial assets and financial liabilities


The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.

 

18.

Capital management policies and procedures


The investment objective of the Company is to provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities.




The capital of the Company consists of bank borrowings and equity comprising issued capital, reserves and retained earnings. The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.




The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:


-         the planned level of gearing which takes into account the Investment Manager's views on the market;


-         the level of equity shares in issue; and


-         the extent to which revenue in excess of that which is required to be distributed should be retained.




The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.




Details of the Company's gearing facilities and financial covenants are detailed in note 14 of the financial statements.

 

19.

Fair value hierarchy


FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following classifications:




Level 1: unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.


Level 2: inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly.


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




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






Level 1

Level 2

Level 3

Total


As at 31 January 2019

 

Note

£'000

£'000

£'000

£'000


Financial assets at fair value through profit or loss







Quoted equities

a)

410,252

-

-

410,252


Quoted bonds

b)

-

11,217

-

11,217




_______

______

_______

______




410,252

11,217

-

421,469




_______

______

_______

______


Financial liabilities at fair value through profit or loss







Derivatives

c)

-

(118)

-

(118)




_______

______

_______

______


Net fair value


410,252

11,099

-

421,351




_______

______

_______

______











Level 1

Level 2

Level 3

Total


As at 31 January 2018

Note

£'000

£'000

£'000

£'000


Financial assets at fair value through profit or loss







Quoted equities

a)

397,944

-

-

397,944


Quoted bonds

b)

-

8,649

-

8,649




_______

______

_______

______




397,944

8,649

-

406,593




_______

______

_______

______


Financial liabilities at fair value through profit or loss







Derivatives

c)

-

(561)

-

(561)




_______

______

_______

______


Net fair value


397,944

8,088

-

406,032





_______

______

_______

______










a)

Quoted equities








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





b)

Quoted bonds



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





c)

Derivatives



The Company's investment in exchange traded options have been fair valued using quoted prices and have been classified as Level 2 as they are not considered to trade in active markets.

 

20.

Related party transactions


Directors' fees and interests


Fees payable during the year to the Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report on page 35 of the published 2019 Annual Report.




Transactions with the Manager


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




Details of transactions during the year and balances outstanding at the year end are disclosed in notes 5 and 7.

 

 

 

ALTERNATIVE PERFORMANCE MEASURES

Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes FRS 102 and the AIC SORP. The Directors assess the Company's performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies.


Total return

Total return is considered to be an alternative performance measure. NAV and share price total returns show how the NAV and share price has performed over a period of time in percentage terms, taking into account both capital returns and dividends paid to shareholders. NAV total return involves investing the same net dividend in the NAV of the Company with debt at fair value on the date on which that dividend was earned. Share price total return involves reinvesting the net dividend in the month that the share price goes ex-dividend.


The tables below provide information relating to the NAVs and share prices of the Company on the dividend reinvestment dates during the years ended 31 January 2019 and 31 January 2018 and total return for the years.



Dividend


Share

2019

rate

NAV

price

31 January 2018

N/A

1,377.57p

1,300.00p

10 May 2018

16.00p

1,351.36p

1,272.50p

19 July 2018

8.00p

1,430.65p

1,350.00p

4 October 2018

8.00p

1,466.17p

1,365.00p

24 January 2019

8.50p

1,380.38p

1,320.00p

31 January 2019

N/A

1,402.22p

1,340.00p

Total return


+4.8%

+6.3%






Dividend


Share

2018

rate

NAV

price

31 January 2017

N/A

1,323.45p

1,232.00p

18 May 2017

14.50p

1,254.71p

1,158.50p

13 July 2017

7.50p

1,307.61p

1,191.00p

12 October 2017

7.50p

1,360.06p

1,262.00p

25 January 2018

8.00p

1,375.36p

1,317.50p

31 January 2018

N/A

1,377.57p

1,300.00p

Total return


+7.1%

+8.8%





Dividend cover

Revenue return per share of 50.19p (2018 - 42.12p) divided by dividends per share of 42.50p (2018 - 39.00p) expressed as a ratio.


Net gearing

Net gearing measures the total borrowings of £38,010,000 (31 January 2018 - £31,644,000) less cash and cash equivalents of £15,272,000 (31 January 2018 - £17,589,000) divided by shareholders' funds of £398,657,000 (31 January 2018 - £391,649,000), expressed as a percentage. Under AIC reporting guidance cash and cash equivalents includes amounts due and to brokers at the year end as well as cash and short term deposits. These balances can be found in notes 12 and 13 below.


Ongoing charges

Ongoing charges is considered to be an alternative performance measure. The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC which is defined as the total of investment management fees and administrative expenses and expressed as a percentage of the average net asset values with debt at fair value throughout the year.





2019

2018

Investment management fees (£'000)

2,913

3,036

Administrative expenses (£'000)

852

739


_______

_______

Ongoing charges (£'000)

3,765

3,775


_______

_______

Average net assets{A} (£'000)

396,330

383,371


_______

_______

Ongoing charges ratio

0.95%

0.98%


_______

_______




{A}         During both years net asset values with debt at fair value equated to net asset value with debt at amortised cost due to the short-term nature of the bank loans.


The ongoing charges ratio provided in the Company's Key Information Document is calculated in line with the PRIIPs regulations.

 

 

 

ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 January 2019. The statutory accounts for the year ended 31 January 2019 received an audit report which was unqualified.

 

The financial information set out above does not constitute the company's statutory accounts for the years ended 31 January 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

 

The statutory accounts for the financial year ended 31 January 2019 were approved by the Directors on 10 April 2019 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 2.00 pm on 4 June 2019 at 1 George Street, Edinburgh EH2 2LL.

 

The Annual Report will be posted to shareholders in April 2019 and additional copies will be available from the Manager (Investor Helpline - Tel. 0808 00 0040) or by download from the Company's webpage

(www.northamericanincome.co.uk)

 

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

 

For The North American Income Trust plc

Aberdeen Asset Management PLC, Secretaries

 

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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Annual Financial Report - RNS