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LEI: 549300JZQ39WJPD7U596
Invesco Select Trust plc
Annual Financial Report for the year ended 31 May 2022
The following text is extracted from the Annual Financial Report of the Company for the year ended 31 May 2022. All page numbers below refer to the Annual Financial Report which will be made available on the Company's website.
Financial Performance
Cumulative Total Returns(1)(3)
To 31 May 2022
| One | Three | Five | |
| UK Equity Share Portfolio | Year | Years | Years |
| Net Asset Value | 6.8% | 25.9% | 21.1% |
| Share Price | 3.0% | 13.6% | 10.4% |
| FTSE All–Share Index | 8.3% | 18.4% | 22.2% |
| One | Three | Five? | |
| Global Equity Income Share Portfolio | Year | Years | Years |
| Net Asset Value | 9.6% | 39.0% | 47.9% |
| Share Price | 4.4% | 30.0% | 37.3% |
| MSCI World Index (£) | 7.4% | 43.0% | 62.9% |
| One | Three | Five? | |
| Balanced Risk Allocation Share Portfolio | Year | Years | Years |
| Net Asset Value | 0.3% | 21.8% | 26.1% |
| Share Price | –5.2% | 11.6% | 15.7% |
| Composite Benchmark Index(2) | –6.1% | 11.8% | 20.3% |
| ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum | 5.1% | 16.1% | 27.3% |
| One | Three | Five? | |
| Managed Liquidity Share Portfolio | Year | Years | Years |
| Net Asset Value | –0.3% | 4.5% | 6.1% |
| Share Price | –4.0% | –2.0% | –2.0% |
Year end Net Asset Value, Share Price and Discount
| Net Asset | Share | ||
| Value | Price | ||
| Share Class | (pence) | (pence) | Discount |
| UK Equity | 194.35 | 175.00 | (10.0)% |
| Global Equity Income | 249.00 | 229.00 | (8.0)% |
| Balanced Risk Allocation | 169.87 | 154.50 | (9.0)% |
| Managed Liquidity | 106.92 | 97.00 | (9.3)% |
(1) Alternative Performance Measure (APM). See Glossary of Terms and Alternative Performance Measures on pages 116 to 119 of the financial report for details of the explanation and reconciliations of APMs.
(2) With effect from 1 June 2021, the benchmark adopted by the Balanced Risk Allocation Portfolio is comprised of 50% 30-year UK Gilts Index, 25% GBP hedged MSCI World Index (net) and 25% GBP hedged S&P Goldman Sachs Commodity Index. Prior to this, the benchmark was ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum. Accordingly, both the new and old benchmark are shown.
(3) Source: Refinitiv/Bloomberg.
Chairman’s Statement
Highlights
– UK Equity Share, Global Equity Income Share and Balanced Risk Allocation Share Portfolios delivered positive NAV performance over the period, with the Global Equity Income and Balanced Risk Allocation Share Portfolios outperforming their respective benchmark indices.
– Dividends rose to 6.70p per UK Equity Share, 7.15p per Global Equity Income Share and 1.00p per Managed Liquidity Share.
– Net assets in the Global Equity Income Share Portfolio increased to £62.6m, with net conversions into that portfolio.
– Period of consolidation following completion of the business combination with Invesco Income Growth Trust in April 2021, one of the results of which are lower ongoing charges.
The Company
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities.
The investment objectives and policies of each of the portfolios are set out on pages 39 to 41.
The Company’s structure enables shareholders to adjust asset allocation to reflect their views of the prevailing market outlook. As set out on page 2, shareholders have the opportunity to convert between share classes, free of capital gains tax, every three months.
Performance
It was pleasing to note, given the global macroeconomic backdrop, that three of the four portfolios delivered positive NAV performance, with the Global Equity Income Share Portfolio and Balanced Risk Allocation Share Portfolio outperforming their respective benchmarks over the period.
The UK Equity Share Portfolio has been jointly managed by Ciaran Mallon and James Goldstone over the period. The portfolio saw positive NAV total return performance during the year, although underperformed the benchmark by 1.5%. The NAV total return of the UK Equity Share Portfolio over the year was 6.8%, which compares with the total return of 8.3% from the FTSE All-Share Index. The share price total return was 3.0%. Market sentiment continued to be dominated by the ongoing impact of the pandemic on the economy and inflationary pressures, particularly around energy costs, which were then worsened by the war in Ukraine.
The Global Equity Income Portfolio, managed by Stephen Anness, also saw positive NAV total return performance, outperforming the benchmark total return by 2.2%. The NAV total return of the Global Equity Income Share Portfolio over the year was 9.6%, which compares with the total return from the MSCI World Index (£) of 7.4%. The share price total return was 4.4%. The portfolio’s stock selection remained strong, particularly in the US and UK, where overweight exposure to consumer staples was a positive element to performance.
The Balanced Risk Allocation Portfolio, by its very nature, has a combination of equities, bonds and commodities exposures. It is managed by Invesco’s Global Asset Allocation Team, based in Atlanta. During the period under review, NAV total return of the Balanced Risk Allocation Share Portfolio was 0.3%, which outperformed the total return from its composite benchmark by 6.4%. The share price total return was -5.2%. The positive NAV performance was largely driven by the portfolio’s exposure to commodity markets, particularly energy commodities and industrial metals, due to a combination of strong demand twinned with supply constraints.
The NAV total return on the Managed Liquidity Portfolio, managed by Derek Steeden, was –0.3%. The portfolio’s return has been impacted by the effect of rising interest rates to combat increasing inflation. It is important to note that although this share class has a lower risk profile than the Company’s other three share classes, it is not designed to be a cash fund, and as such is not without risk to capital. The share price total return was –4.0%.
Balanced Risk Allocation Benchmark Change
As reported in the 2021 Annual Financial Report and effective 1 June 2021, a new benchmark has been used. This new comparator benchmark is a composite whose components are approximate proxies for the portfolio’s holdings and is a blend comprising 50% 30-year UK Gilts Index, 25% GBP hedged MSCI World Index (net) and 25% GBP hedged S&P Goldman Sachs Commodity Index (all total return).
Gearing and Structure
The UK Equity and Global Equity Income portfolios are able to employ gearing by means of a bank loan facility. Your Board has renewed this facility at a level of £40 million to allow the Portfolio Managers to employ gearing, if desired, across the two equity portfolios.
The Company continues to retain its innovative capital structure, offering investors the opportunity to switch (on a quarterly basis) between its UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity share classes in order to position their portfolios for changing investment conditions.
Dividends
We have continued to apply the dividend policy adopted six years ago, and supported by shareholder advisory votes, whereby for both UK Equity and Global Equity Income Shares, dividends are paid by way of three equal interim dividends declared in July, October and January with a ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for the UK Equity Shares were 1.50p per share and for the Global Equity Income Shares 1.55p per share. The fourth interim dividends were 2.20p per share for the UK Equity Shares, bringing the total to 6.70p per share for the year (2021: 6.65p), and 2.50p per share for the Global Equity Income Shares, bringing that total to 7.15p (2021: 7.10p) per share for the year.
The Company’s dividend policy permits the payment of dividends in the UK Equity, Global Equity Income and Managed Liquidity portfolios from capital. With total income of the Company increasing to £6.99m (2021: £3.18m) the contribution from capital required for the Company’s dividends to meet the Board’s target level was reduced from 2021 levels. For the Global Equity Income Shares a contribution from capital of approximately 2.30p per share was required to achieve the dividend level (2021: 3.15p per share). For the UK Equity Shares a contribution from capital of approximately 0.7p per share was required to achieve the dividend level (2021: 2.75p per share).
We intend to continue with the policy of a partial augmentation from capital where appropriate and investors are again being given advisory votes on it. However, whereas in recent years we have set a target of at least maintaining the dividend level from year to year for each of the equity portfolios, we did not set dividend targets in 2022 due to the uncertainty of income flows as a result of the pandemic. With the current uncertainty of future income flows, due in particular to the risk of entering a period of global recession, the Directors have not set dividend targets for the year to 31 May 2023.
The first interim dividends declared in respect of the year to May 2023, which will be paid on 15 August 2022 to shareholders on the register on 22 July 2022, were 1.50p per share for UK Equity Shares, 1.55p per share for Global Equity Income Shares.
The Board has also declared an interim dividend for the year ended 31 May 2023, payable as noted above, of 1.00p per share for Managed Liquidity Shares. This is payable from retained revenue reserves. Given the quantum involved it is unlikely that such payments will be more frequent than annually and may indeed be less frequent.
It continues to be the case that in order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on this share class to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. No dividends have been paid on the Balanced Risk Allocation Shares over the period.
Discount Policy
The Company adopted a discount control policy for all four share classes in January 2013, whereby the Company offers to issue or buy back shares of all classes with a view to maintaining the prices of the shares at close to their respective net asset values. Your Board remains committed to its utilisation, although it has stepped back at times since the onset of the Ukraine conflict, in light of market volatility, and discounts have been somewhat wider than before, in line with discounts generally across the investment trust market. The ongoing implementation of this policy is dependent upon the Company’s authority to buy back shares, and the Directors’ authority to issue shares for cash on a non pre-emptive basis, being renewed at general meetings of the Company.
As discussed below, the Company is seeking a class consent from the shareholders of the UK Equity and Balanced Risk Allocation share classes to cancel their respective share premium accounts. This will give the Company ample scope to continue share buybacks.
Share Capital Movements
During the year to 31 May 2022 the Company bought back and placed in treasury 11,996,500 UK Equity Shares at an average price of 184.1p, 583,000 Global Equity Income Shares at an average price of 227.7p, 165,000 Balanced Risk Allocation Shares at an average price of 165.5p and 63,000 Managed Liquidity Shares at an average price of 104.0p. Other than in connection with the share conversion process, no shares were issued during the year. In addition, no shares were sold from treasury and no treasury shares were cancelled. Since the year-end a further 687,000 UK Equity Shares and 295,000 Global Equity Income Shares have been bought back into treasury. The Board intends to use the Company’s buy back and issuance authorities when this will benefit existing shareholders; and to operate the discount control policy mentioned above; and will ask shareholders to renew the authorities as and when appropriate.
Share Class Conversions
The Company enables shareholders to adjust their asset allocation to reflect their views of future market returns. Shareholders have the opportunity to convert their holdings of shares into any other class of Share, without incurring any tax charge (under current legislation). The conversion dates for the forthcoming year are as follows: 1 August 2022; 1 November 2022; 1 February 2023; and 2 May 2023. The total number of Share class conversions that have occurred over the year’s conversion opportunities resulted in net flows of £5.0 million out of the UK Equity Share Portfolio; of £4.8 million into the Global Equity Income Share Portfolio; of £0.5 million into the Balanced Risk Allocation Share Portfolio; and £0.3 million out of the Managed Liquidity Share Portfolio. Should you wish to convert shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invesco.co.uk/investmenttrusts, or CREST instructions must be received at least ten days before the relevant conversion date.
Cancellation of the UK Equity and Balanced Risk Allocation Share Premium Accounts
In addition to the usual business to be conducted at the AGM, the Board is recommending that the share premium accounts of the UK Equity Share Class and the Balanced Risk Allocation Share Class are cancelled. This will give the Company greater flexibility, subject to financial performance, to make distributions and/or to make purchases of its own shares. The proposal will be implemented by means of a Capital Reduction, which will not involve any distribution or repayment of capital and will not reduce the underlying net assets of the Company. In addition, due to the provisions of the Articles of Association of the Company, the Company will seek a class consent from the shareholders of the UK Equity Share Class and the Balanced Risk Allocation Share Class in respect of the proposed cancellation of the reserves at class meetings to be held immediately prior to the AGM (see below). Full details of the proposal can be found on pages 105 to 111 and in my letter to shareholders set out in the Appendix on pages 112 to 113.
Annual General Meeting (‘AGM’)
I am pleased to invite all our shareholders to the Company’s AGM which will be held in person at 43-45 Portman Square, London, W1H 6LY at 11.30am on 4 October 2022.
As well as the Company’s formal business, there will be a presentation from the UK Equity and Global Equity Income Portfolio Managers. Shareholders will have the opportunity to put questions to the Directors and UK Equity and Global Equity Income Portfolio Managers. Light refreshments will be available. Shareholders may bring a guest to these meetings. To register your interest in attending, please contact us at [email protected].
For those unable to make it in person, we will be posting video updates from all the Portfolio Managers on our website ahead of the AGM.
The business of the AGM is summarised in the Directors’ Report on page 60. It is recommended that shareholders exercise their votes by means of registering them with the Company’s registrar ahead of the meeting, online or by completing paper proxy forms, and appoint the Chairman of the meeting as their proxy. The Board has considered all the resolutions proposed in the Notice of the AGM and believe they are in the best interests of shareholders and the Company as a whole. Accordingly, the Directors recommend that shareholders vote in favour of each resolution, as will the Directors in respect of their own shareholdings.
I look forward to meeting as many of you as possible at the AGM.
Outlook
Many of the challenges that impacted your Company’s portfolios over the last year continue to make their presence felt. The lack of preparedness for the re-opening of the economy post-pandemic has resulted in global supply chain issues and contributed to the current inflationary environment. It was hoped that higher levels of inflation would be a transitory issue, with a lower peak; forecasts are now indicating a ‘higher for longer’ environment. Central banks were caught somewhat on the back foot and have had to act more quickly, and raise rates more strongly, than they might otherwise have done. The economic environment remains uncertain in the short term, with a risk of a global recession, and a cost of living crisis which is resulting in industrial action being seen in many sectors.
There are a number of geopolitical tensions, both in the UK, with the current Conservative leadership contest and Brexit overhang, and on the global stage. The horrific conflict in the Ukraine continues and, sadly, a peaceful resolution feels further out than originally hoped. The effect of the war is having a global impact on energy and food prices.
Market volatility looks to remain heightened for some time as we wait to see how the current economic and political uncertainties play out. Your Company’s UK Equity and Global Equity Income Portfolios continue to be run in a style that maintains ‘balance’. Your Portfolio Managers continue to see attractive investment opportunities and target portfolio returns driven by the performance of the individual underlying companies they have selected. Additionally, income is an important constituent of the total return of the equity portfolios. Your Portfolio Managers have a strong belief in the ability of equities to protect the investor from the effects of inflation in the long term.
The Balanced Risk Allocation Portfolio aims to deliver equity-like returns but with half the volatility of equity markets; it seeks to give some protection to investors from market falls and inflation, with exposures across growth, defensive and real return assets. The Managed Liquidity Portfolio offers a higher degree of security for those with a more conservative outlook; its investments may be impacted by interest rates as well as other factors.
I believe that the choice and diversification offered by your Company’s four portfolios provide investors with additional flexibility and thus a level of protection against market downsides. Shareholders are able to position their investment into the asset classes where they expect to see the greatest returns, or use the Company’s share classes as a tool to diversify investment exposure. The ability to change allocation to the Company’s investment portfolios, without crystallising a taxable gain, also provides the option to use the Company as a ‘lifestyling’ investment, as the ratios of exposures to the four asset classes can be altered on a quarterly, or far less frequent basis, according to risk appetite.
Your Company’s structure and portfolios continue to be well positioned to negotiate the market challenges and opportunities that lie ahead.
Victoria Muir
Chairman
3 August 2022
UK Equity Share Portfolio Managers’ Report
Q How has the portfolio performed in the twelve months to 31 May 2022?
A The portfolio has underperformed its benchmark over the twelve months to 31 May 2022, with a net asset value return of +6.8%. Over the same period the FTSE All-Share Index rose +8.3% (both total return, in sterling terms). For most of the twelve-month period market sentiment continued to be dominated by the ongoing effects of the pandemic on the economy. As the period continued attention swiftly turned to the ever-increasing inflation figures being reported, driven higher by increases in the prices of imported goods and large increases in the costs of energy, all of which have been exacerbated by the war in Ukraine. Unfilled job vacancies also increased inflationary pressures further as wages rose to attract applicants. The combination of these factors has increased the cost of living for the end consumer and to try and curb the rapidly rising rate of inflation the Bank of England has raised interest rates several times since December.
Q What have been the key contributors and detractors to performance over the year?
A Over the period, positive performance relative to the benchmark was seen in six out the eleven sectors that the portfolio is invested in and stock selection in industrials and consumer staples sectors was generally strong. At a sector level the biggest contribution to positive performance versus the FTSE All-Share Index over the twelve-month period was the portfolio’s overweight to the utilities sector. The portfolio’s holdings of Drax, National Grid and SSE performed strongly and were all in the top five best performing stocks on a relative basis versus the FTSE All-Share Index. Drax rose strongly on higher electricity prices and recognition from the market following the transition from coal fired electricity production to sustainably sourced biomass along with the potential for carbon capture and storage technology. Drax is a unique UK listed asset with impressive sustainability credentials and an ambition to become a carbon negative business by 2030.
National Grid performed strongly largely due to the attractive inflation protected revenues in large parts of the company. Additionally, there is an added appreciation of the potential growth in the business as a result of the increased electrification of the economy and the resultant grid infrastructure required. Similarly, SSE was a strong performer as elements of the company’s revenues are inflation protected and it will also benefit from the electrification theme and higher energy prices.
The portfolio’s overweight to the industrials sector performed well on a relative basis. The holdings of Ultra Electronics, Bunzl and Chemring all performed well. UItra Electronics received a bid approach from Cobham in July 2021. Over the course of the rest of the year the position was reduced before exiting fully in March this year. Bunzl the outsourcing specialist and supplier of disposable products released its full year results in February. Although the company experienced a decline in demand for personal protection equipment, which had been strong throughout the depths of the pandemic, this decline was offset by a recovery in business activity and success in passing on inflationary price increases. The company also made some strategic acquisitions as part of its continuing and successful growth strategy.
RELX which has activities in areas such as science journals, risk analytics, legal databases and exhibitions continued its recovery from Covid-19 which saw the events and exhibition part of the business effectively close due to the pandemic and travel restrictions. Results released in February illustrated that growth had been seen from all four divisions of its business and selective acquisitions had supplemented their organic growth strategy.
The portfolio’s underweight to consumer staples was helpful as large international branded staples producers Unilever and Reckitt Benckiser, which are not held in the portfolio, were weaker over the period as was supermarket delivery company Ocado. This was helpful for relative performance versus the FTSE All-Share Index.
Naturally there were some weaker performances in the portfolio. The largest detractor on a sector basis was healthcare where biotherapeutics company PureTech Health was weaker despite good progress in the development of many of its products. There has been no negative news but a de-rating of US biotechnology companies as technology shares have fallen has been unhelpful. The company aims to address significant areas of un-met medical need with novel and lower risk route to market products and approaches, along the brain-immuno-gut axis and has an encouraging pipeline of treatments.
Apart from RELX, mentioned previously, other consumer discretionary stocks have been under pressure due to the rise in the cost of living. Clothing retailer Next has been no exception and whilst the company has experienced strong trading over the twelve-month period the share price has been weaker and has detracted from relative performance. Similarly, JD Sports Fashion had been trading well but a sudden management change and general concerns about the retail sector have also weighed on the share price. Restaurant Group had some modest downgrades earlier in the year and despite some costs being hedged there are concerns that some cost inflation will be passed on to the consumer in price adjustments.
In the basic materials sector the gold holdings were weaker over the period. Historically gold has been a good hedge against inflation and with inflation likely to remain at elevated levels for longer than probably anticipated, we believe this position will provide some diversification benefits in the months to come and have an attractive yield.
The price of crude oil has risen sharply over the twelve months period as supply has struggled to keep up with recovering demand post pandemic. The portfolio is slightly underweight the energy sector compared to the benchmark weighting, and specifically Shell, which performed strongly. Consequently, this was a headwind to relative performance.
| Year end | ||
| Total | Portfolio | |
| Key Contributors | Impact % | Weight % |
| Ultra Electronics | +0.98 | - |
| Drax | +0.97 | 2.9 |
| National Grid | +0.54 | 4.7 |
| SSE | +0.37 | 4.4 |
| RELX | +0.36 | 4.1 |
| Year end | ||
| Total | Portfolio | |
| Key Detractors | Impact % | Weight % |
| Next | –1.26 | 4.4 |
| PureTech Health | –0.99 | 0.7 |
| Shell | –0.79 | 5.6 |
| JD Sports Fashion | –0.71 | 1.2 |
| Restaurant Group | -0.70 | 0.6 |
Q How has gearing impacted the performance and what is your strategy going forward?
A The use of gearing in the portfolio over the period enhanced overall performance. Net gearing at the start of the twelve-month period was around 6% and this was increased to approaching 12% towards the half year mark before reducing to just below 11% at the end of the period. This level is below the limit of 25% set by the Board.
The level of gearing is under regular review and the strategy used to ascertain the appropriate level for the portfolio is unchanged. We are comfortable that the current level of gearing provides an opportunity to enhance the portfolio’s returns relative to the FTSE All-Share Index when considering a wider macro view and the opportunities in the portfolio. Looking to the future, our view remains that UK companies remain attractively valued compared to other developed markets such as the US.
Q How has the portfolio evolved over the period and how is it currently positioned?
A There have been no material adjustments to the positioning of the portfolio although there has been some trading to adjust for the level of gearing over the period. The holding of Fevertree was reduced and subsequently exited early in the period and following the bid for Ultra Electronics the holding was sold and the capital redeployed elsewhere in the portfolio.
The holdings of Young & Co’s Brewery and CVS the veterinary services group were reduced over the period. The opportunity was taken to add to the portfolio’s existing position in PRS REIT when the company raised money in September 2021 to acquire pipeline assets comprising six sites with the potential for 670 new homes.
Hiscox the insurer was added to the portfolio early in the twelve-month review period whilst Cranswick, the pork, poultry, and food products producer, has been a very recent new addition. The holding of Essentra, the packaging products and specialist component manufacturer, was also added to around the same time and performed strongly following a business review that resulted in the disposal of its packaging business. An encouraging fourth quarter update followed by full year results gave rise to some share price volatility. Post the review period end the disposal of the packaging business has been confirmed with the stated intention that most of the cash proceeds will to be used to strengthen the balance sheet.
On a sectoral basis and relative to the FTSE All-Share Index, we remain over-weight consumer discretionary and utilities stocks. The overweight to utilities offers an inflation-linked return that in our view continues to remain underappreciated. Exposure to the energy sector is slightly reduced from twelve months ago but we maintain that these companies continue to stand to benefit from elevated oil prices as growth in supply continues to be outstripped by demand post pandemic. We remain under-weight consumer staples which we see as expensive, and financials in general.
Previously we have spoken to five broad investment themes that the portfolio is exposed to. It is best to think of these themes as an outcome of the investment process rather than a conscious element of the portfolio construction. Our conviction is very much in these key stocks that are spread across “UK Domestics” (28% of the value of the portfolio), “International Value” (31%), “International Growth” (22%), “Recovery” (7%) and “Transformers” (12%). When comparing these weightings to those of twelve months ago the only change is the tilt to “International Value” versus “International Growth” which has shifted approximately 5% as we favour shorter duration value orientated stocks.
Q What is your outlook for the next twelve months and beyond? Why invest in the UK now?
A Overall, we remain positive on the outlook for UK equities despite the current fear of entrenched inflation and higher interest rates which has created a significant amount of market volatility. Furthermore, we strongly believe in the ability of equities to protect an investor from the effects of inflation in the long run.
Short term volatility and uncertainty look set to continue in the months to come and consequently a balanced portfolio that can perform in a range of economic and market regimes is our continuing objective. This balance is expected to reduce the reliance on unpredictable economic or market outcomes and leave the performance of the portfolio to be driven by the performance of the individual companies we have selected within it.
Since the Brexit vote in 2016 UK shares have underperformed other global markets but, many of these UK listed companies are often largely international businesses trading at a discount to their international peers. An improvement in outlook for UK corporate earnings and for nominal growth should, in an undervalued market, boost the outlook for UK listed equities. However, in the current environment it is difficult to predict that this will transpire and whilst we have seen consumer demand remain strong and company order books healthy, concerns are centred around supply challenges. If the economic outlook does improve, and we think it will, key beneficiaries will likely include high quality, cash generative businesses, which form a significant part of our portfolios.
Should the discount to international peers continue there is an increased likelihood that interest in UK companies from international buyers might materialise through merger and acquisition activity. Relative weakness in sterling versus the US dollar also potentially increases the attractiveness of UK assets.
We remain confident in the long-term prospects of the companies that we own in the UK Equity Portfolio which comprises our highest conviction, best ideas. The portfolio is concentrated around high quality, cash generative businesses, with strong liquidity that are likely to further enhance their competitive positions, and this leaves us feeling conservatively optimistic for the year ahead in 2022.
James Goldstone & Ciaran Mallon
Joint Portfolio Managers
3 August 2022
UK Equity Share Portfolio List of Investments
AT 31 May 2022
Ordinary shares listed in the UK unless stated otherwise
| Market | |||
| Value | % of | ||
| Company | Sector† | £’000 | Portfolio |
| Shell | Oil, Gas and Coal | 8,871 | 5.6 |
| National Grid | Gas, Water and Multi-Utilities | 7,520 | 4.7 |
| SSE | Electricity | 6,968 | 4.4 |
| Next | Retailers | 6,942 | 4.4 |
| BP | Oil, Gas and Coal | 6,552 | 4.1 |
| RELX | Media | 6,440 | 4.1 |
| AstraZeneca | Pharmaceuticals and Biotechnology | 6,035 | 3.8 |
| Barclays | Banks | 5,735 | 3.6 |
| Barrick Gold – Canadian Listed | Precious Metals and Mining | 5,539 | 3.5 |
| PRS REIT | Real Estate Investment Trusts | 5,057 | 3.2 |
| Top Ten Holdings | 65,659 | 41.4 | |
| Newmont – US Listed | Precious Metals and Mining | 4,809 | 3.0 |
| Drax | Electricity | 4,623 | 2.9 |
| British American Tobacco | Tobacco | 4,455 | 2.8 |
| Bunzl | General Industrials | 3,954 | 2.5 |
| Experian | Industrial Support Services | 3,897 | 2.5 |
| Legal & General | Life Insurance | 3,873 | 2.4 |
| Ferguson | Industrial Support Services | 3,411 | 2.3 |
| Vodafone | Telecommunications Service Providers | 3,295 | 2.1 |
| Tesco | Personal Care, Drug and Grocery Stores | 3,215 | 2.0 |
| Young & Co’s Brewery – Non-VotingAIM | Travel and Leisure | 3,044 | 1.9 |
| Top Twenty Holdings | 104,235 | 65.8 | |
| United Utilities | Gas, Water and Multi-Utilities | 3,015 | 1.9 |
| Smith & Nephew | Medical Equipment and Services | 2,851 | 1.8 |
| Croda International | Chemicals | 2,772 | 1.8 |
| Chemring | Aerospace and Defence | 2,701 | 1.7 |
| Ashtead | Industrial Transportation | 2,432 | 1.5 |
| Phoenix | Life Insurance | 2,425 | 1.5 |
| Coats | General Industrials | 2,382 | 1.5 |
| Compass | Consumer Services | 2,319 | 1.5 |
| Whitbread | Travel and Leisure | 2,240 | 1.4 |
| Barratt Developments | Household Goods and Home Construction | 2,135 | 1.3 |
| Top Thirty Holdings | 129,507 | 81.7 | |
| Essentra | Industrial Support Services | 2,118 | 1.3 |
| JTC | Investment Banking and Brokerage Services | 1,984 | 1.3 |
| NicholsAIM | Beverages | 1,860 | 1.2 |
| JD Sports Fashion | Retailers | 1,823 | 1.2 |
| Babcock International | Aerospace and Defence | 1,796 | 1.1 |
| Future | Media | 1,781 | 1.1 |
| Hiscox | Non-Life Insurance | 1,643 | 1.0 |
| Hays | Industrial Support Services | 1,608 | 1.0 |
| Sirius Real Estate | Real Estate Investment and Services | 1,601 | 1.0 |
| Chesnara | Life Insurance | 1,538 | 1.0 |
| Top Forty Holdings | 147,259 | 92.9 | |
| XPS Pensions | Investment Banking and Brokerage Services | 1,502 | 0.9 |
| Jupiter Fund Management | Investment Banking and Brokerage Services | 1,410 | 0.9 |
| CVSAIM | Consumer Services | 1,359 | 0.9 |
| Treatt | Chemicals | 1,225 | 0.8 |
| DFS Furniture | Retailers | 1,219 | 0.8 |
| PureTech Health | Pharmaceuticals and Biotechnology | 1,178 | 0.7 |
| Johnson ServiceAIM | Industrial Support Services | 1,079 | 0.7 |
| Restaurant Group | Travel and Leisure | 933 | 0.6 |
| Lancashire | Non-Life Insurance | 845 | 0.5 |
| Sherborne Investors (Guernsey) C | Investment Banking and Brokerage Services | 324 | 0.2 |
| Top Fifty Holdings | 158,333 | 99.9 | |
| Cranswick | Food Producers | 117 | 0.1 |
| Total Holdings 51 (2021: 51) | 158,450 | 100.0 |
AIM Investments quoted on AIM.
† FTSE Industry Classification Benchmark.
Global Equity Income Share Portfolio Manager’s Report
Q How did the portfolio perform in the year under review?
A The net asset value of the portfolio grew in the year to 31 May, by 9.6%, this exceeded the return of the comparator benchmark which increased in value by 7.4%, (both total return, in sterling terms).
Through the summer and autumn of 2021 as parts of the world global equity markets were strong; most economies around the world continued to rebound from the Covid-19 epidemic. Inflation began to pick up due to the continuing disruption of supply chains, especially in Asia, and strong consumer demand. Both monetary and fiscal policies in the developed economies around the world eased as authorities prioritised growth in the wake of the enforced shutdowns during 2020. Hopes remained that the pick-up seen in inflation, post pandemic, would prove transitory.
However, through the early winter and into 2022 price pressure increased in a range of commodities, in particular oil and gas and food. In the US and Europe labour was increasingly scarce, in part due to large numbers of older workers leaving the labour force post pandemic. Wage inflation also began to increase sharply. The response of central banks, particularly the Federal Reserve has been to tighten monetary policy. Elsewhere in the world, the continuation of China’s policy of ‘zero covid’ has led to a series of rolling lockdowns across the country which has seriously impinged on industrial production and exports (from ports such as Shanghai for example). A combination of rising inflation and interest rates has led to increased fears of recession amongst investors, hence global equity markets and especially those stocks trading on very high valuations (such as in the technology sector) were particularly weak.
Whilst rumours were rife of a Russian incursion into Ukraine through the early part of 2022, most market participants viewed it as unlikely, sadly they (and we) were wrong. The onset of all out war in Europe for the first time in 75 years has further fuelled commodity prices, as well as increasing geopolitical uncertainty which has a negative impact on asset values.
Q Given weakness in markets so far this year are you surprised at the positive returns achieved?
A Whilst markets were down (in sterling terms) 6.5% in the first five months of 2022, they were up 14.8% in the last seven months of 2021. It really has been a year where optimism about the earnings and economic growth prospects has been rapidly replaced by pessimism driven by the prospect for rising interest rates and inflation, and thus a risk of a global recession.
Another factor to remember is the relative weakness of sterling particularly against the US dollar which bolstered the valuation of our US dollar denominated assets, and hence supported net asset value in sterling terms.
Q What were the key contributors and detractors to performance?
A Overall, for the portfolio during the period our stock selection delivered outperformance. Stock selection was especially strong in the US and Europe and weak in Asia. We maintained an underweight position in the energy sector through the period, this was clearly negative given the strong increase in the oil and gas price. However, over the medium term we see upside in these companies capped by increasingly punitive tax regimes, and a shift toward renewable technologies. We are not minded to add to positions now.
Key individual holdings for us included Coca-Cola and PepsiCo which performed well as the global economy reopened through 2021, and through the more difficult start to 2022 where their strong brand recognition and historic strength during periods of weak economic growth were valued by investors. Overall, our overweight exposure to consumer staples was a positive for the portfolio.
Elsewhere, our insurance holdings, Zurich Financial and Progressive were also relatively strong. Once again, their relative insulation from an economic recession made their shares attractive, as did very strong balance sheets and above average and growing dividend yields.
We started the period with a position in Meta Platforms (formally known as Facebook). It performed well, but we grew more concerned around a variety of governance and social issues as well as its valuation. We disposed of the holding in the autumn of 2021, a few months before it announced some weak user datapoints. Such was its weight in the benchmark that not owning through this period made it one of our key winners in terms of relative performance.
On the negative side, as we described in the half-year management report, our holding in Tencent, the Chinese based social media, gaming and payments platform was weak during the late summer of 2021 in response to the tightening of regulations relating to privacy and online gaming. We have maintained a position, albeit a reduced one, as we continue to believe the company offers significant upside. By contrast we disposed of our holding in NetEase, the pure play Chinese gaming company, as we saw increased restrictions limiting any share price upside.
One of the most frustrating holdings for us over the year has been Verallia. Our holding in the French based producer of glass bottlers and containers was built up through the fourth quarter of 2021. It is a key player in a highly concentrated industry and a leader in recycling and the reduction of CO2 in production. Nevertheless, natural gas continues to be essential for production and the sharp rise in costs fuelled fears over a squeeze on its margins. The share price has therefore been weak. We remain comfortable that cost increases can be passed onto customers and the company remains a core holding in the portfolio.
As mentioned earlier, despite rising tensions in the early part of 2022, we did not expect a Russian invasion of Ukraine, hence we continued to maintain a modest position in Sberbank, the leading Russian financial institution. The market was steadily pricing in the prospect of a war in Ukraine and consequently the value of Sberbank fell dramatically, with a final write-down in early March of approximately £35,000 or 6 basis points. As such it was a key detractor over the period.
| Year end | ||
| Total | Portfolio | |
| Key Contributors | Impact % | Weight % |
| Lundin Energy | +1.43 | 3.2 |
| Coca Cola | +1.09 | 4.7 |
| Progressive | +0.86 | 2.5 |
| Standard Chartered | +0.73 | 3.5 |
| Meta Platforms Inc | +0.70 | – |
| Year end | ||
| Total | Portfolio | |
| Key Detractors | Impact % | Weight % |
| Tencent | –1.51% | 2.4 |
| Apple | –1.01% | – |
| Sberbank - ADR | –0.96% | – |
| Verallia | –0.85% | 4.6 |
| NetEase | –0.71% | – |
Q How has the portfolio evolved over the period?
A The portfolio has evolved steadily over the year. Whilst our holdings in the industrial segment of the market have increased somewhat it is primarily due to the addition of Kone, a Finnish based elevator and escalator manufacturer whose earnings streams are highly predictable due to the large service and maintenance component.
We have significantly cut back exposure to the consumer staples sector, including some of our strong performers such as Coca-Cola, and sold out of Diageo and Colgate Palmolive. Strong relative performance for the sector means it now trades at a significant premium to the market. We prefer to deploy capital to areas we perceive some positive asymmetry in valuation.
Our exposure to big ecommerce and internet names has reduced as we have sold Meta Platforms and significantly reduced our holding in Alphabet (the parent of Google). However toward the end of the period we added a position in Universal Music, the leading global recoding and rights label which was trading at what we believe to be a discount to its intrinsic value, offers an attractive dividend and we expect to prove a relatively non-cyclical income stream if we head to a recession in 2023.
We remain heavily overweight the financial sector, but not in banks where our key positions remain JPMorgan Chase and Standard Chartered. Our key overweight remains the insurance sector where we see strong dividend income streams and valuations which remain attractive with somewhat less risk than banks. Our holding in 3i, the UK based private equity group, is a key position in the fund. 3i ‘s largest holding is a European based discount retailer, Action, where we see a strong runway for growth for several years ahead of us.
Q What about the healthcare sector? You remain very underweight.
A Healthcare is one of our largest sector underweight positions compared to benchmark. During the year we disposed of Roche, the Swiss pharmaceutical company, but added a modest position in Danaher, the US based medical device and equipment company.
Our caution on the sector stems from the operating environment facing the sector. Due to patent laws which confer exclusivity on developed medicines for typically 10-15 years, large pharmaceutical companies continually need to reinvent themselves, as they have become larger, so it becomes more difficult to grow as newly developed medicines simply replace those losing patent protection. Combine that with ongoing price pressure (especially in the US), makes in our view for an unattractive mix where we struggle to find companies we want to own.
We do own Novartis, another leading Swiss pharmaceutical company. Whilst its earnings growth is likely to be modest in the coming three years, it is in our view relatively low risk, it has a very strong balance sheet and is likely to pay a growing dividend which is currently worth around 4% per year.
Q How does your analysis of ESG risks impact your stock selection and portfolio construction?
A We view analysing ESG risks as a key part of our investment process. As active, fundamental managers we consider every key aspect of a company’s true worth, including material ESG considerations because we believe that the most sustainable way to make money is to buy companies for less than they are worth. Establishing an estimated ‘fair value’ of a company is therefore essential and this entails incorporating ESG aspects into our investment methodology. We take a holistic approach where a company’s ESG credentials are scrutinised alongside traditional financial and qualitative aspects to derive a fair value. All companies face challenges regarding ESG and therefore we have to consider materiality (the impact of ESG factors on fair value), and ESG momentum (the potential for ESG improvement over time). Both can influence a stock’s potential returns and our conviction levels in an investment. As shareholders we actively engage with companies to enhance the value of our investments. We encourage companies to create sustainable value and mitigate risks in relation to their corporate activities. This can include prompting them to improve governance structures, make better asset allocation decisions, instilling sustainable practices and policies, and providing better disclosure. This reinforces our fundamental belief that responsible investing demands a long-term view and that a stakeholder-centric culture of ownership and stewardship is at the heart.
Further details of the Manager’s ESG process, together with examples, are shown on page 34 to 38.
Q What is your outlook for equity markets over the coming year?
A Truly, this is one of the hardest outlooks to call in my career. Peak to trough market corrections have ranged from 12-35% over the past 40 years, so far in 2022 equity markets are currently down 22% (in US dollar terms) On the one hand I look at a market where the correction from highs achieved in late December 2021 makes it seem that we are already discounting a mild to moderate recession. On the other, we are yet to see material downgrades to earnings expectations, and markets were correcting from a high valuation base.
Our most optimistic scenario is that interest rate rises in the US have already begun to slow the economy. More will follow in coming months. Mortgage rates have risen sharply in recent months which has a relatively quick impact on the housing market. Providing energy prices stabilise, and hopefully begin to fall by year end, we may be close to a peak in inflation during this cycle. Markets may well recover strongly toward year end as the market perceives an end to the monetary policy tightening cycle.
However, we must acknowledge that structural changes in the global economy, such as a declining availability of labour, together with rising inflationary expectations throughout most major markets and ongoing shortages of key commodities, will maintain significant inflationary pressure despite rising interest rates. Furthermore, we remain concerned that inflationary expectations are becoming embedded in the labour market. As a result, central banks may be forced to raise interest rates to higher levels than is currently expected and create a material slowdown in economic activity to choke off inflationary pressure. Equity markets could stay under pressure until well into 2023.
We feel our process is well positioned to cope with either the optimistic or pessimistic scenarios, although in the latter we must acknowledge markets may have further downside and our objective will be to deliver outperformance relative to benchmark. We will continue to focus on our process; seeking to identify competitively advantaged businesses, with no obvious ESG risks, who generate substantial free cashflow and effectively allocate capital either to growing the business or return it to shareholders. We seek to buy these companies at a discount to their long-term intrinsic value.
Stephen Anness
Portfolio Manager
3 August 2022
Global Equity Income Share Portfolio List of Investments
AT 31 May 2022
Ordinary shares unless stated otherwise
| At Market | |||||
| Value | % of | ||||
| Company | Sector† | Country | £’000 | Portfolio | |
| 3i | Diversified Financials | United Kingdom | 3,634 | 5.4 | |
| American Tower | Real Estate | United States | 3,499 | 5.2 | |
| Microsoft | Software and Services | United States | 3,425 | 5.1 | |
| Coca-Cola | Food, Beverage and Tobacco | United States | 3,163 | 4.7 | |
| Verallia | Materials | France | 3,116 | 4.6 | |
| AIA | Insurance | Hong Kong | 2,708 | 4.0 | |
| Broadcom | Semiconductors and Semiconductor Equipment | United States | 2,568 | 3.8 | |
| Standard Chartered | Banks | United Kingdom | 2,381 | 3.5 | |
| Zurich Insurance | Insurance | Switzerland | 2,204 | 3.3 | |
| Lundin Energy | Energy | Sweden | 2,167 | 3.2 | |
| Top Ten Holdings | 28,865 | 42.8 | |||
| Link REIT | Real Estate | Hong Kong | 2,130 | 3.1 | |
| Taiwan Semiconductor Manufacturing | Semiconductors and Semiconductor Equipment | Taiwan | 1,998 | 3.0 | |
| KKR & Co | Diversified Financials | United States | 1,742 | 2.6 | |
| Progressive | Insurance | United States | 1,695 | 2.5 | |
| Union Pacific | Transportation | United States | 1,681 | 2.5 | |
| Novartis | Pharmaceuticals, Biotechnology and Life Sciences | Switzerland | 1,669 | 2.5 | |
| Universal Music | Media and Entertainment | Netherlands | 1,661 | 2.5 | |
| TencentR | Media and Entertainment | China | 1,620 | 2.4 | |
| Melrose Industries | Capital Goods | United Kingdom | 1,584 | 2.3 | |
| Herc Holdings | Capital Goods | United States | 1,577 | 2.3 | |
| Top Twenty Holdings | 46,222 | 68.5 | |||
| RELX | Commercial and Professional Services | United Kingdom | 1,574 | 2.3 | |
| Kone – B Shares | Capital Goods | Finland | 1,555 | 2.3 | |
| PepsiCo | Food, Beverage and Tobacco | United States | 1,477 | 2.2 | |
| JPMorgan Chase | Banks | United States | 1,436 | 2.1 | |
| The TJX Companies | Retailing | United States | 1,318 | 1.9 | |
| Alphabet | Media and Entertainment | United States | 1,250 | 1.8 | |
| Home Depot | Retailing | United States | 1,212 | 1.8 | |
| Amazon | Retailing | United States | 1,191 | 1.7 | |
| Installed Building Products | Consumer Durables and Apparel | United States | 1,159 | 1.7 | |
| Canadian Pacific Railway | Transportation | Canada | 1,112 | 1.6 | |
| Top Thirty Holdings | 59,506 | 87.9 | |||
| Texas Instruments | Semiconductors and Semiconductor Equipment | United States | 1,044 | 1.5 | |
| Accenture – A Shares | Software and Services | United States | 998 | 1.5 | |
| Nvidia | Semiconductors and Semiconductor Equipment | United States | 981 | 1.5 | |
| Samsung Electronics – preference shares | Technology Hardware and Equipment | South Korea | 981 | 1.5 | |
| Rolls-Royce | Capital Goods | United Kingdom | 817 | 1.2 | |
| Berkeley | Consumer Durables and Apparel | United Kingdom | 749 | 1.1 | |
| Danaher | Pharmaceuticals, Biotechnology and Life Sciences | United States | 728 | 1.1 | |
| Volkswagen – preference shares | Automobiles and Components | Germany | 722 | 1.1 | |
| Ping An InsuranceH | Insurance | China | 698 | 1.0 | |
| Nestlé | Food, Beverage and Tobacco | Switzerland | 406 | 0.6 | |
| Top Forty Holdings | 67,630 | 100.0 | |||
| SberbankUQ – ADR | Banks | Russia | – | – | |
| Total Holdings 41 (2021: 40) | 67,630 | 100.0 | |||
UQ Unquoted due to delisting of Russian securities.
ADR American Depositary Receipt – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.
H H-Shares – shares issued by companies incorporated in the People’s Republic of China (‘PRC’) and listed on the Hong Kong Stock Exchange.
R Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
† MSCI and Standard & Poor’s Global Industry Classification Standard.
Balanced Risk Allocation Share Portfolio Manager’s Report
Investment Objective
The investment objective of the Balanced Risk Allocation Share Portfolio is to provide shareholders with an attractive total return in differing economic environments, and with low to moderate correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities, and commodities.
Q How has the strategy performed in the year under review?
A The Balanced Risk Allocation Share Portfolio posted a strong return of 0.3% over the fiscal year, outperforming the benchmark by 6.4%. The past twelve months to the end of May 2022 were characterized by consumers unleashing pent-up demand, fuelled by expiring Covid-19 lockdowns and highly accommodative fiscal and monetary policy. The elevated demand coupled with ongoing supply chain issues led to the rise of meaningful and persistent inflation across developed economies. At the turn of the year, the Russian invasion of Ukraine further stoked inflation as persistently high demand was now met with supply constraints due to sanctions on Russian energy, metal and fertilizer exports as well as fears of poor crop yields on planting delays and adverse weather conditions. Central banks were forced to shift their characterisation of inflation as transitory and act through a combination of rate increases and quantitative tightening efforts to try to catch up to the growing threat. The inflationary environment strongly benefitted commodities, particularly energy and agriculture which were top contributors while metals generated smaller contributions. Equities produced tepid results as early period gains were surrendered on geopolitical concerns and fears that central bank tightening could lead to slowing growth and potentially recession. Fixed income exposures performed poorly as the combination of interest rate hikes and high inflation overwhelmed any potential gains from geopolitical concerns.
Q What were the biggest contributors and detractors to performance?
A Exposure to commodity markets was the lone positive contributor to results. Energy commodities delivered the strongest performance due to strong demand, followed by agriculture where the largest contributions came from cotton, soybean oil and wheat. Industrial metals benefitted from Russia’s attack on Ukraine as Russian sanctions magnified already existing supply constrains in aluminium. Copper prices sold off towards the end of the period, resulting in a minor loss, on fears of a slowdown in growth. Precious metals detracted due to rising interest rates and a rising US dollar. Silver declined more than gold as it traded in sympathy with weakness in China and the broader industrial metals complex.
Exposure to equities detracted from results as four of the six markets in which the portfolio invests saw prices decline. UK equities were the top contributor to results in the period as relatively higher exposures to energy, materials, and aerospace and defence names held up well amid the rise in commodity prices and the Russian invasion of Ukraine. European shares fell on the Russian invasion and concerns that the conflict would at least have a negative impact on economic activity and, at worst, could potentially see further spread in the region. US small caps saw prices fall as the heightened volatility had investors cutting risks in higher-beta exposures. Emerging markets fared poorly on fears of China decoupling from the US and renewed Covid-19 lockdowns.
Exposure to government bonds was the largest detractor from performance with all six markets producing negative results. Despite ongoing geopolitical turmoil and another Covid-19 outbreak in China, there was little demand for government bonds as a haven. Rather, the highest inflation in multiple decades and soaring commodity prices had fixed income investors fretting over how aggressive central banks would be in their efforts to curb inflation.
Q How did the tactical allocation perform?
A The tactical allocation detracted from results with losses in equities and commodities offsetting gains from underweights across bonds. Tactical equity disappointed primarily due to ill-timed overweights at the beginning of the year. Tactical commodities detracted largely due to underweights across energy for most of the period. Tactical bonds contributed due to timely underweights towards the end of the period.
Q What is your 30-day outlook?
A The current period is one of the toughest environments for investors in some years. Stocks have experienced their second bear market in just over two years, and bonds posted two consecutive negative quarters for the first time in four decades. While commodities have offered some diversification benefits this year, concerns about central bank efforts to curtail inflation have sparked fear of declining economic growth, which has hit prices in economically sensitive complexes like energy and industrial metals. Should the growth scare materialize alongside evidence of peaking inflation, bonds may be the more interesting asset class.
Tactical positioning for July includes underweights in emerging markets, Europe, Japan and US equities, while UK equities are overweight. In fixed income, the portfolio is overweight Canada, Germany, Japan, the US and Australia and neutral in the UK. In commodities, the portfolio is underweight all exposures except Brent crude oil and gasoline.
Scott Wolle
Portfolio Manager
3 August 2022
Balanced Risk Allocation Share Portfolio List of Derivative Instruments
AT 31 May 2022
| Notional | ||
| Notional | Exposure | |
| Exposure | as % of | |
| £’000 | Net Assets | |
| Government Bond Futures: | ||
| Australia | 1,670 | 23.6 |
| Germany | 1,289 | 18.2 |
| Canada | 876 | 12.4 |
| US | 772 | 10.9 |
| Japan | 461 | 6.5 |
| UK | 232 | 3.3 |
| Total Bond Futures (6) | 5,300 | 74.9 |
| Commodity Futures: | ||
| Energy | ||
| Brent crude | 267 | 3.8 |
| Gasoline | 266 | 3.8 |
| WTI crude | 264 | 3.7 |
| Natural gas | 203 | 2.9 |
| Low sulphur gasoline | 190 | 2.7 |
| New York Harbor ultra-low sulphur diesel | 136 | 1.9 |
| Agriculture | ||
| Soyabean | 201 | 2.8 |
| Cotton | 194 | 2.7 |
| Soyabean meal | 165 | 2.3 |
| Soyabean oil | 110 | 1.6 |
| Wheat | 86 | 1.2 |
| Coffee | 69 | 1.0 |
| Corn | 60 | 0.8 |
| Sugar | 53 | 0.7 |
| Precious Metals | ||
| Gold | 293 | 4.1 |
| Silver | 86 | 1.2 |
| Industrial Metals | ||
| Copper | 189 | 2.7 |
| Aluminium | 172 | 2.4 |
| Total Commodity Futures (18) | 3,004 | 42.3 |
| Equity Futures: | ||
| UK | 686 | 9.7 |
| Japan | 588 | 8.3 |
| Emerging markets | 297 | 4.2 |
| Europe | 227 | 3.2 |
| US small cap | 222 | 3.1 |
| Total Equity Futures (5) | 2,020 | 28.5 |
| Total Derivative Instruments (29) | 10,324 | 145.7 |
Target Annualised Risk
The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:
| Asset Class | Risk | Contribution |
| Equities | 2.9% | 37.1% |
| Commodities | 2.9% | 36.6% |
| Fixed Income | 2.1% | 26.3% |
| 7.9% | 100.0% |
List of Investments
| Market | % | ||
| Yield | value | of | |
| % | £’000 | Portfolio | |
| Short Term Investments | |||
| Invesco Liquidity Funds plc - Sterling | 0.96 | 3,512 | 56.3 |
| UK Treasury Bill - 0% 19 Sep 2022 | 0.90 | 747 | 12.0 |
| UK Treasury Bill - 0% 07 Nov 2022 | 1.33 | 547 | 8.8 |
| UK Treasury Bill - 0% 01 Aug 2022 | 0.40 | 499 | 8.0 |
| UK Treasury Bill - 0% 31 Oct 2022 | 1.25 | 448 | 7.2 |
| UK Treasury Bill - 0% 15 Aug 2022 | 0.90 | 276 | 4.4 |
| UK Treasury Bill - 0% 24 Oct 2022 | 1.15 | 199 | 3.2 |
| Total Short Term Investments | 6,228 | 99.9 | |
| Hedge Funds(1) | |||
| Harbinger Streamline Offshore Fund | 5 | 0.1 | |
| Total Hedge Funds | 5 | 0.1 | |
| Total Fixed Asset Investments | 6,233 | 100.0 |
(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments. During the year the prior residual holdings (4 classes) were consolidated into one holding in a new vehicle.
Derivative instruments held in the Balanced Risk Allocation Share Portfolio are shown on the previous page. At the year end all the derivative instruments held in the Balanced Risk Allocation Share Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy on page 40.
Managed Liquidity Share Portfolio Manager’s Report
Q How does the portfolio generate returns?
A The investment objective of the portfolio is to produce an appropriate level of income return combined with a high degree of security. We aim to generate returns by investing mainly in sterling-based high quality debt securities and similar assets but with the flexibility to invest in assets with a greater weighted average maturity than a money market fund. Accordingly the value of the Portfolio may rise or fall.
The majority of the portfolio is invested in the iShares £ Ultrashort Bond ETF. We reviewed the ETF universe in December 2021 and elected to retain this ETF. We also hold a portion of the portfolio in the Sterling Liquidity Portfolio of Invesco Liquidity Funds plc. to meet short term payment obligations.
The iShares £ Ultrashort Bond ETF invests in Sterling denominated investment grade corporate bonds and quasi-government bonds, aiming to track performance of the Markit iBoxx GBP Liquid Investment Grade Ultrashort Index and has a weighted average maturity of around one year.
Q What has the performance of your portfolio been over the last year?
A The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2022 was –0.3%.
The need to begin to raise interest rates to cool demand began as western economies rebounded more sharply than expected from Covid-19 restrictions. The inflationary effect of this was expected to be transitory, but was brought into much sharper relief by Russia’s invasion of Ukraine on 24 February. Sadly, the considerable humanitarian crisis may last some time. Disruption to global movements of oil, gas and foods could last several years as supply chains re-adjust. The impact on prices continues to transmit through markets with UK CPI inflation hitting 9.1% in May. Central banks are now catching up with substantial interest rate hikes and as a result bond prices have fallen, with one year interest rates up 1.5% over the year.
This portfolio has a substantially shorter duration of around 0.2 years and so has been protected to a large extent. Nevertheless, a small fall in NAV is expected as the impact of rising interest rates more than offset the income yield of the portfolio.
Q What's the outlook for returns given high inflation and rising interest rates?
A Higher short term rates have increased the portfolio’s yield, with the average coupon within the iShares £ Ultrashort Bond ETF standing at 1.8% at the end of June, vs UK base rate of 1.25%. A further six UK central bank interest rate rises are priced into markets by the end of 2022 (four in the US and Eurozone). While visibility on price demand and wage growth is weaker than usual, there are signs that inflation is peaking and growth slowing, as consumers pull back on spending and companies experience higher input costs. Should central banks and governments be successful in limiting inflation and/or should growth slow more abruptly than expected, we could see rates rise by less than is currently priced, which would lift bond prices.
We continue to expect the portfolio to deliver a meaningful pickup over base rates while providing ready access to capital with a high degree of security.
Derek Steeden
Portfolio Manager
3 August 2022
Managed Liquidity Share Portfolio List of Investments
AS AT 31 MAY
| 2022 | 2021 | |||
| Market | Market | |||
| Value | % of | Value | % of | |
| £’000 | Portfolio | £’000 | Portfolio | |
| Invesco Liquidity Funds plc – Sterling | 130 | 9.0 | 140 | 7.7 |
| iShares – Sterling Ultrashort Bond UCITS ETF | 1,315 | 91.0 | 1,669 | 92.3 |
| 1,445 | 100.0 | 1,809 | 100.0 | |
Environmental, Social and Corporate Governance (‘ESG’) statement from the Managers
UK Equity Share Portfolio & Global Equity Income Share Portfolio
Ciaran Mallon
UK Equities Fund Manager
James Goldstone
UK Equities Fund Manager
Stephen Anness
Global Equities Fund Manager
What does ESG mean to us?
• Investing in stocks which have good Environmental, Social and Governance (‘ESG’) momentum behind them can be a positive way for our portfolios to potentially generate returns in excess of the benchmark
• We draw upon ESGintel, Invesco’s proprietary tool, which helps us to better understand how companies are addressing ESG issues
• Engaging with companies to understand corporate strategy today in order to assess how this could evolve in the future
• Monitoring how companies are performing from an ESG perspective and if the valuations fairly reflect the progress being made
Our focus as active fund managers is always on finding mispriced stocks and ESG integration underpins our investment process.
The incorporation of ESG into our investment process considers ESG factors as inputs into the wider investment process as part of a holistic consideration of the investment risk and opportunity, from valuation through investment process to engagement and monitoring. The core aspects of our ESG philosophy include: materiality; ESG momentum; and engagement.
• Materiality refers to the consideration of ESG issues that are financially material to the company we are analysing.
• The concept of ESG Momentum, or improving ESG performance over time, indicates the degree of improvement of various ESG metrics and factors and help fund managers identify upside in the future. We find that companies which are improving in terms of their ESG practices may enjoy favourable financial performance in the longer term.
• Engagement is part of our responsibility as active owners which we take very seriously, and we see engagement with companies as an opportunity to encourage continual improvement. Dialogue with portfolio companies is a core part of the investment process for our investment team. As such, we often participate in board level dialogue and are instrumental in giving shareholder views on management, corporate strategy, transparency, and capital allocation as well as wider ESG aspects.
ESG integration is an ongoing strategic effort to systematically incorporate ESG Factors into fundamental analysis. The aim is to provide a 360 degree evaluation of financial and non-financial materially relevant considerations and to help guide the portfolio strategy.
Our investment process has four stages. In this report we go through in detail how ESG is integrated into each stage of our process.
Idea Generation
We believe it is important to spread our nets as wide as possible when trying to come up with stock ideas which may find their way into our portfolios. We remain open minded as to the type of companies we will consider. This means not ruling out companies just because they happen to be unpopular at that time and vice versa. ESG can create opportunities too – for example, the benefits of moving towards more sustainable sources of energy like wind, solar and hydroelectric power generation. This was one of the reasons we became interested in some of our utility holdings which are held in the UK portfolio. This highlights the importance of opportunities brought about by ESG and not just the risks. Investing in stocks which have the right ESG momentum behind them – by focussing on fundamentals and the broader investment landscape – can be a unique way for our portfolios to potentially generate returns in excess of the benchmark as those businesses that have got ESG momentum behind them have the potential to be rerated.
Fundamental Research & ESG Analysis
Research is at the core of what we do. Our fundamental analysis covers many drivers, for example, corporate strategy, market positioning, competitive dynamics, the macroeconomic environment, financials, regulation, valuation, and, of course, ESG considerations, which guide our analysis throughout.
We use a variety of tools from different providers to measure ESG factors. In addition, at Invesco, we have developed ESGintel, Invesco’s proprietary tool built by our Global ESG research team in collaboration with our Technology Strategy Innovation and Planning (SIP) team.
ESGintel provides fund managers with environmental, social and governance insights, metrics, data points and direction of change. In addition, ESGintel offers fund managers an internal rating on a company, a rating trend, and a rank against sector peers. The approach ensures a targeted focus on the issues that matter most for sustainable value creation and risk management.
This provides a holistic view on how a company’s value chain is impacted in different ways by various ESG topics, such as compensation and alignment, health and safety, and low carbon transition/ climate change.
We always try to meet with a company prior to investment. Based on our fundamental research, including any ESG findings, we focus on truly understanding the key drivers and, most importantly, the path to change. This helps us better understand corporate strategy today and how this could evolve in the future. Today, the subject of ESG is increasingly part of these discussions, led by us.
Portfolio Construction
We aim to create a well-diversified portfolio of active positions that reflect our assessment of the potential upside for each stock weighted against our assessment of the risks. Sustainability and ESG factors will be assessed alongside other fundamental drivers of valuation. The impact of any new purchases will need to be considered at a portfolio level. How will it affect the shape of the portfolio having regard to objectives, existing positions, overall size of the portfolio, liquidity and conviction?
We do not seek out stocks which score well on internal or third party research simply to reduce portfolio risk.
Ongoing Monitoring
Our fund managers and analysts continuously monitor how the stocks are performing as well as considering possible replacements. Is the company performing from an ESG perspective and are the valuations fairly reflecting the progress being made or not?
How do we monitor our holdings from an ESG perspective? Again, the same resources used during the fundamental stage are available to us. Our regular meetings with the management teams of the companies we own provides an ideal platform to discuss key ESG issues, which will be researched in advance. We draw on our own knowledge as well as relevant analysis from our ESG team and data from our previously mentioned proprietary system ESGintel which allows us to monitor progress and improvement against sector peers. Outside of company management meetings we constantly discuss as a team all relevant ESG issues, either stimulated internally or from external sources.
Additional ESG analysis is carried out by the team, when warranted, on particular companies. Such cases would be those that are more controversial, considered to be higher risk and viewed poorly by ESG providers, resulting in a valuation discount. We don’t just look at the specific issue considered to be higher risk either, for example the environmental risk of an oil company, but all areas of ESG. This means undertaking extensive analysis of social and governance policies and actions at the same time.
Challenge, Assessing & Monitoring Risk
In addition, there are two more formal ways in which our portfolios are monitored:
There is a rigorous semi-annual review process which includes a meeting led by the ESG team to assess how our portfolios are performing from an ESG perspective. This ensures a circular process for identifying flags and monitoring of improvements over time. These meetings are important in capturing issues that have developed and evolved whilst we have been shareholders.
There is also the ‘CIO challenge’, a formal review meeting held between the Henley Investment Centre’s Chief Investment Officer (CIO) and each fund manager. This review includes a full breakdown of the ESG performance using Sustainalytics and ISS data, such as the absolute ESG performance of the portfolio, relative performance to benchmarks, stocks exposed to severe controversies, top and bottom ESG performers, carbon intensity and trends. The ESG team review the ESG data and develop stock specific or thematic ESG questions. The ESG performance of the portfolio is discussed with the CIO using the data and the stock specific questions to analyse the fund manager’s level of ESG integration. The aim of these meetings is not to prevent a fund manager from holding any specific stock: rather, what matters is that the fund manager can evidence understanding of ESG issues and show that they have been taken into consideration when building the investment case.
Climate Risk
UK Equity Portfolio
A core aspect of our philosophy on ESG issues is the concept of ESG momentum, or improving ESG performance over time. We find that companies which are improving in terms of their ESG practices may enjoy favourable financial performance in the longer term. At first glance it might appear that the development of the UK Equity Share Portfolio has been at odds with such aims: as indicated by ISS Scope 1 + 2 measures, Carbon intensity has increased between by 7% from January 2020 to May 2022 and stands at 171.9, some 9% higher than the FTSE All-Share Index. However, looking deeper into the detail of the underlying data, tells a very different tale.
• The carbon intensity of the UK Equity Share Portfolio has over the same period increased by substantially less (by +7%) than the FTSE All-share index (+23%), as calibration within the energy sector in particular has developed over time. It is a reminder that the yardsticks used for measurement and comparison are still in their early stages.
• The biggest single contributor to carbon intensity of the UK Equity Share Portfolio (we estimate around 23% of the total ISS defined emissions) derives from the position held in Utility company SSE. As a major distributor of electrical power in the UK, SSE necessarily at present has significant exposure to distribution of power generated from non-renewable sources. However, it is in our view at the very forefront of progress as an enabler of transition towards net zero: it develops, builds and operates infrastructure needed to support the transition, and has set out detailed and specific targets across each of scope 1, 2 and 3*.
• As of 31 May 2022, 28 out of the 51 holdings (55%) in the UK Equity Share Portfolio have aligned with, are aligning, or are committed to aligning with the net zero objective by 2050. This compares favourably with the FTSE All-Share Index of just 133 out of 595 holdings (24%).
We continue to believe that the approach to climate change, and the philosophies behind all aspects ESG deserve to be embedded in an investment framework which encourages positive change. Coupling this with a focus on valuation is, to our minds, the best way to deliver strong investment outcomes over the long term for our clients.
Global Equity Income Portfolio
Climate change continues to be a strategic priority for Invesco, with a commitment to the Net Zero Asset Managers initiative. Companies’ climate transition plans were the most common topic of our targeted ESG engagements over the last twelve months. As an indication of the progress made in reducing carbon emissions (ISS Scope 1+2); the portfolio has reduced carbon intensity by 16% between January 2020 and May 2022 , compared the MSCI World benchmark which reduced emissions by only 9%. Encouragingly, we expect to see more net zero commitments from the companies we are invested in, suggesting this trend can continue.
We would highlight however that the process may not be smooth. Different regions are moving at different speeds, with Europe and the UK in front, Asia and Emerging Markets still lagging. Larger companies are leading smaller and mid- size companies.
As of 31 May 2022, 30 out of the 43 holdings (70%) in the portfolio have aligned with, or are committed to aligning, with the net zero objective by 2050. All companies in our portfolio produce sustainability reports and we are encouraging all companies that we meet to sign up to the net zero initiative, whilst in acknowledging for some companies it may not be technically feasible yet.
Company Specific Examples In the selection overleaf, we highlight some of the recent engagements that we have had with companies to give you a flavour of how active engagement can create positive outcomes.
* Scope 1 and 2 are those emissions that are owned or controlled by a company. Scope 3 refers to the indirect emissions that occur at different points in the full range of activities undertaken in order to create the products or services of the reporting company.
UK Equity Portfolio Example
Independent power production and biomass supplier
– The investment team engaged with the Head of Sustainability to review progress on sustainable carbon capture and storage, sustainable forests and Biomass.
– On Carbon Capture and Storage (CCS) we questioned the company on the environmental risks of leakage. The company were able to confirm that the carbon stays in the ground as part of the geological formation in the same way that oil & gas currently stays in the ground. High pressure is used to drive the carbon deep underground and over time the CO2 infuses into the rocks.
– In terms of sustainable forests it was reiterated that they do not cut down trees to simply provide wood in order to produce energy. Instead it is the wood waste that is used for the production of biomass. The forests are for the production of good quality timber for furniture or the lower grade timber that is used in pallets. It is the 2-5% of branches, thinnings or hollow trees that are used for pellet production. In British Columbia, Canada, forest floor residues are also used for biomass and, this is happening to good effect. Previously, residues were left to decay or piled up and burnt. In some instances they were a fire hazard but they are now being utilised in pellet production. The company is adding economic value to a forest by taking the waste and creating better environmental outcomes.
– In order to support sustainable forestry the company traces the source of wood for biomass and has created an audit protocol and procurement policy in order to do this effectively. It rejects any supply that does not have the correct certification and works closely with US based foresters who work with suppliers to meet UK based governance standards. Following transactions the company returns to the forest to check that the ESG outcomes have been delivered. In terms of biomass sustainability the company’s policy is compliant with current UK and EU law. 100% of woody biomass produced by the company has been verified against a number of forest certification programmes. Action: position maintained
Savings and retirement provider
– We engaged with the management team post their FY21 results released in March 2022. They have a programme of initiatives for 2022 including their new Think Tank. They intend to use research to lead fresh debate, prompt a national conversation, and inspire the action needed to make better longer lives a reality, for all of us. There is a significant retirement savings gap in the UK, which they are committed to help close. They intend to provide customers “with the right guidance and products, at the right time, to support the right decisions” and promote financial inclusion.
– The scale of the business has enabled them to invest £1.3bn into sustainable assets during 2021, including investing over £500m into affordable housing, which helped support some of society’s most vulnerable people. In addition over £200m has gone into projects with a positive environmental impact, such as the provision of renewable electricity, to nearly half a million homes.
– The company is measuring the carbon footprint of their investments and are aligning their portfolio to decarbonisation pathways in line with global temperature goals. Their own scope 1 and 2 emissions will be Net Zero by 2025 (34% reduction per FTE last year) and they are progressing towards their commitment to be Net Zero across their investment portfolio by 2050. Examples of their own energy efficiency activities include a new photovoltaic glass roof in one of their office locations, LED lighting roll out at some office sites and an adoption of a travel policy whereby emphasis is on trip avoidance and carbon efficiency. Action: position maintained
Travel and leisure
– Background: In September 2019, the company engaged with the investment team to seek shareholder feedback on the possibility of moving from a traditional long term incentive plan (LTIP) to a Restricted Share Plan (RSP). We expressed our concerns about the quantum of the award and that the discount from moving from a LTIP to the RSP should begin at a guide rate of 50%. The initial proposal from the company did not achieve this. We further wanted to ensure there was an appropriate financial underpin in place to protect shareholders’ interests. Following further engagement, we became comfortable with the rationale and the quantum of the RSP and supported the proposal at the AGM.
In December 2020, following shareholder approval for the RSP, the impact of the Covid-19 pandemic on the business meant that the financial underpins of the 2020 RSP would not be met. We engaged with the Remuneration Committee to discuss reviewing and possibly removing entirely the financial underpins for the 2020 RSP. We made clear to the committee that, whilst we were mindful of the impact of the pandemic, we would not support the retrospective adjustment of this 2020 award. Following this engagement and after considering shareholder views carefully, the company decided not to proceed any further with the proposal to remove the financial underpins from the 2020 RSP. We regarded our engagement as positive from both a governance and stewardship perspective and reflective of an active approach to governance engagement.
– In Q3 2021 the investment team engaged with the Chairman, General Counsel, and Investor Relations to discuss governance issues including the material vote against the chair (10.2%) and remuneration report (16.8%). The concerns with the board were due to potential over-boarding. We discussed attendance and furthermore that the chair would relinquish certain other board positions. We engaged with the company prior to the AGM on the proposed changes to the RSP and made clear that we would not support the plan on its current terms and were not supportive of changes to in-flight remuneration plans that were not forecast to vest. The company decided to make some changes from their initial position and we were of the view that the revised plan warranted support. Action: position maintained
Global Equity Income Portfolio Example
A supplier of glass bottles and packaging
Our assessment
– Glass packaging is essential in the food and beverage sector, as well as in a range of healthcare settings. The investment team finds the company attractive on a range of valuation measures, believes management is aligned with our objectives and regards the company as maintaining a strong position in a consolidated market.
– Although glass has the benefit of being infinitely recyclable, its production generates significant CO2. The team have engaged with the company extensively to discuss their strategy to lower emissions. The company is switching from heavy fuel oil to gas which will lower CO2 output by around 30% from 2022 levels by 2030. It is also seeking to increase its usage of cullet (crushed recycled glass) from 49% in 2022 to 59% in 2025 which reduces energy usage. Overall, the company aims to reduce CO2 emissions by 46% by 2030 from the 2020 level. The company see themselves as leaders in the glass packaging industry in CO2 reduction and expect this to be a competitive advantage when negotiating with customers.
– We have also engaged with the company on governance issues relating to the separation of CEO and Chairman roles which has now been enacted. We note around 60% of the company’s interest expense is linked to meeting CO2 reduction targets, we view this as a positive signal. We are also encouraged by the enhanced employee share ownership plan which aims for 5% of shares owned by employees by 2025, by from 3% in 2020. Action: position maintained
A global producer of soft drinks
Our assessment
– We have been impressed by the commitment given by the company to the science-based target of reducing carbon emissions (scopes 1 2 and 3) by 30% by 2030, and its ability to encourage its suppliers to respond to the CDP Supply chain questionnaire. The company has an ambition to be net zero by 2050 – we intend to monitor the approach to achieving this over time. The company has made significant progress in improving the sustainability of water resource used in its operations.
– We have actively engaged with the company regarding the use and recycling of plastics. The company is already well within reach of its goal of making 100% of its packaging recyclable by 2025. The company also aims to have 25% of its beverages (by volume) sold in refillable or returnable packaging by 2030. We note that the company has already made progress in a number of markets, such as in Latin America where refillable bottles were initially introduced as an affordable packaging type. The real challenge for the company comes with the collection of packaging to reduce the impact of waste on the environment. The company targets the collection and recycling of a bottle or can for each one that they sell by 2030. This will require collaboration with local governments, businesses and societies. We will continue to engage on this issue in our regular meetings with the company in future.
– Regarding sugar, our view is that the company is making good progress in the reformulation of its products to reduce the calorific content of its beverages, and its work developing and using natural sweeteners. 28% of volumes in 2021 were low or no calorie. More remains to be done and we will continue to question the company on this issue.
– Regarding disclosure, we note the comprehensive environmental, business, and social governance report the company has produced for the past three years and believe this is a significant improvement on previous practise. Action: position maintained
Voting Policy
We review Annual General Meeting (‘AGM’) and Extraordinary General Meeting (‘EGM’) proposals taking into account our own knowledge of the companies in which our portfolios are invested, as well as the comments and recommendations of proxy voting analysis providers ISS*, Glass Lewis and IVIS**. In addition, Invesco provides proprietary proxy voting recommendations and publishes these recommendations via its PROXYintel platform. All voting decisions remain with the portfolio manager, however, where a portfolio manager votes against an Invesco voting recommendation, the rationale for such decision is recorded and available on the platform. There will be times when we will follow the recommendations made by proxy research providers but times where we disagree with the stance being taken.
Voting in line with management recommendations should not be seen as evidence of a lack of engagement or challenge on our part, but rather that we believe that the governance of the companies in which we are invested is appropriately robust and worthy of support. There may be instances where we vote in support of management, but the ESG performance of the company is not perfect and issues have been identified. In this situation we would seek to engage with the company leading up to the vote and if necessary, would have raised concerns and likely given a time horizon or measure for improvement which, if not met, could lead to a vote against in the future. In that respect, our approach to governance is one of engagement and improvement.
We do not expect companies to change overnight but we do expect continual review of governance processes and continued improvement. Further details of how the manager has voted on holdings in the portfolio is available on the company’s webpage at www.invesco.co.uk/selectuk and www.invesco.co.uk/selectglobal.
A recent example of voting engagement, which concerned executive remuneration, is shown on page 37, under the Travel and leisure case study.
Conclusion
The regulatory landscape is rapidly evolving, which increasingly compels organisations and investors alike to clearly demonstrate their awareness of ESG issues in their decisions. Landmark initiatives such as the European Union’s new Sustainable Finance Disclosure Regulation (SFDR) are at the forefront of this shift.
We believe that our approach is fair, coherent and pragmatic. Whilst we consider ESG aspects, we are not bound by any specific ESG criteria and have the flexibility to invest across the ESG spectrum from best to worst in class, but we think that the principles behind ESG deserve to be embedded in an investment framework which encourages positive change. Coupling this with a focus on valuation is, to our minds, the best way to deliver strong investment outcomes for our clients’ long term. This reinforces our fundamental belief that responsible investing demands a long-term view and that a stakeholder-centric culture of ownership and stewardship is at the heart of ESG integration.
* ISS – Institutional Shareholder Services .
** IVIS – Institutional Voting Information Service.
Business Review
Purpose, Business Model and Strategy
Invesco Select Trust plc is a UK investment company with four Share classes, each of which has separate investment objectives, as set out below, and is represented by a separate Portfolio. The Company’s purpose is to generate sustainable returns for its shareholders by providing a choice of investment strategies and the ability to switch between them, free of cost, according to shareholders’ needs. The underlying strategies are each targeted at achieving returns corresponding with specified objectives through a disciplined investment process. The strategy the Board follows to achieve its overall objective and those of each Share class 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 the Company has adopted to achieve its objective has been to contract investment management and administration to appropriate external service providers. The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The Board has a collegiate culture and pursues its fiduciary responsibilities with independence, integrity and diligence, taking advice and outside views as appropriate and constructively challenging and interacting with service providers, including the Manager.
The principal service provider is Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’). In addition to managing the Portfolios in accordance with the Board’s strategy and under its oversight, the Manager is also responsible for providing company secretarial, marketing, accounting 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.
All administrative support is provided by third parties under the oversight of the Board. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Link Group to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.
Investment Policy
The Company’s and respective Share classes’ investment objectives, investment policies and risk and investment limits combine to form the ‘Investment Policy’ of the Company.
The Company
Investment Objective and Policy
The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.
The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives, policies and risks and limits of the Portfolios for these Share classes follow. With the exception of borrowings, the limits for the Company and the four Share classes are measured at the point of acquisition of investments, unless otherwise stated.
Investment Limits of the Company
The Board has prescribed limits on the Investment Policy of the Company, which include the following:
• no more than 15% of the gross assets of the Company may be invested in a single investment; and
• no more than 10% of the gross assets of the Company may be invested in other listed investment companies (excluding property companies structured as REITs).
UK Equity Share Portfolio
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return, with an income that will grow over time, by investing primarily in UK quoted equities.
Investment Policy and Risk
The UK Equity Portfolio is invested primarily in UK-quoted equities and may also hold equity-related or fixed interest securities of UK companies across all market sectors. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded.
The Manager invests the UK Equity Portfolio so as to maximise exposure to the most attractive sectors and securities, within a portfolio structure that reflects the Manager’s view of the macroeconomic environment. The Manager does not set out to manage the risk characteristics of the UK Equity Portfolio relative to the FTSE All-Share Index (the ‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark. The size of weightings will reflect the Manager’s view of the attractiveness of a security and the degree of conviction held. If a security is not considered to be a good investment, it will not be held in the UK Equity Portfolio, irrespective of its weight in the benchmark index.
The Manager controls the stock-specific risk of individual securities by ensuring that the UK Equity Portfolio is always diversified across market sectors. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security.
It is expected that, typically, the Portfolio will hold between 40 and 50 securities.
The Directors believe that the use of borrowings can enhance returns to shareholders and the UK Equity Portfolio will generally use borrowings in pursuing its investment objective.
Investment Limits
The Board has prescribed limits on the investment policy of the UK Equity Portfolio, which include the following:
• no more than 12% of the gross assets of the UK Equity Portfolio may be held in a single investment;
• no more than 10% of the gross assets of the UK Equity Portfolio may be held in other listed investment companies (excluding REITs);
• no more than 20% of the gross assets of the UK Equity Portfolio may be held in overseas assets; and
• borrowings may be used to raise equity exposure up to a maximum of 25% of the net assets of the UK Equity Portfolio when it is considered appropriate.
Global Equity Income Share Portfolio
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Investment Policy and Risk
The Portfolio will be invested predominantly in a portfolio of listed, quoted or traded equities worldwide, but may also hold other securities from time to time including, inter alia, fixed interest securities, preference shares, convertible securities and depositary receipts. Investment may also be made in regulated or authorised collective investment schemes. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded. The Manager will at all times invest and manage the Portfolio’s assets in a manner that is consistent with spreading investment risk, but there will be no rigid industry, sector, region or country restrictions.
The Portfolio may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Portfolio’s direct investments, as described above.
It is expected that, typically, the Portfolio will hold between 40 and 55 securities.
The Directors believe that the use of borrowings can enhance returns to shareholders, and the Global Equity Income Portfolio may use borrowings in pursuing its investment objective.
The Company’s foreign currency investments will not be hedged to sterling as a matter of general policy. However, the Manager may employ currency hedging, either back to sterling or between currencies (i.e. cross hedging of portfolio investments).
Investment Limits
The Board has prescribed the following limits on the investment policy of the Global Equity Income Portfolio:
• no more than 20% of the gross assets of the Global Equity Income Portfolio may be invested in fixed interest securities;
• no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in a single investment;
• no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in other listed investment companies (excluding REITs); and
• borrowings may be used to raise equity exposure up to a maximum of 20% of the net assets of the Global Equity Income Portfolio, when it is considered appropriate.
Balanced Risk Allocation Share Portfolio
Investment Objective
The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.
Investment Policy and Risk
The Portfolio utilises two main strategies: the first seeks to balance the risk contribution from each of three asset classes (equities, bonds and commodities), with the aim of reducing the probability, magnitude and duration of capital losses, and the second seeks to shift tactically the allocation among the assets with the aim of improving expected returns.
The Portfolio is constructed so as to achieve appropriate diversity and to balance risk by asset class (bonds, equities and commodities) and by asset within each asset class. Neutral risk weighting is achieved when each asset class contributes an equal proportion of the total Portfolio risk and each asset contributes an equal proportion of the total risk for its respective asset class. The Manager is permitted to actively vary asset class weightings, subject to a maximum of 150% and a minimum of 50% of each asset class’s neutral weight. The Manager is also permitted to actively vary individual asset weightings, provided the asset class guidelines are not violated. Asset weights may not be less than zero (short) and will not exceed twice the neutral weight. For the purposes of the maximum weighting only, commodity exposures are aggregated and measured by commodity complex rather than by individual assets.
The Portfolio will be mainly invested directly in highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. However, the Portfolio may also be invested in equities, equity-related securities and debt securities (including floating rate notes). Financial derivative instruments (including but not limited to futures and total return swaps) are used only to achieve long exposure to the three asset classes. The Portfolio may also use financial derivative instruments, including currency futures and forwards, for efficient portfolio management, hedging and investment purposes. Financial derivative instruments will not be used to create net short positions in any asset class. The derivatives portfolio will typically comprise between 20 and 33 investment positions.
It is expected that the Portfolio’s investments will mainly be denominated in sterling. Any non-sterling derivative investments may be hedged back into sterling at the discretion of the Manager when it is economic to do so.
Investment Limit
The Board has prescribed the following limits on the investment policy of the Balanced Risk Allocation Portfolio:
• the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Allocation Portfolio; and
• no more than 10% of the gross assets of the Balanced Risk Allocation Portfolio may be held in other listed investment companies.
Managed Liquidity Share Portfolio
Investment Objective
The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Investment Policy and Risk
The Managed Liquidity Portfolio invests mainly in a range of sterling-based or related high quality debt securities and similar assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through authorised funds investing in such instruments, including funds managed by Invesco.
The Managed Liquidity Portfolio generally invests in funds authorised as UCITS schemes (Undertakings for Collective Investments in Transferable Securities, being open ended retail investment funds), which are required under governing regulations to provide a prudent spread of risk. In the event that the Managed Liquidity Portfolio is invested directly in securities and instruments, the Manager will observe investment restrictions and risk diversification policies that are consistent with UCITS regulations.
Investment Limits
The Board has prescribed limits on the investment policy of the Managed Liquidity Portfolio, which include the following:
• no more than 10% of the gross assets of the Managed Liquidity Portfolio may be held in a single investment, other than authorised funds or high quality sovereign debt securities; and
• no more than 5% of the gross assets of the Managed Liquidity Portfolio may be held in unquoted investments, other than authorised funds.
Investors should note that the Managed Liquidity Shares are not designed to replicate the returns or other characteristics of a bank or building society deposit or money market fund. In particular, the Portfolio will typically contain some assets with a greater residual maturity, and as a whole will have greater weighted average maturity, than is prescribed by regulation governing money market funds. As such, the Portfolio may be more sensitive to and impacted by interest rate movements and other factors.
Key Performance Indicators
The Board reviews the performance of the Company by reference to a number of Key Performance Indicators, at either a Company or Portfolio level, which include the following:
• Investment Performance
• Revenue and Dividends
• Discount/Premium
• Ongoing Charges
Investment Performance
To assess investment performance the Board monitors the net asset value (NAV) performance of the individual Share classes relative to that of benchmark indices it considers to be appropriate. However, given the requirements and constraints of the investment objectives and policies followed, no index can be expected to fully represent the performance that might reasonably be expected from any one or all of the Company’s Share classes.
The NAV total return performance of each of the Portfolios over the year to 31 May 2022 and of relevant benchmark indices were as follows:
| UK Equity Portfolio | 6.8% |
| FTSE All-Share Index | 8.3% |
| Global Equity Income Portfolio | 9.6% |
| MSCI World Index (£) | 7.4% |
| Balanced Risk Allocation Portfolio | 0.3% |
| Composite Benchmark | –6.1% |
| ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum | 5.1% |
| Managed Liquidity Portfolio | –0.3% |
Source: Refinitiv.
Other performance periods, together with share price total returns, are shown on pages 9, 16, 23 and 29.
Revenue and Dividends
The Directors review revenue estimates and prospective dividend levels at each Board meeting. For the equity Share classes the Directors have become more focused on total return since sanctioning contributions to dividends from capital, but dividends paid continue to be mostly constituted from revenue and revenue is an important element of overall Portfolio returns.
UK Equity Shares
Revenue earnings per Share for the UK Equity Share Portfolio was 6.00p (2021: 3.90p), based on net revenue for the year of £4,697,000 (2021: £1,322,000), which included £438,000 (2021: nil) of non-recurring special dividends.
Dividend Policy:
It is the Board’s policy that the Directors will declare four dividends in respect of each accounting year (with payment in the month following) comprising of three equal interim dividends, declared in July, October and January, and a ‘wrap-up’ fourth interim dividend, declared in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the Board’s target level. In recent years the Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. The Directors did not set dividend targets for the year to 31 May 2022 due to the uncertainty of income flows as a result of the impact of Covid-19. Given the ongoing uncertainty to income flows, due in particular to the risk of entering a period of global recession, the Directors have not set dividend targets for the year to 31 May 2023.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended 31 May 2022 totalling 6.70p per UK Equity Share (2021: 6.65p) of which 6.00p (2021: 3.90p) was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £5,213,000 (2021: £1,814,000) – the large increase reflects the larger number of shares in issue following the issue of shares due to the business combination with Invesco Income Growth Trust plc in April 2021.
A first interim dividend for the year to 31 May 2023 of 1.50p was declared on 14 July 2022. In the absence of unforeseen circumstances, and in accordance with the dividend policy set out above, the Board intends for this to set the level for the next two quarterly dividends.
Global Equity Income Shares
Revenue earnings per Share for the Global Equity Income Share Portfolio was 4.85p (2021: 3.95p), based on net revenue for the year of £1,197,000 (2021: £1,024,000), which included £149,000 (2021: £192,000) of non-recurring special dividends.
Dividend Policy:
It is the Board’s policy that the Directors will declare four dividends in respect of each accounting year (with payment in the month following) comprising of three equal interim dividends, declared in July, October and January, and a ‘wrap-up’ fourth interim dividend, declared in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the Board’s target level. In recent years the Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual Global Equity Income dividends per share from year to year. The Directors did not set dividend targets for the year to 31 May 2022 due to the uncertainty of income flows as a result of the impact of Covid-19. Given the ongoing uncertainty to income flows, due in particular to the risk of entering a period of global recession, the Directors have not set dividend targets for the year to 31 May 2023.
Dividends Declared:
The Directors have declared and paid four interim dividends for the year ended 31 May 2022 totalling 7.15p (2021: 7.10p) per Global Equity Income Share, of which 4.85p (2021: 3.95p) was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £1,757,000 (2021: £1,815,000) – the decrease reflects the reduction of shares in issue following conversions and buybacks in the year.
A first interim dividend for the year to 31 May 2023 of 1.55p was declared on 14 July 2022. In the absence of unforeseen circumstances, and in accordance with the dividend policy set out above, the Board intends for this to set the level for the next two quarterly dividends.
Balanced Risk Allocation Shares
In order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust under section 1158 of the Corporation Tax Act 2010. The Portfolio recorded a net revenue return of £44,000 in the year (2021: £8,000 net loss).
No dividends are required to be declared or paid for the year to retain investment trust status.
Managed Liquidity Shares
The Board intends to declare dividends on the Managed Liquidity Share Portfolio when the level of income available allows. The Directors declared and paid one interim dividend for the year ended 31 May 2022 totalling 1.00p (2021: nil). The Managed Liquidity Portfolio recorded a net revenue loss for the year of £1,000 (2021: profit of £33,000, including a one-off refund of management fees of £34,000).
A first interim dividend for the year to 31 May 2023 of 1.00p was declared on 14 July 2022 and this will be funded from revenue reserves. It is unlikely, given the quantum of revenue being earned, that future dividends will be more frequent than annual and they could be less frequent.
Discount
The Company has a discount control policy in place for all four Share classes, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the market price of the shares at close to their respective net asset values and, by so doing, avoid significant overhangs or shortages in the market. It is the Board’s policy to buy back shares and to sell shares from treasury on terms that do not dilute the net asset value attributable to existing shareholders at the time of the transaction. The Board reviews the buy back parameters from time to time taking into account current market conditions and other factors and instructs the brokers accordingly.
The operation of this policy is dependent upon the authorities to buy back and issue shares being renewed by shareholders. Notwithstanding the intended effect of this policy, there can be no guarantee that the Company’s shares will trade at close to their respective net asset values. Shareholders should also be aware that there is a risk that this discount policy may lead to a reduction in the size of the Company over time.
The Board and the Manager closely monitor movements in the Company’s share prices and dealings in the Company’s shares. Share movements in the year are summarised on page 43. At 31 May 2022, the share prices, net asset values (‘NAV’) and the discounts of the four Share classes were as follows:
| 2022 | 2021 | |||||
| Net Asset | Share | Net Asset | Share | |||
| Value | Price | Value | Price | |||
| Share Class | (Pence) | (Pence) | Discount | (Pence) | (Pence) | Discount |
| UK Equity | 194.35 | 175.00 | (10.0)% | 188.33 | 176.00 | (6.5)% |
| Global Equity Income | 249.00 | 229.00 | (8.0)% | 233.91 | 226.00 | (3.4)% |
| Balanced Risk Allocation | 169.87 | 154.50 | (9.0)% | 169.33 | 163.00 | (3.7)% |
| Managed Liquidity | 106.92 | 97.00 | (9.3)% | 108.11 | 102.00 | (5.7)% |
The following charts show the premium/(discount) at which the Shares traded over the two years to 31 May 2022. The Shares of all four Portfolios have, generally traded in a range of 3% premium to 13% discount. As can be seen below and on the following page, since the onset of Covid-19 in March 2020 and the more recent conflict in Ukraine, the volatility in markets has led to higher levels of discount being seen sporadically throughout the period.
Source: Refinitiv.
Ongoing Charges
The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure is calculated by dividing the annualised ongoing charges, including those charged to capital, by the average daily net asset value during the year, expressed as a percentage.
At the year end the ongoing charges figure of the Company and that for the different Share classes were as follows:
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | ||
| Company | Equity | Income | Allocation | Liquidity | |
| 2022 | 0.76% | 0.74% | 0.78% | 1.09% | 0.45% |
| 2021 | 0.87% | 0.91% | 0.81% | 1.21% | 0.39% |
The above excludes rebates received by the Managed Liquidity Portfolio. Performance fee arrangements were removed from both the UK Equity and Global Equity Income Share Portfolios in 2021, hence a performance fee is no longer payable. In addition to inflationary effects, shrinkage from buybacks in connection with the discount control policy will tend to cause the ongoing charge percentages to gradually increase.
Financial Position
Assets and Liabilities
The Company’s balance sheet on page 80 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 13 of the financial statements on page 92, with interest paid (finance costs) in note 5.
Owing to the readily realisable nature of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchases and sales of investments and the income from investments against which must be set the costs of borrowing and management expenses.
Borrowing Policy
Borrowing policy is under the control of the Board, which has established effective parameters for the portfolios. Borrowing levels are regularly reviewed. As part of the Company’s Investment Policy, the approved borrowing limits are 25% of the net assets of the UK Equity Portfolio and 20% of net assets of the Global Equity Income Portfolio. The Balanced Risk Allocation Portfolio does not use borrowings, but is geared by means of the derivative instruments used to implement its investment policy. The Managed Liquidity Portfolio does not use borrowings.
Issued Share Capital
All Share classes have a nominal value of 1 penny per Share.
The following table summarises the Company’s share capital at the year end and movements during the year.
| Global | Balanced | |||
| UK | Equity | Risk | Managed | |
| Number of shares | Equity | Income | Allocation | Liquidity |
| Shares held at the year end | ||||
| – excluding treasury | 73,772,657 | 25,155,784 | 4,170,938 | 1,238,254 |
| – held in treasury | 34,743,775 | 16,036,159 | 6,437,218 | 9,313,678 |
| Movements during the year: | ||||
| – increase/(decrease) arising from conversions | (2,552,831) | 1,967,979 | 266,843 | (306,425) |
| – shares bought back into treasury | (11,996,500) | (583,000) | (165,000) | (63,000) |
| – average price thereon | 184.1p | 227.7p | 165.5p | 104.0p |
Since the year end another 687,000 UK Equity Shares and 295,000 Global Equity Income Shares have been bought into treasury at average prices of 160.8p and 219.8p respectively.
Further details on net changes in issued share capital are set out in note 14 to the financial statements on pages 93 and 94. No treasury shares were cancelled during the year.
Current and Future Developments
As part of the Company’s overall strategy, the Company seeks to manage its affairs so as to maximise returns for shareholders. The Board also has a longer-term objective, consistent with the business combination with Invesco Income Growth Trust plc in April 2021, to increase the size of the Company in the belief that increasing the assets of the Company in this way will make the Company’s Shares more attractive to investors and improve the liquidity of the Shares.
Details of trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Chairman’s Statement and the Portfolio Managers’ reports. Further details as to the risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.
Principal Risks and Uncertainties
The Audit Committee regularly undertakes a robust assessment of the risks the Company faces, including those that would threaten its business model, future performance, solvency, reputation or liquidity and emerging risks, on behalf of the Board (see Audit Committee Report on pages 63 and 64). In carrying out this assessment, the Audit Committee together with the Manager, have considered emerging risks such as geopolitical risks, evolving cyber threats and climate related risks.
The following are considered to be the most significant risks to the Company and to shareholders in relation to their investments 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 17 to the financial statements.
| Category and Principal | Mitigating Procedures | Risk trend during |
| Risk Description | and Controls | the year |
| Strategic Risk | ||
| Investment Objectives and Attractiveness to Investors There is no guarantee that the Investment Policy of the Company and of each Portfolio will provide the returns sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives or that the Shares will continue to meet investors’ needs. |
The Board monitors the share registers and the performance of the Company and each Portfolio. It has established a structure offering a range of options for investors and has set guidelines to ensure that the Investment Policy of the Company and each Portfolio is pursued by the Manager. | Unchanged |
| Market Movements and Portfolio Performance Individual Portfolio performance is substantially dependent on the performance of the securities (including derivative instruments) held within the Portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies; interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The Manager strives to maximise the total return from Portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences on the performance of each Portfolio. Further risks specifically applicable to the Balanced Risk Allocation Shares are set out on page 47. The extreme market volatility experienced in February and March 2020 from the market reaction to Covid-19, and the continuing effects, exemplify the risks from external influences. There is an ongoing risk to global economies from measures taken in response to Covid-19, many companies remain at risk from the effects of imposed lockdowns or other restrictions on their production and revenues and this has a consequential effect on the availability of investment income. The risk could be triggered by unfavourable developments globally and/or in one or more regions, a contemporary example being the market uncertainty in relation to the ongoing invasion of Ukraine by Russia. | The performance of the Manager is carefully monitored by the Board and the continuation of the Manager’s mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of Share are pursued by the Manager. For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different Portfolios of the Company, please see both the Chairman’s Statement on pages 6 to 8 and the Portfolio Managers’ reports starting on pages 11 to 31. The Company has a nil-valued holding in Sberbank, a Russian bank but no other direct investments in Russia or other holdings with significant links to Russia. |
Increased |
| Risks Applicable to the Company’s Shares Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be no guarantee that any appreciation in the value of the Company’s Shares will occur and investors may not get back the full value of their investments. Owing to the potential difference between the mid-market price of the Shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect their mid-market price. The market value of a Share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield, where applicable, and prevailing interest rates, amongst other factors. As such, the market value of a Share can fluctuate and may not reflect its underlying NAV. Shares may therefore trade at discounts to their NAVs. Past performance of the Company’s Shares is not necessarily indicative of future performance. |
The Board has adopted a discount control policy that applies to all Share classes and the Board and the Manager monitor the market rating of each Share class. While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective Portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the Shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity Portfolio dividends at levels set by the Board (see pages 41 and 42). |
Unchanged |
| Viability and Compulsory Conversion of a Class of Share It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the Company’s Share classes could result in the relevant Portfolio becoming too small to be viable. The continued listing on the Official List of each class of Share is dependent on at least 25% of the Shares in that class being held in public hands. This means that if more than 75% of the Shares of any class were held by, inter alia, the Directors, persons connected with Directors or persons interested in 5% or more of the relevant Shares, the listing of that class of Share might be suspended or cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but in the event that the listing of any class of Shares were cancelled the Company would lose its investment trust status. |
||
| The Board monitors share conversions and Portfolio sizes and liaises with the Manager on the continued viability of each Share class. If at any time the Board considers that the listing of any class of Share on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant Shares requiring them to convert their Shares into another Share class. |
Unchanged |
|
| Liability of a Portfolio for the Liabilities of Another Portfolio | The Directors intend that, in the absence of unforeseen circumstances, each Portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors:
|
Unchanged |
| Gearing Borrowing will amplify the effect on shareholders’ funds of gains and losses on the underlying securities. Whilst the use of borrowings by the Company should enhance the total return on a particular class of Share where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling, further reducing the total return on that Share class. Similarly, the use of gearing by investment companies or funds in which the Company invests increases the volatility of those investments. The Company has a £40 million 364 day multicurrency revolving credit facility and there is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities. |
Gearing levels of the different Portfolios will change from time to time in accordance with the respective Portfolio Managers’ assessments of risk and reward. The Manager assesses the exposure to gearing on a regular basis, including the level of borrowings and covenants of the credit facility. The Balanced Risk Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 40) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Allocation Shares. |
Unchanged |
| Hedging Where hedging is used there is a risk that the hedge will not be effective. |
The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time. | Unchanged |
| Regulatory and Tax Related The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being subject to UK Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, could 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 the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager’s compliance and internal audit officers report regularly to the Company’s Audit Committee. The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 17 to the financial statements. |
Unchanged |
| Additional Risks Applicable to Balanced Risk Allocation Shares The use of financial derivative instruments, in particular futures, forms part of the investment policy and strategy of the Balanced Risk Allocation Portfolio. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss to the Portfolio. The Portfolio’s ability to use these instruments may be limited by market conditions, regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to liquidate a financial derivative instrument at an advantageous price. |
The Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the Portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements. | Unchanged |
| Third Party Service Providers Risk | ||
| Reliance on Third Party Service Providers 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 successfully pursue its Investment Policy. The Company has no employees and the Board comprises non-executive directors only. The Company is therefore reliant upon the performance of third-party service providers for its executive function and service provisions. The Company’s operational structure means that all cyber risk (information and physical security) arises at its third-party service providers, including fraud, sabotage or crime against the Company. The Company’s operational capability relies upon the ability of its third-party service providers to continue working throughout the disruption caused by a major event such as the Covid-19 pandemic. 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 successfully pursue its investment policy. The Company’s main service providers, of which the Manager is the principal provider, are listed on page 115. 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. Damage to the reputation of the Manager could potentially result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company, which carries the Manager’s name. This could have an adverse impact on the ability of the Company to pursue its investment policy successfully. |
Third-party service providers are subject to ongoing monitoring by the Manager and the Company. The Manager reviews the performance of all third-party providers regularly through formal and informal meetings. The Audit Committee reviews regularly the performance and internal controls of the Manager and all third-party providers through audited service organisation control reports, together with updates on information security, the results of which are reported to the Board. The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements. The Board receives regular update reports from the Manager and third-party service providers on business continuity processes and has been provided with assurance from them all insofar as possible that measures are in place for them to continue to provide contracted services to the Company. |
Unchanged |
Viability Statement
The Company is an investment company which operates as a collective investment vehicle, designed and managed for long term investment. The Board considers long term for this purpose to be at least three years and so has assessed the Company’s viability over this 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 Board considered the principal and emerging risks to which it is exposed, as set out on pages 44 to 48, together with mitigating factors. The risks of failure to meet the Company’s and the Portfolios’ investment objectives, contributory market and investment risks and the challenges of lack of scale have been considered to be of particular importance. The Board also took into account the capabilities of the Manager and the varying market conditions already experienced by the Company since its launch in 2006, including the impact of Covid-19 from March 2020 on global economies and the conflict in Ukraine. Despite the disruption to markets from these recent events, the Directors remain confident that the Company’s investment strategies will continue to serve shareholders well over the longer term. On the question of scale, the Board has also concluded that if an individual Portfolio became too small it should not cause the Company itself to be unviable.
In terms of financial risks to viability, materially all of the investments comprising the portfolios are readily realisable. The equity portfolios also produce a stream of dividend income, which may fluctuate but which the Board expects to continue. The Company has no long term liabilities and the total value of the portfolios more than covers the value of the Company’s short term liabilities and annual operating costs. In arriving at this assessment, the Board considered stressed scenario-testing for both income and loan covenants; borrowing structure; level of gearing; and the liquidity of the portfolios. Consequently, there appears little to no prospect of the Company not being able to meet its financial obligations as they fall due in the next three years.
Based on the above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
Audit Committee Report
The audit committee report required by the AIC Corporate Governance Code is set out on pages 63 and 64. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.
Duty to Promote the Success of the Company (s.172)
The Directors have a statutory duty under section 172 of the Companies Act 2006 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. The Company has no employees and no customers in the traditional sense and 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. In doing so, it has due regard to the impact of its actions on other stakeholders including the Manager, other third-party service providers and the impact of the Company’s operations on the community and the environment which are all taken into account during all discussions and as part of the Board’s decision making.
The Board is committed to maintaining open channels of communication and engagement with stakeholders in a manner which they find most meaningful. The table below sets out how the Board engages with each of its key stakeholders:
| Stakeholder | Key considerations and engagement |
| Shareholders – continued shareholder support and engagement are important to the business and the delivery of its long-term strategy. Further details of our strategy can be found on pages 39 to 41. | Shareholder relations are given high priority by the Board and the Manager. The prime means by which the Company communicates with shareholders are the annual and half-yearly financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and its results. This information is supplemented by daily publication of the NAVs of the Company’s shares via the London Stock Exchange, ad hoc regulatory announcements, monthly factsheets and other information on the Manager’s website www.invesco.co.uk/investmenttrusts, including pre-investment information, Key Information Document (‘KID’), shareholder circulars, Portfolio disclosures, conversion forms and instructions, Stock Exchange announcements, schedule of matters reserved for the Board, terms of reference of Board Committees, Directors’ letters of appointment, the Company’s share price and proxy voting results. The Chairman and Directors welcome contact with shareholders. There is a regular dialogue between the Manager and individual major shareholders to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop a balanced understanding of their issues and concerns. The Company’s corporate broker, Investec Bank plc, is also consulted. General presentations to institutional shareholders and analysts take place throughout the year. All meetings between the Manager and institutional shareholders are reported to the Board. It is the intention of the Board that the annual financial report and the notice of the AGM be issued to shareholders so as to provide at least twenty working days’ notice of the AGM. Shareholders wishing to lodge questions in advance of the AGM are invited to do so in writing to the Company Secretary at the address given on page 115. |
| The Manager – the Manager’s performance is critical for the Company to successfully deliver its investment strategy and meet its objective to provide shareholders with consistent long-term returns. Further details of the Portfolio Managers investment approach can be found in the Portfolio Manager Reports on pages 11 to 31. | The Board engages with the Manager at every Board meeting and reviews the Company’s relationships with other service providers, such as the registrar, depositary and custodian, at least annually. During the year the most significant engagement was with the Manager and, in particular the individual Portfolio Managers. At every Board meeting the Directors receive an investor relations update from the Manager, which details any significant changes in the Company’s shareholder register, shareholder feedback, as well as noti?cations of any publications or press articles. Maintaining a close and constructive working relationship with the Manager is crucial as the Board and the Manager both aim to achieve consistent, long-term returns in line with the Company’s investment strategy. Important components in the collaboration with the Manager, representative of the Company’s culture are:
|
| Third-party Service Providers – in order to function as an investment trust with a premium listing on the London Stock Exchange, the Company relies on a diverse range of reputable advisers for support in meeting all relevant obligations. | The Board through the Manager maintains regular contact with its key external service providers and receives regular reporting from them, both through the Board and committee meetings, as well as outside of the regular meeting cycle. Their advice, as well as their needs and views are routinely taken into account. The Board (through the Management Engagement Committee) formally assesses the third-party service providers’ performance, fees and continuing appointment annually to ensure that the key service providers continue to function at an acceptable level and are appropriately remunerated to deliver the expected level of service. The Audit Committee reviews and evaluates the financial reporting control environments in place at each service provider. There have been no material changes to the level of service provided by the Company’s third-party suppliers as a result of the Covid-19 pandemic. |
| Investee Companies – the Board recognises the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. | On the Company’s behalf the Portfolio Managers engage with investee companies, particularly in relation to ESG matters and shares held in the portfolio are voted at general meetings. Examples of Portfolio Managers engagement with investee companies can be found on pages 37 to 38. |
| Regulators – the Company can only operate as an investment trust if it conducts its affairs in compliance with such status. Interaction with regulators such as the Financial Conduct Authority (‘FCA)’ and Financial Reporting Council (‘FRC’), who have a legitimate interest in how the Company operates in the market and treats its shareholders, and industry bodies such as the Association of Investment Companies, remains an area of Board focus. | The Company regularly considers how it meets various regulatory and statutory obligations and how any governance decisions it makes can have an impact on its stakeholders, both in the shorter and in the longer term. The Board receives reports from the Manager and Auditor on their respective regulatory compliance and any inspections or reviews that are commissioned by regulatory bodies. The Company is a member of the AIC, which looks after the interests of investment trusts and provides information to the market. Comprehensive information relating to the Company can be found on the AIC website, www.aic.co.uk. As a member of the AIC, the Company is welcomed to comment on consultations and proposal documents on matters affecting the Company and annually to nominate and vote for future board members. |
The mechanisms for engaging with stakeholders are kept under review by the Directors and will be discussed on a regular basis at Board meetings to ensure that they remain effective. Examples of key discussions and considerations of the Board made during the year were:
• to consider the continued impact of Covid-19 and the impact of global events such as the situation in Ukraine on the Company and portfolio holdings;
• to consider and approve the renewal of the Company’s loan facility;
• to consider and approve four quarterly dividend payments (see page 41 and 42 for further details);
• to consider and approve four quarterly share conversions (see page 2 for further details); and
• to consider and approve the ongoing use of share buybacks as part of the Board’s adopted discount policy (see page 42 for further details).
Board Diversity
The Company’s policy on diversity is set out on page 57. The Board takes into account many factors, including the balance of skills, knowledge, diversity (including gender) and experience, amongst other factors when reviewing its composition and appointing new directors. The Board has considered the recommendations of the Davies and Hampton-Alexander review as well as the Parker review, but does not consider it appropriate to establish targets or quotas in this regard. There are no set targets in respect of diversity, including gender. However, diversity forms part of both the Nomination Committee and main Board’s deliberations when considering new appointments. The Company’s success depends on suitably qualified candidates who are willing, and have the time, to be a director of the Company. Summary biographical details of the Directors are set out on page 54. The Company has no employees.
The Board notes the new FCA rules on diversity and inclusion on company boards introduced for accounting periods starting on or after 1 April 2022 and will report fully on compliance with those rules in the Company’s annual financial report for the year ended 31 May 2023. However, in compliance with two of the three new FCA rules, at the year end the Board comprised five directors, two of whom are women, thereby constituting 40% female representation and both the Chairman of the Board and Senior Independent Director appointments are women.
Environment, Social and Governance (‘ESG’) Matters
In relation to the portfolios, 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 considered in the context of its responsibility to manage investments in the financial interests of shareholders.
The Manager is committed to being a responsible investor and applies, and is a signatory to, the United Nations Principles for Responsible Investment (‘PRI’), which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency. The Manager achieved a global ‘A+’ rating for its overall approach to responsible investment for the last four years as well as achieving an ‘A’ or ‘A+’ across all categories in the latest available assessment period from PRI for Strategy and Governance. In addition, the Manager is an active member of the UK Sustainable Investment and Finance Association as well as a supporter of the Task Force for Climate Related Financial Disclosure (‘TCFD’) since 2019. The Manager published its Climate Change report in line with the TCFD in November 2021. Although TCFD does not apply directly for the Company at present, the Board confirms that it will comply with all reporting regulations as they are implemented.
The Manager has also complied with the spirit of the Sustainable Finance Disclosure Regulation (‘SFDR’) which came into effect within the European Union on 10 March 2021 and introduces a number of sustainability-related disclosure requirements for financial market participants.
The wider Invesco investment team incorporates ESG considerations in its investment process as part of the evaluation of new opportunities, with identified ESG concerns feeding into the final investment decision and assessment of relative value. The Portfolio Managers make their own conclusions about the ESG characteristics of each investment held and about the overall ESG characteristics of the portfolios, although third party ESG ratings may inform their view. Additionally, the Manager’s ESG team provides formalised ESG portfolio monitoring. This is a rigorous semi-annual process where the portfolios are reviewed from an ESG perspective.
Regarding stewardship, the Board considers that the Company has a responsibility as a shareholder towards ensuring that high standards of corporate governance are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company’s voting rights are exercised on an informed and independent basis.
Further details are shown in the ESG Statement from the Manager on pages 34 to 38.
The Company’s stewardship functions have been delegated to the Manager. The Manager has adopted a clear and considered policy towards its responsibility as a shareholder on behalf of the Company. As part of this policy, the Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The Manager is also a Tier 1 signatory of the Financial Reporting Council’s Stewardship Code, 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.
A copy of the current Manager’s Stewardship Policy can be found at www.invesco.co.uk.
A greenhouse gas emissions statement is included in the Directors’ Report on page 58.
Modern Slavery
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
This Strategic Report was approved by the Board on 3 August 2022.
Invesco Asset Management Limited
Company Secretary
Statement of Directors’ Responsibilities
IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT.
The Directors are responsible for preparing the Annual Financial Report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in the 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 profit or loss 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 judgements and estimates that are reasonable and prudent;
• state whether applicable 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 that 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 the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration 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 Auditor is 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 Auditor is aware of that information.
The Directors of the Company each confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and
• this 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.
The Directors consider that this 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.
Signed on behalf of the Board of Directors
Victoria Muir
Chairman
3 August 2022
Electronic Publication
The Annual Financial Report is published on the Manager’s website www.invesco.co.uk/investmenttrusts. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, which is maintained by the Company’s Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Income Statement
FOR THE YEAR ENDED 31 MAY
| 2022 | 2021 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| Notes | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Gains on investments held at fair value | 9 | — | 9,824 | 9,824 | — | 28,391 | 28,391 |
| Gains/(losses) on derivative instruments | 10 | 72 | (32) | 40 | 38 | 1,701 | 1,739 |
| Gains/(losses) on foreign exchange | — | 43 | 43 | — | (104) | (104) | |
| Income | 2 | 6,988 | — | 6,988 | 3,184 | 539 | 3,723 |
| Investment management fees | 3 | (360) | (836) | (1,196) | (198) | (454) | (652) |
| Performance fee waiver | 3 | — | — | — | — | 531 | 531 |
| Other expenses | 4 | (502) | (6) | (508) | (385) | (23) | (408) |
| Net return before finance costs and taxation | 6,198 | 8,993 | 15,191 | 2,639 | 30,581 | 33,220 | |
| Finance costs | 5 | (70) | (165) | (235) | (38) | (90) | (128) |
| Return before taxation | 6,128 | 8,828 | 14,956 | 2,601 | 30,491 | 33,092 | |
| Tax | 6 | (191) | — | (191) | (230) | — | (230) |
| Return after taxation for the financial year | 5,937 | 8,828 | 14,765 | 2,371 | 30,491 | 32,862 | |
| Return per ordinary share (basic and diluted) | 7 | ||||||
| – UK Equity Share Portfolio | 6.00p | 6.07p | 12.07p | 3.90p | 41.42p | 45.32p | |
| – Global Equity Income Share Portfolio | 4.85p | 16.66p | 21.51p | 3.95p | 57.28p | 61.23p | |
| – Balanced Risk Allocation Share Portfolio | 1.05p | (0.83)p | 0.22p | (0.17)p | 33.10p | 32.93p | |
| – Managed Liquidity Share Portfolio | (0.07)p | (0.28)p | (0.35)p | 1.35p | 0.95p | 2.30p | |
The total column of this statement represents the Company’s Income Statement prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the current year. Income Statements for the different Share classes are shown on pages 15, 22, 28 and 32 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.
The accompanying accounting policies and notes are an integral part of these financial statements.
Statement of Changes in Equity
FOR THE year ended 31 May
| Capital | ||||||||
| Share | Share | Special | redemption | Capital | Revenue | |||
| capital | premium | reserve | reserve | reserve | reserve | Total | ||
| Notes | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| At 31 May 2020 | 1,050 | 1,290 | 55,454 | 359 | 49,568 | (52) | 107,669 | |
| Cancellation of deferred shares | — | — | (5) | 5 | — | — | — | |
| Shares bought back and held in treasury | — | — | (28,704) | — | — | — | (28,704) | |
| Share conversions | (1) | — | 1 | — | — | — | — | |
| Return after taxation per the income statement | — | — | — | — | 30,491 | 2,371 | 32,862 | |
| Dividends paid | 8 | — | — | (1,283) | — | — | (2,346) | (3,629) |
| Issue of shares on business combination | 666 | 121,859 | — | — | — | — | 122,525 | |
| Cost of shares issued in respect of the business combination | — | (159) | — | — | — | — | (159) | |
| At 31 May 2021 | 1,715 | 122,990 | 25,463 | 364 | 80,059 | (27) | 230,564 | |
| Cancellation of deferred shares | — | — | (8) | 8 | — | — | — | |
| Shares bought back and held in treasury | 15 | — | — | (10,438) | — | (13,485) | — | (23,923) |
| Share conversions | (6) | — | 4,478 | — | (4,472) | — | — | |
| Return after taxation per the income statement | — | — | — | — | 8,828 | 5,937 | 14,765 | |
| Dividends paid | 8 | — | — | (560) | — | (516) | (5,909) | (6,985) |
| At 31 May 2022 | 1,709 | 122,990 | 18,935 | 372 | 70,414 | 1 | 214,421 |
The accompanying accounting policies and notes are an integral part of these financial statements.
Balance Sheet
AS AT 31 MAY 2022
| Global | Balanced | |||||
| UK | Equity | Risk | Managed | Company | ||
| Equity | Income | Allocation | Liquidity | Total | ||
| Notes | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Fixed assets | ||||||
| Investments held at fair value through profit or loss | 9 | 158,450 | 67,630 | 6,233 | 1,445 | 233,758 |
| Current assets | ||||||
| Derivative assets held at fair value through profit or loss | 10 | — | — | 362 | — | 362 |
| Debtors | 11 | 804 | 351 | 331 | 8 | 1,494 |
| Cash and cash equivalents | 322 | 215 | 401 | 9 | 947 | |
| 1,126 | 566 | 1,094 | 17 | 2,803 | ||
| Creditors: amounts falling due within one year | ||||||
| Derivative liabilities held at fair value through profit or loss | 10 | — | — | (225) | — | (225) |
| Other creditors | 12 | (448) | (206) | (17) | (138) | (809) |
| Bank facility | 13 | (15,754) | (5,352) | — | — | (21,106) |
| (16,202) | (5,558) | (242) | (138) | (22,140) | ||
| Net current (liabilities)/assets | (15,076) | (4,992) | 852 | (121) | (19,337) | |
| Net assets | 143,374 | 62,638 | 7,085 | 1,324 | 214,421 | |
| Capital and reserves | ||||||
| Share capital | 14(a) | 1,085 | 412 | 106 | 106 | 1,709 |
| Share premium | 15 | 121,700 | — | 1,290 | — | 122,990 |
| Special reserve | 15 | — | 17,211 | 1,000 | 724 | 18,935 |
| Capital redemption reserve | 15 | 80 | 81 | 27 | 184 | 372 |
| Capital reserve | 15 | 20,509 | 44,934 | 4,683 | 288 | 70,414 |
| Revenue reserve | 15 | — | — | (21) | 22 | 1 |
| Shareholders’ funds | 143,374 | 62,638 | 7,085 | 1,324 | 214,421 | |
| Net asset value per ordinary share | 16 | 194.35p | 249.00p | 169.87p | 106.92p |
The financial statements were approved and authorised for issue by the Board of Directors on 3 August 2022.
Signed on behalf of the Board of Directors
Victoria Muir
Chairman
The accompanying accounting policies and notes are an integral part of these financial statements.
Balance Sheet
AS AT 31 MAY 2021
| Global | Balanced | |||||
| UK | Equity | Risk | Managed | Company | ||
| Equity | Income | Allocation | Liquidity | Total | ||
| Notes | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Fixed assets | ||||||
| Investments held at fair value through profit or loss | 9 | 176,434 | 63,902 | 5,741 | 1,809 | 247,886 |
| Current assets | ||||||
| Derivative assets held at fair value through profit or loss | 10 | — | — | 292 | — | 292 |
| Debtors | 11 | 1,040 | 299 | 190 | 36 | 1,565 |
| Cash and cash equivalents | 2,331 | 137 | 704 | 32 | 3,204 | |
| 3,371 | 436 | 1,186 | 68 | 5,061 | ||
| Creditors: amounts falling due within one year | ||||||
| Derivative liabilities held at fair value through profit or loss | 10 | — | — | (18) | — | (18) |
| Other creditors | 12 | (1,627) | (185) | (19) | (139) | (1,970) |
| Bank facility | 13 | (11,844) | (8,551) | — | — | (20,395) |
| (13,471) | (8,736) | (37) | (139) | (22,383) | ||
| Net current (liabilities)/assets | (10,100) | (8,300) | 1,149 | (71) | (17,322) | |
| Net assets | 166,334 | 55,602 | 6,890 | 1,738 | 230,564 | |
| Capital and reserves | ||||||
| Share capital | 14(a) | 1,111 | 392 | 103 | 109 | 1,715 |
| Share premium | 15 | 121,700 | — | 1,290 | — | 122,990 |
| Special reserve | 15 | 9,224 | 14,305 | 817 | 1,117 | 25,463 |
| Capital redemption reserve | 15 | 74 | 81 | 27 | 182 | 364 |
| Capital reserve | 15 | 34,225 | 40,824 | 4,718 | 292 | 80,059 |
| Revenue reserve | 15 | — | — | (65) | 38 | (27) |
| Shareholders’ funds | 166,334 | 55,602 | 6,890 | 1,738 | 230,564 | |
| Net asset value per ordinary share | 16 | 188.33p | 233.91p | 169.33p | 108.11p |
The accompanying accounting policies and notes are an integral part of these financial statements.
Cash Flow Statement
FOR THE YEAR ENDED 31 MAY
| 2022 | 2021 | ||
| Notes | £’000 | £’000 | |
| Cash flows from operating activities | |||
| Net return before finance costs and taxation | 15,191 | 33,220 | |
| Tax on overseas income | (191) | (230) | |
| Adjustments for: | |||
| Purchase of investments | (50,081) | (111,945) | |
| Sale of investments | 74,109 | 129,265 | |
| Sale of futures | 177 | 1,715 | |
| 24,205 | 19,035 | ||
| Scrip dividends | (676) | (9) | |
| Gains on investments | (9,824) | (28,391) | |
| Gains on derivatives | (40) | (1,739) | |
| (Increase)/decrease in debtors | (449) | 650 | |
| Decrease in creditors | (213) | (460) | |
| Net cash inflow from operating activities | 28,003 | 22,076 | |
| Cash flows from investing activities | |||
| Cash acquired following business combination(1) | — | 3,342 | |
| Net cash inflow from investing activities | — | 3,342 | |
| Cash flows from financing activities | |||
| Interest paid on bank facility | (234) | (128) | |
| Increase in bank facility | 708 | 10,612 | |
| Costs associated with the issue of shares on business combination(1) | — | (159) | |
| Share buy back costs | (23,749) | (29,357) | |
| Equity dividends paid | 8 | (6,985) | (3,629) |
| Net cash outflow from financing activities | (30,260) | (22,661) | |
| Net (decrease)/increase in cash and cash equivalents | (2,257) | 2,757 | |
| Cash and cash equivalents at the start of the year | 3,204 | 447 | |
| Cash and cash equivalents at the end of the year | 947 | 3,204 | |
| Reconciliation of cash and cash equivalents to the Balance Sheet is as follows: | |||
| Cash held at custodian | 747 | 1,114 | |
| Invesco Liquidity Funds plc – Sterling, money market fund | 200 | 2,090 | |
| Cash and cash equivalents | 947 | 3,204 | |
| Cash flow from operating activities includes: | |||
| Interest received | (1) | (1) | |
| Dividends received | 5,732 | 3,107 |
| At | At | ||||
| 1 June | Cash | 31 May | |||
| 2021 | Flows | 2022 | |||
| £’000 | £’000 | £’000 | |||
| Analysis of changes in net debt: | |||||
| Cash and cash equivalents | 3,204 | (2,257) | 947 | ||
| Bank facility | (20,392) | (708) | (21,100) | ||
| Total | (17,188) | (2,965) | (20,153) | ||
(1) For definition of business combination used in this annual financial report, refer to Glossary of Terms and Alternative Performance Measures on page 116.
The accompanying accounting policies and notes are an integral part of these financial 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.
The principal accounting policies are set out below:
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards, including FRS 102 ‘the Financial Reporting Standard applicable in the UK and Republic of Ireland’, and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies (AIC) in April 2021. The financial statements are issued on a going concern basis as disclosed on page 57.
The accounting policies applied to these financial statements are consistent with those applied for the preceding year.
(ii) Definitions used in the financial statements
‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Allocation Share Portfolio and/or the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or may include, an investment portfolio, derivative instruments, cash, loans, debtors and other creditors, which together make up the net assets as shown in the balance sheet.
‘Share’ UK Equity Share, Global Equity Income Share, Balanced Risk Allocation Share, Managed Liquidity Share and/or Deferred Share (as the case may be).
The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios’ income statements and summaries of net assets (shown on pages 15, 22, 28, 32 and 33) do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice and the auditor does not express an opinion on each individual portfolio. These have been disclosed to assist shareholders’ understanding of the assets and liabilities, and income and expenses of the different Share classes.
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement.
(iii) Functional and presentational currency
The Company’s investments are made in several currencies, however, the financial statements are presented in sterling, which is the Company’s functional currency. In arriving at this conclusion, the Directors considered that the Company’s shares are listed and traded on the London Stock Exchange, the shareholder base is predominantly in the United Kingdom and the Company pays dividends and expenses in sterling.
(iv) Transactions and balances
Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
(v) 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 the financial instruments, which is explained below.
(i) Recognition of Financial Assets and Financial Liabilities
The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company 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 right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.
(iii) Derecognition of Financial Liabilities
The Company derecognises financial liabilities when its obligations are discharged, cancelled or expire.
(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, including financial derivative instruments, are classified as held at fair value through profit or loss.
Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.
Fair value for investments, including financial derivative instruments, 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 with regard to the International Private Equity and Venture Capital Valuation Guidelines and on recommendations from Invesco’s Pricing Committee, both of which use valuation techniques such as earnings multiples, recent arm’s length transactions and net assets.
Financial liabilities
Financial liabilities, excluding financial derivative instruments but 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) Derivatives and hedging
Derivative instruments are valued at fair value in the balance sheet. Derivative instruments may be capital or revenue in nature and, accordingly, changes in their fair value are recognised in revenue or capital in the income statement as appropriate.
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 reserves.
Futures contracts may be entered into for hedging purposes and any profits and losses on the closure or revaluation of positions are included in capital reserves. Where futures contracts are used for investment exposure any income element arising on bond futures is recognised as a gain on derivative instruments in the income statement and shown in revenue.
(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, have a maturity of less than three months at date of origination and provide a return no greater than the rate of a three-month high quality government bond. For the Balanced Risk Allocation and Managed Liquidity Portfolios, cash and cash equivalents do not include investments in Invesco Liquidity Funds plc – Sterling as this forms part of those Portfolio’s fixed assets.
(e) Income
Dividend income from investments is recognised when the shareholders’ right to receive payment has been established, normally the ex-dividend date. UK dividends are stated net of related tax credits. Interest income arising from cash is recognised on an accruals basis and underwriting commission is recognised as earned. Special dividends are taken to revenue unless they arise from a return of capital, when they are allocated to capital in the income statement. Income from fixed income securities is recognised in the income statement using the effective interest method.
(f) Expenses and finance costs
All expenses are accounted for on an accruals basis. Expenses are charged to the income statement and shown in revenue except where expenses are presented as capital items when a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and thus management fees and finance costs are charged to revenue and capital to reflect the Directors’ expected long-term view of the nature of the investment returns of each Portfolio.
Expenses charged to the Company in relation to a specific Portfolio are charged directly to that Portfolio.
Expenses charged to the Company that are common to more than one Portfolio are allocated between those Portfolios in the same proportions as the net assets of each Portfolio at the latest conversion date.
Finance costs are accounted for on an accruals basis using the effective interest rate method.
The management fees and finance costs are charged in accordance with the Board’s expected split of long-term returns, in the form of capital gains and income, to the applicable Portfolio as follows:
| Revenue | Capital | |
| Portfolio | Reserve | Reserve |
| UK Equity | 30% | 70% |
| Global Equity Income | 30% | 70% |
| Balanced Risk Allocation | 30% | 70% |
| Managed Liquidity | 100% | – |
(g) Dividends
Dividends are accrued in the financial statements when there is an obligation to pay the dividends at the balance sheet date.
(h) Taxation
Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
For the Company, any allocation of tax relief to capital is based on the marginal basis, such that tax allowable capital expenses are offset against taxable income. Where individual Portfolios have extra tax capacity arising from unused tax allowable expenses which can be used by a different Portfolio, this extra tax capacity is transferred between the Portfolios at a valuation of 1% of the amount transferred.
Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.
A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.
Investment trusts which have approval under the appropriate tax regulations are not liable for taxation on capital gains.
2. Income
This note shows the income generated from the portfolios (investment assets) of the Company and income received from any other source.
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Income from investments: | |||||
| UK dividends: | |||||
| – ordinary dividends | 3,694 | 204 | — | — | 3,898 |
| – special dividends | 438 | 91 | — | — | 529 |
| – scrip dividends | 676 | — | — | — | 676 |
| 4,808 | 295 | — | — | 5,103 | |
| Overseas dividends: | |||||
| – ordinary dividends | 561 | 1,248 | 8 | 5 | 1,822 |
| – special dividends | — | 58 | — | — | 58 |
| Interest from Treasury bills | — | — | 4 | — | 4 |
| 5,369 | 1,601 | 12 | 5 | 6,987 | |
| Other income: | |||||
| Rebates of management fee | — | — | — | 1 | 1 |
| Total income | 5,369 | 1,601 | 12 | 6 | 6,988 |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Income from investments: | |||||
| UK dividends: | |||||
| – ordinary dividends | 1,460 | 142 | — | — | 1,602 |
| – scrip dividends | 9 | — | — | — | 9 |
| 1,469 | 142 | — | — | 1,611 | |
| Overseas dividends: | |||||
| – ordinary dividends | 187 | 1,147 | 2 | 3 | 1,339 |
| – special dividends | — | 192 | — | — | 192 |
| Interest from Treasury bills | — | — | 2 | — | 2 |
| 1,656 | 1,481 | 4 | 3 | 3,144 | |
| Other income: | |||||
| Rebates of management fee | — | — | — | 40(1) | 40 |
| Total income | 1,656 | 1,481 | 4 | 43 | 3,184 |
(1) Includes a £34,000 (1.40p per share) refund of unpaid management fees in respect of historic overcharges. As reported in the 2017 Half-Year Financial Report, it was agreed that the refund would be paid directly to affected shareholders and any unpaid amounts would be returned to the Company.
Special dividends recognised as revenue for the year are as shown above. There were no special dividends recognised in capital in respect of any of the four Portfolios during the year (2021: £539,000 in respect of the UK Equity Portfolio).
3. Investment management and performance fees
This note shows the fees paid to the Manager. These are made up of the individual Portfolio investment management fees calculated quarterly on the basis of their net asset values and the performance fees of the UK Equity and Global Equity Income Portfolios.
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Investment management fee: | |||||
| – charged to revenue | 240 | 102 | 16 | 2 | 360 |
| – charged to capital | 561 | 237 | 38 | — | 836 |
| Total investment management fee | 801 | 339 | 54 | 2 | 1,196 |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Investment management fee: | |||||
| – charged to revenue | 91 | 88 | 16 | 3 | 198 |
| – charged to capital | 213 | 204 | 37 | - | 454 |
| Total investment management fee | 304 | 292 | 53 | 3 | 652 |
Details of the investment management agreement are given on pages 57 and 58 in the Directors’ Report.
During the 2021 financial year, following the issue of shares pursuant to the Scheme of Reconstruction of Invesco Income Growth Trust plc (‘the business combination’), an improved fee structure was proposed for the UK Equity Share Portfolio and Global Equity Income Share Portfolio. The management fee payable by the Company in respect of these two share portfolios will be reduced to 0.55% per annum on the net assets of up to £100 million, and 0.50% per annum on the net assets of over £100 million.
As a result of the business combination in 2021, the Manager agreed to remove the performance fee arrangements which were in place for both the UK Equity and Global Equity Income Share Portfolios. Furthermore, the historical performance fee accrued on the UK Equity Share Portfolio of £531,000 was also waived by the Manager as a benefit towards the costs of the business combination and written-back to capital in the Income Statement in the 2021 financial year.
4. Other Expenses
The other expenses of the Company, including those paid to Directors and the auditor, are presented below; those paid to the Directors and the auditor are separately identified.
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Charged to revenue: | |||||
| Directors’ remuneration (i)(ii) | 103 | 38 | 4 | 1 | 146 |
| Auditor’s fees (iii): | |||||
| – for the audit of the Company’s financial statements | 34 | 15 | 2 | 1 | 52 |
| Other expenses (iv) | 200 | 83 | 18 | 3 | 304 |
| 337 | 136 | 24 | 5 | 502 | |
Charged to capital: |
|||||
| Custodian transaction charges | 2 | 2 | 2 | — | 6 |
| Total | 339 | 138 | 26 | 5 | 508 |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Charged to revenue: | |||||
| Directors’ remuneration (i)(ii) | 60 | 55 | 8 | 2 | 125 |
| Auditor’s fees (iii): | |||||
| – for the audit of the Company’s financial statements | 34 | 11 | 1 | 1 | 47 |
| Other expenses (iv) | 111 | 73 | 25 | 4 | 213 |
| 205 | 139 | 34 | 7 | 385 | |
| Charged to capital: | |||||
| Custodian transaction charges | 17 | 4 | 2 | — | 23 |
| Total | 222 | 143 | 36 | 7 | 408 |
(i) The Director’s Remuneration Report provides information on Directors’ fees. Included within other expenses is £13,000 (2021: £12,000) of employer’s national insurance payable on Directors’ remuneration.
(ii) As at 31 May 2022, the amounts outstanding on Directors’ fees and employer’s national insurance was £26,000 (2021: £26,000).
(iii) The Auditor’s fees shown include out of pocket expenses, but exclude VAT, which is included in other administrative expenses. In the 2021 financial year Grant Thornton UK LLP provided non-audit services related to work on the business combination with Invesco Income Growth Trust plc, which amounted to £23,000. This amount was recognised in investment gains and losses as part of professional fees in respect of the business combination.
(iv) Includes fees for depositary, broker and registrar, and also printing, postage and listing costs.
5. Finance Costs
Finance costs arise on any borrowing the Company has utilised in the year. The Company has a committed £40 million revolving credit facility (see note 13 for further details).
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Interest payable on borrowings repayable within one year as follows: | |||||
| – charged to revenue | 50 | 20 | — | — | 70 |
| – charged to capital | 118 | 47 | — | — | 165 |
| Total | 168 | 67 | — | — | 235 |
| 2021 | |||||
| Interest payable on borrowings repayable within one year as follows: | |||||
| – charged to revenue | 20 | 18 | — | — | 38 |
| – charged to capital | 48 | 42 | — | — | 90 |
| Total | 68 | 60 | — | — | 128 |
6. Tax
As an investment trust, the Company pays no tax on capital gains. However, the Company suffers tax on certain overseas dividends that is irrecoverable and this note shows details of the tax charge. In addition, this note clarifies the basis for the Company having no deferred tax asset or liability.
(a) Tax charge
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Overseas tax | 45 | 146 | — | — | 191 |
| 2021 | |||||
| Overseas tax | 18 | 212 | — | — | 230 |
The accounting policy for taxation is disclosed in note 1(h).
(b) Reconciliation of tax charge
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Return before taxation | 9,499 | 5,453 | 9 | (5) | 14,956 |
| Theoretical tax at the current | |||||
| UK Corporation Tax rate of 19.00% (2021: 19.00%) | 1,805 | 1,036 | 2 | (1) | 2,842 |
| Effect of: | |||||
| – Non-taxable losses on investments and derivatives | (1,035) | (832) | (2) | 1 | (1,868) |
| – Non-taxable losses on foreign exchange | 2 | (3) | — | — | (1) |
| – Non-taxable scrip dividends | (128) | — | — | — | (128) |
| – Non-taxable UK dividends | (677) | (39) | — | — | (716) |
| – Non-taxable UK special dividends | (83) | (15) | — | — | (98) |
| – Non-taxable overseas dividends | (107) | (218) | — | — | (325) |
| – Non-taxable overseas special dividends | — | (13) | — | — | (13) |
| – Foreign tax expensed | — | (2) | — | — | (2) |
| – Overseas tax | 45 | 146 | — | — | 191 |
| – Accrued income taxable on receipt | — | 6 | — | — | 6 |
| – Excess of allowable expenses over taxable income | 223 | 80 | — | — | 303 |
| Tax charge for the year | 45 | 146 | — | — | 191 |
| 2021 | |||||
| Return before taxation | 15,392 | 16,085 | 1,559 | 56 | 33,092 |
| Theoretical tax at the current | |||||
| UK Corporation Tax rate of 19.00% (2020: 19.00%) | 2,924 | 3,056 | 296 | 11 | 6,287 |
| Effect of: | |||||
| – Non-taxable gains on investments and derivatives | (2,521) | (2,871) | (320) | (5) | (5,717) |
| – Non-taxable losses on foreign exchange | 2 | 2 | 15 | — | 19 |
| – Non-taxable scrip dividends | (2) | — | — | — | (2) |
| – Non-taxable UK dividends | (274) | (27) | — | — | (301) |
| – Non-taxable overseas dividends | (35) | (216) | — | — | (251) |
| – Non-taxable special dividends | (102) | (37) | — | — | (139) |
| – Overseas tax | 18 | 212 | — | — | 230 |
| – Disallowable expenses | 3 | 1 | — | — | 4 |
| – Accrued income taxable on receipt | — | 1 | — | — | 1 |
| – Excess of allowable expenses over taxable income | 5 | 91 | 9 | (6) | 99 |
| Tax charge for the year | 18 | 212 | — | — | 230 |
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to retain such status for the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.
(c) Factors that may affect future tax charges
The Company has excess management expenses and loan relationship deficits of £16,922,000 (2021: £15,258,000) that are available to offset future taxable revenue. A deferred tax asset of £4,230,000 (2021: £3,814,000), measured at the standard corporation tax substantively enacted rate of 25% (2021: 25%) 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
Return per share is the amount of profit (or loss) generated for each share class in the financial year divided by the weighted average number of the shares in issue. The basic and diluted returns per share are identical as the ordinary shares for each of the portfolios are not dilutive.
Revenue, capital and total return per ordinary share is based on each of the returns after taxation shown by the income statement for the applicable Share class and on the following numbers of Shares being the weighted average number of Shares in issue throughout the year for each Share class:
| Average number of shares |
|||
| Share | 2022 | 2021 | |
| UK Equity | 78,338,470 | 33,926,654 | |
| Global Equity Income | 24,671,635 | 25,925,091 | |
| Balanced Risk Allocation | 4,178,755 | 4,733,820 | |
| Managed Liquidity | 1,440,703 | 2,436,740 | |
8. Dividends
Dividends are distributions of Portfolio returns to shareholders. These are determined by the Directors and paid four times a year.
Dividends paid for each applicable Share class, which represent distributions for the purpose of s1159 of the Corporation Tax Act 2010, follows:
| 2022 | 2021 | ||||||
| Number | Dividend | Total | Number | Dividend | Total | ||
| of shares | rate (pence) | £’000 | of shares | rate (pence) | £’000 | ||
| UK Equity | |||||||
| First interim | 83,711,988 | 1.50 | 1,256 | 30,584,941 | 1.50 | 459 | |
| Second interim | 78,889,303 | 1.50 | 1,183 | 29,379,249 | 1.50 | 440 | |
| Third interim | 76,191,115 | 1.50 | 1,143 | 26,871,720 | 1.50 | 403 | |
| Fourth interim | 74,135,486 | 2.20 | 1,631 | 23,814,892 | 2.15 | 512 | |
| 6.70 | 5,213 | 6.65 | 1,814 | ||||
| Global Equity Income | |||||||
| First interim | 23,770,805 | 1.55 | 368 | 27,605,800 | 1.55 | 428 | |
| Second interim | 24,551,255 | 1.55 | 381 | 26,376,118 | 1.55 | 409 | |
| Third interim | 24,846,796 | 1.55 | 385 | 25,557,022 | 1.55 | 396 | |
| Fourth interim | 24,920,131 | 2.50 | 623 | 23,745,988 | 2.45 | 582 | |
| 7.15 | 1,757 | 7.10 | 1,815 | ||||
| Managed Liquidity | |||||||
| First interim | 1,544,679 | 1.00 | 15 | — | — | — | |
| 1.00 | 15 | — | — | ||||
| Total paid in the year | 6,985 | 3,629 | |||||
No dividends have been paid to Balanced Risk Allocation shareholders during the year (2021: nil)
The Company’s dividend policy permits the payment of dividends by the UK Equity, Global Equity Income and Managed Liquidity Portfolios from capital. An analysis of dividends paid in the year from revenue and capital follows.
| Global | ||||
| UK | Equity | Managed | Company | |
| Equity | Income | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 |
| Dividends paid in the year: | ||||
| From revenue – current year | 4,697 | 1,197 | — | 5,894 |
| From revenue – reserves brought forward | — | — | 15 | 15 |
| From revenue | 4,697 | 1,197 | 15 | 5,909 |
| From capital | 516 | 560 | — | 1,076 |
| 5,213 | 1,757 | 15 | 6,985 | |
| Global | ||||
| UK | Equity | Managed | Company | |
| Equity | Income | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 |
| Dividends paid in the year: | ||||
| From revenue | 1,322 | 1,024 | — | 2,346 |
| From capital | 492 | 791 | — | 1,283 |
| 1,814 | 1,815 | — | 3,629 |
9. Investments held at fair value
The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange, and a small proportion of investments which are valued by the Directors as they are unlisted or not regularly traded. Gains and losses are either:
• realised, usually arising when investments are sold; or
• unrealised, being the difference from cost on the investments held at the year end.
(a) Analysis of investments by listing status
| 2022 | 2021 | ||
| £’000 | £’000 | ||
| UK listed investments | 161,557 | 178,775 | |
| Overseas listed investments(i) | 72,196 | 69,106 | |
| Unquoted hedge fund investments | 5 | 5 | |
| 233,758 | 247,886 |
(i) Includes the Invesco Liquidity Funds plc – Sterling, money market fund positions held by the Balanced Risk Allocation Portfolio of £3,512,000 (2021: £2,359,000) and Managed Liquidity Portfolio of £130,000 (2021: £140,000).
(b) Analysis of investment gains
| 2022 | 2021 | ||
| £’000 | £’000 | ||
| Opening valuation | 247,886 | 116,928 | |
| Movements in year: | |||
| Purchases at cost | 49,637 | 230,052 | |
| Sales proceeds | (73,589) | (127,485) | |
| Gains on investments in the year | 9,824 | 28,391 | |
| Closing valuation | 233,758 | 247,886 | |
| Closing book cost | 215,092 | 226,927 | |
| Closing investment holding gains | 18,666 | 20,959 | |
| Closing valuation | 233,758 | 247,886 |
The Company received £73,589,000 (2021: £127,485,000) from investments sold in the year. The book cost of these investments when they were purchased was £61,472,000 (2021: £125,833,000) realising a profit of £12,117,000 (2021: profit £1,652,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.
(c) Transaction costs
Transaction costs were £71,000 (2021: £257,000) on purchases and £36,000 (2021: £64,000) on sales and are included in investment gains and losses. Transaction costs in relation to the 2021 financial year investments acquired from the business combination are shown in 9(d) below.
(d) Purchases at cost
During the 2021 financial year £118,144,000 of investments were acquired in respect of the business combination. Stamp duty of £475,000 plus professional costs of £512,000 less cash benefits of £534,000 were incurred and recognised in investment gains and losses.
10. Derivative instruments
Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Allocation Portfolio uses futures, which represent agreements to buy or sell commodities or financial instruments at a pre-determined price in the future.
Excluding forward currency contracts used for currency hedging purposes.
| 2022 | 2021 | ||
| £’000 | £’000 | ||
| Opening derivative assets held at fair value through profit or loss | 292 | 401 | |
| Opening derivative liabilities held at fair value through profit or loss | (18) | (151) | |
| Opening net derivative assets held at fair value as shown in balance sheet | 274 | 250 | |
| Closing derivative assets held at fair value through profit or loss | 362 | 292 | |
| Closing derivative liabilities held at fair value through profit or loss | (225) | (18) | |
| Closing net derivative assets held at fair value shown in balance sheet | 137 | 274 | |
| Movement in derivative holding (liabilities)/assets | (137) | 24 | |
| Net realised gains on derivative instruments | 105 | 1,677 | |
| Net capital (losses)/gains on derivative instruments as shown in the income statement | (32) | 1,701 | |
| Net income arising on derivatives | 72 | 38 | |
| Total gains on derivative instruments | 40 | 1,739 |
The derivative assets/(liabilities) shown in the balance sheet are the unrealised gains/(losses) arising from the revaluation to fair value of futures contracts held in the Balanced Risk Allocation Share Portfolio, as shown on page 26.
11. Debtors
Debtors are amounts due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.
| 2022 | 2021 | ||
| £’000 | £’000 | ||
| Amounts due from brokers | — | 520 | |
| Collateral pledged for futures contracts | 321 | 187 | |
| Tax recoverable | 234 | 204 | |
| Prepayments and accrued income | 939 | 654 | |
| 1,494 | 1,565 |
12. Other creditors
Creditors are amounts owed by the Company and include amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor.
| 2022 | 2021 | ||
| £’000 | £’000 | ||
| Shares bought back | 174 | — | |
| Tax payable | 137 | 137 | |
| Amounts due to brokers | 85 | 1,205 | |
| Accruals | 413 | 628 | |
| Other payables | 809 | 1,970 |
Interest payable on the bank facility is included within the amounts outstanding on the bank facility as shown on the balance sheet.
13. Bank facility and overdraft
At the year end the Company had a £40 million (2021: £40 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 25 April 2023 (2021: 26 April 2022). In addition, an overdraft facility for the purpose of short term settlement is also available. Both facilities are with The Bank of New York Mellon. The interest payable on the credit facility is based on the Adjusted Reference Rate (principally SONIA, SOFR and €STR respectively in respect of loans drawn in GBP, USD and Euro) plus a margin for amounts drawn.
Under the bank facility’s covenants, the Company’s total indebtedness must not exceed 30% of total assets (excluding any Balanced Risk Allocation Portfolio assets) and the total assets must not be less than £120 million (2021: £120 million). The Company was in compliance with the covenants throughout the year and at year end.
At the year end, the interest payable on the bank facility was £6,000 (2021: £3,000).
14. Share Capital and Reserves
Share capital represents the total number of shares in issue, including treasury shares.
All shares have a nominal value of 1 pence.
(a) Movements in Share Capital during the Year
| Issued and fully paid: | |||||
| Global | Balanced | Total | |||
| UK | Equity | Risk | Managed | Share | |
| Equity | Income | Allocation | Liquidity | Capital | |
| Ordinary Shares (number) | |||||
| At 31 May 2021 | 88,321,988 | 23,770,805 | 4,069,095 | 1,607,679 | 117,769,567 |
| Shares bought back into treasury | (11,996,500) | (583,000) | (165,000) | (63,000) | (12,807,500) |
| Arising on share conversion: | |||||
| - August 2021 | (1,176,185) | 890,450 | 110,924 | (109,971) | (284,782) |
| - November 2021 | (578,188) | 375,541 | 83,750 | 57,345 | (61,552) |
| - February 2022 | (635,629) | 466,335 | 155,457 | (144,944) | (158,781) |
| - May 2022 | (162,829) | 235,653 | (83,288) | (108,855) | (119,319) |
| At 31 May 2022 | 73,772,657 | 25,155,784 | 4,170,938 | 1,238,254 | 104,337,633 |
| Treasury Shares (number) | |||||
| At 31 May 2021 | 22,747,275 | 15,453,159 | 6,272,218 | 9,250,678 | 53,723,330 |
| Shares bought back into treasury | 11,996,500 | 583,000 | 165,000 | 63,000 | 12,807,500 |
| At 31 May 2022 | 34,743,775 | 16,036,159 | 6,437,218 | 9,313,678 | 66,530,830 |
| Ordinary Shares of 1 penny each (£’000) | |||||
| At 31 May 2021 | 883 | 238 | 40 | 16 | 1,177 |
| Shares bought back into treasury | (119) | (6) | (2) | (1) | (128) |
| - August 2021 | (12) | 9 | 1 | (1) | (3) |
| - November 2021 | (6) | 4 | 1 | — | (1) |
| - February 2022 | (6) | 5 | 2 | (1) | — |
| - May 2022 | (2) | 2 | (1) | (1) | (2) |
| At 31 May 2022 | 738 | 252 | 41 | 12 | 1,043 |
| Treasury Shares of 1 penny each (£’000) | |||||
| At 31 May 2021 | 228 | 154 | 63 | 93 | 538 |
| Shares bought back into treasury | 119 | 6 | 2 | 1 | 128 |
| At 31 May 2022 | 347 | 160 | 65 | 94 | 666 |
| Total Share Capital (£’000) | |||||
| Ordinary share capital | 738 | 252 | 41 | 12 | 1,043 |
| Treasury share capital | 347 | 160 | 65 | 94 | 666 |
| At 31 May 2022 | 1,085 | 412 | 106 | 106 | 1,709 |
| Average buy back price | 184.1p | 227.7p | 165.5p | 104.0p |
The total cost of share buy backs was £23,923,000 (2021: £28,704,000). As part of the conversion process 815,900 (2021: 457,600) deferred shares of 1p each were created and subsequently cancelled during the year. No deferred shares were in issue at the start or end of the year.
No ordinary shares were issued from treasury during the year (2021: nil).
(b) Movements in Share Capital after the Year End
Since the year end, UK Equity and Global Equity Income Portfolios bought back 687,000 and 295,000 shares respectively to be held in treasury.
(c) Voting Rights
Rights attaching to the Shares are described in the Directors’ Report on page 58.
(d) Deferred Shares
The Deferred shares do not carry any rights to participate in the Company’s profits, do not entitle the holder to any repayment of capital on a return of assets (except for the sum of 1p) and do not carry any right to receive notice of or attend or vote at any general meeting of the Company. Any Deferred shares that arise as a result of conversions of Shares are cancelled in the same reporting period.
(e) Future Convertibility of the Shares
Shares are convertible at the option of the holder into any other class of Share. Further conversion details are given on page 2 and in the Shareholder Information on page 114.
15. Reserves
This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.
The share premium comprises the net proceeds received by the Company following the issue of new shares, after deduction of the nominal amount of 1 penny and any applicable costs.
The special reserve arose from the cancellation of the share premium account, in January 2007, and is available as distributable profits to be used for all purposes under the Companies Act 2006, including buy back of shares and payment of dividends.
During the year the special reserve in relation to the UK Equity Portfolio was fully utilised to fund share buy backs and subsequent share buy backs were funded from the capital reserve.
The capital redemption reserve arises from the nominal value of shares bought back and cancelled; this and the share premium are non-distributable.
Capital investment gains and losses are shown in note 9(b), and form part of the capital reserve. The revenue reserve shows the net revenue retained after payments of any dividends. The capital and revenue reserves are distributable.
16. Net Asset Value per Share
The net assets (total assets less total liabilities) attributable to a share class are often termed shareholders’ funds and are converted into net asset value per share by dividing by the number of shares in issue.
The net asset value per Share and the net assets attributable at the year end were as follows:
| Ordinary Shares | 2022 | 2021 | ||
| Net Asset | Net Asset | |||
| Value Per | Net Assets | Value Per | Net Assets | |
| Share | Attributable | Share | Attributable | |
| Pence | £’000 | Pence | £’000 | |
| UK Equity | 194.35 | 143,374 | 188.33 | 166,334 |
| Global Equity Income | 249.00 | 62,638 | 233.91 | 55,602 |
| Balanced Risk Allocation | 169.87 | 7,085 | 169.33 | 6,890 |
| Managed Liquidity | 106.92 | 1,324 | 108.11 | 1,738 |
Net asset value per Share is based on net assets at the year end and on the number of Shares in issue (excluding Treasury Shares) for each Share class at the year end.
17. Financial Instruments
This note summarises the risks deriving from the financial instruments that comprise the Company’s assets and liabilities.
The Company’s financial instruments comprise the following:
• investments in equities, fixed interest securities and liquidity funds which are held in accordance with the Company’s investment objectives and the investment objectives of the four Portfolios;
• short-term debtors, creditors and cash arising directly from operations;
• short-term forward foreign currency and futures contracts; and
• bank facility and short-term overdrafts, used to finance operations.
The financial instruments held in each of the four investment portfolios are shown on pages 13 and 14; 20 and 21; 26 and 27; and 32.
The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for these 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’s principal risks and uncertainties are outlined in the Strategic Report on pages 44 to 48. This note expands on risk areas in relation to the Company’s financial instruments. The Portfolios are managed in accordance with the Company’s investment policies and objectives, which are set out on pages 39 to 41. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on page 64.
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, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.
Credit risk incorporating counterparty 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
As an investment trust the Company invests in equities and other investments for the long-term in accordance with its investment policies so as to meet its investment objectives. In pursuing its objectives, the Company is exposed to a variety of risks that could result in a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the Directors’ policies for managing these risks follow. These have not changed from those applying in the previous year.
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.
The main risk that the Company faces arising from its financial instruments is market risk – this risk is reviewed in detail below. Since the Company mainly invests in quoted investments and derivative instruments traded on recognised exchanges, liquidity risk and credit risk are significantly mitigated.
17.1 Market Risk
Market risk arises from changes in the fair value of future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (17.1.1), interest rate risk (17.1.2) and other price risk (17.1.3).
The Company’s Portfolio Managers assess the individual investment portfolio exposures when making each investment decision for their Portfolios, and monitor the overall level of market risk on the whole of their investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance for the four Portfolios and the Company, as disclosed in the Board Responsibilities section of the Directors’ Report on page 55. Borrowings can be used by the UK Equity and Global Equity Income Portfolios, which will increase the Company’s exposure to market risk and volatility. The borrowing limits for these Portfolios are 25% and 20% of attributable net assets, respectively.
17.1.1 Currency Risk
A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Allocation Portfolio and a small proportion of the UK Equity Portfolio consist of assets, liabilities and income denominated in currencies other than sterling. As a result, movements in exchange rates will affect the sterling value of those items.
Management of the currency risk
The Portfolio Managers monitor the separate Portfolios’ exposure to foreign currencies on a daily basis and report to the Board on a regular basis. Forward foreign currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates and to achieve portfolio characteristics that assist the Company in meeting its investment objectives in line with its investment policies. All contracts are limited to currencies and amounts commensurate with the exposure to those currencies. No such contracts were in place at the current or preceding year end. Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and its receipt.
Foreign Currency Exposure
The fair values of the Company’s monetary items that have currency exposure at 31 May are shown below. Where the Company’s investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis so as to show the overall level of exposure.
UK Equity Portfolio:
Year ended 31 May 2022
| Investments | |||||
| Foreign | at fair value | ||||
| currency | through | ||||
| Debtors | exposure | profit or | |||
| (due from | on net | loss | Total net | ||
| brokers & | Cash | monetary | that are | foreign | |
| dividends)* | at bank | items | equities | currency | |
| Currency | £’000 | £’000 | £’000 | £’000 | £’000 |
| Canadian Dollar | — | — | — | 5,539 | 5,539 |
| Euro | 1 | — | 1 | — | 1 |
| US Dollar | 169 | — | 169 | 4,809 | 4,978 |
| 170 | — | 170 | 10,348 | 10,518 | |
| Year ended 31 May 2021 | |||||
| Canadian Dollar | 40 | — | 40 | 6,818 | 6,858 |
| Euro | 2 | — | 2 | – | 2 |
| US Dollar | 161 | — | 161 | 5,342 | 5,503 |
| 203 | — | 203 | 12,160 | 12,363 |
Global Equity Income Portfolio:
Year ended 31 May 2022
| Investments | |||||
| Foreign | at fair value | ||||
| currency | through | ||||
| Debtors | exposure | profit or | |||
| (due from | on net | loss | Total net | ||
| brokers & | Cash | monetary | that are | foreign | |
| dividends)* | at bank | items | equities | currency | |
| Currency | £’000 | £’000 | £’000 | £’000 | £’000 |
| Canadian Dollar | — | — | — | 1,112 | 1,112 |
| Euro | 83 | 127 | 210 | 7,054 | 7,264 |
| Hong Kong Dollar | 43 | — | 43 | 7,156 | 7,199 |
| Norwegian Krone | 6 | — | 6 | — | 6 |
| South Korean Won | — | — | — | 981 | 981 |
| Swedish Krona | 14 | — | 14 | 2,167 | 2,181 |
| Swiss Franc | 134 | 8 | 142 | 4,279 | 4,421 |
| Taiwanese Dollar | — | — | — | 1,998 | 1,998 |
| US Dollar | 27 | — | 27 | 32,144 | 32,171 |
| 307 | 135 | 442 | 56,891 | 57,333 | |
Year ended 31 May 2021 |
|||||
| Canadian Dollar | — | — | — | 1,356 | 1,356 |
| Euro | 63 | 2 | 65 | 2,642 | 2,707 |
| Hong Kong Dollar | 20 | — | 20 | 4,462 | 4,482 |
| Norwegian Krone | 6 | — | 6 | — | 6 |
| South Korean Won | — | — | — | 1,944 | 1,944 |
| Swedish Krona | 8 | — | 8 | 1,612 | 1,620 |
| Swiss Franc | 124 | — | 124 | 7,317 | 7,441 |
| Taiwanese Dollar | — | — | — | 2,977 | 2,977 |
| US Dollar | 45 | — | 45 | 30,468 | 30,513 |
| 266 | 2 | 268 | 52,778 | 53,046 |
Balanced Risk Allocation Portfolio:
Year ended 31 May 2022
| Derivative | Derivative | Investments | |||||
| assets held | liabilities | Foreign | at fair value | ||||
| at fair | held at fair | currency | through | ||||
| value | Debtors | value | exposure | profit or | |||
| through | (due from | through | on net | loss | Total net | ||
| profit | brokers & | Cash | profit | monetary | that are | foreign | |
| or loss | dividends)* | at bank | or loss | items | equities | currency | |
| Currency | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Australian Dollar | — | 114 | 14 | (88) | 40 | — | 40 |
| Canadian Dollar | — | 20 | 5 | (7) | 18 | — | 18 |
| Euro | 7 | 96 | 13 | (57) | 59 | — | 59 |
| Japanese Yen | 46 | (10) | 7 | (3) | 40 | — | 40 |
| US Dollar | 272 | 92 | 76 | (65) | 375 | 5 | 380 |
| 325 | 312 | 115 | (220) | 532 | 5 | 537 | |
| Year ended 31 May 2021 | |||||||
| Australian Dollar | 15 | 6 | 24 | — | 45 | — | 45 |
| Canadian Dollar | — | 23 | 18 | (5) | 36 | — | 36 |
| Euro | 28 | 5 | 43 | — | 76 | — | 76 |
| Japanese Yen | 14 | 20 | 21 | — | 55 | — | 55 |
| US Dollar | 209 | 84 | 77 | (13) | 357 | 5 | 362 |
| 266 | 138 | 183 | (18) | 569 | 5 | 574 |
* Debtors includes collateral pledged for futures contracts.
Foreign Currency sensitivity
The preceding exposure analysis 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, if used, that offset the effects of changes in currency exchange rates.
The effect of strengthening or weakening of sterling against other currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean, giving the following exchange rate fluctuations:
| 2022 | 2021 | |
| £/Australian Dollar | +/– 2.6% | +/– 1.2% |
| £/Canadian Dollar | +/– 2.5% | +/– 1.2% |
| £/Euro | +/– 1.1% | +/– 2.2% |
| £/Hong Kong Dollar | +/– 2.9% | +/– 3.9% |
| £/Japanese Yen | +/– 2.5% | +/– 4.7% |
| £/Norwegian Krone | +/– 2.0% | +/– 1.5% |
| £/South Korean Won | +/– 1.3% | +/– 2.6% |
| £/Swedish Krona | +/– 2.6% | +/– 1.8% |
| £/Swiss Franc | +/– 1.7% | +/– 3.3% |
| £/Taiwan Dollar | +/– 1.8% | +/– 2.2% |
| £/US Dollar | +/– 3.2% | +/– 3.8% |
The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial non-sterling assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Allocation Portfolios using the exchange rate fluctuations shown above.
If sterling had strengthened against other currencies by the exchange rate fluctuations shown in the table above, this would have had the following after tax effect:
UK Equity Portfolio:
| 2022 | 2021 | |||||
| Revenue | Capital | Total loss | Revenue | Capital | Total | |
| return | return | after tax | return | return | return | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Canadian Dollar | — | (138) | (138) | – | (82) | (82) |
| Euro | (3) | — | (3) | (2) | – | (2) |
| US Dollar | (32) | (154) | (186) | (19) | (203) | (222) |
| (35) | (292) | (327) | (21) | (285) | (306) | |
| Global Equity Income Portfolio: | ||||||
| 2022 | 2021 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| return | return | return | return | return | return | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Canadian Dollar | — | (28) | (28) | – | (16) | (16) |
| Euro | (3) | (79) | (82) | (1) | (58) | (59) |
| Hong Kong Dollar | (3) | (208) | (211) | (1) | (174) | (175) |
| South Korean Won | — | (13) | (13) | (3) | (51) | (54) |
| Swedish Krona | (2) | (56) | (58) | (1) | (29) | (30) |
| Swiss Franc | (3) | (73) | (76) | (8) | (241) | (249) |
| Taiwan Dollar | (1) | (36) | (37) | (1) | (65) | (66) |
| US Dollar | (16) | (1,029) | (1,045) | (22) | (1,158) | (1,180) |
| (28) | (1,522) | (1,550) | (37) | (1,792) | (1,829) | |
| Balanced Risk Allocation Portfolio: | ||||||
| 2022 | 2021 | |||||
| Revenue | Capital | Total | Revenue | Capital | Total | |
| return | return | return | return | return | return | |
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |
| Australian Dollar | — | (1) | (1) | – | (1) | (1) |
| Euro | — | (1) | (1) | – | (2) | (2) |
| Japanese Yen | — | (1) | (1) | – | (3) | (3) |
| US Dollar | — | (12) | (12) | – | (14) | (14) |
| — | (15) | (15) | — | (20) | (20) | |
If sterling had weakened by the same amounts, the effect would have been the converse.
17.1.2 Interest Rate Risk
Interest rate movements may affect:
• the fair value of the investments in fixed interest rate securities;
• the level of income receivable on cash deposits; and
• the interest payable on variable rate borrowings.
Management of interest rate risk
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the Portfolio Managers. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels.
When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian or deposit taker. The Company has a £40 million (2021: £40 million), 364 day multicurrency revolving credit facility which is due for renewal on 25 April 2023. The Company uses the facility when required at levels approved and monitored by the Board.
Interest rate exposure
The Company also has available an uncommitted overdraft facility for settlement purposes and interest is dependent on the base rate determined by the custodian.
At 31 May the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:
• floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be reset; and
• fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
The following table sets out the financial assets and financial liabilities exposure at the year end:
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Exposure to floating interest rates: | |||||
| Investments held at fair value through profit or loss(1) | — | – | 3,512 | 130 | 3,642 |
| Cash and short term deposits | 322 | 215 | 401 | 9 | 947 |
| Bank Loans | (15,750) | (5,350) | — | — | (21,100) |
| (15,428) | (5,135) | 3,913 | 139 | (16,511) | |
| Exposure to fixed interest rates: | |||||
| Investments held at fair value through profit or loss including UK Treasury Bills | — | — | 2,716 | — | 2,716 |
| Net exposure to interest rates | (15,428) | (5,135) | 6,629 | 139 | (13,795) |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Exposure to floating interest rates: | |||||
| Investments held at fair value through profit or loss(1) | — | — | 2,359 | 140 | 2,499 |
| Cash and cash equivalents | 2,331 | 137 | 704 | 32 | 3,204 |
| Bank facility | (11,842) | (8,550) | — | — | (20,392) |
| (9,511) | (8,413) | 3,063 | 172 | (14,689) | |
| Exposure to fixed interest rates: | |||||
| Investments held at fair value through profit or loss including UK Treasury Bills | — | — | 3,377 | — | 3,377 |
| Net exposure to interest rates | (9,511) | (8,413) | 6,440 | 172 | (11,312) |
(1) Comprises holdings in the Invesco Liquidity Funds plc – Sterling.
The income on the iShares - Sterling Ultrashort Bond UCITS ETF and Invesco Liquidity Funds plc – Sterling investments are affected by interbank lending rates; the principal amount should normally remain stable regardless of interest rate movements.
Interest rate sensitivity
At the maximum possible borrowing level of £40 million (2021: £40 million), the maximum effect over one year of a 0.5% movement in interest rates would be a £200,000 (2021: £200,000) movement in the Company’s income and net assets.
The effect of a 1% movement in the interest rates on investments held at fair value through profit and loss would result in a £7,000 (2021: £12,000) maximum movement in the Company’s income statement and net assets.
The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently throughout the year.
Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the role of the Portfolio Managers to manage the Portfolios to achieve the best returns they can.
17.1.3 Other Price Risk
Management of other price risk
The Directors monitor the market price risks inherent in the investment portfolios by meeting regularly to review performance.
The Company’s investment portfolios are the product of the Manager’s investment processes and the application of the Portfolios’ investment policies. Their value will move according to the performance of the shares held within them. However, the Portfolios do not replicate their respective benchmarks or the markets in which the Portfolios invest, so their performance may not correlate with them.
Notwithstanding the issue of correlation, if the fixed asset value of an investment portfolio moved by 10% at the balance sheet date, the profit after tax and net assets for the year would increase/decrease by the following amounts:
| Global | Balanced | |||
| Equity | Risk | Managed | ||
| UK Equity | Income | Allocation | Liquidity | |
| £’000 | £’000 | £’000 | £’000 | |
| 2022 | ||||
| Profit after tax increase/decrease due to rise/fall of 10% | 15,845 | 6,763 | 623 | 145 |
| 2021 | ||||
| Profit after tax increase/decrease due to rise/fall of 10% | 17,643 | 6,390 | 574 | 181 |
17.2 Liquidity Risk
Management of liquidity risk
Liquidity risk is mitigated by the investments held by the Company’s four portfolios being diversified and the majority being readily realisable securities which can be sold to meet funding commitments. If required, the Company’s borrowing facilities provide additional long-term and short-term flexibility.
The Directors’ policy is that in normal market conditions short-term borrowings be used to manage short term liabilities and working capital requirements rather than realising investments.
Liquidity risk
The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
| Global | Balanced Risk | |||||
| Equity | Managed | |||||
| UK Equity | Income | Allocation | Liquidity | |||
| 3 months | 3 months | 3 months | More than | 3 months | Company | |
| or less | or less | or less | 3 months | or less | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Bank facility(1) | 15,754 | 5,352 | — | — | — | 21,106 |
| Amount due to brokers | — | 85 | — | — | — | 85 |
| Other creditors and accruals | 448 | 121 | 17 | — | 1 | 587 |
| Derivative financial instruments | — | — | 200 | 25 | — | 225 |
| 16,202 | 5,558 | 217 | 25 | 1 | 22,003 | |
| Global | Balanced Risk Allocation |
|||||
| Equity | Managed | |||||
| UK Equity | Income | Liquidity | ||||
| 3 months | 3 months | 3 months | More than | 3 months | Company | |
| or less | or less | or less | 3 months | or less | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Bank facility(1) | 11,844 | 8,551 | — | — | — | 20,395 |
| Amount due to brokers | 1,139 | — | — | — | — | 1,139 |
| Other creditors and accruals | 488 | 185 | 19 | — | 2 | 694 |
| Derivative financial instruments | — | — | 18 | — | — | 18 |
| 13,471 | 8,736 | 37 | — | 2 | 22,246 | |
(1) Interest due on the bank facility at the year end was £6,000 (2021: £3,000).
17.3 Credit Risk
Credit risk is that the failure of the counterparty in a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.
This risk is managed as follows:
• investment transactions are carried out with a selection of brokers, approved by the Manager and settled on a delivery versus payment basis. Brokers’ credit ratings are regularly reviewed by the Manager, so as to minimise the risk of default to the Company;
• the derivative financial instruments are all exchange traded and the exchange guarantees their settlement;
• the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the daily review of failed trade reports and the use of daily stock and cash reconciliations. Only approved counterparties are used;
• the Company’s ability to operate in the short-term may be adversely affected if the Company’s Manager, other outsource service providers, or their delegates suffer insolvency or other financial difficulties. The Board reviews annual controls reports from major service providers;
• where an investment is made in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; and
• cash balances are limited to a maximum of £5 million for each of the UK Equity and Global Equity Income Portfolios and £2.5 million for each of the Balanced Risk Allocation and Managed Liquidity Portfolios, with any one deposit taker (other than cash collateral on derivative instruments). Only deposit takers approved by the Manager are used. Cash held at brokers includes any cash collateral on futures contracts and during the year only one futures clearing broker, Merrill Lynch, was used.
The following table sets out the maximum credit risk exposure at the year end:
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Bonds (UK Treasury bills) | — | — | 2,716 | — | 2,716 |
| Cash held as short-term investment(1) | — | — | 3,512 | 130 | 3,642 |
| Unquoted Securities | — | — | 5 | — | 5 |
| Derivative financial Instruments | — | — | 137 | — | 137 |
| Debtors(2) | – | — | 321 | — | 321 |
| Cash and short-term deposits | 322 | 215 | 401 | 9 | 947 |
| 322 | 215 | 7,092 | 139 | 7,768 | |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Bonds (UK Treasury bills) | — | — | 3,377 | — | 3,377 |
| Cash held as short-term investment(1) | — | — | 2,359 | 140 | 2,499 |
| Unquoted securities | — | — | 5 | — | 5 |
| Derivative financial Instruments | — | — | 274 | — | 274 |
| Debtors(2) | 520 | — | 187 | — | 707 |
| Cash and cash equivalents | 2,331 | 137 | 704 | 32 | 3,204 |
| 2,851 | 137 | 6,906 | 172 | 10,066 |
(1) Invesco Liquidity Funds plc, money market fund.
(2) Cash collateral pledged for futures contracts of £321,000 is included in debtors (2021: £187,000) and excludes tax recoverable and prepayments and accrued income.
18. Fair Values of Financial Assets and Financial Liabilities
‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. This note sets out the fair value hierarchy comprising three ‘levels’ and the aggregate amount of investments in each level.
The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivative instruments), or the balance sheet amount is a reasonable approximation of fair value.
FRS 102 as amended for fair value hierarchy disclosures sets out three fair value levels. These are:
Level 1 – fair value based on quoted prices in active markets for identical assets.
Level 2 – fair values based on valuation techniques using observable inputs other than quoted prices within level 1.
Level 3 – fair values based on valuation techniques using inputs that are not based on observable market data.
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. The majority of the Company’s investments are quoted equity investments and Treasury bills which are deemed to be Level 1. Level 2 comprises all other quoted fixed income investments, derivative instruments and liquidity funds held in the Balanced Risk Allocation and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Allocation Portfolio.
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2022 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Financial assets designated at fair value through profit or loss: | |||||
| Level 1 | 158,450 | 67,630 | 2,716 | 1,315 | 230,111 |
| Level 2 | — | — | 3,874 | 130 | 4,004 |
| Level 3 | — | — | 5 | — | 5 |
| Total for financial assets | 158,450 | 67,630 | 6,595 | 1,445 | 234,120 |
| Financial liabilities: | |||||
| Level 2 – derivatives liabilities held at fair value | — | — | 225 | — | 225 |
| Global | Balanced | ||||
| UK | Equity | Risk | Managed | Company | |
| Equity | Income | Allocation | Liquidity | Total | |
| 2021 | £’000 | £’000 | £’000 | £’000 | £’000 |
| Financial assets designated at fair value through profit or loss: | |||||
| Level 1 | 176,434 | 63,902 | 3,377 | 1,669 | 245,382 |
| Level 2 | — | — | 2,651 | 140 | 2,791 |
| Level 3 | — | — | 5 | — | 5 |
| Total for financial assets | 176,434 | 63,902 | 6,033 | 1,809 | 248,178 |
| Financial liabilities: | |||||
| Level 2 – derivatives liabilities held at fair value | — | — | 18 | — | 18 |
19. Capital Management
This note is designed to set out the Company’s objectives, policies and processes for managing its capital. The capital is funded from monies invested in the Company by shareholders (both initial investment and any retained amounts) and any borrowings by the Company.
The Company’s total capital employed at 31 May 2022 was £235,521,000 (2021: £250,956,000) comprising borrowings of £21,100,000 (2021: £20,392,000) and equity share capital and other reserves of £214,421,000 (2021: £230,564,000).
The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 39 to 41, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, maximum gross gearing was 9.8% (2021: 17.3%). 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 Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 44 to 48. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio’s investment objectivity and policy and that this will amplify the effect on equity of changes in the value of each applicable 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 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 lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year.
Borrowings comprise any drawings on the credit and/or overdraft facilities, details of which are given in note 13.
20. Contingencies, guarantees and financial commitments
Any liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.
There were no contingencies, guarantees or financial commitments of the Company at the year end (2021: £nil).
21. Related party transactions and transactions with the Manager
A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.
Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on pages 65 to 67 with additional disclosure in note 4. No other related parties have been identified.
Details of the Manager’s services and fees are disclosed in the Director’s Report on pages 57 and 58 and note 3.
22. 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 figures and financial information for the year ended 31 May 2022 are extracted from the Company's annual financial statements for that year and do not constitute statutory accounts. The Company's annual financial statements for the year to 31 May 2022 have been audited but have not yet been delivered to the Registrar of Companies. The Auditor's report on the 2022 annual financial statements was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The figures and financial information for the year ended 31 May 2021 are compiled from an extract of the published accounts for that year and do not constitute statutory accounts. Those accounts have been delivered to the Registrar of Companies. The Auditor's report on the 2021 annual financial statements was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.
The audited annual financial report will be posted to shareholders during August 2022, and will be delivered to the Registrar of Companies, shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, from its correspondence address, 43-45 Portman Square, London W1H 6LY, and via the web pages of all of the Share classes on the Manager’s website at www.invesco.co.uk/investmenttrusts.
A copy of the annual financial report will be submitted shortly to the National Storage Mechanism ("NSM") and will be available for inspection at the NSM, which is situated at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The separate General Meeting of the Shareholders of the UK Equity Share Class, the separate General Meeting of the Shareholders of the Balanced Risk Allocation Share Class and the Annual General Meeting will be held on 4 October 2022 from 11.00am at 43-45 Portman Square, London W1H 6LY.
By order of the Board
Invesco Asset Management Limited
3 August 2022
Notice of separate General Meeting of the shareholders of the UK Equity Share Class
THIS Notice of a separate General Meeting of the shareholders of the UK Equity Share Class IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate independent professional adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Shares in the UK Equity Share Class of Invesco Select Trust plc, please forward this document and the accompanying Form of Proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.
NOTICE IS GIVEN that the general meeting of the UK Equity Share Class of Invesco Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.00am on 4 October 2022 for the following purposes:
To consider, and if though fit, pass the following resolution as a special resolution:
Special resolution
1. That, in accordance with section 630 of the Companies Act and articles 5.6.2 and 8 of the articles of association of the Company, this separate general meeting of the holders of the UK Equity shares of 1 penny each in the capital of the Company hereby irrevocably consents to and sanctions the passing of the resolution numbered 17 set out in the notice of the annual general meeting of the Company to be held on 4 October 2022 and every variation, modification or abrogation of the rights, privileges and restrictions attaching to the UK Equity shares of 1 penny each in the capital of the Company as a class of shares that will or may be effected thereby.
Dated 3 August 2022
By order of the Board
Invesco Asset Management Limited
Company Secretary
Notice of separate General Meeting of the shareholders of the Balanced Risk Allocation Share Class
THIS Notice of a separate General Meeting of the shareholders of the Balanced Risk Allocation Share Class IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate independent professional adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Shares in the Balanced Risk Share Class of Invesco Select Trust plc, please forward this document and the accompanying Form of Proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.
NOTICE IS GIVEN that the general meeting of the Balanced Risk Allocation Share Class of Invesco Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.15am on 4 October 2022 for the following purposes:
To consider, and if though fit, pass the following resolution as a special resolution:
Special resolution
1. That, in accordance with section 630 of the Companies Act and articles 5.6.2 and 8 of the articles of association of the Company, this separate general meeting of the holders of the Balanced Risk Allocation shares of 1 penny each in the capital of the Company hereby irrevocably consents to and sanctions the passing of the resolution numbered 17 set out in the notice of the annual general meeting of the Company to be held on 4 October 2022 and every variation, modification or abrogation of the rights, privileges and restrictions attaching to the Balanced Risk Allocation shares of 1 penny each in the capital of the Company as a class of shares that will or may be effected thereby.
Dated 3 August 2022
By order of the Board
Invesco Asset Management Limited
Company Secretary
Notice of Annual General Meeting
THIS Notice of Annual General Meeting IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate independent professional adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Shares in Invesco Select Trust plc, please forward this document and the accompanying Form of Proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.
NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.30am on 4 October 2022 for the following purposes:
Ordinary Business of the Company
To consider and, if thought fit, to pass the following resolutions which will be proposed as an Ordinary Resolutions:
1. To receive the Annual Financial Report for the year ended 31 May 2022.
2. To approve the Directors’ Remuneration Policy.
3. To approve the Annual Statement and Report on Remuneration.
4. To re-elect Craig Cleland as a Director of the Company.
5. To re-elect Davina Curling as a Director of the Company.
6. To re-elect Mark Dampier as a Director of the Company.
7. To re-elect Victoria Muir as a Director of the Company.
8. To re-elect Tim Woodhead as a Director of the Company.
9. To re-appoint Grant Thornton UK LLP as Auditor to the Company.
10. To authorise the Audit Committee to determine the Auditor’s remuneration.
Ordinary Business of the UK Equity Share Class
Only holders of UK Equity Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:
11. To approve the UK Equity Share Class Portfolio dividend payment policy as set out on page 41 of the 2022 Annual Financial Report.
Ordinary Business of the Global Equity Income Share Class
Only holders of Global Equity Income Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:
12. To approve the Global Equity Income Share Class Portfolio dividend payment policy as set out on page 41 of the 2022 Annual Financial Report.
Special Business of the Company
To consider and, if thought fit, to pass the following resolution which will be proposed as an Ordinary Resolutions:
13. That:
the Directors be and they are hereby generally and unconditionally authorised, for the purpose of section 551 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to exercise all the powers of the Company to allot relevant securities (as defined in sections 551(3) and (6) of the 2006 Act) up to an aggregate nominal amount equal to £1,000,000 of UK Equity Shares, £1,000,000 of Global Equity Income Shares, £1,000,000 of Balanced Risk Allocation Shares and £1,000,000 of Managed Liquidity Shares, provided that this authority shall expire at the conclusion of the next AGM of the Company or the date falling 15 months after the passing of this resolution, whichever is the earlier, but so that such authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offers or agreements as if the power conferred hereby had not expired.
To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions:
14. That:
the Directors be and they are hereby empowered, in accordance with sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (‘2006 Act’) to allot Shares in each class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity) for cash, either pursuant to the authority given by resolution 13 or (if such allotment constitutes the sale of relevant Shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, as if section 561 of the 2006 Act did not apply to any such allotment, provided that this power shall be limited:
(a) to the allotment of Shares in connection with a rights issue in favour of all holders of a class of Share where the Shares attributable respectively to the interests of all holders of Shares of such class are either proportionate (as nearly as may be) to the respective numbers of relevant Shares held by them or are otherwise allotted in accordance with the rights attaching to such Shares (subject in either case to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise);
(b) to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £72,923 of UK Equity Shares, £24,946 of Global Equity Income Shares, £4,215 of Balanced Risk Allocation Shares and £1,257 of Managed Liquidity Shares; and
(c) to the allotment of equity securities at a price of not less than the net asset value per Share as close as practicable to the allotment or sale
and this power shall expire at the conclusion of the next AGM of the Company or the date 15 months after the passing of this resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry of this power which would or might require equity securities to be allotted after such expiry as if the power conferred by this resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the 2006 Act shall bear the same meanings in this resolution.
15. That:
the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its issued Shares in each Share class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity).
PROVIDED ALWAYS THAT:
(i) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of each class of the Company’s share capital as at the date of the AGM;
(ii) the minimum price which may be paid for a Share shall be 1p;
(iii) the maximum price which may be paid for a Share in each Share class must not be more than the higher of: (a) 5% above the average of the mid-market values of the Shares for the five business days before the purchase is made; and (b) the higher of the price of the last independent trade in the Shares and the highest then current independent bid for the Shares on the London Stock Exchange;
(iv) any purchase of Shares will be made in the market for cash at prices below the prevailing net asset value per Share (as determined by the Directors);
(v) the authority hereby conferred shall expire at the conclusion of the next AGM of the Company or, if earlier, on the expiry of 15 months from the passing of this resolution unless the authority is renewed at any other general meeting prior to such time; and
(vi) the Company may make a contract to purchase Shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiration of such authority and may make a purchase of Shares pursuant to any such contract.
16. That:
the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 days.
17. That:
the share premium accounts of each of (i) the class of UK Equity shares of 1 penny each in the capital of the Company; and (ii) the class of Balanced Risk Allocation shares of 1 penny each in the capital of the Company, be cancelled and the amount of the share premium of each share class so cancelled be credited to a reserve in respect of each the respective share classes.
Dated 3 August 2022
By order of the Board
Invesco Asset Management Limited
Company Secretary
Appendix
Proposed cancellation of the UK Equity and Balanced Risk Allocation Share Premium Accounts
DEFINITIONS
“Act” Companies Act 2006 (as amended from time to time)
“Capital Reduction” the proposal recommended by the Board that, subject to the approval of the Court, (i) the sum of £121,700,000 being the entire amount standing to the credit of the UK Equity Share Class share premium account; and (ii) the sum of £1,290,000 being the entire amount standing to the credit of the Balanced Risk Allocation Share Class share premium account, be cancelled and credited to a reserve;
“Court” the High Court of Justice in England and Wales
“Latest Practicable Date” 2 August 2022 (being the latest practicable date prior to the publication of this document)
TIMETABLE
Expected date of initial directions hearing of the Court 18 October 2022
Expected date of Court hearing to confirm the Capital Reduction 8 November 2022
Expected effective date for the Capital reduction on or around 21 November 2022
Note The expected dates for the confirmation of the Capital Reduction by the Court and the Capital Reduction becoming effective are based on provisions dates that have been obtained for the required Court hearings of the Company's application. These provisional hearing dates are subject to change and dependent on the Court's timetable.
LETTER FROM CHAIRMAN
Capital Reduction
In addition to the usual business to be conducted at the AGM, I am writing in connection with the Capital Reduction; to provide you with information about the reasons for the Capital Reduction, to explain why the Board considers it to be in the best interests of the Company and its shareholders as a whole, and to explain why the Board unanimously recommends that you vote in favour of it.
The two share premium accounts have built up over time. The UK Equity Share Class account in particular grew significantly following the merger with Invesco Income Growth Trust plc in 2021. The Balanced Risk Allocation Share Class account has grown due to historic share issuance. The Capital Reduction will have the effect of creating distributable reserves in respect of each of the relevant share classes and which will provide the Company with flexibility:
(a) Subject to the financial performance of the Company, to make future distributions; and/or
(b) to make purchases of its own shares as permitted by the Act and in accordance with resolution 15 to be proposed at the AGM.
The Directors will only exercise the authority to purchase the Company’s shares if, in light of market conditions prevailing at the time, they consider that the purchase of such shares can be expected to result in an increase in earnings or net assets per share and is in the best interest of the Company’s shareholders (and other stakeholders) generally.
The Capital Reduction will not involve any distribution or repayment of capital or share premium by the Company and will not reduce the underlying net assets of the Company. There will be no change to the number of ordinary shares in issue (or their nominal value) following implementation of the Capital Reduction and no new share certificates will be issued as a result of the Capital Reduction.
Share premium account
The Act requires that if a company issues shares at a premium to the nominal value of those shares, whether for cash or otherwise, a sum equal to the aggregate amount of value of the premiums must be transferred to the company’s share premium account. A share premium account can only be used in limited circumstances. Due to the structure of the Company each of the share classes has its own share premium account. The Board is recommending that the share premium accounts of UK Equity Share Class and Balanced Risk Allocation Share Class be cancelled. As at the Last Practicable Date the amount standing to the credit of the UK Equity Share Class’s share premium account was £121,700,000 and the amount standing to the credit of the Balanced Risk Allocation Share Class’s share premium account was £1,290,000. Following the implementation of the Capital Reduction the entire share premium account of each of the UK Equity Share Class and Balanced Risk Allocation Share Class will be cancelled.
Approval of the shareholders and class consent
Section 641 of the Act provides that any reduction of the share premium account must be approved by the Company’s shareholders by a special resolution. In addition, in accordance with the provisions of the articles of association of the Company, the Company will seek a class consent from the shareholders of the UK Equity Share Class and the Balanced Risk Allocation Share Class in respect of the proposed cancellation of the reserves.
Court approval
In addition to the approval of the shareholders, the Capital Reduction requires the approval of the Court. Accordingly, following approval of the Capital Reduction by shareholders at the AGM, an application will be made to the Court in order to confirm and approve the Capital Reduction.
Creditor protection
In providing its approval, the Court may require protection for the creditors of the Company (if any) whose debts remain outstanding on the relevant date, except in the case of creditors (including contingent creditors) that have consented to the Capital Reduction. Any such creditor protection may include seeking the consent of the Company’s creditors to the Capital Reduction or the provision by the Company to the Court of an undertaking to deposit a sum of money into a blocked account created for the purpose of discharging, in due course, any amounts owing to the non-consenting creditors of the Company.
Court hearing
It is anticipated that the initial directions hearing in relation to the Capital Reduction will take place on 18 October 2022, with the final hearing by the Court to confirm the Capital Reduction taking place on 8 November 2022 and the Capital Reduction becoming effective as soon as practicable thereafter, following the necessary registration of, amongst other things, the order of the Court (Court Order) confirming the Capital Reduction at Companies House.
Right to abandon
The Board reserves the right to abandon or to discontinue (in whole or in part) the application to the Court in the event that the Board considers that the terms on which the Capital Reduction would be (or would be likely to be) confirmed by the Court, would not be in the best interests of the Company and/or the shareholders as a whole. The Board has undertaken a thorough review of the Company’s liabilities (including contingent liabilities) and considers that the Company will be able to satisfy the Court that, as at the date on which the Court Order relating to the Capital Reduction and the statement of capital in respect of the Capital Reduction are registered by the Registrar of Companies at Companies House and the Capital Reduction therefore becomes effective, the Company’s creditors will either have consent to the Capital Reduction or be sufficiently protected.
Victoria Muir
3 August 2022
