Fidelity Special Values

FIDELITY SPECIAL VALUES PLC

Final Results for the year ended 31 August 2023

Financial Highlights:

• Fidelity Special Values PLC reports a +5.9% NAV and a +5.6% share price rise against a Benchmark return of +5.2%.

• The Board recommends a final dividend of 6.27 pence per share which together with the interim dividend payment of 2.53 pence per share (totalling 8.80 pence) represents an increase of 13.5% over the prior year.

• In an environment of rising interest rates, the overweight exposure to banks was the largest contributor to performance.

• The Portfolio Manager believes we are potentially in the very early stages of a long-term rally in value stocks.

Contacts

For further information, please contact:

Smita Amin

Company Secretary

01737 836347

FIL Investments International

CHAIRMAN’S STATEMENT

The global backdrop for the year under review remains unsettled. The prolonged Russia/Ukraine war has affected energy prices and global trade as well as contributing to an increasingly fractious geopolitical environment. More recently, the developing conflict in the Middle East has added concerns about the impact on oil prices and disruption to global supply chains and commodity markets. In the banking sector, the collapse of Credit Suisse in Europe and several regional banks in the US raised fears of systemic contagion not seen since the Global Financial Crisis of 2008/9. Fortunately, this did not materialise. The year under review has certainly been an interesting one for the UK, featuring three Prime Ministers and as many Chancellors of the Exchequer, seven months of double-digit CPI inflation and eight consecutive base rate increases. Against this background, the UK stock market delivered rather dull returns, with the FTSE All-Share Index (“Benchmark”) delivering a total return of a little over 5% and the mid-cap and small-cap indices essentially flat year-on-year.

Your Company marginally outperformed the Benchmark, with a net asset value (“NAV”) total return of 5.9% and a share price total return of 5.6% compared with the 5.2% return for the Benchmark. While this may look unremarkable at face value, it is notable given the significant differences between the Company’s portfolio and the Benchmark. More than 80% of the Benchmark is accounted for by the largest stocks that make up the FTSE 100 Index (total return of 6.3% for the year), whereas your Company only has around a quarter of its holdings which are in the FTSE 100 Index. Overall, the weighting in small-cap and mid-cap companies hurt relative returns in the year under review, while stock selection in banks and financials, where the portfolio is overweight compared to the Benchmark, contributed most to the outperformance.

As your Portfolio Manager, Alex Wright, outlines in his report, while mid-cap and small-cap exposure detracted from returns relative to the Benchmark, these under-researched companies currently offer particularly attractively valued opportunities and have historically been a strong contributor to the Company’s long-term outperformance. Over the ten years to 31 August 2023, the Company’s NAV and share price total returns of 107.1% and 100.0% respectively are well ahead of the Benchmark total return of 70.6%. It is pleasing to see that Alex’s long-term, value-focused strategy is still working well, even as the UK remains out of favour compared with other developed markets. He is well supported by Jonathan Winton, the co-Portfolio Manager, and by Fidelity’s extensive investment research team.

DIVIDEND
Dividends are an important component of long-term total returns and the Board’s policy is to pay dividends twice yearly in order to smooth the dividend payments for the Company’s financial year.

The Company’s revenue return for the year to 31 August 2023 was 10.67 pence per share (2022: 9.42 pence). An interim dividend of 2.53 pence per share (2022: 2.30 pence) was paid on 21 June 2023. The Board recommends a final dividend of 6.27 pence per share for the year ended 31 August 2023 (2022: 5.45 pence) for approval by Shareholders at the Annual General Meeting (“AGM”) on 14 December 2023. The interim and final dividends (total of 8.80 pence) represent an increase of 1.05 pence (13.5%) over the 7.75 pence paid for the year ended 31 August 2022. The dividend will be payable on 10 January 2024 to Shareholders on the register at close of business on 1 December 2023 (ex-dividend date 30 November 2023).

The interim and final dividends for the year will provide Shareholders with a 14th consecutive year of sustained annual dividend growth. While income is not a core objective of your Company’s investment strategy, we as a Board understand the value of being ‘paid to wait’ in times of more muted stock market performance.

GEARING
Gearing has remained relatively low during the year under review, beginning the period at 10.0% and ending at 6.5%. This reflects Alex’s caution on the economic environment and, while he can find value in individual companies, there is a risk that the economic outlook may undermine their ability to deliver on forecast earnings. As he explains in his report, the current modest level of gearing means Alex has plenty of ‘dry powder’ that he can use to take advantage of any new investment opportunities in the coming year.

The Board has agreed with the Portfolio Manager that if he is able to find attractive opportunities in the market, then the Company’s gearing should be allowed to rise. Combined with Alex’s contrarian and value-focused investment philosophy, and also making effective use of the Company’s structural advantages over its open-ended counterparts, this should continue to add value for Shareholders over the long-term.

It is the current intention of the Board that, in normal market conditions, the Portfolio Manager will maintain gearing in the range of 0% to 25%. The Company remained within these levels throughout the reporting year. The maximum level of gearing allowed is 40%.

DISCOUNT
Investment trust discounts have widened significantly in the past 18 months, and at the time of writing, the investment trust sector average discount was 18.7%. After several years of trading close to, or at a premium to NAV, your Company has not been immune to this trend of widening discounts. However, in the year under review, the discount to NAV remained relatively stable, beginning the year at 8.5% and ending it at 8.8%. Under the Company’s discount management policy, the Board seeks to maintain the discount in single digits in normal market conditions and during the year it briefly reached the 10% level before quickly reverting back into single digits. While a number of our peers have elected to repurchase shares this year because of the pressure of rising discounts, we have not undertaken any share repurchases, and as at 31 August 2023, your Company remains the only one in its UK All Companies peer group to be trading at a single-digit discount to NAV. The average discount for the other companies in the peer group was 12.3%.

The Board continues to monitor the level of the Company’s discount closely and will take action when it believes to do so will be effective and to the benefit of Shareholders.

RAISING OUR PROFILE
While the strength of Alex’s investment performance over many years will have been a key factor in limiting the rise in the discount, your Board and Fidelity have also been working hard to raise the Company’s profile with both retail and institutional investors. You may have seen Alex’s articles in The Sunday Times or the Daily Express; his views on investing and the UK stock market attract a lot of media interest, and he also regularly appears at professional investor roadshows. A discount to NAV tends to arise when there are more sellers than buyers in the market, and we appreciate Alex’s efforts to make the time to ensure that your Company remains high on investors’ buy lists. External recognition is always a bonus, and we were delighted that in November 2022, the Company was named as the best UK All Companies Trust in the Investment Company of the Year awards from Investment Week magazine.

BOARD OF DIRECTORS
As part of the Board’s succession plan, Andy Irvine retired from the Board at the conclusion of the AGM on 14 December 2022, having served on the Board as a non-executive Director since 2010 and as Chairman since 2016, and we thank him for his significant contribution to the Company during this period. At the same time, I succeeded him as Chairman of the Board and Nigel Foster succeeded me as Senior Independent Director. There have been no other Board changes during the reporting year.

In accordance with the UK Corporate Governance Code for Directors of FTSE 350 companies, all Directors are subject to annual re-election at the AGM on 14 December 2023. The Directors’ biographies can be found in the Annual Report, and, between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company.

ANNUAL GENERAL MEETING
The Company’s AGM is at 11.00 am on Thursday, 14 December 2023.

This is a great opportunity for Shareholders to hear Alex’s thoughts at first hand and also to meet your Company’s Directors. The Board and I hope to see as many of you as possible on the day. Details of the Company’s AGM are below.

OUTLOOK
The UK equity market has remained distinctly out of favour in a global context, particularly when compared with the US. The macro headwinds are undeniable: inflation has been stubbornly higher than in other developed economies, interest rates have risen further and faster, and there is the added uncertainty of a General Election at some point in the next 15 months. However, there are also reasons for optimism: both core and headline inflation have begun to trend downwards, there is an increasing expectation that the Bank of England base rate is at or close to a cyclical peak and upward revisions to UK GDP numbers suggest a greater likelihood of avoiding recession. Added to this, the UK stock market remains at low valuation levels compared to other developed markets, reducing downside risk and providing the potential for significant upside when sentiment becomes more positive.

Against this backdrop, we are fortunate to have a Portfolio Manager with an active and contrarian approach to stock picking that allows him to seek out pockets of opportunity that may be under-appreciated by investors both at home and internationally.

As Alex points out in his Portfolio Manager Review, there are many UK-listed stocks that may be affected by the economic cycle in the short-term but which have compelling company-specific stories that can be important drivers of their share price over time. By favouring attractively valued businesses with lower levels of debt and the resilience to navigate the climate of uncertainty, we are confident that Alex’s selections have the potential to deliver solid longer-term returns, as has been demonstrated in your Company’s strong performance compared to the Benchmark over many years.

On a final note, it was very pleasing to see at the Company’s AGM on 14 December 2022 that the Company’s three-yearly continuation resolution was passed with 99.89% of votes in favour. We thank our Shareholders for this overwhelming vote of confidence in Alex’s long-term approach and look forward to continuing to justify your support of Fidelity Special Values PLC in the years ahead.

DEAN BUCKLEY
Chairman
6 November 2023

ANNUAL GENERAL MEETING – THURSDAY, 14 DECEMBER 2023 AT 11.00 AM
The AGM of the Company will be held at 11.00 am on Thursday, 14 December 2023 at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St Paul’s or Mansion House) and virtually via the online Lumi AGM meeting platform. Full details of the meeting are given in the Notice of Meeting in the Annual Report.

For those shareholders who are unable to attend in person, we will live-stream the formal business and presentations of the meeting online.

Alex Wright, the Portfolio Manager, will be making a presentation to shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that shareholders may have. Copies of his presentation can be requested by email at [email protected] or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP.

Properly registered Shareholders joining the AGM virtually will be able to vote on the proposed resolutions. Please see Note 9 to the Notes to the Notice of Meeting in the Annual Report for details on how to vote virtually. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and we will answer as many of these as possible at an appropriate juncture during the meeting.

Further information and links to the Lumi platform may be found on the Company’s website www.fidelity.co.uk/specialvalues. On the day of the AGM, in order to join electronically and ask questions via the Lumi platform, shareholders will need to connect to the website https://web.lumiagm.com.

Please note that investors on platforms such as Fidelity Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ Bell Youinvest will need to request attendance at the AGM in accordance with the policies of your chosen platform. They may request that you submit electronic votes in advance of the meeting. If you are unable to obtain a unique IVC and PIN from your nominee or platform, we will also welcome online participation as a guest. Once you have accessed https://web.lumiagm.com from your web browser on a tablet or computer, you will need to enter the Lumi Meeting ID which is 102-255-614. You should then select the ‘Guest Access’ option before entering your name and who you are representing, if applicable. This will allow you to view the meeting and ask questions, but you will not be able to vote.

PORTFOLIO MANAGER’S REVIEW

QUESTION
How has the Company performed in the year to 31 August 2023?

ANSWER
The Company recorded a net asset value (“NAV”) and share price total return of 5.9% and 5.6% respectively, which was slightly ahead of the FTSE All-Share Index (Benchmark) return of 5.2%. The positive returns conceal what proved to be another volatile period as markets grappled with political uncertainties at home, culminating in last October’s mini-budget debacle, persistent weaker economic indicators, stubbornly elevated inflation, and sharply rising interest rates.

In an environment of rising interest rates, our overweight exposure to banks was the largest contributor to performance, given the low starting point for valuations and the meaningful impact of higher rates on bank profits. The largest individual contributors were AIB Group, the leading personal bank and mortgage provider in Ireland, UK-listed TBC Bank Group, the largest banking group in Georgia, and Kaspi.kz, the dominant consumer finance, e-commerce and payments platform in Kazakhstan.

Despite the rising cost of living, retailer Marks & Spencer Group bucked the trend, reporting strong trading in clothing and food, taking meaningful market share in both areas. Similarly, the resurgence in travel demand after the COVID pandemic saw the share prices of low-cost airline Ryanair Holdings and passport photo booth operator ME Group International (formerly known as Photo-Me International) recover strongly. Outsourcer Mitie Group reported record full-year revenues as it posted an increase in operating profits, boosted by contract wins, renewals and acquisitions. It is now a much-improved business, with a healthier balance sheet, simplified structure and huge investments in systems and technology, allowing it to win more work at better margins.

We make a concerted effort to look for opportunities across the market, and our resulting bias to small- and mid-cap companies, which account for about 60% of the portfolio, hurt relative returns as they were seen as more vulnerable to economic weakness. However, this is an under-researched area where we continue to find particularly attractively valued opportunities.

Sector-wise, our oil and gas positions proved a drag on performance, with our holding in North Sea producer Ithaca Energy the largest detractor. The stock was affected by the introduction of a windfall tax, a policy that will hurt North Sea investments generally, and largely undermine the UK’s energy security goal. The Government is now looking to partially reverse this decision.

Government outsourcer Serco Group was a surprising underperformer given that it has delivered strong profits and recently upgraded its full year earnings forecast. It is a well-run business that is diversified both geographically and services-wise and should be capable of producing inflation protected organic growth with the potential for some margin expansion over the medium-term. Its exposure to defence and immigration contracts is particularly attractive in the current political environment, and its strong balance sheet provides mergers and acquisitions (“M&A”) and buyback optionality.

Drink distributor C&C Group suffered from a slow recovery in pub demand post-COVID, rising costs and problems with implementing a new IT system. The market seems to be assuming those issues are permanent, but we believe that C&C has an unusually dominant position as one of the only national distributors and should be able to gradually pass on price increases and overcome its operational challenges to deliver strong profitability growth over the medium-term as margins improve towards historical levels.

QUESTION
High inflation and the cost-of-living crisis persist. How has this affected the Company’s portfolio this year?

ANSWER
Overall, we have been pleased by the earnings resilience of the holdings in the Company’s portfolio. Last year, we materially reduced our consumer exposure, selling our holdings in domestic housebuilders and cutting exposure to areas more susceptible to a demand slowdown, such as big-ticket items and advertising. These decisions contributed positively to this year’s performance given the profit warnings in those industries, and with the housing market experiencing a marked slowdown. However, the profit warnings have not been as widespread as feared and in general the consumer has proved relatively resilient, helping Marks & Spencer, travel companies and airlines to beat earnings expectations. This reflects economic indicators that have been weak but not excessively so.

QUESTION
With interest rates at their highest level for 15 years, how will this affect markets and the Company’s current portfolio?

ANSWER
Rising interest rates have led to a meaningful de-rating in some areas of the market where business models are heavily dependent on debt, such as real estate and infrastructure, and have caused significant weakness in the UK housing market. These are industries where we had very low exposure.

Conversely, higher interest rates have benefited sectors such as banks and life insurers, which we favour, and which had been shunned since the global financial crisis. More generally, the combination of higher rates and the weaker economic environment is likely to remain challenging in the near-term for corporates and consumers who need to refinance their debts. As a result, we remain selective and favour companies with lower levels of debt and the resilience to navigate the uncertainty.

M&A activity has been prevalent over recent years given cheap financing and attractive valuations on offer in the UK. Holdings that exited the Company’s portfolio as a result of successful bids over the past 12 months include international power producer ContourGlobal, consultancy firm RPS Group and teleradiology services provider Medica Group. The jump in funding costs may deter some bids, especially at the larger-cap end of the market, but smaller-sized deals should be more manageable and valuations in smaller-cap companies are more appealing.

QUESTION
Value stocks have outperformed growth stocks over the last three years, do you think this will continue?

ANSWER
Over the past decade, we have experienced a prolonged period of subdued inflation, low interest rates and modest economic growth. This has favoured growth companies at the expense of those that we favour – unloved stocks with lower downside risk. While this trend began to reverse towards the end of 2020, value stocks still have significant ground to catch up.

The current market environment of higher and stickier inflation, rising interest rates and economic volatility is more aligned to the long-term pattern seen over the last 100 years. History suggests that over the long-term value tends to outperform, given generally higher discount rates and a reversion to the mean. We, therefore, believe that we are in the very early stages of a long-term rally in value stocks.

QUESTION
How is the UK market valued compared to the rest of the world? Does the UK still present a good opportunity for investors?

ANSWER
UK equities are pricing in extreme pessimism and, as a result, trade at a significant discount to other markets. While the near-term outlook is uncertain and corporate earnings could still disappoint in the UK, this is also true of other markets such as the US, where valuations are meaningfully more expensive.

To provide some context, at the time of writing (September 2023), our analysts estimate that the UK equity market (FTSE All-Share Index) trades on 10.9x 2024 earnings; continental European equities (MSCI Europe ex UK Index) trades on 13.4x earnings and the US (S&P 500 Index) trades on 18.6x earnings. Our portfolio, which trades on only 7.7x earnings, is at the very bottom of the valuation range seen over my ten year tenure, despite offering better sales and profit growth prospects, and carrying significantly less debt. When considering that the Company’s shares as at 31 August 2023 were available at a discount of 8.8% to the NAV, we believe that this could be a great investment opportunity on a three to five year view.

QUESTION
The Company’s portfolio is overweight in banking and life insurers. Why do you prefer these sectors currently?

ANSWER
Financials form the biggest part of the Company’s portfolio, with banks and life insurers comprising 16% and 8% respectively of the portfolio. Higher interest rates have enabled banks to significantly improve their profitability at a time when earnings in many industries are under pressure. Yet many investors continue to avoid banks because they are scarred from the 2008 global financial crisis. As a result, banks trade on attractive valuations. UK and Irish banks have become much higher quality businesses since the changes to the regulatory environment over the past decade. They have strengthened their balance sheets, trimmed bloated cost bases and withdrawn from riskier lending.

Our holdings in the sector are diversified both geographically and through business models, with idiosyncratic factors driving their growth. For example, our largest holding is AIB Group which is not only an interest rate story but also benefits from an improvement in Ireland’s banking industry, where the number of competing groups has recently shrunk from five to three. The rising interest rate environment is also positive for life insurers, which benefit from an acceleration in pension fund re-risking.

While our holdings in these two sectors remain attractively valued, we have taken some profits following the strong returns achieved over the past year. We have redeployed some of the proceeds into non-life insurance companies, adding to our modest exposure (c. 4% of the portfolio at the time of writing) given the improving pricing environment and moderating cost of insurance claims.

QUESTION
What do you think are the biggest risks and opportunities for the next 12 months?

ANSWER
The biggest risk is a recession and its impact on corporate earnings. While there is increasing talk of a soft landing, there is considerable historical evidence on the impact of monetary tightening to keep us cautious on company prospects in the near-term. In this uncertain environment, we favour companies with lower levels of debt and the resilience to navigate the uncertainty. We are wary of stocks where fundamentals and margins have been strong, and a deterioration is not priced in.

While we consider the current macroeconomic backdrop when we forecast financials for our holdings and potential new ideas, we feel our time is best spent on researching stocks from a bottom-up perspective and taking a long-term view of their prospects. Many of these companies will be affected by the economic cycle but have compelling company specific stories that can be important drivers of their share price over time.

Given the nature of the post-pandemic environment, there are companies that have already exhibited fundamental weakness resembling a recessionary scenario, and while corporate earnings have generally performed better than expected, there have been profit warnings in the small-and mid-cap companies’ space. Many of these companies have seen their earnings rebased and trade on low valuations with limited downside and significant upside once the environment normalises. This is starting to present us with some interesting opportunities, and we have begun to build positions in some of these stocks, particularly in smaller companies.

Nonetheless, our caution is reflected in the Company’s modest gearing. While valuations are attractive and we are finding new ideas, we are conscious of the near-term uncertainty and want to retain some dry powder to take advantage of any forced sellers and new opportunities.

ALEX WRIGHT
Portfolio Manager
6 November 2023

Strategic Report

Principal Risks and Uncertainties and Risk Management
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code, the Board has a robust ongoing process for identifying, evaluating and managing the principal risks and uncertainties faced by the Company, including those that could threaten its business model, future performance, solvency or liquidity. The Board, with the assistance of the Alternative Investment Fund Manager (FIL Investment Services (UK) Limited/the “Manager”), has developed a risk matrix which, as part of the risk management and internal controls process, identifies the key existing and emerging risks and uncertainties that the Company faces. The Audit Committee continues to identify any new emerging risks and take any action necessary to mitigate their potential impact. The risks identified are placed on the Company’s risk matrix and graded appropriately. This process, together with the policies and procedures for the mitigation of existing and emerging risks, is updated and reviewed regularly in the form of comprehensive reports by the Audit Committee. The Board determines the nature and extent of any risks it is willing to take in order to achieve its strategic objectives.

Climate change, which refers to a large scale shift in the planet’s weather patterns and average temperatures, continues to be a key emerging as well as a principal risk confronting asset managers and their investors. The Board notes that the Manager has integrated ESG considerations, including climate change, into the Company’s investment process. Further details are in the Annual Report. The Board will continue to monitor how this may impact the Company as a risk to investment valuations and potentially Shareholder returns.

The Manager also has responsibility for risk management for the Company. It works with the Board to identify and manage the principal and emerging risks and uncertainties and to ensure that the Board can continue to meet its UK corporate governance obligations.

The Board considers the risks listed below as the principal risks and uncertainties faced by the Company.

Continuation Vote
A continuation vote takes place every three years. There is a risk that Shareholders do not vote in favour of continuation during periods when performance of the Company’s NAV and share price is poor. At the AGM held on 14 December 2022, 99.89% of Shareholders voted in favour of the continuation of the Company. The next continuation vote will take place at the AGM in 2025.

Viability Statement
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve month period required by the “Going Concern” basis. The Company is an investment trust with the objective of achieving long-term capital growth. The Board considers long-term to be at least five years, and accordingly, the Directors believe that five years is an appropriate investment horizon to assess the viability of the Company, although the life of the Company is not intended to be limited to this or any other period.

In making an assessment of the viability of the Company, the Board has considered the following:

· The ongoing relevance of the investment objective in prevailing market conditions;

· The Company’s level of gearing;

· The Company’s NAV and share price performance compared to its Benchmark;

· The principal and emerging risks and uncertainties facing the Company and their potential impact, as set out above;

· The likely future demand for the Company’s shares;

· The Company’s share price discount to the NAV;

· The liquidity of the Company’s portfolio;

· The level of income generated by the Company; and

· Future income and expenditure forecasts.

The Company’s performance for the five year reporting period to 31 August 2023 was a NAV total return of +22.6% and a share price total return of +10.3% compared to the Benchmark total return of +18.4%. The Board regularly reviews the investment policy and considers whether it remains appropriate. The Board has concluded that there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five years based on the following considerations:

· The Investment Manager’s compliance with the Company’s investment objective and policy, its investment strategy and asset allocation;

· The fact that the portfolio comprises sufficient readily realisable securities which can be sold to meet funding requirements if necessary;

· The Board’s discount management policy; and

· The ongoing processes for monitoring operating costs and income which are considered to be reasonable in comparison to the Company’s total assets.

In preparing the Financial Statements, the Directors have considered the impact of climate change as detailed above. The Board has also considered the impact of regulatory changes, unforeseen market events and the ongoing implications of the Russia and Ukraine war and developing conflicts in the Middle East and how this may affect the Company.

In addition, the Directors’ assessment of the Company’s ability to operate in the foreseeable future is included in the Going Concern Statement below.

GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective, risk management policies, liquidity risk, credit risk, capital management policies and procedures, the nature of its portfolio and its expenditure and cash flow projections. The Directors, having considered the liquidity of the Company’s portfolio of investments (being mainly securities which are readily realisable) and the projected income and expenditure, are satisfied that the Company is financially sound and has adequate resources to meet all of its liabilities and ongoing expenses and continue in operational existence for the foreseeable future. The Board has, therefore, concluded that the Company has adequate resources to continue to adopt the going concern basis for the period to 30 November 2024 which is at least twelve months from the date of approval of the Financial Statements. This conclusion also takes into account the Board’s assessment of the ongoing risks from the war in Ukraine and significant market events.

Accordingly, the Financial Statements of the Company have been prepared on a going concern basis.

The prospects of the Company over a period longer than twelve months can be found in the Viability Statement above.

PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must act in a way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to the likely consequences of any decision in the long-term; the need to foster relationships with the Company’s suppliers, customers and others; the impact of the Company’s operations on the community and the environment; the desirability of the Company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.

As an externally managed Investment Trust, the Company has no employees or physical assets, and a number of the Company’s functions are outsourced to third parties. The key outsourced function is the provision of investment management services by the Manager, but other professional service providers support the Company by providing administration, custodial, banking and audit services. The Board considers the Company’s key stakeholders to be the existing and potential Shareholders, the external appointed Manager (FIL Investment Services (UK) Limited) and other third-party professional service providers. The Board considers that the interest of these stakeholders is aligned with the Company’s objective of delivering long-term capital growth to investors, in line with the Company’s stated objective and strategy, while providing the highest standards of legal, regulatory and commercial conduct.

The Board, with the Portfolio Manager, sets the overall investment strategy and reviews this at an annual strategy day which is separate from the regular cycle of board meetings. In order to ensure good governance of the Company, the Board has set various limits on the investments in the portfolio, whether in the maximum size of individual holdings, the use of derivatives, the level of gearing and others. These limits and guidelines are regularly monitored and reviewed and are set out in the Annual Report.

The Board places great importance on communication with Shareholders. The Annual General Meeting (“AGM”) provides the key forum for the Board and the Portfolio Manager to present to the Shareholders on the Company’s performance and future plans and the Board encourages all Shareholders to attend in person or virtually and raise any questions or concerns. The Chairman and other Board members are available to meet Shareholders as appropriate. Shareholders may also communicate with Board members at any time by writing to them at the Company’s registered office at FIL Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP or via the Company Secretary in writing at the same address or by email at [email protected]. The Portfolio Manager meets with major Shareholders, potential investors, stock market analysts, journalists and other commentators throughout the year. These communication opportunities help inform the Board in considering how best to promote the success of the company over the long-term.

The Board seeks to engage with the Manager and other service providers and advisers in a constructive and collaborative way, promoting a culture of strong governance, while encouraging open and constructive debate, in order to ensure appropriate and regular challenge and evaluation. This aims to enhance service levels and strengthen relationships with service providers, with a view to ensuring Shareholders’ interests are best served, by maintaining the highest standards of commercial conduct while keeping cost levels competitive.

Whilst the Company’s direct operations are limited, the Board recognises the importance of considering the impact of the Company’s investment strategy on the wider community and environment. The Board believes that a proper consideration of Environmental, Social and Governance (“ESG”) issues aligns with the investment objective to deliver long-term capital growth, and the Board’s review of the Manager includes an assessment of their ESG approach, which is set out in the Annual Report.

In addition to ensuring that the Company’s investment objective was being pursued, key decisions and actions taken by the Directors during the reporting year, and up to the date of approval of this report, have included:

· As part of the Board’s succession plan, the appointment of Dean Buckley as Chairman of the Board when Andy Irvine stepped down from the Board at the last AGM. As a result of the change in Mr Buckley’s role, the decision to appoint Nigel Foster as Senior Independent Director, both appointments with effect from 14 December 2022;

· The decision to carry out an external Board evaluation using the services of Lintstock Ltd. in accordance with the UK Corporate Governance Code;

· The decision to pay an interim dividend of 2.53 pence per share and to recommend the payment of a final dividend of 6.27 pence per share (a total of 8.80 pence per share), to maintain the 14 year track record of increasing dividends, while retaining funds for reinvestment, consistent with the objective of long-term capital growth; and

· The decision to once again hold a hybrid AGM in 2023 in order to make it more accessible to those investors who are unable to or prefer not to attend in person.

Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report and Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial period. Under that law, the Directors have elected to prepare the Financial Statements in accordance with UK Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), including Financial Reporting Standard FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland (“FRS 102”). 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 for the reporting period.

In preparing these Financial Statements the Directors are required to:

· Select suitable accounting policies in accordance with Section 10 of FRS 102 and then apply them consistently;

· Make judgements and estimates that are reasonable and prudent;

· Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

· State whether applicable UK Accounting Standards, including FRS 102, 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 to enable them to ensure that the Company and the Financial Statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

The Directors have delegated the responsibility for the maintenance and integrity of the corporate and financial information included on the Company’s pages of the Manager’s website at www.fidelity.co.uk/specialvalues to the Manager. Visitors to the website need to be aware that legislation in the UK governing the preparation and dissemination of the Financial Statements may differ from legislation in their jurisdictions.

The Directors confirm that to the best of their knowledge:

· The Financial Statements, prepared in accordance with UK Generally Accepted Accounting Practice, including FRS 102, give a true and fair view of the assets, liabilities, financial position and profit of the Company;

· The Annual Report, including the Strategic 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 it faces; and

· The Annual Report and Financial Statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company’s performance, business model and strategy.

The Statement of Directors’ Responsibility was approved by the Board on 6 November 2023 and signed on its behalf by:

DEAN BUCKLEY
Chairman

Income Statement for the year ended 31 August 2023

The Company does not have any other comprehensive income. Accordingly, the net return/(loss) on ordinary activities after taxation for the year is also the total comprehensive income for the year and no separate Statement of Comprehensive Income has been presented.

The total column of this statement represents the Income Statement of the Company. The revenue and capital columns are supplementary and presented for information purposes as recommended by the Statement of Recommended Practice issued by the AIC.

No operations were acquired or discontinued in the year and all items in the above statement derive from continuing operations.

The Notes below form an integral part of these Financial Statements.

Balance Sheet as at 31 August 2023 Company number 2972628

The Financial Statements above and below were approved by the Board of Directors on 6 November 2023 and were signed on its behalf by:

DEAN BUCKLEY
Chairman

The Notes below form an integral part of these Financial Statements.

Statement of Changes in Equity for the year ended 31 August 2023

The Notes below form an integral part of these Financial Statements.

Cash Flow Statement for the year ended 31 August 2023

The Notes below form an integral part of these Financial Statements.

Notes to the Financial Statements

1 Principal Activity
Fidelity Special Values PLC is an Investment Company incorporated in England and Wales with a premium listing on the London Stock Exchange. The Company’s registration number is 2972628, and its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has been approved by HM Revenue & Customs as an Investment Trust under Section 1158 of the Corporation Tax Act 2010 and intends to conduct its affairs so as to continue to be approved.

2 Accounting Policies
The Company has prepared its Financial Statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”), including FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, issued by the Financial Reporting Council (“FRC”). The Financial Statements have also been prepared in accordance with the Statement of Recommended Practice: Financial Statements of Investment Trust Companies and Venture Capital Trusts (“SORP”) issued by the Association of Investment Companies (“AIC”), in July 2022.

a) Basis of accounting – The Financial Statements have been prepared on a going concern basis and under the historical cost convention, except for the measurement at fair value of investments and derivative instruments. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence up to 30 November 2024 which is at least twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed income and expense projections, reviewed the liquidity of the investment portfolio and considered the Company’s ability to meet liabilities as they fall due. This conclusion also takes into account the Director’s assessment of the risks faced by the Company as detailed in the Going Concern Statement above.

In preparing these Financial Statements the Directors have considered the impact of climate change risk as an emerging and a principal risk as set out above, and have concluded that there was no further impact of climate change to be taken into account as the investments are valued based on market pricing. In line with FRS 102, investments are valued at fair value, which in active markets are quoted bid prices at the balance sheet date. Investments which are unlisted are priced using market-based valuation approaches. All investments therefore reflect the market participants view of climate change risk on the investments held by the Company.

The Company’s Going Concern Statement above takes account of all events and conditions up to 30 November 2024 which is at least twelve months from the date of approval of these Financial Statements.

b) Significant accounting estimates and judgements – The Directors make judgements and estimates concerning the future. Estimates and judgements are continually evaluated and are based on historical experience and other factors, such as expectations of future events, and are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The judgements required in order to determine the appropriate valuation methodology of level 3 financial instruments have a risk of causing an adjustment to the carrying amounts of assets. These judgements include making assessments of the possible valuations in the event of a listing or other marketability related risks.

c) Segmental reporting – The Company is engaged in a single segment business and, therefore, no segmental reporting is provided.

d) Presentation of the Income Statement – In order to reflect better the activities of an investment 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 prepared alongside the Income Statement. The net revenue return after taxation for the year is the measure the Directors believe appropriate in assessing the Company’s compliance with certain requirements set out in Section 1159 of the Corporation Tax Act 2010.

e) Income – Income from equity investments is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. Overseas dividends are accounted for gross of any tax deducted at source. Amounts are credited to the revenue column of the Income Statement. Where the Company has elected to receive its dividends in the form of additional shares rather than cash, the amount of the cash dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares received over the amount of the cash dividend is recognised in the capital column of the Income Statement. Special dividends are treated as a revenue receipt or a capital receipt depending on the facts and circumstances of each particular case. Interest for securities is accounted for on an accruals basis and is credited to the revenue column of the Income Statement.

Derivative instrument income received from dividends on long contracts for difference (“CFDs”) is accounted for on the date on which the right to receive the payment is established, normally the ex-dividend date. The amount net of tax is credited to the revenue column of the Income Statement.

Interest received on CFDs, bank deposits, collateral and money market funds is accounted for on an accruals basis and credited to the revenue column of the Income Statement. Interest received on CFDs represents the finance costs calculated by reference to the notional value of the CFDs.

f) Investment management fees and other expenses – Investment management fees and other expenses are accounted for on an accruals basis and are charged as follows:

· Investment management fees are allocated in full to revenue; and

· All other expenses are allocated in full to revenue with the exception of those directly attributable to share issues or other capital events.

g) Functional currency and foreign exchange – The functional and reporting currency of the Company is UK sterling, which is the currency of the primary economic environment in which the Company operates. Transactions denominated in foreign currencies are reported in UK sterling at the rate of exchange ruling at the date of the transaction. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling at the Balance Sheet date. Foreign exchange gains and losses arising on translation are recognised in the Income Statement as a revenue or a capital item depending on the nature of the underlying item to which they relate.

h) Finance costs – Finance costs comprise interest on bank overdrafts and collateral and finance costs paid on CFDs, which are accounted for on an accruals basis. Finance costs are charged in full to the revenue column of the Income Statement.

i) Taxation – The taxation charge represents the sum of current taxation and deferred taxation.

Current taxation is taxation suffered at source on overseas income less amounts recoverable under taxation treaties. Taxation is charged or credited to the revenue column of the Income Statement, except where it relates to items of a capital nature, in which case it is charged or credited to the capital column of the Income Statement. Where expenses are allocated between revenue and capital any tax relief in respect of the expenses is allocated between revenue and capital returns on the marginal basis using the Company’s effective rate of corporation tax for the accounting period. The Company is an approved Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not liable for UK taxation on capital gains.

Deferred taxation is the taxation expected to be payable or recoverable on timing differences between the treatment of certain items for accounting purposes and their treatment for the purposes of computing taxable profits. Deferred taxation is based on tax rates that have been enacted or substantively enacted when the taxation is expected to be payable or recoverable. Deferred tax assets are only recognised if it is considered more likely than not that there will be sufficient future taxable profits to utilise them.

j) Dividend paid – Dividends payable to equity Shareholders are recognised when the Company’s obligation to make payment is established.

k) Investments – The Company’s business is investing in financial instruments with a view to profiting from their total return in the form of income and capital growth. This portfolio of investments is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided on that basis to the Company’s Board of Directors. Investments are measured at fair value with changes in fair value recognised in profit or loss, in accordance with the provisions of both Section 11 and Section 12 of FRS 102. The fair value of investments is initially taken to be their cost and is subsequently measured as follows:

· Listed investments are valued at bid prices, or last market prices, depending on the convention of the exchange on which they are listed; and

· Unlisted investments are not quoted, or are not frequently traded, and are stated at the best estimate of fair value. The Manager’s Fair Value Committee (‘FVC’), which is independent of the Portfolio Manager’s team, meets quarterly to determine the fair value of unlisted investments.

The FVC provide a recommendation of fair values to the Board using market-based approaches such as multiples, industry valuation benchmarks and available market prices. Consideration is given to the cost of the investment, recent arm’s length transactions in the same or similar investments and the financial performance of the investment since purchase. This pricing methodology is subject to a detailed review and appropriate challenge by the Directors.

In accordance with the AIC SORP, the Company includes transaction costs, incidental to the purchase or sale of investments, within losses on investments in the capital column of the Income Statement and has disclosed these costs in Note 10 below.

l) Derivative instruments – When appropriate, permitted transactions in derivative instruments are used. Derivative transactions into which the Company may enter include long and short CFDs, futures, options and warrants. Derivatives are classified as other financial instruments and are initially accounted for and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value as follows:

· Long CFDs – the difference between the strike price and the value of the underlying shares in the contract;

· Futures – the difference between the contract price and the quoted trade price; and

· Options – value based on similar instruments or the quoted trade price for the contract.

Where transactions are used to protect or enhance income, if the circumstances support this, the income and expenses derived are included in net income in the revenue column of the Income Statement. Where such transactions are used to protect or enhance capital, if the circumstances support this, the income and expenses derived are included: for long CFDs, as gains or losses on long CFDs, and for short CFDs, futures and options as gains or losses on short CFDs, futures and options in the capital column of the Income Statement. Any positions on such transactions open at the year end are reflected on the Balance Sheet at their fair value within current assets or current liabilities.

m) Debtors – Debtors include securities sold for future settlement, amounts receivable on settlement of derivatives, accrued income, taxation recoverable and other debtors and prepayments incurred in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business, if longer) they are classified as current assets. If not, they are presented as non-current assets. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

n) Amounts held at futures clearing houses and brokers – These are amounts held in segregated accounts as collateral on behalf of brokers and are carried at amortised cost.

o) Cash and cash equivalents – Cash and cash equivalents may comprise cash at bank and money market funds which are short-term, highly liquid and are readily convertible to a known amount of cash. These are subject to an insignificant risk of changes in value.

p) Other creditors – Other creditors include securities purchased for future settlement, finance costs payable, investment management fees and other creditors and expenses accrued in the ordinary course of business. If payment is due within one year or less (or in the normal operating cycle of the business, if longer) they are classified as current liabilities. If not, they are presented as non-current liabilities. They are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.

q) Capital reserve – The following are accounted for in the capital reserve:

· Gains and losses on the disposal of investments and derivative instruments;

· Changes in the fair value of investments and derivative instruments held at the year end;

· Foreign exchange gains and losses of a capital nature;

· Dividends receivable which are capital in nature; and

· Costs of repurchasing or issuing ordinary shares.

Technical guidance issued by the Institute of Chartered Accountants in England and Wales in TECH 02/17BL, guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, states that changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms at the Balance Sheet date, can be treated as realised. Capital reserves realised and unrealised are shown in aggregate as capital reserve in the Statement of Changes in Equity and the Balance Sheet. At the Balance Sheet date, the portfolio of the Company consisted of investments listed on a recognised stock exchange and derivative instruments contracted with counterparties having an adequate credit rating, and the portfolio was considered to be readily convertible to cash, with the exception of the level 3 investments which had unrealised investment holding losses of £9,684,000 (2022: losses of £9,389,000).

3 Income

Special dividends of £1,904,000 (2022: £372,000) have been recognised in capital during the year.

* Due to negative interest rates in the prior year, the Company received interest on some of its long CFDs.

4 Investment Management Fees

FIL Investment Services (UK) Limited is the Company’s Alternative Investment Fund Manager and has delegated portfolio management to FIL Investments International (“FII”). Both companies are Fidelity group companies.

FII charges investment management fees at an annual rate of 0.60% of net assets. Fees are accrued on a daily basis and payable monthly.

5 Other Expenses

1 Details of the breakdown of Directors’ fees are disclosed in the Directors’ Remuneration Report in the Annual Report.

2 The VAT payable on audit fees is included in sundry other expenses.

6 Finance Costs

7 Taxation on Return/(Loss) on Ordinary Activities

b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK corporation tax for an investment trust company of 25.00% (2022: 19.00%). A reconciliation of the standard rate of UK corporation tax to the taxation charge for the year is shown below:

* The Company is exempt from UK taxation on capital gains as it meets the HM Revenue & Customs criteria for an investment company set out in Section 1159 of the Corporation Tax Act 2010.

c) Deferred taxation
A deferred tax asset of £17,235,000 (2022: £16,119,000), in respect of excess expenses of £68,940,000 (2022: £64,476,000) available to be set off against future taxable profits has not been recognised as it is unlikely that there will be sufficient future taxable profits to utilise these expenses.

The UK corporation tax rate increased from 19.00% to 25.00% from 1 April 2023. The rate of 25.00% has been applied to calculate the unrecognised deferred tax asset for the current year (2022: 25.00%).

8 Return/(Loss) per Ordinary Share

The return/(loss) per ordinary share is based on the net return/(loss) on ordinary activities after taxation for the year divided by the weighted average number of ordinary shares held outside of Treasury during the year, as shown below:

9 Dividends Paid to Shareholders

The Directors have proposed the payment of a final dividend of 6.27 pence per ordinary share for the year ended 31 August 2023 which is subject to approval by Shareholders at the Annual General Meeting on 14 December 2023 and has not been included as a liability in these Financial Statements. The dividend will be paid on 10 January 2024 to Shareholders on the register at the close of business on 1 December 2023 (ex-dividend date 30 November 2023).

10 Investments

The Company received £367,363,000 (2022: £348,004,000) from investments sold in the year. The book cost of these investments when they were purchased was £325,162,000 (2022: £274,519,000). These investments have been revalued over time and until they were sold any unrealised gains/(losses) were included in the fair value of the investments.

Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments, which are included in the losses on investments above, were as follows:

The portfolio turnover rate for the year was 44.2% (2022: 42.8%).

11 Derivative Instruments

12 Debtors

13 Other Creditors

14 Share Capital

During the year, no new ordinary shares were issued (2022: 11,070,000 shares). The premium received on the issue of new ordinary shares for the prior year ended 31 August 2022 was £33,118,000 and was credited to the share premium account. At 31 August 2023, no shares were held in Treasury.

15 Capital and Reserves

The capital reserve balance at 31 August 2023 includes investment holding losses of £31,685,000 (2022: gains of £22,537,000) as detailed in Note 10 above. The revenue and capital reserves are distributable by way of dividend. See Note 2 (q) above for further details.

16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based on the total Shareholders’ funds divided by the number of ordinary shares held outside of Treasury.

It is the Company’s policy that shares held in Treasury will only be reissued at net asset value per ordinary share or at a premium to net asset value per ordinary share and, therefore, shares held in Treasury have no dilutive effect.

17 FINANCIAL INSTRUMENTS
Management of risk
The Company’s investing activities in pursuit of its investment objective involve certain inherent risks. The Board confirms that there is an ongoing process for identifying, evaluating and managing the risks faced by the Company. The Board with the assistance of the Manager, has developed a risk matrix which, as part of the internal control process, identifies the risks that the Company faces. Principal risks identified are market, economic and political, investment performance (including the use of derivatives and gearing), cybercrime and information security, environmental, social and governance (“ESG”), competition, business continuity, key person and operational support, discount control and regulatory. Risks are identified and graded in this process, together with steps taken in mitigation, and are updated and reviewed on an ongoing basis. These risks and how they are identified, evaluated and managed are shown above.

This note refers to the identification, measurement and management of risks potentially affecting the value of financial instruments. The Company’s financial instruments may comprise:

· Equity shares (listed and unlisted) and bonds held in accordance with the Company’s investment objective and policies;

· Derivative instruments which comprise CFDs, futures and options on listed stocks and equity indices; and

· Cash, liquid resources and short-term debtors and creditors that arise from its operations.

The risks identified arising from the Company’s financial instruments are market price risk (which comprises interest rate risk, foreign currency risk and other price risk), liquidity risk, counterparty risk, credit risk and derivative instrument risk. The Board reviews and agrees policies for managing each of these risks, which are summarised below. These policies are consistent with those followed last year.

MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and reserves. In addition, the Company has gearing through the use of derivative instruments. The Board imposes limits to ensure gearing levels are appropriate. The Company is exposed to a financial risk arising as a result of any increases in interest rates associated with the funding of the derivative instruments.

Interest rate risk exposure
The values of the Company’s financial instruments that are exposed to movements in interest rates are shown below:

Due to negative interest rates in the prior year, the Company received interest on some of its long CFD positions.

Foreign currency risk
The Company does not carry out currency speculation. The Company’s net return/(loss) on ordinary activities after taxation for the year and its net assets can be affected by foreign exchange movements because the Company has income and assets which are denominated in currencies other than the Company’s functional currency which is UK sterling. The Company can also be subject to short-term exposure to exchange rate movements, for example, between the date when an investment is purchased or sold and the date when settlement of the transaction occurs.

Three principal areas have been identified where foreign currency risk could impact the Company:

· Movements in currency exchange rates affecting the value of investments and derivative instruments;

· Movements in currency exchange rates affecting short-term timing differences; and

· Movements in currency exchange rates affecting income received.

The portfolio management team monitor foreign currency risk but it is not the Company’s policy to hedge against currency risk.

Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is shown below:

1 The exposure to the market of long CFDs.

2 Cash and cash equivalents are made up of £2,028,000 cash at bank and £57,432,000 held in Fidelity Institutional Liquidity Fund.

1 The exposure to the market of long CFDs.

2 Debtors include amounts held at futures clearing houses and brokers.

3 Cash and cash equivalents are made up of £2,014,000 cash at bank and £78,436,000 held in Fidelity Institutional Liquidity Fund.

Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share capital and reserves. The Company’s financial liabilities comprise other creditors. The currency profile of these financial liabilities is shown below:

Other price risk
Other price risk arises mainly from uncertainty about future prices of financial instruments used in the Company’s business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets quarterly to consider the asset allocation of the portfolio and the risk associated with particular industry sectors within the parameters of the investment objective. The Portfolio Manager is responsible for actively monitoring the existing portfolio selected in accordance with the overall asset allocation parameters described above and seeks to ensure that individual stocks also meet an acceptable risk/reward profile. Other price risks arising from derivative positions, mainly due to the underlying exposures, are estimated using Value at Risk and Stress Tests as set out in the Company’s internal Risk Management Process Document.

Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in meeting obligations associated with financial liabilities. The Company’s assets mainly comprise readily realisable securities and derivative instruments which can be sold easily to meet funding commitments if necessary. Short-term flexibility is achieved by the use of a bank overdraft, if required.

Liquidity risk exposure
At 31 August 2023, the undiscounted gross cash outflows of the financial liabilities were all repayable within one year and consisted of derivative instrument liabilities of £949,000 (2022: £9,200,000) and other creditors of £860,000 (2022: £3,481,000).

Counterparty risk
Certain derivative instruments in which the Company may invest are not traded on an exchange but instead will be traded between counterparties based on contractual relationships, under the terms outlined in the International Swaps and Derivatives Association’s (“ISDA”) market standard derivative legal documentation. These are known as Over the Counter (“OTC”) trades. As a result, the Company is subject to the risk that a counterparty may not perform its obligations under the related contract. In accordance with the risk management process which the Investment Manager employs, this risk is minimised by only entering into transactions with counterparties which are believed to have an adequate credit rating at the time the transaction is entered into, by ensuring that formal legal agreements covering the terms of the contract are entered into in advance, and through adopting a counterparty risk framework which measures, monitors and manages counterparty risk by the use of internal and external credit agency ratings and by evaluating derivative instrument credit risk exposure.

For derivative transactions, collateral is used to reduce the risk of both parties to the contract. All collateral amounts are held in UK sterling and are managed on a daily basis for all relevant transactions. At 31 August 2023, £580,000 (2022: £nil) was held by the brokers in a segregated collateral account on behalf of the Company, to reduce the credit risk exposure of the Company. This collateral comprised: J.P. Morgan Securities plc £220,000 (2022: £nil) and HSBC Bank plc £360,000 (2022: £nil). At 31 August 2023, there were no amounts held by the Company at futures clearing houses and brokers, in a segregated collateral account, on behalf of the brokers, to reduce the credit risk exposure of the brokers (2022: £8,190,000). In the year to 31 August 2022, this collateral comprised: J.P. Morgan Securities plc £5,140,000 in cash and HSBC Bank plc £3,050,000 in cash.

Credit risk
Financial instruments may be adversely affected if any of the institutions with which money is deposited suffer insolvency or other financial difficulties. All transactions are carried out with brokers that have been approved by the Manager and are settled on a delivery versus payment basis. Limits are set on the amount that may be due from any one broker and are kept under review by the Manager. Exposure to credit risk arises on unsettled security transactions and derivative instrument contracts and cash at bank.

Derivative instrument risk
The risks and risk management processes which result from the use of derivative instruments, are set out in a documented Derivative Risk Measurement and Management Document. Derivative instruments are used by the Manager for the following purposes:

· To gain unfunded long exposure to equity markets, sectors or single stocks. Unfunded exposure is exposure gained without an initial flow of capital;

· To hedge equity market risk using derivatives with the intention of at least partially mitigating losses in the exposures of the Company’s portfolio as a result of falls in the equity market; and

· To position short exposures in the Company’s portfolio. These uncovered exposures benefit from falls in the prices of shares which the Portfolio Manager believes to be over-valued. These positions, therefore, distinguish themselves from other short exposures held for hedging purposes since they are expected to add risk to the portfolio.

RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 August 2023, an increase of 1.00% in interest rates throughout the year, with all other variables held constant, would have decreased the Company’s net gain on ordinary activities after taxation for the year and decreased the net assets of the Company by £698,000 (2022: increased the net loss and decreased the net assets by £994,000). A decrease of 1.00% in interest rates throughout the year would have had an equal but opposite effect.

Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31 August 2023, a 10% strengthening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have decreased the Company’s net gain on ordinary activities after taxation for the year and decreased the net assets of the Company by £25,706,000 (2022: increased the net loss and decreased the net assets by £22,692,000). A 10% weakening of the UK sterling exchange rate against foreign currencies, with all other variables held constant, would have increased the Company’s net gain on ordinary activities after taxation for the year and increased the net assets of the Company by £31,418,000 (2022: decreased the net loss and increased the net assets by £27,734,000).