Keystone Investment Trust Plc - Annual Financial Report

KEYSTONE INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT ANNOUNCEMENT
FOR THE YEAR ENDED 30 SEPTEMBER 2019

FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

Performance Statistics­

Total Return(1)(3) (dividends reinvested)

Change for the year	2019					2018
Net asset value (NAV)(2)(3)	+1.1%					0.0%
Share price	–4.1%					+0.8%
FTSE All-Share Index(4)	+2.7%					+5.9%
	AT			AT
	30 SEPTEMBER			30 SEPTEMBER		%
	2019			2018		CHANGE
Capital Statistics
Net assets (£’000)	257,606			266,146		–3.2
NAV(2)(3) per share	1,862.4p			1,921.7p		–3.1
Share price(1)	1,540.0p			1,685.0p		–8.6
FTSE All-Share Index(1)(4)	4,061.7			4,127.9		–1.6
Discount(3) of share price to NAV(2) per share	(17.3)%			(12.3)%
Gearing from borrowings(3)	– gross – debt at par			12.4%		12.0%
	– net – debt at par			3.7%		11.6%
	– gross – debt at market value			15.1%		14.8%
	– net – debt at market value			6.1%		14.4%
		FOR THE YEAR TO 30 SEPTEMBER				%
			2019		2018	CHANGE
Revenue Statistics
Net revenue available for ordinary shareholders (£’000)			7,516		7,552
Revenue return per ordinary share			55.60p		55.90p	–0.5
Dividends per ordinary share – first interim			24.00p		18.00p
– second interim			12.00p		38.00p
– third interim(5)			20.00p		—
			56.00p		56.00p	0.0
– special			3.67p		1.75p
– total			59.67p		57.75p	+3.3
Ongoing charges(3):			0.54%		0.54%
Excluding performance fee			0.00%		0.00%
Performance fee			0.54%		0.54%

(1)        Source: Refinitiv.

(2)        Figures with debt at market value.

(3)        Alternative Performance Measure (APM). See Glossary of Terms and Alternative Performance Measures on pages 69 to 71 of the financial report for the explanation and reconciliations of APMs.

(4)        The benchmark index of the Company.

(5)        The Company has moved to a quarterly dividends model and, as a consequence of the timing of this decision, will pay three interim dividends this year: June, September and December, the third interim being in lieu of a final dividend. Next year, the Company intends to pay four quarterly dividends in March, June, September and December.

CHAIRMAN’S STATEMENT

Performance

The total return to shareholders over the year to 30 September 2019 was –4.1% (2018: +0.8%), based on the share price and disappointingly marks the fourth successive year that the return has been behind our benchmark, the FTSE All-Share Index, which posted a total return of +2.7% (2018: +5.9%). The total return on the underlying net asset value (NAV) per share was +1.1% (2018: 0.0%) with debt at market value. At year end, the share price stood at a discount of 17.3% (2018: 12.3%) to the NAV (debt at market value).

The performance of the Company is unsatisfactory and the Board is acutely aware of shareholders’ concerns. The Board has supported James Goldstone and the team at Invesco since he took over the management of the portfolio in April 2017. This period has coincided with market sentiments aligning against UK domestic stocks. During the year, the Board spent a significant amount of time challenging the investment process and portfolio positioning. James’s contrarian approach to seeking truly undervalued companies in the UK requires patience. The Manager’s Report section of the Strategic Report provides a review of market and portfolio performance during the year and his view of the outlook.

The weighted average discount of the investment companies in the UK All Companies sector narrowed marginally but remained wide through the year. It was 8.3% at 30 September 2019 compared with 9.5% at 30 September 2018 (source: JP Morgan Cazenove). The average discount at which the Company’s ordinary shares traded relative to their underlying NAV (with debt at market value) over the past year widened to 12.9%, from 11.4% last year.

Discount and Buyback Authority

The Board regularly monitors the discount and how it compares with other investment trusts in the peer group. The Board has authority to buy back shares and is willing to do so if it is considered good value for shareholders. As such, the Board is monitoring the current anomalous discount carefully.

Sub-division of the Company’s Share Capital

The Board is proposing to sub-divide the Company’s shares so that investors will receive five new shares with a nominal value of 10p in place of each existing share of 50p. The share price following the split will therefore be approximately one-fifth of the current price, and dividends per share will be reduced accordingly. The intention is to improve market liquidity and to make the Company more attractive to retail investors. The proposal requires the approval of shareholders and the Board recommends voting in favour of this resolution at the forthcoming AGM.

Existing shareholders are assured that this sub-division of shares will not affect the underlying value of their holdings in the Company as each shareholder will hold the same proportionate interest in the Company following the completion of the share split as before.

Revenue and Dividends

The revenue return after tax for the year was 55.6p per ordinary share, slightly down from last year’s 55.9p per share.

We announced in May 2019 the decision to change to quarterly dividends in order to provide shareholders with a more attractive flow of income. The Board has declared a third interim dividend, in lieu of a final, of 20p per share, with an element funded from the revenue reserve, giving a total dividend for the year of 56p per share (2018: 56p). This equates to a yield of 3.6% at 30 September 2019, which compares favourably with the UK All Companies sector average of 2.6% (source: JP Morgan Cazenove), and also extends the Company’s record of either increasing or maintaining the level of ordinary dividends each year since 1976. The dividend will be paid on 20 December 2019 to shareholders on the register on 29 November 2019. The Board has decided again to pass on special dividends received from portfolio companies totalling £497,000 this year, the equivalent of 3.67p per share (2018: £236,000: 1.75p). It will be paid at the same time as the third interim dividend. The total dividend for the year of 59.67p represents an increase of 3.3% compared with 57.75p for the previous year.

Corporate Governance

The Board is committed to maintaining high standards of Corporate Governance and is accountable to shareholders for the governance of the Company’s affairs. The Association of Investment Companies in 2019 and the Financial Reporting Council in 2018, respectively, issued revisions of the 2016 AIC Code of Corporate Governance and the 2016 UK Code of Corporate Governance. These will apply for the Company’s financial year beginning 1 October 2019. Nonetheless, where practical, the Board has chosen to present elements of the new Codes in preparation for full compliance with the new codes in the next financial year, including a tenure policy for the Chairman and providing a note in this annual report of the individual contribution that each Director brings to the Board.

Gearing

The Board takes responsibility for the Company’s gearing strategy and sets parameters within which the Manager operates. The Board requires that no net purchases be made which would take the level of net gearing, with debt at par, above 15% of net assets, and that sales be made if, as a result of market movements, net gearing goes higher than 15% of net assets. The Manager has discretion on where to set the portfolio’s exposure subject to the limits set by the Board. At the year end net gearing, with debt at par, stood at 3.7% compared with 11.6% a year ago.

The Company has fixed borrowing in the form of long-term debentures that amount to £32 million, and has also arranged with The Bank of New York Mellon an overdraft facility of up to £15 million that can be used for investment purposes. The net gearing of the Company is determined by the extent to which borrowings are invested.

Costs

The Board monitors costs closely and is pleased to report the ongoing charges, excluding borrowing costs, remain competitive at 0.54% (2018: 0.54%). This includes the base management fee which is 0.45% of the Company’s market capitalisation. This was reduced from 0.6% when James Goldstone took over as portfolio manager.

Outlook

The Board is encouraged by early signs since the year end that James’s patience is beginning to pay off. As it has throughout the year, the Board continues to monitor investment performance closely and, with advice and guidance from the Company’s corporate broker, Numis, to consider distribution and other initiatives that could help to improve the demand for and liquidity of the shares. Although the outlook for the UK remains uncertain, not least because of Brexit, the Board is confident that James Goldstone, employing his differentiated investment approach anchored in value, has positioned the portfolio to generate worthwhile returns over time and enable the Company to fulfil its investment objective to provide shareholders with long-term growth of capital.

AGM

The timing and format of the AGM has been changed to encourage more shareholders to attend and will be held on 11 February 2020 at 43-45 Portman Square, London W1H 6LY at 12.30pm. This will be my first AGM as Chairman, since I took over the role from Beatrice Hollond in January 2019, and shareholders are cordially invited to attend the AGM and stay for a buffet lunch afterwards. You are welcome to bring a guest. To register your interest in attending, please contact us at [email protected]. The Notice of the AGM of the Company is on pages 62 to 66 and a summary of the resolutions is set out in the Directors’ Report on pages 60 and 61. The Directors and the portfolio manager, James Goldstone, will be available at the meeting to answer shareholders’ questions. The Board has carefully considered all the resolutions proposed in the Notice and, in their opinion, consider them to be in the best interests of the shareholders as a whole.

Karen Brade

Chairman

28 November 2019

Business Review

Keystone Investment Trust plc is an investment company holding investments with a market value in excess of £260 million and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below.

The business model adopted by the Company to achieve its investment objective has been to contract the services of Invesco Fund Managers Limited (IFML or the Manager) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The Manager also provides company secretarial, marketing and general administration services. In practice, many of these services are performed under delegated authority by Invesco Asset Management Limited (IAML), a company related to IFML. References to the Manager in this annual financial report should consequently be considered to include both entities. The portfolio manager responsible for the day-to-day management of the portfolio is James Goldstone.

The Manager has delegated portfolio valuation, fund accounting and administrative services to The Bank of New York Mellon, London Branch. The Company has contractual arrangements with Link Asset Services as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian. BNYMIL is also the Company’s bank.

Investment Objective and Policy

Investment Objective

The Company’s objective is to provide shareholders with long-term growth of capital, mainly from UK investments.

Investment Policy and Risk

The portfolio is invested by the Manager so as to maximise exposure to the most attractive sectors and stocks within the UK stock market and, within the limits set out below, internationally. The Manager does not set out to manage the risk characteristics of the portfolio relative to the benchmark index and the investment process will result in potentially very significant over or underweight positions in individual sectors versus the benchmark.

The Manager controls stock-specific and sector risk by ensuring that the portfolio is always appropriately diversified. In depth, continual analysis of the fundamentals of investee companies allows the portfolio manager to assess the financial risks associated with any particular stock. The portfolio is typically made up of 50 to 80 stocks. If a stock is not considered to be a good investment, then the Company will not own it, irrespective of its weight in the index.

Investment Limits

The Board has prescribed the following limits on the investment policy, all of which are at time of investment unless otherwise stated:

–   no single equity investment in a UK listed company may exceed 12.5% of gross assets;

–   the Company will not invest more than 15% of its assets in other listed investment companies;

–   the Company will not invest more than £12 million in bonds, with a maximum of £1.5 million in any issue;

–   the Company will not normally invest more than 5% of gross assets in unquoted investments;

–   the Company will not normally invest more than 15% of its equity investments in companies that are not UK listed and incorporated; and

–   borrowing may be used by the Company to create gearing within limits determined by the Board.

Gearing Policy

The Board takes responsibility for the Company’s gearing strategy and sets parameters within which the Manager operates. The Company has fixed borrowing, in the form of long-term debentures that amount to £32 million, and also has an uncommitted overdraft facility from BNYMIL of up to £15 million that can be used for investment purposes. The 7.75% Debenture Stock 2020 is due to be repaid at par on 1 October 2020 together with accrued interest to the date of repayment and the 6.5% Debenture Stock 2023 is due to be repaid on 27 April 2023. The net gearing of the Company is determined by the extent to which borrowings are invested. The Board reviews the limit to which the Manager may gear the portfolio at every Board meeting. The Board requires that no net purchases be made which would take the level of net gearing, with debt at par, above 15% of net assets, and that sales be made if, as a result of market movements net gearing goes higher than 15% of net assets. The Manager has discretion as to how much borrowing is utilised within the limits set by the Board. At the year end net gearing, with debt at par, stood at 3.7%.

Foreign Exchange

The Company has some non-sterling denominated investments and is therefore subject to foreign exchange risk. The Board monitors foreign currency exposure and takes a view, from time to time, on whether foreign currency exposure should be hedged. During the year, the Board had prescribed that all currency exposure should be hedged other than US dollar, Canadian dollar and Swiss franc. Since the year end, the Board has provided the Manager some discretion as to whether to hedge currency exposure to US dollar and Canadian dollar.

Performance

Delivery of shareholder value is achieved through outperformance of the relevant benchmark.

The Board reviews performance by reference to a number of Key Performance Indicators that include the following (all of which, apart from dividends, are Alternative Performance Measures and are defined on pages 69 to 71):

•           net asset value (NAV) and share price total return compared with benchmark and peer group performance;

•           share price premium/discount relative to the net asset value;

•           dividends; and

•           ongoing charges.

The Company’s NAV and share price total returns for the year to 30 September 2019 were +1.1% and –4.1% respectively, both of which were less than the total return of the Company’s benchmark, the FTSE All-Share Index, of +2.7%. The Manager’s Report on pages 12 to 15 provides commentary on the reasons for the performance.

As a result of the Company’s NAV total return underperformance against the benchmark, no performance fee has been earned for the year.

A table of the returns for the last ten years, together with a graph, can be found on page 3.

Peer group performance is monitored by comparing the Company with the 13 investment companies making up the UK All Companies sector. As at 30 September 2019, in NAV total return terms, the Company was ranked 5th in its sector over one year, 11th over three years and 9th over five years (source: JPMorgan Cazenove). The Board also compares the Company to a bespoke list of investment companies which the Board considers to be its nearest peers.

The Company’s shares traded at a discount relative to NAV (with debt at market value) through the year, as shown in the following graph. The discount at the year end was 17.3%. The Company’s shares are likely to trade on a relatively wide discount until there is more certainty around the macro economic backdrop and in particular the UK’s exit from the European Union.

With advice and guidance from the Company’s corporate broker, Numis, the Board continues to consider distribution and other initiatives that could help to improve the demand for and liquidity of the shares, and hence the discount at which they trade.

Dividends form a key component of the total return to shareholders. The income from the portfolio and potential level of dividend payable is reviewed at every board meeting. The Board decided to move from semi-annual to quarterly dividends in May 2019. The Board’s dividend payment policy is for the Directors to declare four dividends in respect of each accounting year, with a payment in each calendar quarter. Additional special dividends may be declared, at the discretion of the Directors.

A first interim dividend, which reflected payment of two quarters under the new quarterly model, of 24p (2018:18p) per share was paid on 14 June 2019, a second interim dividend of 12p per share was paid on 27 September 2019 and a third interim dividend, in lieu of a final dividend, of 20p has been declared, which is payable on 20 December 2019 to shareholders on the register at 29 November 2019. These give a total ordinary dividend for the year of 56p, which is on a par with the previous year. The Board has also declared a special dividend of 3.67p (2018: 1.75p) to be paid at the same time as the third interim dividend. The total dividend for the year of 59.67p represents an increase of 3.3% compared with 57.75p for the previous year. The dividend history of the Company over the last ten years is shown in the table on page 3.

The ongoing charge is the industry measure of the Company’s operating costs as a percentage of average net asset value (debt at market value) during the year. The expenses of the Company are reviewed at every board meeting, with the aim of managing costs incurred and their impact on performance. The ongoing charges figure for the past year remained at 0.54%, the same as for the year to 30 September 2018. No performance fee was payable in respect of either year. The ten year record of ongoing charges is shown on page 3 and the calculation is shown in the Glossary of Terms and Alternative Performance Measures on page 70.

Financial Position

At 30 September 2019, the Company’s net assets were valued at £258 million (2018: £266 million). These comprised a portfolio of mainly equity investments and net current assets.

At this and the previous year end, the Company’s ordinary shares were geared by borrowings in the form of two issues of long-term debentures, totalling £32 million nominal. Their weighted average interest rate was 6.77% for both years. The Company also had £0.25 million of 5% cumulative preference shares in issue.

In addition, the Company has an uncommitted overdraft facility of up to £15 million. No amounts were drawn down at the year end (2018: none).

Outlook and Future Trends

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Manager’s Report section of this Strategic Report. Further details as to the risks affecting the Company are set out below under ‘Principal Risks and Uncertainties’.

Principal Risks and Uncertainties

The Audit Committee regularly undertakes a robust assessment of the risks the Company faces, on behalf of the Board (see Audit Committee Report on pages 21 to 23).

The following are considered to be the most significant risks to the Company and to shareholders in relation to their investment in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 16 to the financial statements.

Investment Objective

There is no guarantee that the Company’s strategy and business model will be successful in achieving its investment objective.

The Board monitors the performance of the Company and has established guidelines to ensure that the approved investment policy is pursued by the Manager.

Market Risk

The majority of the Company’s investments are traded on the London Stock Exchange. The principal risk for investors in the Company is of a significant fall in stock markets and/or a prolonged period of decline in the markets relative to other forms of investment. The value of investments held within the portfolio is influenced by many factors including the general health of the UK economy, interest rates, inflation, government policies, industry conditions, political events, tax laws, environmental laws and investor sentiment. The portfolio manager has summarised in the Manager’s Report section of this Strategic Report particular factors affecting the performance of markets in the year and his view of those most pertinent to the outlook for the portfolio. Such factors are out of the control of the Board and the Manager and may give rise to high levels of volatility in the prices of investments held by the Company, although the use or elimination of gearing may modify the impact on shareholder return.

Investment Risk

An inherent risk of investment is that the stocks selected for the portfolio do not perform well.

The investment process employed by the Manager combines top down assessment of economic and market conditions with stock selection. Fundamental analysis forms the basis of the Company’s stock selection process, with an emphasis on sound balance sheets, good cash flows, the ability to pay and sustain dividends, good asset bases and market conditions. The process is complemented by constant assessment of market valuations. It is important to have a sense of a company’s realistic valuation which, to some extent, will be independent of the price at which it trades in the market. Overall, the investment process aims to achieve absolute returns through a genuinely active stock selection approach. This can therefore result in a portfolio which looks substantially different from the benchmark index.

Risk management is an integral part of the investment management process. The Manager effectively controls risk by ensuring that the Company’s portfolio is always appropriately diversified. Continual analysis of all holdings gives the Manager a thorough understanding of financial risks associated with them.

The portfolio of investments held at 30 September 2019 is set out on pages 16 and 17.

Past performance of the Company is not necessarily indicative of future performance.

Shares

Shareholders are exposed to certain risks in addition to risks applying to the Company itself.

The ordinary shares of the Company may trade at a premium or discount to its NAV. The Board monitors the price of the Company’s shares in relation to their NAV and the premium/discount at which they trade. The Board is proposing a resolution on a share split at the Company’s AGM as detailed in the Chairman’s Statement on page 4.

The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested.

While it is the intention of the Directors to pay dividends to ordinary shareholders four times a year, the ability to do so will depend upon the level of income received from securities and the timing of receipt of such income by the Company. Accordingly, the amount of the dividends paid to ordinary shareholders may fluctuate. Any change in the tax or accounting treatment of dividends or other investment income received by the Company may also affect the level of dividend paid.

The Directors seek powers to issue and buy back the Company’s shares each year, which can be used to help manage the liquidity and enhance the NAV for existing shareholders. The Board also monitors the level of revenue available for distribution at each Board meeting.

Gearing

Gearing levels may change from time to time in accordance with the Manager’s and the Board’s assessment of risk and reward. Whilst the use of borrowings by the Company should enhance total return where the return on the Company’s underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling. The Board and the Manager regularly review gearing and will continue to monitor the level closely over the year ahead. The maximum gearing limit currently authorised by the Board is 15% of net assets. As at 30 September 2019, net gearing from borrowings stood at 3.7% (2018: 11.6%) with debt at par.

Reliance on the Manager and Other Service Providers

The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function. In particular, the Manager performs services that are integral to the operation of the Company and the custodian appointed by the depositary holds assets on its behalf. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue its investment policy successfully.

The Company has limited direct exposure to cyber risk. However, the Company’s operations or reputation could be affected if any of its service providers suffered a major cyber security breach. The Board monitors the preparedness of its service providers in this regard and is satisfied that the risk is given due priority.

The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy successfully.

The Company’s main service providers are listed on page 68. The Board monitors the services provided to the Company informally at every Board meeting and formally at least annually and by reference to third party independent audited control reports.

Regulatory

The Company is subject to various laws and regulations by virtue of its status as a public limited company, as an investment trust and as an alternative investment fund. A loss of investment trust status, under section 1158 of the Corporation Tax Act 2010, could lead to the Company being subject to capital gains tax on the profits arising from the sale of its investments. A serious breach of other regulatory rules might lead to suspension from the Stock Exchange. Other control failures, either by the Manager or another of the Company’s service providers, might result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.

The Manager reviews the level of compliance with tax and other regulatory financial requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from service providers. The Manager’s Compliance Officer produces regular reports for review by the Company’s Audit Committee.

In addition to these risks, the outcome and potential impact on the Company of the ongoing Brexit situation remains unclear at the time of writing. The outcome of the forthcoming General Election is likely to have a material impact on the Brexit position. The majority of the Company's assets, liabilities and income are denominated in Sterling and the Company has the ability to hedge non-Sterling positions, should there be sharp movements in exchange rates to the pound. Separately, investor sentiment might lead to increased or reduced demand for the Company's shares, in the light of continued Brexit uncertainty, which would be reflected in a narrowing or widening of the discount at which the Company's shares trade relative to their net asset value. Overall, the Board does not expect the Company's business model, over the longer term, to be affected by Brexit.

Viability Statement

The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

In assessing the viability of the Company the Directors considered the Company’s current position, the principal risks to which it is exposed, as set out on pages 8 to 10, and their potential impact on its future development and prospects. The most significant of these are shareholder dissatisfaction arising from failure to meet the Company’s investment objective, through poor investment performance or because the investment policy is no longer appropriate to the prevailing market conditions, and contributory market and investment risks. The Board also took into account the capabilities of the Manager and the varying market conditions experienced, which have effectively stress tested the Company over many years through different and difficult market cycles.

In terms of financial risks to viability, save for the limited value ascribed to unquoted investments, the Company’s portfolio is readily realisable and many times the value of its short term liabilities and annual operating costs. The Company also has long term debt obligations comprising two debentures. The smaller debenture, £7 million, falls due in 2020 and the larger, £25 million, in 2023. In aggregate this long term debt amounts to 11.1% of total assets less current liabilities, so the principal is more than nine times covered and the risk that interest obligations will not be met is negligible.

Based on the above, and assuming there is no significant adverse change to the regulatory environment and tax treatment of UK investment trusts, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

Board Responsibilities

As set out in the Directors’ Report on page 54 the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense. In accordance with the Company’s nature as an investment trust the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting, reviews its relationships with other service providers at least annually and monitors compliance with the Company’s obligations to debt holders.

Board Diversity

The Company’s policy on diversity is set out on page 53. The Nomination Committee considers diversity, including the balance of skills, knowledge, gender and experience, amongst other factors, when reviewing the composition of the Board and appointing new directors. Although the Board has not set a specific target or quota in this regard, it has aspired to meet the Hampton Alexander return target of 33% female board representation and has achieved this. At the date of this report, the Board comprises five non-executive directors of whom two, including the Chairman, are women thereby constituting 40% female representation. Summary biographical details of the Directors are set out on page 18. The Company has no employees.

Environment, Social and Governance (ESG) Matters

The Company has no employees, property or activities outside of investment, and so environmental policy has limited application. The Company has delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments that are in the financial interests of shareholders. The Manager is committed to being a responsible investor and applies the United Nations Principles for Responsible Investment which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency.

The Manager is a signatory to the FRC Stewardship Code 2012 which seeks to improve the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities. As a long term, valuation-led, active investor, the Manager’s investment process is aligned with ESG integration and active ownership. ESG matters are considered as one input to the investment process, as part of evaluation of ideas, company dialogue and portfolio monitoring. ESG aspects are incorporated into the wider investment process as part of a holistic consideration of the investment risk and opportunity. A copy of the Manager’s Stewardship Code can be found at www.invesco.co.uk.

Modern Slavery Act 2015

The Company is an investment vehicle and does not provide goods or services in the normal course of its business or have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

MANAGER’S REPORT

Market Review

The twelve months to September 2019 have been another challenging period in which to manage equity portfolios. The FTSE All-Share Index finished the period up 2.7% year-on-year on a total return basis, however that performance figure belies some very significant volatility along the way as the Index was at one point in December 2018 down over 12%.

Almost to the day, the start of the period under review coincided with a sharp decline in global equities and in the final calendar quarter of 2018 the FTSE All-Share fell 11%. Markets had already been concerned about the threat to global growth from the escalating US-China trade dispute. As the outlook for global economic growth deteriorated, hawkish comments from the US Federal Reserve gave the impression that it was determined to continue to tighten monetary policy regardless of this weaker data. A sharp fall in the oil price from $85 in October to just above $50 in December added to the narrative that growth was slowing. Fraught negotiations around Brexit provided an additional layer of uncertainty in a UK context and gave added impetus to a market rotation into higher quality, less cyclical and more internationally exposed stocks and sectors.

The new year saw greater optimism surrounding US-China trade talks as well as signals from the Federal Reserve that monetary policy may not be on “autopilot” after all. Between October and May the bond market moved from pricing in three rate rises for 2019 to three cuts and global equity markets duly rallied. By the end of March 2019, the FTSE All-Share had recovered two thirds of the losses from the final quarter of 2018 and by the end of April 2019 was 14% above the December low. Brent crude oil had climbed back to US$75 per barrel.

Despite the optimism creeping into headline index levels, political and economic uncertainty persisted at home. The Bank of England cut its official 2019 UK growth estimate from +1.7% to +1.2% as the question of the UK’s departure from the European Union continued to dominate the agenda. As the 29 March deadline for Britain’s exit drew closer, Parliament prepared to take control of the process. The Prime Minister’s stance softened and the chances of leaving without a deal were seen to recede. Sterling strengthened against international currencies over the first quarter, peaking at US$1.33 and €1.17 in March as an extension to Article 50 was secured, avoiding a no-deal exit.

The UK economy proved remarkably resilient throughout this period, as did trends in employment and disposable income. However, as the 29 March deadline was missed and the new 31 October deadline was set, some uncertainty crept in which impacted consumer confidence and retail sales, the latter not helped by an extremely tough comparative period in 2018 which had been boosted by both weather and the royal wedding. UK GDP and manufacturing output data for the month of April were very weak at –0.4% and –3.9% respectively, hinting at an artificial boost in the prior quarter as inventories were built into March to ensure continuity of supply.

In late May Prime Minister Teresa May announced her intention to resign as leader of the Conservatives. With most of the candidates to replace her from the Eurosceptic wing of the party and a number of them stating that they intended to take the UK out on 31 October with or without a deal, sterling showed renewed weakness and at the end of May had fallen to $1.255.

Domestic politics and the impending deadline for leaving the EU continued to drive the performance of sterling and the performance of UK domestically exposed share prices relative to their internationally exposed counterparts. The Tory leadership contest concluded in late July with Boris Johnson elected leader. As the rhetoric built around “getting Brexit done” and the slogan that the UK would be leaving on 31 October “come what may” hit the headlines, sterling fell back to post referendum lows of $1.20 in August. Concern abated somewhat in early September when the Benn Act was passed, forcing the government to request a further extension from the EU if they had been unable to reach a deal by 19 October and sterling duly rallied. Frustrated by such moves and their impact on the UK’s negotiating position, Prime Minister Johnson moved to prorogue Parliament until shortly before the end of the extension period. In late September the Supreme Court ruled the prorogation unlawful and the UK entered uncharted constitutional waters, sterling reversing its latest decline in the process.

Labour market strength was sustained throughout the year with unemployment at or below 4% and job vacancies remaining at above 800,000. Consequently wage growth, which had remained stuck below 2.5% in recent years, began to accelerate towards 3% in 2018 and hit 4% in July 2019. With core CPI below 2% throughout, real disposable income growth continued to build and provided a strong foundation for the broader UK economy.

Elsewhere in the world, the Chinese authorities continued with fiscal and monetary stimulus, cutting taxes, cutting interest rates and reducing the reserve ratio requirement which finished the period at 13%, down from 17% 18 months earlier. More significantly perhaps, the Renminbi (RMB) weakened to trade through the psychologically important level of RMB 7 to the US dollar for the first time since 2008. Nevertheless, the impact of the trade dispute proved a more powerful negative force and the Chinese economy failed to show progress: retail sales growth finished the period at multi-year lows, infrastructure investment failed to inflect and measures of industrial activity continued to weaken.

Beyond China, the trade dispute also continued to take its toll. With total imports to China down 8.5% in September, Korean exports fell 9% and German export orders for plant and machinery were down 19%. In the US the composite Institute of Supply Management index began a decline from above 60 in September 2018 that saw it finish in September 2019 at 51. The manufacturing component ended at 49, below the critical level of 50 that signals contraction.

Against the background of global economic and political uncertainty and declining real interest rates, the gold price was strong, rising from under $1,200 in September 2018, to $1,300 in May 2019 and then to a six year high in early September 2019 above $1,550. Translated into sterling, which over the year fell from $1.30 to just above $1.20, these gains were magnified.

Portfolio Review

AJ Bell was the standout contributor to returns in the twelve months to September. The portfolio took some profits by selling shares in a successful IPO in December 2018 and the remaining position then saw a very significant increase in value as the new shares proved so highly sought after that they trebled in the five months post listing. Once the lock-up had expired, an additional disposal was made but the company remains a large holding in the portfolio reflecting the strength of its customer proposition in a high growth segment of financial services.

JD Sports Fashion made a very strong contribution as it continued its multi-year run of impressive UK like-for-like sales whilst also capitalising on the strength of the relationships with key brand partners to make acquisitions. In recent years the company has acquired distressed businesses in a number of overseas markets and then restructured those companies to bring them in line with the core UK operating model. The acquisition of The Finish Line in June 2018 provided a very attractive entry to the key US market and the progress made in this financial year has vindicated the strategy. The stockmarket has responded favourably to the resultant upgrades to earnings estimates and the shares have enjoyed a re-rating.

Elsewhere in retail, Next also defied the crisis facing many high-street retailers and provided positive returns over the twelve months. Next released a strong trading statement in July which confirmed better-than-expected full price sales for the second quarter. This supported the thesis that growth in the company’s online operations can more than offset the structural challenges in UK physical retail and that together the two sides of the business represent a formidable multi-channel operator. Half-year results released in September confirmed double-digit growth in online sales, whilst management reaffirmed its full-year guidance.

Media business Future was another standout performer as the share price trebled in the year. Traditionally a magazine publishing business, Future is transitioning to a predominantly online business model. Management has significantly increased margins by generating new revenue streams via online advertising and e-commerce, augmented by earnings accretive acquisitions. At the end of the period under review, Future issued a strong trading update in which it stated that better-than-expected trading in its core operations would result in earnings “materially ahead of the board’s expectations”.

The portfolio’s gold holdings made a major positive contribution to performance. Both Randgold Resources and Acacia Mining were acquired by Barrick Gold in all-share transactions. After extensive engagement with Barrick at the time of the deals, the holding was maintained and Barrick is now a top ten position in the portfolio. As the gold price made headway and operational and strategic successes were reported, the share prices of all five of the portfolio’s gold mining holdings (Barrick, Newmont, Agnico Eagle Mines, Endeavour Mining and Wheaton Precious Metals) responded positively and if viewed as a single position would have accounted for the second biggest contribution in the year, after AJ Bell.

There were also bids for Dairy Crest and BCA Marketplace, in both cases at meaningful premiums to the prevailing share prices. Dairy Crest was sold when the acquisition by Saputo of Canada was completed in May and BCA Marketplace was sold in the market at a level just below the recommended offer from TDR Capital.

McBride made the biggest negative contribution to returns in the year in the wake of three profit warnings. This resulted mainly from the company’s inability to pass through input cost inflation, exacerbated by the weakness of sterling, to end customers. The second warning saw the CEO resign. After much consideration the decision was taken to retain the position. I continue to believe that the company’s market share should in time confer better pricing power, especially in light of the unsustainable operational and financial weakness of many of the business’ competitors. Following the recruitment of an activist investor to the board, the chairman has been replaced and a new CEO with strong relevant industry experience has been announced. At the current valuation no credit is being given for the stabilisation of the company which I believe should be possible.

Elsewhere, the share price of floorings manufacturer Victoria fell very sharply at the end of October 2018, following the release of an unexpected trading update. The company had sought to simplify and extend its debt finance arrangements, and in so doing was obliged to release commentary on trading and near-term strategy. The guidance for lower margins but higher revenues was taken badly by the market and the logic of the proposed bond issue was misunderstood, leaving the shares exposed to heavy short-selling. A meeting with company management provided comfort that the fundamental investment case remained intact. I have since conducted visits to three of the company’s manufacturing sites and my conviction in the stock remains. As such I have taken advantage of the significant share price weakness to increase the portfolio’s holding by almost half.

Motif Bio also made a significant dent in performance after the Food and Drug Administration (FDA) surprised the market and declined to approve its late stage novel antibiotic product, Iclaprim. Although the position had been reduced before the Complete Response Letter from the FDA had been issued, the value of the residual holding fell very sharply and impacted performance. Further sales were made subsequently such that the position is now de minimus.

In financials, a relatively new position in Plus500, a financial trading platform, proved problematic. The company guided downwards on revenues which called into question the quality and sustainability of the business and introduced significant volatility to the outlook for profits. On balance I decided to exit the position.

Strategy and outlook

Clarity and certainty are in very short supply and for now the market continues to favour perceived safe-havens and shun anything considered exposed to the potential downside of leaving the EU without a deal. What has become clear however, is the potential for a marked rotation in markets should this issue ever be resolved. During phases when the market considers this likely, shares in heavily de-rated domestically focused businesses have risen very sharply and their highly valued, internationally exposed counterparts have fallen back. Any development that enables the stockmarket to move beyond worrying about Brexit should see these so far abortive moves play out in full.

Markets are rightly concerned about Brexit. However, with an election in December and with domestic politics in such a state of upheaval, they have also been fearful of a hard-left socialist government emerging from the chaos. The risk cannot be fully discounted, but at the time of writing Labour has failed to close the gap in the polls versus the Conservatives. Furthermore, the leaders of other smaller parties continue to refuse to countenance a Corbyn-led coalition. The risk has therefore receded in my view.

Looking beyond the UK, China remains a significant worry. There is no sign of a much-needed boost to growth from the recent fiscal and monetary stimulus and the weakness in the exchange rate. With GDP and corporate profits stagnating, the foundations of China’s rapidly assembled debt mountain look more unsustainable than ever and corporate defaults are rising. The recently announced phase one trade deal fails to adequately address the critical issues of intellectual property and Huawei and is therefore little more than a fig leaf in the long-running trade dispute with the US. Meanwhile violent protests in Hong Kong continue and the rhetoric from the mainland suggests that patience is almost exhausted. US politicians disagree on most things but both sides seem united in their concern over Hong Kong and in the view that China poses a long-term threat to US interests and needs to be contained. The risk of a more serious US-China disagreement is therefore high.

US growth has likewise been damaged by the trade war but there are also signs that the domestic engine is misfiring with a flattening labour market and subdued housing demand. This is against the backdrop of a US fiscal position that looks unsustainable. Having conceded that interest rates have peaked, the Federal Reserve have now embarked on another round of monetary easing. Ostensibly to deal with a severe liquidity issue that arose in mid-September in the critically important repo market, the Fed have so far provided circa $250 billion and promised to provide an additional $60 billion per month. Markets have not yet made a connection between the fiscal deficit and this recent change to monetary policy but I believe this is the next step. The simple fact is that the US continues to live beyond its means. Overseas holders of treasuries have stopped expanding their holdings and domestic buyers now appear to be saturated too, so the government has run out of buyers of treasuries to fund this overspend. That leaves the Federal Reserve as buyer of last resort and threatens to take US monetary policy into a new realm with direct monetisation of government spending. This threatens the US dollar, both its value and also its status as the world’s reserve currency.

Gold has responded well to recent events but if a weaker dollar and yet more unconventional monetary policy do lie ahead, the gold shares in the portfolio should continue to offer protection and diversification to the portfolio and should show further progress. Critically an increase in the gold price is not required to justify holding the shares: all five of the companies held generate enough cash flow at spot gold prices for their valuations to be attractive. Any further upside in the price of the metal will make them more attractive still.

Low growth and low interest rates therefore look set to persist and central banks appear as determined as ever to do “whatever it takes” to avoid a debt deflation. No sooner has unconventional monetary policy been reversed than it is once again being introduced, such that the Japanification of other developed economies is now a regularly discussed theme. In this context Brexit is an immediate and specific issue for the UK but it is not the only challenge.

In fact the UK stockmarket is being affected by a far broader, global phenomenon that has seen Value de-rated very sharply relative to all other styles and factors. Predictability of revenues and earnings has always merited a premium rating and a lack of visibility has always attracted a discount. However, the current climate has produced a divergence in valuations that is extreme, levels only seen twice in the last thirty years in the teeth of stockmarket crashes in 2001 and 2008/9. At the top-end I believe we are now at the limits of the re-rating that has driven share price performance in recent years. The reciprocal of these high multiples is such low earnings yields that even if growth expectations are met, investing in these companies is unlikely to deliver an attractive total return. At the bottom end, earnings yields are so high that they alone deliver a compelling total return. Should these companies grow earnings in the way I believe possible or ever be considered worthy of a re-rating by the market, the total return from this point will be significant. This is not what the market expects. It is an increasingly contrarian approach that has seen underperformance in recent periods. Regardless, now is not the time to compromise on my conviction that valuation does matter.

So I am not changing the shape of the portfolio but have exited positions where conviction had fallen or where I saw some risk of missing earnings forecasts that was not adequately reflected in the valuation. In the process I have taken gearing down from 11.6% to 3.7%. This both reduces risk and creates scope to take advantage of any pronounced market weakness that may emerge in the future. I have also increased the weighting to gold miners to 9%. These holdings should provide insurance against tail risks, both geo-political (Iran/Saudi/US, US/China tensions, loss of the US dollar’s reserve currency status) and economic (a global credit event, widening US fiscal deficit, pronounced dollar weakness) and should in theory be inversely correlated with the market in times of stress.

I believe that a low valuation is the ultimate defensive attribute and a stretched valuation is a risk. The stockmarket seems instead to be interpreting a low valuation as evidence of a weak business and a high valuation to be the evidence of a company that can do no wrong. My aim as portfolio manager is “to provide shareholders with an attractive, real, long-term total return”. The fund today consists largely of companies that provide that return from the current level of capital generation: if earnings do not grow and current depressed multiples simply persist, I believe that objective can be met. If earnings grow as I anticipate or if a re-rating should occur, it should be exceeded.

James Goldstone, Portfolio Manager

The Strategic Report was approved by the Board of Directors on 28 November 2019.

Invesco Asset Management Limited

Company Secretary

INVESTMENTS IN ORDER OF VALUATION

AT 30 SEPTEMBER 2019

UK listed ordinary shares unless stated otherwise

Investments                           

		MARKET VALUE	% OF
COMPANY	SECTOR	£’000	PORTFOLIO
BP	Oil & Gas Producers	13,600	5.1
Barclays	Banks	11,781	4.4
Tesco	Food & Drug Retailers	10,647	4.0
British American Tobacco	Tobacco	9,581	3.6
AJ Bell	Financial Services	9,476	3.5
Royal Dutch Shell – B shares	Oil & Gas Producers	9,455	3.5
Coats	General Industrials	8,260	3.1
Barrick Gold	Mining
– Canadian listed		4,694	3.1
– UK listed		3,541
JD Sports Fashion	General Retailers	7,991	3.0
Babcock International	Aerospace & Defence	7,881	2.9
Top Ten Investments		96,907	36.2
Next	General Retailers	7,834	2.9
Royal Bank of Scotland	Banks	7,225	2.7
Melrose Industries	Construction & Materials	5,662	2.1
Johnson ServiceAIM	Support Services	5,024	1.9
Legal & General	Life Insurance	4,980	1.9
Future	Media	4,787	1.8
VictoriaAIM	Household Goods & Home Construction	4,720	1.8
PureTech Health	Pharmaceuticals & Biotechnology	4,545	1.7
RELX	Media	4,379	1.6
Endeavour Mining	Mining
– Canadian listed		4,149	1.5
Top Twenty Investments		150,212	56.1
Agnico Eagle Mines	Mining
– Canadian listed		4,118	1.5
Ultra Electronics	Aerospace & Defence	4,077	1.5
Hollywood Bowl	Travel & Leisure	4,036	1.5
CVSAIM	General Retailers	3,949	1.5
Summit Properties	Real Estate Investment & Services	3,935	1.5
MJ Gleeson	Household Goods & Home Construction	3,842	1.4
Secure Trust Bank	Banks	3,650	1.4
easyJet	Travel & Leisure	3,614	1.4
Phoenix Spree Deutschland	Real Estate Investment & Services	3,532	1.3
Newmont Goldcorp – US listed	Mining	3,452	1.3
Top Thirty Investments		188,417	70.4
Sigma CapitalAIM	Financial Services	3,400	1.3
PRS REIT	Real Estate Investment Trusts	3,339	1.2
Bushveld MineralsAIM	Mining	3,288	1.2
HomeServe	Support Services	3,217	1.2
IWG	Support Services	3,175	1.2
On the Beach	Travel & Leisure	3,149	1.2
Rolls-Royce	Aerospace & Defence	3,075	1.2
Fevertree DrinksAIM	Beverages	3,058	1.1
Harworth	Real Estate Investment & Services	2,977	1.1
Capita	Support Services	2,954	1.1
Top Forty Investments		220,049	82.2
XPS Pensions	Financial Services	2,922	1.1
Pollen Street Secured Lending
(formerly P2P Global Investments)	Equity Investment Instruments	2,877	1.1
IAG	Travel & Leisure	2,873	1.1
Essentra	Support Services	2,844	1.1
DS Smith	General Industrials	2,740	1.0
Chesnara	Life Insurance	2,584	1.0
BT	Fixed Line Telecommunications	2,546	1.0
Wheaton Precious Metals	Mining	2,461	0.9
N Brown	General Retailers	2,370	0.9
Burford CapitalAIM	Financial Services	2,211	0.8
Top Fifty Investments		246,477	92.2

   

		MARKET
		VALUE	% OF
COMPANY	SECTOR	£’000	PORTFOLIO
Pearson	Media	2,203	0.8
Ashtead	Support Services	1,958	0.7
McBride	Household Goods & Home Construction	1,883	0.7
Distribution Finance CapitalAIM	Financial Services	1,868	0.7
Cairn Homes	Household Goods & Home Construction	1,850	0.7
Horizon DiscoveryAIM	Pharmaceuticals & Biotechnology	1,739	0.7
Hadrian’s Wall Secured Investments	Equity Investment Instruments	1,501	0.6
Marwyn Value Investors	Equity Investment Instruments	1,346	0.5
Sherborne Investors Guernsey CAIM	Financial Services	1,315	0.5
TungstenAIM	Financial Services	1,147	0.4
Top Sixty Investments		263,287	98.5
Alfa Financial Software	Software & Computer Services	1,035	0.4
Safestyle UKAIM	General Retailers	958	0.4
Balfour Beatty	Construction & Materials	895	0.3
Amigo	Financial Services	763	0.3
TruFinAIM	Financial Services	207	0.1
NexeonUQ	Electronic & Electrical Equipment	83	—
Motif Bio	Pharmaceuticals & Biotechnology
– ADR		40
– AIM listed		16	—
– ADR warrants 9 Nov 2021		6
Countryside	Household Goods & Home Construction	44	—
EurovestechUQ	Financial Services	39	—
XTL Biopharmaceuticals – ADR	Pharmaceuticals & Biotechnology	6	—
Top Seventy Investments		267,379	100.0
Lombard Medical – US listed	Health Care Equipment & Services	1	—
MiradaAIM	Media	—	—
Jaguar Health	Pharmaceuticals & Biotechnology
– US indemnity sharesUQ		—	—
Total Investments 73 (2018: 87)		267,380	100.0

AIM: Investments quoted on AIM.

UQ: Unquoted investment.

ADR: American Depositary Receipts – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for ensuring that the annual financial report is prepared in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in UK and Republic of Ireland’. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the net return of the Company for that period.

In preparing these financial statements, the Directors are required to:

•        select suitable accounting policies and then apply them consistently;

•        make judgments and accounting estimates that are reasonable and prudent;

•        state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

•        prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records which are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with company law. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

The Directors confirm that:

•        in so far as they are aware, there is no relevant audit information of which the Company’s Auditors are unaware; and

•        each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditors are aware of that information.

The Directors of the Company, whose names are shown on page 18 of this Report, each confirm to the best of their knowledge that:

•        the financial statements, prepared in accordance with United Kingdom accounting standards on a going concern basis, give a true and fair view of the assets, liabilities, financial position and net return of the Company;

•        the annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

•        they consider that the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

Karen Brade

Chairman

Signed on behalf of the Board of Directors

28 November 2019

INCOME STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER

		2019			2018
		REVENUE	CAPITAL	TOTAL	REVENUE	CAPITAL	TOTAL
	NOTES	£’000	£’000	£’000	£’000	£’000	£’000
Losses on investments	9	—	(3,796)	(3,796)	—	(8,653)	(8,653)
Gains/(losses) on foreign
exchange		—	68	68	—	(166)	(166)
Income	2	8,732	279	9,011	8,806	2,499	11,305
Investment management
and performance related fees	3	(235)	(704)	(939)	(261)	(785)	(1,046)
Other expenses	4	(392)	—	(392)	(408)	—	(408)
Net return before finance
costs and taxation		8,105	(4,153)	3,952	8,137	(7,105)	1,032
Finance costs	5	(567)	(1,662)	(2,229)	(564)	(1,655)	(2,219)
Return before taxation		7,538	(5,815)	1,723	7,573	(8,760)	(1,187)
Taxation	6	(22)	—	(22)	(21)	—	(21)
Return after taxation for the
financial year		7,516	(5,815)	1,701	7,552	(8,760)	(1,208)
Return per ordinary share
Basic	7	55.6p	(43.0)p	12.6p	55.9p	(64.8)p	(8.9)p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income/(expense) and therefore no additional statement of comprehensive income/(expense) is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 SEPTEMBER

		CALLED UP	SHARE	CAPITAL
		SHARE	PREMIUM	REDEMPTION	CAPITAL	REVENUE
		CAPITAL	ACCOUNT	RESERVE	RESERVE	RESERVE	TOTAL
	NOTES	£’000	£’000	£’000	£’000	£’000	£’000
At 30 September 2017		6,760	3,449	466	253,648	11,064	275,387
Return after taxation		—	—	—	(8,760)	7,552	(1,208)
Dividends paid	8	—	—	—	—	(8,033)	(8,033)
At 30 September 2018		6,760	3,449	466	244,888	10,583	266,146
Return after taxation		—	—	—	(5,815)	7,516	1,701
Dividends paid	8	—	—	—	—	(10,241)	(10,241)
At 30 September 2019		6,760	3,449	466	239,073	7,858	257,606

The accompanying notes are an integral part of these statements.

BALANCE SHEET

AT 30 SEPTEMBER

		2019	2018
	NOTES	£’000	£’000
Fixed assets
Investments held at fair value through profit or loss	9	267,380	296,692
Current assets
Debtors	10	782	1,663
Cash and cash equivalents		22,557	1,078
		23,339	2,741
Creditors: amounts falling due within one year	11	(1,042)	(1,250)
Net current assets		22,297	1,491
Total assets less current liabilities		289,677	298,183
Creditors: amounts falling due after more than one year	12	(32,071)	(32,037)
Net assets		257,606	266,146
Capital and reserves
Called up share capital	13	6,760	6,760
Share premium account	14	3,449	3,449
Capital redemption reserve	14	466	466
Capital reserve	14	239,073	244,888
Revenue reserve	14	7,858	10,583
Total shareholders’ funds		257,606	266,146
Net asset value per ordinary share – basic
– debt at par	15	1,905.5p	1,968.7p
– debt at market value	15	1,862.4p	1,921.7p

The financial statements on pages 34 to 51 were approved and authorised for issue by the Board of Directors on 28 November 2019.

Signed on behalf of the Board of Directors

Karen Brade

Chairman

The accompanying notes are an integral part of these statements.

CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER

		2019	2018
	NOTES	£’000	£’000
Cash flow from operating activities
Net return before finance costs and taxation		3,952	1,032
Tax on overseas income	6	(22)	(21)
Adjustments for:
Purchase of investments		(57,894)	(111,227)
Sale of investments		84,268	99,172
		26,374	(12,055)
Scrip dividends		(211)	(114)
Losses on investments held at fair value		3,796	8,653
Net cash movement from derivative instruments
– currency hedges		(28)	87
Decrease in debtors		30	8
Decrease in creditors		(13)	(12)
Net cash inflow/(outflow) from operating activities		33,878	(2,422)
Cash flow from financing activities
Interest and facility fee paid on overdraft		(18)	(8)
Interest paid on debenture stocks		(2,165)	(2,165)
Preference dividends paid		(12)	(12)
Net equity dividends paid	8	(10,241)	(8,070)
Return of unclaimed dividends	8	37	—
Net cash outflow from financing activities		(12,399)	(10,255)
Net increase/(decrease) in cash and cash equivalents		21,479	(12,677)
Cash and cash equivalents at start of the year		1,078	13,755
Cash and cash equivalents at the end of the year		22,557	1,078
Reconciliation of cash and cash equivalents to
the Balance Sheet is as follows:
Cash at custodian		107	1,078
Short-Term Investment Company (Global Series) plc,
money market fund		22,450	—
Cash and cash equivalents		22,557	1,078
Cash flow from operating activities includes:
Dividends received		8,615	10,933
Interest received		172	172
		2019	2018
		£’000	£’000
Changes in liabilities arising from financing activities:
Opening balance on debenture stock and preference shares		32,037	32,003
Increase due to amortisation of discount and issue expenses
on debenture stock in the year		34	34
Closing balance as at 30 September		32,071	32,037

The accompanying notes are an integral part of these statements.

NOTES TO THE FINANCIAL STATEMENTS

1.       Accounting Policies

Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end.

A summary of the principal accounting policies adopted by the Company is set out below.

(a)      Basis of Preparation

(i)            Accounting Standards applied

The financial statements have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments and derivatives, in accordance with FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’, the Companies Act 2006 and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (SORP).

The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019 and early adoption is encouraged. The Company has chosen to early adopt the revised SORP. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 9. The result of this change has no impact on the net asset value or total return for both the current year and prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

(ii)           Functional and presentation currency

The financial statements are presented in Sterling, which is the Company’s functional and presentation currency and the currency in which the Company’s share capital and expenses, as well as a majority of its assets and liabilities, are denominated.

(iii)          Significant Accounting Estimates and Judgements

The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year.

(b)      Financial Instruments

The Company has chosen to apply the provisions of sections 11 and 12 of FRS 102 in full in respect of financial instruments.

(i)            Recognition of financial assets and financial liabilities

The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.

(ii)           Derecognition of financial assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.

(iii)          Derecognition of financial liabilities

The Company derecognises financial liabilities when its obligations are discharged, cancelled or expired.

(iv)          Trade date accounting

Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.

(v)           Classification and measurement of financial assets and financial liabilities

Financial assets

The Company’s investments are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy, and this is also the basis on which investment information is provided internally to the Board.

Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed as part of gains and losses on investments in the income statement, and are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value based on recommendations from Invesco’s European Unquoted Pricing Committee, which in turn is guided by the International Private Equity and Venture Capital Valuation Guidelines issued in 2015, using valuation techniques such as earnings multiples, recent arm’s length transactions, net assets and milestones attained.

Financial liabilities

Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

(c)      Amounts recognised in Capital Reserves

The following are included in the income statement and recognised in capital: realised gains or losses on sales of investments; realised gains or losses on foreign currency and any forward currency contracts; management fees and finance costs allocated to capital; and other capital charges, and unrealised increases or decreases in the valuation of investments at the year end (including the related foreign exchange gains and losses).

(d)      Cash and cash equivalents

Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.

(e)      Income

Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent to the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserve. Special dividends are taken to income unless they arise from a return of capital, when they are allocated to capital in the income statement. Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

(f)      Management and Performance-related fees

Investment management fees are recognised on an accruals basis and are charged 75% to capital and 25% to revenue. This is in line with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company.

Performance-related fees are calculated as detailed in the Directors’ Report and are charged wholly to capital as they arise mainly from capital returns on the investment portfolio.

(g)      Expenses and Finance costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method, with the debentures being held at amortised cost. The finance costs of debt are allocated 75% to capital and 25% to revenue for the reasons outlined in (f) above. The 5% cumulative preference shares are classified as a liability and therefore the dividends payable on these shares are classified as finance costs and charged to revenue in the income statement.

(h)      Hedging

Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are included in capital.

(i)       Foreign Currency Translation

Transactions in foreign currency, whether of a revenue or capital nature, are translated to Sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to Sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to capital or to revenue, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.

(j)       Taxation

Foreign dividends that suffer withholding tax at source are shown gross, with the corresponding tax charge in the income statement.

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.

A deferred tax asset has not been recognised in respect of surplus management expenses and losses on loan relationships, as the Company is unlikely to have sufficient future taxable revenue to offset against these.

(k)      Dividends Payable

Dividends are not recognised in the financial statements unless there is an obligation to pay at the balance sheet date.

2.       Income

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

	2019	2018
	£’000	£’000
Income from investments
UK dividends	7,224	7,522
UK special dividends	497	236
Income from interest distributions	171	171
Overseas dividends	593	716
Scrip dividends	211	114
	8,696	8,759
Other income
Deposit interest	1	1
Other	35	46
	36	47
	8,732	8,806

Special dividends of £279,000 were recognised in capital during the year (2018: £2,499,000).

3.       Investment Management and Performance-related Fees

This note shows the fees paid to the Manager. These are made up of the management fee payable quarterly and a performance-related fee calculated annually. The latter is only payable when the portfolio outperforms the benchmark index plus its hurdle, which is +1.25% per annum.

	2019			2018
	REVENUE	CAPITAL	TOTAL	REVENUE	CAPITAL	TOTAL
	£’000	£’000	£’000	£’000	£’000	£’000
Investment management fee	235	704	939	261	785	1,046
Performance-related fee	—	—	—	—	—	—
	235	704	939	261	785	1,046

Details of the investment management agreement are given on page 56 in the Directors’ Report.

At 30 September 2019, £236,000 (2018: £256,000) was accrued in respect of the investment management fee. There was no performance-related fee provision for the year (2018: £nil).

4.       Other Expenses

The other expenses of the Company are presented below.

	2019	2018
	£’000	£’000
Directors’ remuneration(i)	122	125
Auditors’ fees(ii):
– for audit of the Company's annual financial statements	26	26
Other expenses(iii)	244	257
	392	408

(i)       The Director’s Remuneration Report provides further information on Directors’ fees.

(ii)      Auditors’ fees include expenses but excludes VAT. VAT is included in other expenses.

(iii)     Other expenses include: £9,400 (2018: £7,700) of employer’s National Insurance payable on Directors’ remuneration. As at 30 September 2019, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £9,800 (2018: £10,100).

5.       Finance Costs

Finance costs arise on any borrowing that the Company has, with the main borrowing being the £32 million of Debenture stocks (see note 12) and an uncommitted bank overdraft facility (see note 11).

	2019			2018
	REVENUE	CAPITAL	TOTAL	REVENUE	CAPITAL	TOTAL
	£’000	£’000	£’000	£’000	£’000	£’000
Interest payable on borrowings
repayable not by instalment:
Fees due on overdraft facility	3	7	10	—	—	—
Payable on bank borrowings	2	6	8	2	6	8
Debenture stock repayable
in 1 to 3 years	136	407	543	136	407	543
Debenture stock repayable
after 3 years	414	1,242	1,656	414	1,242	1,656
	555	1,662	2,217	552	1,655	2,207
Dividends on 5% cumulative
preference shares	12	—	12	12	—	12
	567	1,662	2,229	564	1,655	2,219

6.       Taxation

As an investment trust, the Company pays no tax on capital gains and as the Company principally invests in UK assets, it has little overseas tax. This note shows details of the tax charge and why no deferred tax is required to provide for tax that is expected to arise in the future due to differences in accounting and tax bases.

(a)      Current Tax Charge

		2019	2018
		REVENUE	REVENUE
		£’000	£’000
Overseas tax		22	21
(b) Reconciliation of Total Tax Charge
		2019	2018
		£’000	£’000
Total return before taxation		1,723	(1,187)
UK Corporation Tax effective rate of 19% (2018: 19%)		327	(226)
Effect of:
– Non-taxable UK dividends		(1,492)	(1,931)
– Non taxable scrip dividends		(40)	(22)
– Non-taxable overseas dividends		(110)	(141)
– Non-taxable losses on investments		721	1,644
– Non-taxable (gains)/losses on foreign exchange		(13)	32
– Excess of allowable expenses over taxable income		607	642
– Disallowable expenses		—	2
– Overseas taxation		22	21
Total Tax charge for the year	22		21

(c)      Factors that may Affect Future Tax Changes

The Company has cumulative excess management expenses of £78,482,000 (2018: £75,291,000) that are available to offset future taxable revenue.

A deferred tax asset of £13,342,000 (2018: £12,800,000) at 17% (2018: 17%) has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset.

7.       Return per Ordinary Share

Basic return per share is the amount of gain (or loss) generated for the financial year divided by the number of ordinary shares in issue. The calculation is based on the weighted average number of shares in issue during the year.

The basic revenue, capital and total return per ordinary share is based on each of the returns after taxation and on 13,518,799 (2018: 13,518,799) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

8.       Dividends

Dividends represent the return of income less expenses to shareholders. Dividends are paid as an amount per ordinary share held.

	2019		2018
	PENCE	£’000	PENCE	£’000
Dividends paid and recognised in the year:
Second interim dividend (prior year)	38.00	5,137	37.00	5,002
Special dividend (prior year)	1.75	237	4.70	635
First interim dividend	24.00	3,245	18.00	2,433
Second interim dividend	12.00	1,622	—	—
	75.75	10,241	59.70	8,070
Return of unclaimed dividends from
previous years	—		(37)
	75.75	10,241	59.70	8,033

   

	2019		2018
	PENCE	£’000	PENCE	£’000
Dividends payable in respect of the year:
First interim dividend	24.00	3,245	18.00	2,433
Second interim dividend	12.00	1,622	38.00	5,137
Third interim dividend	20.00	2,704	—	—
	56.00	7,571	56.00	7,570
Special dividend	3.67	496	1.75	237
	59.67	8,067	57.75	7,807

The Company has moved to a quarterly dividends model and, as a consequence of the timing of this decision, will pay three interim dividends this year: June, September and December, the third interim being in lieu of a final dividend (2018 second interim being in lieu of final dividend).

9.       Investments

The portfolio is made up primarily of investments which are listed, i.e. traded on a recognised stock exchange (including AIM), and some unlisted investments. Gains and losses are either:

–        realised, usually arising when investments are sold; or

–        unrealised, being the difference from cost on those investments still held at the year end.

Analysis of Investments by Listing Status
	2019	2018
	£’000	£’000
Investments listed on a recognised stock exchange	267,258	285,654
Unlisted investments	122	11,038
	267,380	296,692

(b)      Analysis of Investment Gains and Losses

	2019		2018
	LISTED	UNLISTED	TOTAL	TOTAL
	£’000	£’000	£’000	£’000
Opening book cost	294,910	8,624	303,534	277,620
Opening investment holding
(losses)/gains	(9,256)	2,414	(6,842)	17,158
Opening valuation	285,654	11,038	296,692	294,778
Analysis of transactions made during
the year
Purchases at cost	57,910	—	57,910	110,727
Sales proceeds received	(79,602)	(3,824)	(83,426)	(100,160)
Losses on investments	(3,772)	(24)	(3,796)	(8,653)*
Transfer between listed and unlisted	7,068	(7,068)	—	—
Closing valuation	267,258	122	267,380	296,692
Closing book cost	267,543	4,155	271,698	303,534
Closing investment holding losses	(285)	(4,033)	(4,318)	(6,842)
Closing valuation	267,258	122	267,380	296,692

The Company received £83,426,000 (2018: £100,160,000) from investments sold in the year. The book cost of these investments when they were purchased was £89,778,000 (2018: £84,813,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.

*Due to the early adoption of the revised SORP issued in October 2019 (see Accounting Policies note 1(a)(i) on page 37). The losses on investments figure for the year ended 30 September 2018 is constituted of the following:

	£’000
Net realised gains on sales	15,347
Investment holding losses in the year	(24,000)
Losses on investments	(8,653)

(c)      Transaction Costs

Transaction costs on purchases of £198,000 (2018: £410,000) and on sales of £227,000 (2018: £72,000) are included within gains and losses on investments in the income statement.

10.     Debtors

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

	2019	2018
	£’000	£’000
Amounts due from brokers	146	988
Overseas withholding tax recoverable	286	275
Unrealised profit on forward currency contracts	98	70
Prepayments and accrued income	252	293
Unclaimed dividends from previous years recoverable	—	37
	782	1,663

11.     Creditors: amounts falling due within one year

Creditors are amounts which must be paid by the Company, and include any amounts due to brokers for the purchase of investments or amounts owed to suppliers, such as the Manager and auditors, and bank overdraft.

	2019	2018
	£’000	£’000
Amounts due to brokers	—	195
Accruals	1,042	1,055
	1,042	1,250

The Company has an uncommitted bank overdraft facility of up to £15 million, renewable on 18 September 2020. Interest payable on the facility is at a margin over base rate. The covenant under the facility requires total assets not to fall below £100 million.

12.     Creditors: amounts falling due after more than one year

Long term creditors consist of £32 million of debentures and a small issue of preference shares. These form the principal borrowings of the Company and the fixed interest that the Company pays is reported under note 5 ‘Finance Costs’.

	2019	2018
	£’000	£’000
Debenture Stock:
7.75% redeemable 1 October 2020	7,000	7,000
6.5% redeemable 27 April 2023	24,968	24,968
	31,968	31,968
Discount and issue expenses on debenture stock	(147)	(181)
	31,821	31,787
5% cumulative preference shares of £1 each	250	250
	32,071	32,037

The debentures rank pari passu with each other, and ahead of shareholders, and are secured by floating charge over the assets of the Company.

The debenture stocks both pay interest twice a year; the 7.75% Debenture Stock 2020 for the six months ended 31 March and 30 September, and the 6.5% Debenture Stock 2023 for the six months to 27 April and 27 October. Both debenture stocks generally make the payments in April and October. The preference shares dividend is paid bi-annually in March and September.

13.     Called up share capital

Ordinary share capital represents the total number of shares in issue, for which dividends accrue.

	2019		2018
	NUMBER	£’000	NUMBER	£’000
Allotted, called-up and fully paid:
Ordinary shares of 50p each	13,518,799	6,760	13,518,799	6,760

The Company is limited by shares. The ordinary shares are fully participating and on a poll carry one vote per £1 nominal held.

No shares were issued or bought back during the year (2018: nil).

14.     Reserves

This note explains the different reserves that have arisen over the years. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.

The share premium account comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 50 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital arising from the buy back and cancellation of shares; it, and the share premium account, are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date and cumulative realised gains/(losses) on the disposal of investments. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve. Share buy backs can be funded from the capital reserve.

The revenue reserve shows the net revenue retained after payment of dividends. The revenue and capital reserves are distributable by way of dividend.

15.     Net Asset Value

The Company’s total net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The following shows the shareholders’ funds and net asset value (NAV) in pence per share, together with a reconciliation of NAV with debt at par to NAV with debt at market value. The difference in the NAVs arises from the valuation of the debenture stocks and preference shares. The number of shares in issue at the year end is shown in note 13.

	2019		2018
	SHAREHOLDERS’	NAV	SHAREHOLDERS’	NAV
	FUNDS	PER SHARE	FUNDS	PER SHARE
	£’000	PENCE	£’000	PENCE
NAV – debt at par	257,606	1,905.5	266,146	1,968.7
Add back: debt at par, after
amortised costs (note 12)	32,071	237.2	32,037	237.0
Deduct: debt at market value
Less:   (note 17)	(37,905)	(280.3)	(38,392)	(284.0)
NAV – debt at market value	251,772	1,862.4	259,791	1,921.7

Only the basic NAV is shown. There is no dilution in this or the previous year.

16.     Financial Instruments

Financial instruments comprise the Company’s investment portfolio, derivative instruments (if any) as well as its cash, and any borrowings, debtors and creditors. This note sets out the Company’s financial instruments and the risks related to them.

The Company’s financial instruments comprise its investment portfolio (as shown on pages 16 to 17), derivatives, cash, borrowings, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured. The Company did not have any exposure to other derivatives during the year, apart from the use of forward currency contracts to hedge the Euro exposure (2018: same).

The principal risks that an investment company faces in its portfolio management activities are set out below:

Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:

Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;

Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and

Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.

Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.

Credit risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Directors’ Report.

An investment company invests in equities and other investments for the long term so as to meet its investment objective and policies. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for distribution by way of dividends.

The risks applicable to the Company and the policies the Company used to manage these risks for the two years under review follow.

Market risk

The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed under Board Responsibilities on page 54. No derivatives or hedging instruments are utilised to manage market risk. Borrowings are used to enhance returns, however, this increases the Company’s exposure to market risk and volatility.

Currency risk

The majority of the Company’s assets, liabilities and income are denominated in Sterling. There is some exposure to US dollars, Swiss francs, Canadian dollars and the Euro. The Euro was hedged by the use of forward currency contracts.

Management of the currency risk

The Manager monitors the Company’s exposure to foreign currencies daily and reports to the Board on a regular basis.

Forward currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates which are also used to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policies. All contracts are limited to currencies and amounts commensurate with asset exposure to those currencies.

Income denominated in foreign currencies is converted to Sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

Currency exposure

The fair values of the Company’s monetary items that had currency exposure at 30 September are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

	30 SEPTEMBER 2019
	Canadian		Swiss
	Dollar	Euro	Franc	US Dollar
	£’000	£’000	£’000	£’000
Debtors (due from brokers and dividends)	—	44	282	1
Forward currency contracts	—	(5,799)	—	—
Foreign currency exposure on net
monetary items	—	(5,755)	282	1
Investments at fair value through profit or
loss that are equities	8,843	5,785	—	10,084
Total net foreign currency exposure	8,843	30	282	10,085
	30 SEPTEMBER 2018
	Canadian		Swiss
	Dollar	Euro	Franc	US Dollar
	£’000	£’000	£’000	£’000
Debtors (due from brokers and dividends)	—	1	272	35
Forward currency contracts	(3,126)	(8,525)	—	—
Foreign currency exposure on net
monetary items	(3,126)	(8,524)	272	35
Investments at fair value through profit or
loss that are equities	3,258	8,340	—	6,326
Total net foreign currency exposure	132	(184)	272	6,361

The above amounts may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout each year.

Currency sensitivity

The table below illustrates the sensitivity of net assets and of net return after taxation for the year using the exchange rates shown below. It is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts that offset the effects of changes in currency exchange rate.

	2019	2018
£/Canadian dollar	±2.7%	±2.6%
£/Euro	±2.0%	±0.9%
£/Swiss franc	±3.2%	±2.2%
£/US dollar	±2.5%	±3.0%

The above percentages have been determined based on the market volatility in the year, using the standard deviation of Sterling’s daily fluctuation to the relevant foreign currencies against the mean during the year.

If Sterling were to weaken against the Canadian dollar, Euro, US dollar or Swiss franc to this extent, this would have the following effect:

	30 SEPTEMBER 2019
	CANADIAN		SWISS
	DOLLAR	EURO	FRANC	US DOLLAR
	£’000	£’000	£’000	£’000
Income statement – return after taxation
Revenue return	—	1	9	5
Capital return	239	—	—	252
Total return after taxation for the year	239	1	9	257
Effect on net asset value	0.1%	0.0%	0.0%	0.1%
	30 SEPTEMBER 2018
	Canadian		Swiss
	Dollar	Euro	Franc	US Dollar
	£’000	£’000	£’000	£’000
Income statement – return after taxation
Revenue return	—	—	6	3
Capital return	3	(2)	—	190
Total return after taxation for the year	3	(2)	6	193
Effect on net asset value	0.0%	0.0%	0.0%	0.1%

If sterling were to strengthen by the same amounts, the effect would be the converse.

In the opinion of the Directors, the above sensitivity analysis is not representative of the year as a whole, since the level of exposure may change frequently as part of the currency risk management process of the Company.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on the variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian. The Company has an uncommitted overdraft facility of up to £15 million available for investment and settlement purposes, details are shown in note 11. Use of the overdraft has been infrequent over the two years being reported on and at the year end none was drawn down (2018: none).

At the balance sheet date the Company had structural debt comprising £32 million of debenture stocks and £250,000 of 5% cumulative preference shares. The interest rates on the debenture stocks and preference shares are fixed and details are shown in notes 5 and 12.

The Company’s portfolio is substantially invested in equities which are not directly exposed to interest rate risk.

Other price risk

Other price risk (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, and it is the business of the Manager to manage the portfolio to achieve the best returns.

Management of other price risk

The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated objectives and policies and to review investment performance.

The Company’s portfolio is the result of the Manager’s investment process and as a result is not correlated with the Company’s benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.

Based on the equity portfolio value of £267,380,000 (2018: £296,692,000), if the value of the portfolio rose or fell by 1% at the balance sheet date, the net return after tax for the year and net assets would increase or decrease by £2.67 million (2018: £2.97 million) respectively; in calculating these amounts no adjustment has been made for other variables including management fees.

Liquidity risk

Liquidity risk is minimised as the majority of the Company’s investments are readily realisable securities which can be sold to meet funding commitments if necessary. In addition, the bank overdraft facility provides for additional funding flexibility. No special arrangements have been made in connection with the liquidity of any of the Company’s assets.

Liquidity risk exposure

The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

	2019				2018
	LESS		MORE		LESS		MORE
	THAN	THREE TO	THAN		THAN	THREE TO	THAN
	THREE	TWELVE	ONE		THREE	TWELVE	ONE
	MONTHS	MONTHS	YEAR	TOTAL	MONTHS	MONTHS	YEAR	TOTAL
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000
Debenture stocks	—	—	31,968	31,968	—	—	31,968	31,968
Interest on debenture
stocks	811	1,354	4,870	7,035	811	1,354	7,035	9,200
Amounts due to
brokers	—	—	—	—	195	—	—	195
Other creditors
and accruals	337	—	—	337	351	—	—	351
	1,148	1,354	36,838	39,340	1,357	1,354	39,003	41,714

The 5% cumulative preference shares do not have a fixed repayment date and are, as a result, not shown in the above table. Details are shown in note 12 of the financial statements.

Credit risk

Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved and appropriately regulated counterparties. During the year cash balances were limited to a maximum of 6% of gross assets with any one deposit taker and 12.5% of gross assets for holdings in the Short-Term Investments Company (Global Series) plc (STIC), a triple A rated money market fund which invests in high quality sterling denominated money market investments such as commercial paper, certificates of deposit, time deposits and asset-backed commercial paper. Only deposit takers approved by the Board are used.

The portfolio may be adversely affected if the custodian of the Company’s assets suffers insolvency or other financial difficulties. The risk associated with failure of the custodian is mitigated by the appointment of a depositary. The depositary is ultimately responsible for safekeeping of the Company’s assets and is strictly liable for the recovery of financial instruments in the event of loss. As part of the Board’s risk management and control monitoring, the Board reviews the custodian’s annual control report and the Manager’s management of the relationship with the custodian.

17.     Fair Value

The fair values of the financial assets and financial liabilities, other than debentures and preference shares, are either carried in the balance sheet at their fair value (investments), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals, cash at bank and overdraft).

Fair Value Hierarchy Disclosures

Nearly all of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures. The three levels set out in FRS 102 follow:

Level 1 – The unadjusted quoted price 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 (i.e. developed using market data) for  the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability. The valuation techniques used by the Company are explained in the accounting policies note.

	2019				2018
	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL	LEVEL 1	LEVEL 2	LEVEL 3	TOTAL
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000
Financial assets
designated at fair
value through
profit or loss:
Quoted investments:
Equities	267,252	—	—	267,252	285,480	—	—	285,480
Other securities	—	6	—	6	—	174	—	174
Unquoted investments:
Equities	—	—	122	122	—	—	11,038	11,038
Derivative financial
instruments:
Currency hedges	—	98	—	98	—	70	—	70
Total for financial
assets	267,252	104	122	267,478	285,480	244	11,038	296,762

During the year AJ Bell was admitted to the Main Market of the London Stock Exchange and was transferred from Level 3 (unquoted) to Level 1 (2018: £7,068,000). In addition, Oxford Sciences Innovation, previously included in Level 3, was sold (2018: £3,746,000) and Halosource (2018: £19,000) was also transferred to Level 3 and subsequently written off.

With regard to unobservable inputs used in the valuation of unquoted investments, there are no reasonably possible alternative assumptions which would produce a material change to the Company’s net asset value.

The book cost and fair value of the debentures and the preference shares based on the offer value at the balance sheet date follow.

	BOOK	FAIR	BOOK	FAIR
	VALUE	VALUE	VALUE	VALUE
	2019	2019	2018	2018
	£’000	£’000	£’000	£’000
Debentures payable in less than 5 years:
7.75% Debenture Stock 2020	7,000	7,491	7,000	7,946
6.5% Debenture Stock 2023	24,968	30,168	24,968	30,200
Discount on issue of debentures	(147)	—	(181)	—
	31,821	37,659	31,787	38,146
5% Cumulative preference shares of £1 each	250	246	250	246
	32,071	37,905	32,037	38,392

18.     Capital Management

The Company’s capital, or equity, is represented by its net assets which are managed to achieve the Company’s investment objective set out on page 6.

The Company’s total capital employed at 30 September 2019 was £289,677,000 (2018: £298,183,000) comprising borrowings of £32,071,000 (2018: £32,037,000) and equity share capital and other reserves of £257,606,000 (2018: £266,146,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on page 6, including that borrowings may be used to provide gearing of the equity portfolio. At the balance sheet date, net gearing, with debt at par, was 3.7% (2018: 11.6%). The Company’s policies and processes for managing capital are unchanged from the preceding year.

The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section on pages 8 and 9. These also explain that the Company is able to gear and that gearing will amplify the effect on equity of changes in the value of the portfolio.

The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments.

The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by section 1159 Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the overdraft facility, by the terms imposed by the custodian. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year.

Borrowings comprise debenture stocks, preference shares and an uncommitted bank overdraft facility, details of which are contained in note 12.

19.     Contingencies, Guarantees and Financial Commitments

Contingencies or guarantees that the Company will or has given would be disclosed in this note if any existed. Likewise any commitments, being those amounts that the Company is contractually required to pay in the future as long as the other party meets their obligations.

There were no contingencies, guarantees or other financial commitments of the Company at the year end (2018: £nil).

20.                    Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or influence over the Company. Under accounting standards, the Manager is not a related party.

Under UK GAAP, the Company has identified the Directors as related parties. The Directors' remuneration and interests have been disclosed on pages 25 and 26 with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager's services and fees are disclosed in the Directors' Report on pages 56 and 57 and in note 3.

21.        Post Balance Sheet Events

Any significant events that occurred after the Company’s financial year end but before the signing of the Balance Sheet will be shown here.

There are no significant events after the end of the reporting period requiring disclosure.

The financial information set out above does not constitute the Company’s statutory accounts for the year ended 30 September 2019.  The financial information for the year ended 30 September 2018 is derived from the statutory accounts for 2018, which have been delivered to the Registrar of Companies.  The 2018 accounts were audited and the audit report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498 of the Companies Act 2006.  The statutory accounts for the year ended 30 September 2019 have been finalised and audited but have not yet been delivered to the Registrar of Companies. 

The audited annual financial report will be available to shareholders shortly.  Copies may be obtained during normal business hours from the Company’s administration office, 2nd Floor, 43-45 Portman Square, London W1H 6LY and are available via the Company’s section of the Manager’s website at www.invesco.co.uk/keystone .

The Annual General Meeting will be held on 11 February 2020 at 12.30pm at 43-45 Portman Square, London, W1H 6LY.

By order of the Board

Invesco Asset Management Limited

28 November 2019

Contact:

Shilla Pindoria         0203 753 1000