TIDMSCF
RNS Number : 3229R
Schroder Income Growth Fund PLC
26 October 2023
ANNUAL REPORT AND ACCOUNTS
Schroder Income Growth Fund plc (the "Company") hereby submits
its final results for the year ended 31 August 2023.
The Company's annual report and accounts for the year ended 31
August 2023 are also being published in hard copy format and an
electronic copy will shortly be available to download from the
Company's webpages www.schroders.co.uk/incomegrowth . Please click
on the following link to view the document:
http://www.rns-pdf.londonstockexchange.com/rns/3229R_1-2023-10-25.pdf
Enquiries:
Shilla Pindoria
Schroder Investment Management Limited
Tel: 020 7658 6000
Highlights for the year ended 31 August 2023
-- Dividend per share for the year rose by 4.6% to 13.80p (31 August 2022: 13.20p), reflecting the Company's
principal objective of delivering real income growth in excess of inflation - marking the 28th consecutive year
of dividend growth.
-- NAV total return increased by 4.03% to 220.6p (31 August 2022: 211.7p), whilst NAV per share rose to 4.2% (31
August 2022: 2.7%) despite a volatile period for UK equity markets, although underperformed versus the FTSE
All-Share Index.
-- The Company renewed its GBP30m revolving credit facility with SMBC for a further year, effective from 22
September 2023.
-- Earnings per share fell by 5.9% to 13.14p due to reduced dividends from mining shares and corporate management
pivoting from special dividends towards share buybacks.
-- Six new holding were added to the portfolio including Glencore and XPS Pensions with seven existing holdings
sold. Exposure to property was reduced whilst exposure to international banks was increased.
-- As at 31 August 2023, the Company held GBP1.56m in cash.
-- The Manager will report on the year ended 31 August 2023 and outline views on the future direction of the
portfolio, in a webinar on 20 November 2023 at 2pm.
-- The Company's Annual General Meeting (AGM) will be held at 12:30pm on Wednesday, 13 December 2023 at Schroders'
offices.
Chairman's Statement
I am pleased to present the first set of annual results of
Schroder Income Growth Fund plc since becoming Chairman in December
2022. Rising interest rates and sluggish global growth have made
navigating equity markets a challenging task during the year. Your
Manager has not allowed these distractions to alter their
fundamental and well tested investment philosophy.
Revenue and dividends
Despite difficult conditions, your Company was able to increase
your dividend for the 28th year running. Dividends per share for
the year of 13.80p represent a 4.6% increase on the previous year,
in accordance with the Company's objective to increase the dividend
in line with inflation over the longer term. In this respect we
define the medium term as five years and the longer term as
ten.
Earnings per share fell by 5.9% to 13.14p. The dividend of
13.80p was 95.2% covered by earnings. After payment of the fourth
interim dividend on 3 November 2023, the revenue reserve will be
GBP7.5 million, representing 10.80p per ordinary share or over nine
months of the annual dividend. The ability to smooth income by
judicious use of revenue reserves remains a particular advantage of
investment trusts over open ended funds.
Income earned by the Company came under pressure during the year
for two main reasons. Firstly, lower commodity prices led to a
notable reduction in earnings and dividends from mining shares.
Secondly corporate managements pivoted from special dividends
towards share buybacks thus reducing income for the market and your
Company. The reduction in earnings per share masks very strong
dividend growth across many stocks held in the portfolio.
In tandem with much higher inflation the Company was
consequently unable to increase the dividend in real terms this
year without drawing heavily on reserves. Such outcomes have arisen
from time to time in the last 28 years of our history. Despite
this, we have continued to fulfil the primary objective of 'real
growth of income' above the levels of inflation over the longer
term.
Performance
During a volatile period for UK equity markets the Company
returned 4.2% in net asset value total returns. Share price total
returns over the period were -3.0% as compares to a return of 5.2%
for the FTSE All-Share total return index. A bias towards medium
and smaller sized companies, whose returns lagged those of the
larger FTSE100, detracted from short term performance but have
added significant value over the longer term. For more details of
performance please refer to the Manager's Review.
Share price performance and discount to NAV
The Company's share price discount to NAV averaged 1.60% during
the year but widened towards the latter part of the year to end at
8.9%. Whilst the Company did not buy back any shares during the
year, your Board continues to monitor the discount closely and will
take appropriate action as required.
Gearing
The Company has renewed its GBP30 million revolving credit
facility with Sumitomo Mitsui Banking Corporation Europe Limited
("SMBC") for a further year effective from 22 September 2023. The
average gearing level over the year was 12.01% and at the end of
the Company's financial year the level of gearing was 13.7%.
Annual General Meeting
The AGM will be held at 12.30pm on Wednesday, 13 December 2023
at Schroders' offices at 1 London Wall Place, London EC2Y 5AU. Your
Board strongly encourages shareholders to attend and participate in
the meeting. Shareholders will also be able to hear a presentation
from the Manager and light refreshments will be served. Please note
that all voting will be by poll and we encourage all shareholders
to 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 to appoint the Chairman of the meeting as
their proxy. Information on voting can be found in the Notice of
Meeting on pages 75 to 78. In the event that shareholders have a
question for your Board, please email
amcompanysecretary@schroders.com in advance of the AGM.
Changes to the Articles of Association
One of the resolutions that will be proposed at the AGM is an
amendment to the Company's Articles of Association (the "Articles")
to allow for flexibility to hold shareholder meetings (wholly or
partially) by electronic means. This will allow your Board to hold
hybrid or virtual meetings when in the best interests of
shareholder safety, for example, in the event of a future pandemic.
The amendments will not prevent the Company from holding physical
meetings and the Board's intention and strong preference is always
to hold a physical general meeting when safe and practical to do
so.
Other amendments primarily relate to changes in law and
regulation and developments in market practice since the Articles
were last adopted. Further details can be found in the Director's
Report and a summary of all the changes being introduced can be
found in the Annual General Meeting - Recommendations section on
pages 72 to 74.
Results Webinar
Please join the Manager for a webinar in which they will report
on the year ended 31 August 2023 and outline their thoughts on the
future direction of the portfolio. The presentation will be
followed by a live Q&A session. The webinar will take place on
20 November 2023 at 2pm. Register for the event at
https://registration.duuzra.com/form/SCF2023.
Outlook
Many of the challenges the Company has faced look set to
continue into the year ahead. Concerns surrounding inflation and
interest rate rises have been a feature of the last year. It seems
likely that interest rates will stay higher for longer to help
bring inflation into line with Bank of England's and other Central
Banks' targets. Concerns over fiscal sustainability have broadened
from the UK to the US and Europe leading to falls in government
bond markets and consequent pressure on equities.
The UK market continues to face negative investor sentiment,
relative to Global and European markets, and investor outflows have
been a drag on UK market returns. In addition, geopolitical risks
understandably remain front of mind for investors. Such sentiment
also creates significant opportunities for the Company over the
longer term. The de-rating of UK smaller and medium sized companies
is a prime example of this, and it is pleasing to see your Manager
actively taking advantage of the valuation dislocations. Company
managements seem to agree their shares are good value with a shift
towards buybacks and away from dividends.
We cannot ignore the reality that higher interest rates allow
savers with an income target choice from a wider range of
investments. The abiding feature of equities though is that their
profits and dividends grow over the long term in nominal and real
terms, a factor sometimes ignored when looking at shorter term cash
rates.
For investors real returns matter particularly in periods of
rising inflation and interest rates. This is why the principal aim
of the Company is to increase income above the rate of inflation
over the medium and longer term.
We remain committed to paying an increasing annual dividend and
grow income adjusted for inflation over the long term, and I am
pleased that we have been able to deliver such increases for 28
years. Whilst we utilised the Company's reserves on this occasion,
they remain strong, having added to them in the previous financial
year. We continue to monitor the income from the portfolio and
remain committed to the sustainability of the Company's
dividend.
Whilst it is disappointing the Company's performance over the
last year has lagged the broader UK market we are confident in your
Manager and their abilities to deploy their investment approach and
exploit the market inefficiencies to drive returns over the long
term. We base such confidence on the record since Sue Noffke and
her team took over managing the portfolio in 2011. In that period
the share price total return performance of 126.47% and the NAV
total return of 128.46% are both well ahead of the FTSE All-Share
Index total return of 103.50%. Investment performance will
fluctuate with market cycles but we, as your Board, are focused on
ensuring the Company continues to meet its investment objectives
over the long term.
Ewen Cameron Watt
Chairman
25 October 2023
Manager's Review
The net asset value total return in the 12 months to 31 August
2023 was 4.2%. This compares to 5.2% from the FTSE All Share Total
Return Index. The share price return was -3.0%. The AIC UK Equity
Income median return was 4.4% over the period. It is disappointing
to report that your Company's return lagged these comparators over
the 12 month period.
Revenue after tax for your Company fell by 5.9% compared to the
same period last year. The decline was the result of a fall in
income received and a rise in the cost of gearing, as interest
costs reflected higher average interest rates in the latest 12
months compared to those in the prior period.
Total income for the Company fell 3.6% compared to the same
period last year, due to three factors. The principal reason was a
halving of total income from the mining sector. Lower commodity
prices, compared to their peak levels of 2021/22, led to a marked
reduction in earnings and dividends from the companies in this
sector from the extraordinarily high level of the prior two years.
Ordinary dividends were lower whilst special dividends, which had
been material in the prior period, were absent except for a small
special dividend payment by Glencore. Your Company had less
invested in the mining sector during the last 12 months compared to
the prior period, on the belief that we had passed the peak for the
commodity cycle. Whilst the fall in mining sector income had been
anticipated, the Company was not able to offset the full reduction
despite income from banks holdings increasing by over 50% and from
oils by over 30%.
The second reason was the non-payment of a dividend by the
insurance company Direct Line Group due to disappointing operating
performance, detailed in the performance section. Your Company
exited its position in the stock.
Lastly some changes to dividend dates for a few holdings meant
being paid in September rather than August this year, resulting in
some income being shifted from this period into the Company's next
financial year. Contributions to your Company's income from special
dividends peaked in the 12-month period to August 2021 and has
fallen back, in each of the past two years, to levels that appear
normal in historical terms.
Additional factors weighing on income in the year was the split
of GlaxoSmithKline into two businesses, the biopharma company,
rebasing its dividend to free up funds for investment in research
and development. Dividends were around one quarter below their
level of the prior period. Gambling company 888 did not pay a
dividend in the period as the company prioritised balance sheet
leverage resulting from the purchase of William Hill's UK assets.
Additionally, movements in dividend dates impacted three of the
holdings which last year paid dividends in August and this year
switched to September - asset manager M&G, Asian life insurance
business Prudential, and student property company, Empiric.
On the positive side a diverse range of holdings saw dividends
grow significantly, at more than 20%. Oil majors, Shell and BP,
continued to build back their dividend payments to shareholders
after the cuts of two years ago. Asian oriented banks, HSBC and
Standard Chartered, saw particularly strong growth while domestic
bank NatWest Group and financial services infrastructure business
TP ICAP also grew robustly. Several of your Company's holdings in
the consumer discretionary area rewarded shareholders with
excellent dividend growth as their businesses flourished following
the pandemic disruptions - Whitbread and Hollywood Bowl saw
dividends double and triple respectively, with strong growth from
studios and broadcaster ITV and luxury goods company Burberry.
Double digit dividend increases were received from domestic bank
Lloyds, investment company 3i, financial services provider XPS
Pensions, power utilities companies SSE and Drax and infrastructure
and construction company Balfour Beatty.
Elsewhere more stable companies - information providers RELX and
Pearson, distribution services business Bunzl, retailer Pets at
Home, utility company National Grid, GP patient practice business
Assura, defence services business QinetiQ, engineering group
Spectris, and insurance company Legal & General all increased
dividends by mid to high single digits. Companies in the portfolio
with low or no dividend growth are typically in a growth phase such
as pharmaceuticals company AstraZeneca, telecoms company BT and
sustainable technologies company Johnson Matthey, or they have
switched preference to share buy backs over dividends as a way of
rewarding shareholders, an example of this is food retailer
Tesco.
A feature of the market, particularly evident in the mining,
banks and oils sectors, has been a trend to favour share buy backs
in capital allocation decisions. With resulting dividend payments
spread over reduced share counts, this approach, all other things
equal, improves the sustainability, and growth, of income for these
more cyclical sectors which are particularly sensitive to the
economic cycle. Companies and their boards must determine whether
the price paid for shares in conducting a share buyback offer
attractive returns when benchmarked against other uses of capital,
such as investment in projects, research and development, staff,
facilities or acquisitions. Several other companies across a range
of industries are conducting share buybacks including food retailer
Tesco, budget hotel operator Whitbread, luxury fashion house
Burberry, consumer goods company Unilever, infrastructure and
construction firm Balfour Beatty, TP ICAP and information companies
RELX and Pearson. Some 17 of your Company's 43 holdings conducted
share buy backs over the period.
At a market level we believe a total shareholder yield in excess
of 6% represents an attractive level in absolute terms, relative to
other equity markets and other assets - including bonds and cash(1)
.
(1) Total shareholder yield is the sum of a stock's dividend
yield (paid over previous twelve months less any special dividends)
and the percentage of net share buybacks over the previous twelve
months.
Market background
While global economic activity has generally surprised to the
upside in 2023, inflation has been stronger and stickier than had
been assumed. Central Banks around the world continued to raise
interest rates during the period which has pushed up bond yields
towards historic averages from the abnormally low levels seen in
the post Global Financial Crisis era. In the second half of the
period, bond and equity markets have been looking for signs that
inflation is under sufficient control for central banks to signal
the monetary tightening is done.
At the start of the period in September 2022 UK gilts suffered
an especially sharp decline, along with Sterling, leading to
stresses in the pensions and fixed income market (LDI) which was
driven by the Truss/Kwarteng 'mini budget'. This resulted in Bank
of England intervention, criticism from outside authorities
including the US government and the International Monetary Fund
(IMF), and another change in the UK's Prime Minister and
Chancellor. UK bond and stock markets did eventually calm down
after many of the policies announced by Kwarteng were subsequently
reversed by the new Chancellor, Jeremy Hunt, in his Autumn
statement promising the country would tighten its belt in
future.
Further afield China loosened its pandemic restrictions,
although the boost to economic activity was underwhelming and China
has fallen short of original expectations with issues in the real
estate sector weighing on activity and confidence. The collapse of
Silicon Valley Bank (SVB) in the US in March raised concerns
particularly over US regional banks that are subject to less
regulation than their global peers. Subsequently in Europe,
troubled lender Credit Suisse was subject to an emergency takeover
from rival UBS in a deal brokered by the Swiss authorities.
Enthusiasm for Artificial Intelligence (AI) drove huge gains in
select areas of the US market as investors poured money into the
technology sector.
Portfolio performance
Disappointingly the NAV total return underperformed the FTSE
All-Share Index. Your Company generated a total return of 4.2% over
the 12-month period against 5.2% for the FTSE All-Share Index.
Portfolio performance was insufficient to offset the higher cost of
gearing in the period. A bias towards medium and smaller sized
companies, whose returns lagged behind those of the larger FTSE100,
detracted from performance.
At a sector level the main driver of negative relative returns
was stock selection in industrials. Your Company did not own the
strongly performing stocks in this sector. Aerospace and defence
companies, Rolls Royce, Melrose and BAE Systems, rose as orderbooks
strengthened with a strong post covid recovery in civil and defence
aerospace end markets. CRH benefitted from a re-rating of the
shares in advance of its move to relist on the US stock exchange,
whilst Ashtead continued to experience robust demand for equipment
rental in the USA.
Additionally having more exposure in basic materials than in the
benchmark index detracted from performance with weakness in
commodity prices, particularly precious metals, impacting holdings
in miner Anglo American and sustainability solutions company
Johnson Matthey. Anglo American suffered from a combination of
weaker commodity prices and operational difficulties, now resolved.
Your Manager continues to find the diversified exposure to forward
facing metals and valuation of the business attractive. Lower
precious metals prices weighed on Johnson Matthey whilst increased
investment across areas of the group have hit profits. New
management has begun to execute its strategy and your Manager is
encouraged that Standard Industries, a US activist industrial
investor, has increased its stake in the business (announced in
September 2023) to 10% from its original 5% stake in April
2022.
Property companies suffered the ructions of bond markets in the
autumn of 2022 as yields rose sharply. Assura was the largest
individual detractor in the period. The shares suffered as bond
yields rose and the market fretted about the higher costs of
refinancing debt. BT weighed on performance as the market worried
about a range of issues from the near-term cash flow impact of
significant broadband investment, the impact of higher bond yields
on the large company pension scheme and a change in CEO. The
incoming CEO has been an independent director on the board of BT
for 2 years and is likely to hit the ground running. The group has
potential levers to demonstrate value and the valuation of the
shares remains compelling. Your Company's position in Direct Line,
now sold, was a significant drag on performance over the period.
The impact of adverse weather and significant claims inflation was
detrimental to profits and capital leading to the company forgoing
payment of a dividend until profits and capital have been
restored.
Positioning in the two consumer sector positions contributed
positively to performance by owning less than the market in
consumer staples and owning more than the market in consumer
discretionary sectors. Staples companies underperformed over the
period as they experienced an unwind of the pandemic boost to
volumes of cigarettes and alcohol as well as a headwind to profits
from currency moves over the period as the pound staged a part
recovery from the lows of September 2022. Not owning British
American Tobacco, Imperial Brands or international drinks company
Diageo, all of which were weak, was positive for your Company.
Consumer discretionary stocks performed strongly as they recovered
from the sharp selloff in the summer and early autumn of 2022 on
fears over domestic politics and economic prospects and in the face
of a mounting cost of living crisis and higher costs of servicing
mortgages. Many of your Company's holdings are resilient businesses
offering consumers good value for money and they have gained market
share in recent years from weaker competitors exiting the market.
Your Company's material positions in Whitbread, Hollywood Bowl and
Pets at Home, as well as financial investment group 3i (whose main
asset is European value for money retailer Action) all had strong
operating and share price performances.
Five top/bottom relative performers
Weight Relative
relative
Portfolio to performance
weight index Impact
(%)(1) (%)(1) (%)(2) (%)(3)
------------------------- --------- -------- ------------------ ------
British American Tobacco 0.0 -2.9 -23.3 +0.8
------------------------- --------- -------- ------------------ ------
Hollywood Bowl 2.0 2.0 40.2 +0.7
------------------------- --------- -------- ------------------ ------
Diageo 0.0 -3.5 -17.0 +0.6
------------------------- --------- -------- ------------------ ------
3i Group 1.9 1.2 64.2 +0.6
------------------------- --------- -------- ------------------ ------
Whitbread 2.2 1.9 35.5 +0.6
------------------------- --------- -------- ------------------ ------
Weight Relative
relative
Portfolio to performance
weight index Impact
(%)(1) (%)(1) (%)(2) (%)(3)
---------------- --------- -------- ----------- ------
Assura 1.7 1.6 -30.6 -0.7
---------------- --------- -------- ----------- ------
BT Group 2.6 2.2 -23.3 -0.6
---------------- --------- -------- ----------- ------
Rolls Royce 0.0 -0.5 183.4 -0.5
---------------- --------- -------- ----------- ------
Direct Line 0.9 0.8 -26.5 -0.5
---------------- --------- -------- ----------- ------
Johnson Matthey 2.1 1.9 -21.0 -0.5
---------------- --------- -------- ----------- ------
Source: Schroders, FactSet, for Schroder Income Growth
investment portfolio, 12 months to end August 2023.
1 Average weights over the period.
2 Total return of the stock relative to the FTSE All-Share TR
over the period.
3 Contribution to performance relative to the FTSE All-Share TR.
The securities shown above are for illustrative purposes only and
are not to be considered a recommendation to buy or sell.
Portfolio activity
Your Manager has continued to review the portfolio for
opportunities to add new investments for attractive medium term
total returns, augment existing holdings at compelling levels or
exit those where share prices are fully valued or where the
investment case and conviction has weakened. During the 12-month
period, six new holdings were added to your Company and seven were
sold.
At a sector level, the principal changes to your Company were a
reduction in exposure to property and additions to existing
positions in banks and utilities. Your Manager sold out of
purpose-built student accommodation (PBSA) provider Unite Group in
September, prior to the significant rise in government bond (gilt)
yields arising from the LDI fallout of the UK's autumn statement,
viewing the valuation of the shares as close to fair value.
Positions in fellow PBSA company, Empiric Student Property, and
Assura, were reduced later in the period. Large diversified
international bank HSBC was considered attractive given the
likelihood of higher for longer interest rates, the stock's low
valuation, both relative to history and in absolute terms, the
strong capital position and attractive dividend yield together with
additional capital returns, in the form of share buy backs. Your
Company added to its existing positions in regulated electricity
network and renewables company SSE and to electricity and gas
transmission and distribution business National Grid. Both
businesses have attractive growth pathways investing for the energy
transition in renewable electricity in the former and in the
electricity grid in both the UK and USA in the latter.
Additionally, their dividend yields, and future dividend growth are
attractive characteristics.
Whilst maintaining your Company's commodity sector exposures
overall your Manager made changes to its preferences within the oil
and mining areas. The Company established a new holding in BP
through a part reduction in the Company's large position in fellow
oil major Shell. At its 2022 results, BP signalled its ambition to
grow its dividend, extend share buy backs whilst accelerating
investments into both low carbon energy and fossil fuels, and
reduce debt. Your Manager believes there is scope for Shell to
follow a similar strategy but opted to introduce diversity by
owning both companies. The Company sold iron ore producer Rio Tinto
and reduced its position in Anglo American, subsequently investing
the proceeds into a new holding in diversified miner Glencore. Your
Manager is attracted to Glencore's asset mix of forward-facing
minerals which are well positioned to benefit as the world moves to
decarbonise energy and industry. Extensive research has been
conducted on the company, particularly around ethics, governance,
climate and social risks. Additionally, several engagements were
conducted to understand better the business strategy and the firm's
commitment to cultural change associated with the settlement of
bribery and corruption fines from the Department of Justice and
Senior Fraud Office authorities. Your Manager believes that there
is sufficient evidence of culture change and commitment to further
improvements which, taken together justifies a position in the
portfolio. Rio Tinto was exited due to a view of the greater risks
and costs associated with the development of a new iron ore
facility in Simandou, Guinea.
Your Company sold out of private assets investment manager
Petershill, reinvesting the proceeds into peer Intermediate
Capital, which it believes is higher quality and more attractively
valued. The holding in National Express (now Mobico) was exited on
concerns over availability and cost inflation pressures of bus
drivers, together with a stretched balance sheet. Direct Line
Insurance was sold in two stages, the first following a
disappointing trading update, the remainder following the full year
results, and the subsequent announcement of forgoing a dividend.
Part of the proceeds were invested in topping up its position in
global asset management company M&G. Your Company exited its
holding in the mid cap recruitment company SThree, which focuses on
the permanent and flexible contract roles in STEM areas across
Europe and the US, as in the near term it sees more headwinds as
the post Covid hiring has begun to normalise, especially in the
company's core areas of technology and healthcare. Your Company
also sold its allocation to consumer healthcare business Haleon
following its split from GlaxoSmithKline as it was a small holding
with a low dividend yield.
Your Manager saw upside potential from ITV's strong cash
generation and longer-term digital initiatives and added a new
holding in the media group. A new position was also established in
Victrex, a world leader in high performance polymer solutions for a
range of industrial and medical device applications. The company
has strong pricing power, growth potential and balance sheet. Food
producer Cranswick has industry leading capabilities and continues
to invest at pace into a broad range of growth opportunities for
attractive returns. The shares have derated over the past three
years whilst the business has grown, expanded new facilities (pork
and poultry), developed new capabilities (breaded chicken) and
diversified into new areas (pet foods). A new holding was
established in XPS Pensions, a leading pensions consulting and
administration business with significant organic growth
opportunities as it takes share in a large addressable market, the
shares offer an attractive and growing dividend yield.
Your Manager continues to add to existing holdings on share
price weakness when there is conviction in the investment case, in
line with the investment process. Research into other potential
investments is conducted continuously, along with risk/reward
assessments versus existing portfolio holdings, in a healthy
competition for capital. Your Manager is genuinely excited about
the companies in the portfolio and see exceptional opportunities
within the market to deliver growth in capital and income.
Outlook
Global economic activity in 2023 has surprised on the upside,
leading to higher and more stubborn inflation than anticipated by
both global Central Banks and markets. However, inflation has
moderated from its peak levels. Higher for longer interest rates
are now seen as necessary to bring inflation down towards the
targets and forecasts of Central Banks. Central Banks are currently
at or close to peak rates as the impact of significant rate rises
over the past two years, which always work with a lag, appears to
be taking effect, cooling both activity and inflation. In addition
to economic risks, there are political risks that include a US
election and likely a UK election in 2024, ongoing geopolitical
tensions between the USA and China, and unresolved conflict between
Russia and Ukraine. While the risks of a recession may have
diminished, they have not entirely disappeared.
Investing in the UK equity market is not the same as investing
in the UK economy. Listed UK equities include a wide array of
international firms, many of which are global leaders in their
fields and derive the majority of their revenues from overseas. In
fact, 77% of FTSE All Share revenues come from outside the UK.
However, the negative narrative surrounding the UK economy has
heavily impacted investor sentiment in the UK equity market,
leading to an acceleration of outflows from the market into mainly
global equities and other asset classes.
Since the Brexit vote in 2016, the UK has gained a reputation as
a problematic economy among major economies, with political
instability generating uncertainty about the nation's future and a
lack of confidence from both domestic and overseas investors.
However, the economic performance of the UK has been better than
feared. While Brexit has weakened supply potential, the UK economy
has broadly kept pace with the trends seen across advanced
economies over the past seven years. Recent revisions to UK
economic data challenge the prevailing view that the UK lags behind
all other major industrial economies (the G7) in its economic
performance since the Covid pandemic. UK business investment has
also been picking up more recently, having initially stalled after
the UK's vote to leave the EU and the aftermath of the pandemic.
Recent data continues to exceed expectations, and UK corporates
have strong balance sheets and liquidity to increase investment
spending.
Sentiment towards UK equities has remained very negative, with
persistent outflows weighing on market valuations. This has heavily
impacted the absolute and relative valuations of listed UK
companies, particularly those in the small and medium-sized (SMID)
sectors. There has been a significant de-rating of medium and
smaller-sized companies over the past two years, both in absolute
terms and relative to the largest FTSE 100 companies, due to
selling pressures from outflows. However, SMID companies have
traditionally outgrown larger companies in the UK and have
delivered attractive total returns that have kept pace with the
best returns from global equity markets over the long term. The
convergence of valuations between SMID and large-cap areas presents
a mispriced opportunity.
Negative sentiment has resulted in aggregate valuations of UK
equities at multi-year lows. Total shareholder yields are high in
absolute terms, relative to other equity markets and other assets,
including bonds and cash. Companies across the market, including
those in your portfolio, are particularly active in buying back
their own shares, as they see compelling returns from investing in
their businesses at current prices. Small and medium-sized stocks
are subject to ongoing bid activity from overseas and private
equity-backed entities. These low valuations are unlikely to
persist indefinitely, and there is currently a broad set of
investment opportunities within the UK equity market that may well
be considered bargains in the future.
Fading political uncertainty, combined with a reassessment of
economic performance on growth and inflation, could support a
revision of the negative narrative on UK risk assets and be one of
the catalysts to address the market's persistent undervaluation.
Investing in a market that remains significantly out of favour with
investors provides a plethora of opportunities across the market
spectrum, which should provide patient investors with highly
attractive returns in the medium term.
Sue Noffke
Portfolio Manager
Schroder Investment Management Limited
25 October 2023
Business Review
Principal risks and uncertainties
The Board, through its delegation to the Audit and Risk
Committee, is responsible for the Company's system of risk
management and internal control and for reviewing its
effectiveness. The Board has adopted a detailed matrix of principal
risks affecting the Company's business as an investment trust and
has established associated policies and processes designed to
manage and, where possible, mitigate those risks, which are
monitored by the Audit and Risk Committee on an ongoing basis. This
system assists the Board in determining the nature and extent of
the risks it is willing to take in achieving the Company's
strategic objectives. Both the principal risks and the monitoring
system are also subject to robust assessment at least annually. The
last assessment took place in October 2023.
During the year, the Board discussed and monitored a number of
risks which could potentially impact the Company's ability to meet
its strategic objectives. The Board received updates from the
Manager, Company Secretary and other service providers on emerging
risks that could affect the Company. The Board was mindful of the
following emerging risks during the year; the ongoing conflict in
Ukraine, rising inflation and interest rates, the threat of a UK
recession and increasing energy prices. These risks were not seen
as new principal or emerging risks but those that exacerbate
existing risks and have been incorporated in the market risks
section in the table below.
Political risk includes the impact of geopolitical risk,
regional tensions, trade wars and sanctions against companies. The
Board continued to monitor the Russian invasion of Ukraine and its
impact on political tensions, supply chains, interest rates and in
particular higher inflation in the UK and globally. The Board is
also mindful that changes to financial and public policy could
impact the Company in the future. Climate change risk includes how
climate change could affect the Company's investments, and
potentially shareholder returns. The Board notes that the Manager
has integrated ESG considerations, including climate change, into
the investment process. The Board will continue to monitor this.
The Board considers that both political risks and climate risks
referred to above are covered in the table below under economic and
market risks and ESG and climate change risks respectively.
Although the Board believes that it has a robust framework of
internal control in place this can provide only reasonable, and not
absolute, assurance against material financial misstatement or loss
and is designed to manage, not eliminate, risk. Actions taken by
the Board and, where appropriate, its Committees, to manage and
mitigate the Company's principal risks and uncertainties are set
out in the table below.
The "Change" column on the right highlights at a glance the
Board's assessment of any increases or decreases in risk during the
year after mitigation and management. The arrows show the risks as
increased, decreased or unchanged.
Risk Mitigation and management Change
Strategic Unchanged
The Company's investment The Board holds a separate annual
objectives may become strategy meeting to consider the
out of line with the requirements Company's strategy and performance,
of investors, resulting the appropriateness of the Company's
in a wide discount of investment remit together with opportunities
the share price to underlying and threats to its business. Share
NAV per share. price relative to NAV per share is
monitored at quarterly board meetings
and the use of buy back authorities
is considered on a regular basis.
The marketing and distribution activity
is actively reviewed and there is
proactive engagement with shareholders.
The Company holds a continuation
vote every five years on whether
the Company should continue in its
current form. Shareholders will have
the opportunity to vote on the continuation
of the Company at its AGM in 2025.
The Company's cost base The ongoing competitiveness of all Unchanged
could become uncompetitive, service provider fees is subject
particularly in light to periodic benchmarking against
of open- ended alternatives. its competitors.
Annual consideration of management
fee levels.
Investment management Unchanged
The Manager's investment Review of the Manager's compliance
strategy, if inappropriate, with the agreed investment restrictions,
may result in the Company investment performance and risk against
underperforming the market investment objectives and strategy;
and/or peer group companies, relative performance; the portfolio's
leading to the Company risk profile; and appropriate strategies
and its objectives becoming employed to mitigate any negative
unattractive to investors. impact of substantial changes in
markets.
Annual review of the ongoing suitability
of the Manager, including resources
and key personnel risk.
Economic and market Increased
The Company is exposed The risk profile of the portfolio The increased
to the effect of market is considered and appropriate strategies risk reflects
fluctuations due to the to mitigate any negative impact of the continuing
nature of its business. substantial changes in markets are geopolitical
A significant fall in discussed with the Manager. concerns globally
equity markets could have as well as higher
an adverse impact on the inflation, interest
market value of the Company's rate rises and
underlying investments. the ongoing
There are inherent risks involved economic impact
The portfolio will normally in stock selection. The Manager is of these. The
be fairly fully invested experienced and has a long track Board continues
and as such will therefore record in successfully investing to monitor these
inevitably be exposed in public equity holdings. macro events
to economic and market on a regular
risk. Changes in general The Manager monitors the impact of basis.
economic and market conditions, foreign currency movements on the
such as currency exchange portfolio and is able to rebalance
rates, interest rates, the portfolio towards stocks which
inflation rates, industry are less impacted by changes in foreign
conditions, tax laws, currency exchange rates if required.
political events and trends
can substantially and
adversely affect the value
of investments. Market
risk includes the potential
impact of events which
are outside the Company's
control, such as pandemics,
civil unrest and wars.
Custody Unchanged
Safe custody of the Company's The depositary reports on the safe
assets may be compromised custody of the Company's assets,
through control failures including cash and portfolio holdings,
by the depositary. which are independently reconciled
with the Manager's records.
The review of audited internal controls
reports covering custodial arrangements
is undertaken.
An annual report from the depositary
on its activities, including matters
arising from custody operations is
reviewed.
Gearing Increased
The Company utilises a Gearing is monitored and strict restrictions The loan was
credit facility. This on borrowings are imposed: gearing renewed in September
arrangement increases continues to operate within pre-agreed 2023 for a further
the funds available for limits so as not to exceed 25% of year. Borrowing
investment through borrowing. shareholders' funds. remains expensive
While this has the potential in the current
to enhance investment falling market
returns in rising markets, environment
in falling markets the However, the
impact could be detrimental Manager optimises
to performance. the use of gearing
to maximise
the return to
its equity shareholders
through appropriate
borrowing levels.
Accounting, legal and Unchanged
regulatory
The confirmation of compliance with
In order to continue to relevant laws and regulations by
qualify as an investment key service providers.
trust, the Company must
comply with the requirements Shareholder documents and announcements,
of section 1158 of the including the Company's published
Corporation Tax Act 2010. annual report are subject to stringent
review processes.
Breaches of the UK Listing
Rules, the Companies Act Procedures have been established
or other regulations with to safeguard against disclosure of
which the Company is required inside information.
to comply, could lead
to a number of detrimental
outcomes.
Service provider Unchanged
The Company has no employees Service providers are appointed subject
and has delegated certain to due diligence processes and with
functions to a number clearly-documented contractual arrangements
of service providers, detailing service expectations.
principally the Manager,
depositary and registrar. Regular reports are provided by key
Failure of controls and service providers and the quality
poor performance of any of services provided are monitored.
service provider could
lead to disruption, reputational Audited internal controls reports
damage or loss. from key service providers, including
confirmation of business continuity
arrangements, are reviewed annually.
Cyber Increased
The Company's service Service providers report on cyber The evolving
providers are all exposed risk mitigation and management at nature of cyber
to the risk of cyber attacks. least annually, which includes confirmation attacks remains
Cyber attacks could lead of business continuity capability prevalent across
to loss of personal or in the event of a cyber attack. the industry.
confidential information While the risk
or disrupt operations In addition, the Board received presentations of financial
from the Manager, the registrar and loss is probably
the safekeeping agent and custodian small, the risk
on cyber risk. of reputational
damage and loss
of sensitive
information
continues to
be significant.
ESG and climate change Unchanged
The failure of the Manager The Manager's ESG policies, including
to identify ESG issues, those relating to climate change,
including the impact of which have been adopted by the Company,
climate change, could are fully integrated into the investment
impact shareholder returns process, as set out in the Strategic
due to valuation issues Report. Investments are valued at
in investee companies fair value and reflect market participants'
and the Company's shares views of ESG and climate change risk
becoming less attractive on the Company's portfolio investments.
to investors. The Manager regularly reports to
the Board on ESG and climate change
matters, including engagement with
investee companies. Any investor
feedback is also taken into consideration
by the Board.
Risk assessment and internal controls review by the Board
Risk assessment includes consideration of the scope and quality
of the systems of internal control operating within key service
providers, and ensures regular communication of the results of
monitoring by such providers to the Audit and Risk Committee,
including the incidence of significant control failings or
weaknesses that have been identified at any time and the extent to
which they have resulted in unforeseen outcomes or contingencies
that may have a material impact on the Company's performance or
condition.
No significant control failings or weaknesses were Identified
from the Audit and Risk Committee's ongoing risk assessment which
has been in place throughout the financial year and up to the date
of this report. The Board is satisfied that it has undertaken a
detailed review of the risks facing the Company.
A full analysis of the financial risks facing the Company is set
out in note 19 to the accounts on pages 65 to 69.
Viability statement
The Directors have assessed the viability of the Company over a
five year period, taking into account the Company's position at 31
August 2023 and the potential impacts of the principal risks and
uncertainties it faces for the review period. The Directors have
assessed the Company's operational resilience and they are
satisfied that the Company's outsourced service providers will
continue to operate effectively.
A period of five years has been chosen as the Board believes
that this reflects a suitable time horizon for strategic planning,
taking into account the investment policy, liquidity of
investments, potential impact of economic cycles, nature of
operating costs, dividends and availability of funding.
In its assessment of the viability of the Company, the Directors
have considered each of the Company's principal risks and
uncertainties detailed on pages 24 to 26 and in particular the
impact of a significant fall in UK equity markets on the value of
the Company's investment portfolio. The Directors have considered
the Company's income and expenditure projections and the fact that
the Company's investments comprise readily realisable securities
which can be sold to meet funding requirements if necessary and on
that basis consider that five years is an appropriate time period.
The Directors also considered the beneficial tax treatment the
Company is eligible for as an investment trust. If changes to these
taxation arrangements were to be made it would affect the viability
of the Company to act as an effective investment vehicle.
Whilst the Company's Articles of Association require that a
proposal for the continuation of the Company be put forward at the
AGM in 2025, the Directors have no present reason to believe such a
resolution will not be passed by shareholders.
The Directors also considered a stress test in which the
Company's NAV dropped by 50% and noted that, based on the
assumptions in the test, the Company would continue to be viable
over a five year period. Based on the Company's processes for
monitoring operating costs, the Board's view that the Manager has
the appropriate depth and quality of resource to achieve superior
returns in the longer term, the portfolio risk profile, limits
imposed on gearing, counterparty exposure, liquidity risk and
financial controls, the Directors have 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 five
year period of their assessment.
Going concern
The Directors have assessed the principal risks, the impact of
the emerging risks and uncertainties and the matters referred to in
the viability statement. The Board have considered climate risk,
political risk and external market factors in their assessment.
Based on the work the Directors have performed, they have not
identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast significant
doubt on the Company's ability to continue as a going concern for
the period assessed by the Directors, being the period to 30
November 2024 which is at least 12 months from the date the
financial statements were authorised for issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
25 October 2023
Statement of Directors' Responsibilities in respect of the
Annual Report and Accounts
The Directors are responsible for preparing the annual report,
and the financial statements in accordance with applicable law and
regulation.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). 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 return 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;
- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- make judgements and accounting estimates that are reasonable and prudent; 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 enable them to ensure that
the financial statements and the Directors' Remuneration Report
comply with the Companies Act 2006.
The Directors 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.
The Manager is responsible for the maintenance and integrity of
the Company's webpages. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
The Directors consider that the annual report and accounts,
taken as a whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
Directors' Statement
Each of the Directors, whose names and functions are listed on
pages 30 and 31, confirm that to the best of their knowledge:
- the Company's financial statements, which have been prepared
in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising FRS 102
"The Financial Reporting Standard applicable in the UK and Republic
of Ireland" and applicable law), give a true and fair view of the
assets, liabilities, financial position and loss of the Company;
and
- 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 that it faces.
By order of the Board
Ewen Cameron Watt
Chairman
25 October 2023
Income Statement
for the year ended 31 August 2023
2023 2022
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ------- ------- ------- ------- -------- --------
Gains/(losses) on investments
held at fair value
through profit or loss - 326 326 - (16,596) (16,596)
------------------------------ ------- ------- ------- ------- -------- --------
Net foreign currency
losses - - - - (1) (1)
------------------------------ ------- ------- ------- ------- -------- --------
Income from investments 10,560 - 10,560 10,954 1,707 12,661
------------------------------ ------- ------- ------- ------- -------- --------
Other interest receivable
and similar income 90 - 90 8 - 8
------------------------------ ------- ------- ------- ------- -------- --------
Gross return/(loss) 10,650 326 10,976 10,962 (14,890) (3,928)
------------------------------ ------- ------- ------- ------- -------- --------
Investment management
fee (422) (633) (1,055) (527) (527) (1,054)
------------------------------ ------- ------- ------- ------- -------- --------
Administrative expenses (552) - (552) (523) - (523)
------------------------------ ------- ------- ------- ------- -------- --------
Net return/(loss) before
finance costs and taxation 9,676 (307) 9,369 9,912 (15,417) (5,505)
------------------------------ ------- ------- ------- ------- -------- --------
Finance costs (546) (821) (1,367) (202) (202) (404)
------------------------------ ------- ------- ------- ------- -------- --------
Net return/(loss) before
taxation 9,130 (1,128) 8,002 9,710 (15,619) (5,909)
------------------------------ ------- ------- ------- ------- -------- --------
Taxation - - - (13) - (13)
------------------------------ ------- ------- ------- ------- -------- --------
Net return/(loss) after
taxation 9,130 (1,128) 8,002 9,697 (15,619) (5,922)
------------------------------ ------- ------- ------- ------- -------- --------
Return/(loss) per share
(pence) 13.14 (1.62) 11.52 13.96 (22.49) (8.53)
------------------------------ ------- ------- ------- ------- -------- --------
The "Total" column of this statement is the profit and loss
account of the Company. The "Revenue" and "Capital" columns
represent supplementary information prepared under guidance issued
by The Association of Investment Companies. The Company has no
other items of other comprehensive income, and therefore the net
return after taxation is also the total comprehensive income for
the year.
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
in the year.
Statement of Changes in Equity
for the year ended 31 August 2023
Called-up Capital Warrant Share
share Share redemption exercise purchase Capital Revenue
capital premium reserve reserve reserve reserves reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
At 31 August 2021 6,946 9,449 2,011 1,596 34,936 153,859 11,118 219,915
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Issue of new shares - - - - - - - -
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Net (loss)/return
on ordinary activities - - - - - (15,619) 9,697 (5,922)
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Dividends paid in
the year - - - - - - (8,893) (8,893)
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
At 31 August 2022 6,946 9,449 2,011 1,596 34,936 138,240 11,922 205,100
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Net (loss)/return
on ordinary activities - - - - - (1,128) 9,130 8,002
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Dividends paid in
the year - - - - - - (9,170) (9,170)
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
At 31 August 2023 6,946 9,449 2,011 1,596 34,936 137,112 11,882 203,932
------------------------ --------- ------- ---------- -------- -------- -------- ------- -------
Statement of Financial Position
at 31 August 2023
2023 2022
GBP'000 GBP'000
------------------------------------------------- -------- --------
Fixed assets
------------------------------------------------- -------- --------
Investments held at fair value through profit or
loss 229,714 230,497
------------------------------------------------- -------- --------
Current assets
------------------------------------------------- -------- --------
Debtors 2,557 2,737
------------------------------------------------- -------- --------
Cash at bank and in hand 1,560 2,305
------------------------------------------------- -------- --------
4,117 5,042
------------------------------------------------- -------- --------
Current liabilities
------------------------------------------------- -------- --------
Creditors: amounts falling due within one year (29,899) (30,439)
------------------------------------------------- -------- --------
Net current liabilities (25,782) (25,397)
------------------------------------------------- -------- --------
Total assets less current liabilities 203,932 205,100
------------------------------------------------- -------- --------
Net assets 203,932 205,100
------------------------------------------------- -------- --------
Capital and reserves
------------------------------------------------- -------- --------
Called-up share capital 6,946 6,946
------------------------------------------------- -------- --------
Share premium 9,449 9,449
------------------------------------------------- -------- --------
Capital redemption reserve 2,011 2,011
------------------------------------------------- -------- --------
Warrant exercise reserve 1,596 1,596
------------------------------------------------- -------- --------
Share purchase reserve 34,936 34,936
------------------------------------------------- -------- --------
Capital reserves 137,112 138,240
------------------------------------------------- -------- --------
Revenue reserve 11,882 11,922
------------------------------------------------- -------- --------
Total equity shareholders' funds 203,932 205,100
------------------------------------------------- -------- --------
Net asset value per share (pence) 293.58 295.26
------------------------------------------------- -------- --------
These accounts were approved and authorised for issue by the
Board of Directors on 25 October 2023 and signed on its behalf
by:
Ewen Cameron Watt
Chairman
Notes to the accounts for the year ended 31 August 2023
1. Accounting Policies
(a) Basis of accounting
Schroder Income Growth Fund plc ("the Company") is registered in
England and Wales as a public company limited by shares. The
Company's registered office is 1 London Wall Place, London EC2Y
5AU.
The accounts are prepared in accordance with the Companies Act
2006, United Kingdom Generally Accepted Accounting Practice ("UK
GAAP"), in particular in accordance with Financial Reporting
Standard (FRS) 102 "The Financial Reporting Standard applicable in
the UK and Republic of Ireland", and with the Statement of
Recommended Practice "Financial Statements of Investment Trust
Companies and Venture Capital Trusts" (the "SORP") issued by the
Association of Investment Companies in July 2022. All of the
Company's operations are of a continuing nature.
The accounts have been prepared on a going concern basis under
the historical cost convention, as modified by the revaluation of
investments and derivative financial instruments held at fair value
through profit or loss. The directors believe that the Company has
adequate resources to continue operating until 30 November 2024,
which is at least 12 months from the date of approval of these
accounts. In forming this opinion, the directors have taken into
consideration: the controls and monitoring processes in place; the
Company's low level of debt and other payables; the low level of
operating expenses, comprising largely variable costs which would
reduce pro rata in the event of a market downturn; and that the
Company's assets comprise cash and readily realisable securities
quoted in active markets. The directors have considered the impact
of climate change risk and emerging risk 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.
Further details of directors' considerations regarding this are
given in the Chairman's Statement, Portfolio Managers' Review,
Going Concern Statement, Viability Statement and under the
Principal Risks and uncertainties in the Strategic Report.
The Company has not presented a statement of cash flows, as it
is not required for an investment trust which meets certain
conditions; in particular that substantially all of the Company's
investments are highly liquid and carried at market value.
The accounts are presented in sterling and amounts have been
rounded to the nearest thousand.
The accounting policies applied to these accounts are consistent
with those applied in the accounts for the year ended 31 August
2022.
Other than the Director's assessment of going concern, no
significant judgements, estimates or assumptions have been required
in the preparation of the accounts for the current or preceding
financial year.
(b) Valuation of investments
The Company's investments are classified as fair value through
profit and loss in accordance with FRS 102. Upon initial
recognition the investments are measured at the transaction price,
excluding expenses incidental to purchase which are written off to
capital at the time of acquisition. Subsequently the investments
are valued at fair value, which are quoted bid prices for
investments traded in active markets. Fair value gains or losses
are recognised in the capital column of the Income Statement.
All purchases and sales are accounted for on a trade date
basis.
(c) Accounting for reserves
Gains and losses on sales of investments, and the management fee
or finance costs allocated to capital, are included in the Income
Statement and dealt with in capital reserves within "Gains and
losses on sales of investments". Increases and decreases in the
valuation of investments held at the year end, are included in the
Income Statement and dealt with in capital reserves within
"Investment holding gains and losses".
Foreign exchange gains and losses on cash and deposit balances
are included in the Income Statement and in capital reserves within
"Gains and losses on sales of investments".
(d) Income
Dividends receivable from equity shares are included in revenue
on an ex-dividend basis except where, in the opinion of the Board,
the dividend is capital in nature, in which case it is included in
capital.
Dividends from overseas companies are included gross of any
withholding tax.
Where the Company has elected to receive scrip dividends in the
form of additional shares rather than in cash, the amount of the
cash dividend foregone is recognised in revenue. Any excess in the
value of the shares received over the amount of the cash dividend
is recognised in capital.
Deposit interest outstanding at the year end is calculated and
accrued on a time apportionment basis using market rates of
interest.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses
are allocated wholly to revenue with the following exceptions:
- The management fee is allocated 40% to revenue and 60% to
capital in line with the Board's expected long-term split of
revenue and capital return from the Company's investment
portfolio.
- Expenses incidental to the purchase and sale of an investment
are written off to capital at the time of acquisition or disposal.
These expenses are commonly referred to as transaction costs and
comprise brokerage commission and stamp duty. Details of
transaction costs are given in note 10 on page 61.
(f) Finance costs
Finance costs, including any premiums payable on settlement or
redemption and direct issue costs, are accounted for on an accruals
basis using the effective interest method in accordance with FRS
102.
Finance costs are allocated 40% to revenue and 60% to capital in
line with the Board's expected long-term split of revenue and
capital return from the Company's investment portfolio.
(g) Financial instruments
Cash at bank and in hand may comprise cash and demand deposits
which are readily convertible to a known amount of cash and are
subject to insignificant risk of changes in value.
Other debtors and creditors do not carry any interest, are
short-term in nature and are accordingly stated at nominal value,
with debtors reduced by appropriate allowances for estimated
irrecoverable amounts.
Bank loans and overdrafts are initially measured at transaction
price and, subsequently at amortised cost. They are recorded at the
proceeds received net of direct issue costs.
(h) Taxation
The tax charge for the year is based on amounts expected to be
received or paid.
Deferred tax is accounted for in accordance with FRS 102.
Deferred tax is provided on all timing differences that have
originated but not reversed by the accounting date.
Deferred tax liabilities are recognised for all taxable timing
differences but deferred tax assets are only recognised to the
extent that it is probable that taxable profits will be available
against which those timing differences can be utilised.
Deferred tax is measured at the tax rate which is expected to
apply in the periods in which the timing differences are expected
to reverse, based on tax rates that have been enacted or
substantively enacted at the accounting date and is measured on an
undiscounted basis.
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of the related irrecoverable
VAT.
(j) Foreign currency
In accordance with FRS 102, the Company is required to determine
a functional currency, being the currency in which the Company
predominantly operates. The Board has determined that sterling is
the Company's functional currency and the presentational currency
of the accounts.
Transactions denominated in foreign currencies are converted at
actual exchange rates as at the date of the transaction. Monetary
assets, liabilities and investments held at fair value, denominated
in foreign currencies at the year end are translated at the rates
of exchange prevailing at the year end.
(k) Dividends payable
Dividends on equity shares are recognised as a deduction of
equity when the liability to pay the dividends arises.
Consequently, interim dividends are recognised when paid and
final dividends when approved in the general meeting.
2. Gains/(losses) on investments held at fair value through profit or loss
2023 2022
GBP'000 GBP'000
------------------------------------------------------- ------- --------
Gains on sales of investments based on historic cost 1,242 6,923
------------------------------------------------------- ------- --------
Amounts recognised in investment holding gains and
losses in the previous year in respect of investments
sold in the year (2,196) (10,239)
------------------------------------------------------- ------- --------
(Losses) on sales of investments based on the carrying
value at the previous balance sheet date (954) (3,316)
------------------------------------------------------- ------- --------
Net movement in investment holding gains and losses 1,280 (13,280)
------------------------------------------------------- ------- --------
Gains/(losses) on investments held at fair value
through profit or loss 326 (16,596)
------------------------------------------------------- ------- --------
3. Income
2023 2022
GBP'000 GBP'000
---------------------------------------------- ------- -------
Income from investments:
---------------------------------------------- ------- -------
UK dividends 8,763 9,406
---------------------------------------------- ------- -------
UK special dividends 196 496
---------------------------------------------- ------- -------
Overseas dividends 1,538 909
---------------------------------------------- ------- -------
Scrip dividends 63 143
---------------------------------------------- ------- -------
10,560 10,954
---------------------------------------------- ------- -------
Other interest receivable and similar income:
---------------------------------------------- ------- -------
Deposit interest 90 8
---------------------------------------------- ------- -------
90 8
---------------------------------------------- ------- -------
Total income 10,650 10,962
---------------------------------------------- ------- -------
Capital:
---------------------------------------------- ------- -------
Special dividends allocated to capital - 1,707
---------------------------------------------- ------- -------
4. Investment management fee
2023 2022
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------- ------- ------- ------- ------- ------- -------
Management fee 422 633 1,055 527 527 1,054
--------------- ------- ------- ------- ------- ------- -------
The basis for calculating the management fee is set out in the
Directors' Report on page 32.
5. Administrative expenses
2023 2022
GBP'000 GBP'000
------------------------------------------------------ ------- -------
Administration expenses 374 350
------------------------------------------------------ ------- -------
Directors' fees 122 119
------------------------------------------------------ ------- -------
Auditor's remuneration for the audit of the Company's
financial statements(1) 56 54
------------------------------------------------------ ------- -------
552 523
------------------------------------------------------ ------- -------
(1) Includes GBP9,000 (2022: GBP9,000) irrecoverable VAT.
6. Finance costs
2023 2022
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------- ------- ------- ------- ------- ------- -------
Interest on bank loans
and overdrafts 546 821 1,367 202 202 404
----------------------- ------- ------- ------- ------- ------- -------
7. Taxation
(a) Analysis of charge in the year:
2023 2022
GBP'000 GBP'000
--------------------------- ------- -------
Irrecoverable overseas tax - 13
--------------------------- ------- -------
Tax charge for the year - 13
--------------------------- ------- -------
(b) Factors affecting tax charge for the year
The tax assessed for the year is lower (2022: higher) than the
Company's applicable rate of corporation tax for the year of 21.5%
(2022: 19.0%).
The factors affecting the current tax charge for the year are as
follows:
2023 2022
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- ------- ------- ------- ------- -------- -------
Net gain/return on
ordinary activities
before taxation 9,130 (1,128) 8,002 9,710 (15,619) (5,909)
----------------------------- ------- ------- ------- ------- -------- -------
Net gain/return on
ordinary activities
before taxation multiplied
by the Company's applicable
rate of corporation
tax for the year of
21.5% (2022: 19.0%) 1,962 (243) 1,719 1,845 (2,968) (1,123)
----------------------------- ------- ------- ------- ------- -------- -------
Effects of:
----------------------------- ------- ------- ------- ------- -------- -------
Capital return/loss
on investments - (70) (70) - 3,153 3,153
----------------------------- ------- ------- ------- ------- -------- -------
Income not chargeable
to corporation tax (2,181) - (2,181) (1,978) (324) (2,302)
----------------------------- ------- ------- ------- ------- -------- -------
Unrelieved expenses 219 313 532 133 139 272
----------------------------- ------- ------- ------- ------- -------- -------
Irrecoverable overseas
tax - - - 13 - 13
----------------------------- ------- ------- ------- ------- -------- -------
Tax charge for the
year - - - 13 - 13
----------------------------- ------- ------- ------- ------- -------- -------
(c) Deferred taxation
The Company has an unrecognised deferred tax asset of
GBP9,207,000 (2022: GBP8,589,000) based on a main rate of
corporation tax of 25% (2022: 25%). In its 2021 budget, the UK
government announced that the main rate of corporation tax (for all
profits except ring fence profits) for the fiscal year beginning on
1 April 2023 would increase to 25%.
The deferred tax asset has arisen due to the cumulative excess
of deductible expenses over taxable income. Given the composition
of the Company's portfolio, it is not likely that this asset will
be utilised in the foreseeable future and therefore no asset has
been recognised in the accounts.
Given the Company's status as an Investment Trust Company, no
provision has been made for deferred tax on any capital gains or
losses arising on the revaluation or disposal of investments.
8. Dividends
(a) Dividends paid and declared
2023 2022
GBP'000 GBP'000
------------------------------------------------------ ------- -------
2022 fourth interim dividend of 5.7p (2021: 5.3p) 3,959 3,682
------------------------------------------------------ ------- -------
First interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
------------------------------------------------------ ------- -------
Second interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
------------------------------------------------------ ------- -------
Third interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
------------------------------------------------------ ------- -------
Total dividends paid in the year 9,170 8,893
------------------------------------------------------ ------- -------
2023 2022
GBP'000 GBP'000
------------------------------------------------------ ------- -------
Fourth interim dividend declared of 6.3p (2022: 5.7p) 4,376 3,959
------------------------------------------------------ ------- -------
All dividends paid and declared to date have been paid, or will
be paid, out of revenue profits.
(b) Dividends for the purposes of Section 1158 of the
Corporation Tax Act 2010 ("Section 1158")
The requirements of Section 1158 are considered on the basis of
dividends declared in respect of the financial year as shown below.
The revenue available for distribution by way of dividend for the
year is GBP9,130,000 (2022: GBP9,697,000).
2023 2022
GBP'000 GBP'000
--------------------------------------------------- ------- -------
First interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
--------------------------------------------------- ------- -------
Second interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
--------------------------------------------------- ------- -------
Third interim dividend of 2.5p (2022: 2.5p) 1,737 1,737
--------------------------------------------------- ------- -------
Fourth interim dividend of 6.3p (2022: 5.3p) 4,376 3,959
--------------------------------------------------- ------- -------
Total dividends of 13.80p (2022: 13.20p) per share 9,587 9,170
--------------------------------------------------- ------- -------
9. Return/(loss) per share
2023 2022
GBP'000 GBP'000
---------------------------------------------------- ---------- ----------
Revenue return 9,130 9,697
---------------------------------------------------- ---------- ----------
Capital loss (1,128) (15,619)
---------------------------------------------------- ---------- ----------
Total return/(loss) 8,002 (5,922)
---------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares in issue
during the year 69,463,343 69,463,343
---------------------------------------------------- ---------- ----------
Revenue return per share 13.14p 13.96p
---------------------------------------------------- ---------- ----------
Capital loss per share (1.62)p (22.49)p
---------------------------------------------------- ---------- ----------
Total return/gain per share 11.52p (8.53)p
---------------------------------------------------- ---------- ----------
10. Investments held at fair value through profit or loss
2023 2022
GBP'000 GBP'000
------------------------------------------------- -------- --------
Opening book cost 207,135 187,930
------------------------------------------------- -------- --------
Opening investment holding gains 23,362 46,881
------------------------------------------------- -------- --------
Opening fair value 230,497 234,811
------------------------------------------------- -------- --------
Analysis of transactions made during the year
------------------------------------------------- -------- --------
Purchases at cost 57,193 69,738
------------------------------------------------- -------- --------
Sales proceeds (58,302) (57,456)
------------------------------------------------- -------- --------
Gains/(losses) on investments held at fair value 326 (16,596)
------------------------------------------------- -------- --------
Closing fair value 229,714 230,497
------------------------------------------------- -------- --------
Closing book cost 207,268 207,135
------------------------------------------------- -------- --------
Closing investment holding gains 22,446 23,362
------------------------------------------------- -------- --------
Closing fair value 229,714 230,497
------------------------------------------------- -------- --------
All investments are listed on a recognised stock exchange.
Sales proceeds amounting to GBP58,302,000 (2022: GBP57,456,000)
were receivable from disposal of investments in the year. The book
cost of these investments when they were purchased was
GBP57,059,000 (2022: GBP50,533,000). 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.
The following transaction costs, comprising stamp duty and
brokerage commission were incurred during the year:
2023 2022
GBP'000 GBP'000
---------------- ------- -------
On acquisitions 236 352
---------------- ------- -------
On disposals 30 24
---------------- ------- -------
266 376
---------------- ------- -------
11. Debtors
2023 2022
GBP'000 GBP'000
---------------------------------- ------- -------
Dividends and interest receivable 2,537 2,718
---------------------------------- ------- -------
Taxation recoverable 5 5
---------------------------------- ------- -------
Other debtors 15 14
---------------------------------- ------- -------
2,557 2,737
---------------------------------- ------- -------
The directors consider that the carrying amount of debtors
approximates to their fair value.
12. Creditors: amounts falling due within one year
2023 2022
GBP'000 GBP'000
----------------------------- ------- -------
Bank loan 29,500 30,000
----------------------------- ------- -------
Other creditors and accruals 399 439
----------------------------- ------- -------
29,899 30,439
----------------------------- ------- -------
The bank loan comprises GBP29.5 million (2022: GBP30 million)
drawn down on the Company's revolving credit facility with SMBC
Bank International plc. The facility was extended for a further
year, effective 22 September 2023.
The facility is unsecured but is subject to covenants and
restrictions which are customary for a facility of this nature, all
of which have been complied with during the year. Further details
of this facility are given in note 19(a)(i).
The Directors consider that the carrying amount of creditors
falling due within one year approximates to their fair value.
13. Called-up share capital
2023 2022
GBP'000 GBP'000
---------------------------------------------------- ------- -------
Ordinary shares allotted, called-up and fully paid:
---------------------------------------------------- ------- -------
Ordinary shares of 10p each
---------------------------------------------------- ------- -------
Opening balance of 69,463,343 (2022: 69,463,343)
shares 6,946 6,946
---------------------------------------------------- ------- -------
Total of 69,463,343 (2022: 69,463,343) shares 6,946 6,946
---------------------------------------------------- ------- -------
14. Reserves
Year ended 31 August 2023
Capital reserves
Gains and Investment
losses
Capital Warrant Share on holding
Share redemption exercise purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Opening balance 9,449 2,011 1,596 34,936 114,878 23,362 11,922
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Gains on sales
of investments
based on the
carrying value
at the previous
balance sheet
date - - - - (954) - -
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Net movement
in investment
holding gains
and losses - - - - - 1,280 -
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Transfer on
disposal of
investments - - - - 2,196 (2,196) -
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Management
fee and finance
costs allocated
to capital - - - - (1,454) - -
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Dividends paid - - - - - - (9,170)
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Retained revenue
for the year - - - - - - 9,130
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Closing balance 9,449 2,011 1,596 34,936 114,666 22,446 11,882
----------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Year ended 31 August 2022
Capital reserves
Gains and Investment
losses
Capital Warrant Share on holding
Share redemption exercise purchase sales of gains and Revenue
premium(1) reserve(1) reserve(1) reserve(2) investments(2) losses(3) reserve(4)
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Opening balance 9,449 2,011 1,596 34,936 106,978 46,881 11,118
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Losses on sales
of investments
based on the
carrying value
at the previous
balance sheet
date - - - - (3,316) - -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Net movement
in investment
holding gains
and losses - - - - - (13,280) -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Transfer on
disposal of
investments - - - - 10,239 (10,239) -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Realised exchange
gains on currency
balances - - - - (1) - -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Management
fee and finance
costs allocated
to capital - - - - (729) - -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Special dividends
allocated to
capital - - - - 1,707 - -
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Dividends paid - - - - - - (8,893)
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Retained revenue
for the year - - - - - - 9,697
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
Closing balance 9,449 2,011 1,596 34,936 114,878 23,362 11,922
------------------- ---------- ---------- ---------- ---------- -------------- ---------- ----------
The Company's Articles of Association permit dividend
distributions out of realised capital profits.
(1) These reserves are not distributable.
(2) These are realised (distributable) capital reserves which
may be used to repurchase the Company's own shares or distributed
as dividends.
(3) This reserve comprises holding gains on liquid investments
(which may be deemed to be realised) and other amounts which are
unrealised. An analysis has not been made between those amounts
that are realised (and may be distributed as dividends or used to
repurchase the Company's own shares) and those that are
unrealised.
(4) The revenue reserve may distributed as dividends or used to
repurchase the Company's own shares.
15. Net asset value per share
2023 2022
-------------------------------------------------- ---------- ----------
Net assets attributable to shareholders (GBP'000) 203,932 205,100
-------------------------------------------------- ---------- ----------
Shares in issue at the year end 69,463,343 69,463,343
-------------------------------------------------- ---------- ----------
Net asset value per share 293.58p 295.26p
-------------------------------------------------- ---------- ----------
16. Transactions with the Manager
Under the terms of the AIFM Agreement, the Manager is entitled
to receive a management fee. Details of the basis of the
calculation are given in the Directors' Report on page 32. Any
investments in funds managed or advised by the Manager or any of
its associated companies are excluded from the assets used for the
purpose of the calculation and therefore incur no fee.
The management fee payable in respect of the year ended 31
August 2023 amounted to GBP1,055,000 (2022: GBP1,054,000) of which
GBP259,000 (2022: GBP259,000) was outstanding at the year end.
Effective from 1 March 2021, the Manager is entitled to receive
a further fee to cover administration and company secretarial
costs. The secretarial fee payable for the year amounted to
GBP180,000 (2022: GBP180,000) including VAT, of which GBP45,000
(2022: GBP45,000) was outstanding at the year end.
No Director of the Company served as a director of any member of
the Schroder Group at any time during the year.
17. Related party transactions
Details of the remuneration payable to Directors are given in
the Directors' Remuneration Report on pages 42 to 44 and details of
directors' shareholdings are given in in the Directors'
Remuneration Report on page 44. Details of transactions with the
Manager are given in note 16 above. There have been no other
transactions with related parties during the year (2022: nil).
18. Disclosures regarding financial instruments measured at fair value
The Company's financial instruments within the scope of FRS 102
that are held at fair value comprise its investment portfolio.
FRS 102 requires financial instruments to be categorised into a
hierarchy consisting of the three levels below.
Level 1 - valued using unadjusted quoted prices in active
markets for identical assets.
Level 2 - valued using observable inputs other than quoted
prices included within Level 1.
Level 3 - valued using inputs that are unobservable.
Details of the valuation techniques used by the Company are
given in note 1(b).
At 31 August 2023, all investments in the Company's portfolio
are categorised as Level 1 (2022: same).
19. Financial instruments' exposure to risk and risk management policies
The Company's objectives are set out on the inside front cover
of this report. In pursuing these objectives, the Company is
exposed to a variety of financial risks that could result in a
reduction in the Company's net assets or a reduction in the profits
available for dividends.
These financial risks include market risk (comprising interest
rate risk and other price risk), liquidity risk and credit risk.
The directors' policy for managing these risks is set out below.
The Board coordinates the Company's risk management policy. The
Company has no significant direct exposure to foreign exchange risk
on monetary items. The objectives, policies and processes for
managing the risks and the methods used to measure the risks that
are set out below, have not changed from those applying in the
comparative year.
The Company's classes of financial instruments may comprise the
following:
- investments in equity shares which are held in accordance with
the Company's investment objectives;
- short-term debtors, creditors and cash arising directly from its operations; and
- loans drawn on a facility, the purpose of which are to assist
with financing the Company's operations.
(a) Market risk
The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in market
prices. This market risk comprises two elements: interest rate risk
and other price risk. Information to enable an evaluation of the
nature and extent of these two elements of market risk is given in
parts (i) and (ii) of this note, together with sensitivity analyses
where appropriate. The Board reviews and agrees policies for
managing these risks and these policies have remained unchanged
from those applying in the comparative year. The Manager assesses
the exposure to market risk when making each investment decision
and monitors the overall level of market risk on the whole of the
investment portfolio on an ongoing basis.
(i) Interest rate risk
Interest rate movements may affect the level of income
receivable on cash deposits and the interest payable on variable
rate borrowings when interest rates are re-set.
Management of interest rate risk
Liquidity and borrowings are managed with the aim of increasing
returns to shareholders. The board's policy is to permit gearing up
to 25% where gearing is defined as borrowings used for investment
purposes, less cash, expressed as a percentage of net assets. Any
amount drawn on the facility would normally be for a one month
period, at the end of which the drawdown may be rolled over,
adjusted or repaid, and the interest rate is re-set. These amounts
have been included in the analysis below, although the exposure to
interest rate changes is not significant as any drawings can be
repaid at the end of the one month period under the terms of this
flexible arrangement.
The Company has arranged a GBP5m overdraft facility with HSBC
Bank plc, this was not utilised during the current or comparative
year.
Interest rate exposure
The exposure of financial assets and financial liabilities to
floating interest rates, giving cash flow interest rate risk when
rates are re-set, is shown below:
2023 2022
GBP'000 GBP'000
------------------------------------------------- -------- --------
Exposure to floating interest rates:
------------------------------------------------- -------- --------
Cash at bank and in hand 1,560 2,305
------------------------------------------------- -------- --------
Creditors falling due within one year: bank loan (29,500) (30,000)
------------------------------------------------- -------- --------
Total exposure (27,940) (27,695)
------------------------------------------------- -------- --------
Cash balances earn interest at a floating rate based on the
Sterling Overnight Index Average (2022: Sterling Overnight Index
Average).
The Company extended its GBP30 million credit facility with SMBC
Bank International plc for a further year, effective from 22
September 2023. Interest payable is calculated at the aggregate of
the compounded daily Risk Free Rate ("RFR"), plus a margin. Amounts
are normally drawn down on the facility for a one month period, at
the end of which it may be rolled over or adjusted. At 31 August
2023, the Company had drawn down GBP29.5 million (2022: GBP30
million), for a one month period at an interest rate of 5.91%
(2022: 2.52%) per annum.
The above year end amounts are not representative of the
exposure to interest rates during the current or comparative year
as the level cash balances and drawings on the facility have
fluctuated. The maximum and minimum exposure during the year was as
follows:
2023 2022
GBP'000 GBP'000
----------------------------------------------------- -------- --------
Minimum debit interest rate exposure during the year
- net debt (21,727) (17,972)
----------------------------------------------------- -------- --------
Maximum debit interest rate exposure during the year
- net debt (27,940) (27,695)
----------------------------------------------------- -------- --------
Interest rate sensitivity
The following table illustrates the sensitivity of the return
after taxation for the year and net assets to a 1.5% (2022: 1.5%)
increase or decrease in interest rates in regards to the Company's
monetary financial assets and financial liabilities. This level of
change is considered to be a reasonable illustration based on
observation of current market conditions. The sensitivity analysis
is based on the Company's monetary financial instruments held at
the balance sheet date which are exposed to interest rate
movements, with all other variables held constant.
2023 2022
1.5% increase 1.5% decrease 1.5% increase 1.5% decrease
in rate in rate in rate in rate
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- ------------- ------------- ------------- -------------
Income statement - return
after taxation
---------------------------- ------------- ------------- ------------- -------------
Revenue return (154) 154 (145) 145
---------------------------- ------------- ------------- ------------- -------------
Capital return (266) 266 (270) 270
---------------------------- ------------- ------------- ------------- -------------
Total return after taxation (420) 420 (415) 415
---------------------------- ------------- ------------- ------------- -------------
Net assets (420) 420 (415) 415
---------------------------- ------------- ------------- ------------- -------------
Given the increase in the UK interest rates, the interest rate
sensitivity has been updated to 1.5%. The prior year disclosure has
been updated to 1.5% to show a direct comparison in the
sensitivity. In the prior year report, the sensitivity was
calculated using 1.0%, which was representative of the market at 31
August 2022. As disclosed in the prior year annual report, an
increase of 1.0% reduced total return after taxation by GBP277,000
(a decrease of 1.0% had an equal and opposite effect).
In the opinion of the directors, this sensitivity analysis may
not be representative of the Company's future exposure to interest
rate changes as the level of cash balances and drawings on the
facility will fluctuate.
(ii) Other price risk
Market price risk includes changes in market prices, other than
those arising from interest rate risk, which may affect the value
of investments.
Management of market price risk
The Board meets on at least four occasions each year to consider
the asset allocation of the portfolio and the risk associated with
particular industry sectors. The investment management team has
responsibility for monitoring the portfolio, which is selected in
accordance with the Company's investment objective and seeks to
ensure that individual stocks meet an acceptable risk/reward
profile.
Market price risk exposure
The Company's total exposure to changes in market prices at 31
August comprised the following:
2023 2022
GBP'000 GBP'000
------------------------------------------------- ------- -------
Investments held at fair value through profit or
loss 229,714 230,497
------------------------------------------------- ------- -------
The above data is broadly representative of the exposure to
market price risk during the year.
Concentration of exposure to market price risk
An analysis of the Company's investments is given on page 14.
The portfolio principally comprises securities of companies listed
on the London Stock Exchange and accordingly there is a
concentration of exposure to economic conditions in the UK. However
it should be noted that many of these companies conduct much of
their business overseas. Furthermore, up to 20% of the portfolio
may be listed on overseas stock exchanges.
Market price risk sensitivity
The following table illustrates the sensitivity of the return
after taxation for the year and net assets to an increase or
decrease of 20% (2022: 20%) in the fair values of the Company's
investments. This level of change is considered to be a reasonable
illustration based on observation of current market conditions. The
sensitivity analysis is based on the Company's exposure through
equity investments and includes the impact on the management fee
but assumes that all other variables are held constant.
2023 2022
20% increase 20% decrease 20% increase 20% decrease
in fair value in fair value in fair value in fair value
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- ------------- ------------- ------------- -------------
Income statement - return
after taxation
---------------------------- ------------- ------------- ------------- -------------
Revenue return (83) 83 (104) 104
---------------------------- ------------- ------------- ------------- -------------
Capital return 45,819 (45,819) 45,996 (45,996)
---------------------------- ------------- ------------- ------------- -------------
Total return after taxation
and net assets 45,736 (45,736) 45,892 (45,892)
---------------------------- ------------- ------------- ------------- -------------
Change in net asset value 22.4% (22.4%) 22.4% (22.4%)
---------------------------- ------------- ------------- ------------- -------------
(b) Liquidity risk
This is the risk that the Company will encounter difficulty in
meeting its obligations associated with financial liabilities that
are settled by delivering cash or another financial asset.
Management of liquidity risk
Liquidity risk is not significant as the Company's assets
comprise mainly readily realisable securities, which can be sold to
meet funding requirements if necessary. The facility is also
available to provide liquidity at short notice. The Board's policy
is for the Company to remain fully invested in normal market
conditions. The facility may be used to manage working capital
requirements and to gear the Company as appropriate.
Liquidity risk exposure
Contractual maturities of financial liabilities, based on the
earliest date on which payment can be required are as follows:
2023 2022
Three months Three months
or less Total or less Total
GBP'000 GBP'000 GBP'000 GBP'000
------------------------------- ------------ ------- ------------ -------
Creditors: amounts falling
due within one year
------------------------------- ------------ ------- ------------ -------
Securities purchased awaiting
settlement - - - -
------------------------------- ------------ ------- ------------ -------
Other creditors and accruals 399 399 424 424
------------------------------- ------------ ------- ------------ -------
Bank loan - including interest 29,645 29,645 30,063 30,063
------------------------------- ------------ ------- ------------ -------
30,044 30,044 30,487 30,487
------------------------------- ------------ ------- ------------ -------
(c) Credit risk
Credit risk is the risk that the failure of the counterparty to
a transaction to discharge its obligations under that transaction
could result in loss to the Company.
Management of credit risk
This risk is not significant and is managed as follows:
Portfolio dealing
The Company invests in markets that operate a "Delivery Versus
Payment" settlement process which mitigates the risk of losing the
principal of a trade during settlement. The Manager continuously
monitors dealing activity to ensure best execution, which involves
measuring various indicators including the quality of trade
settlement and incidence of failed trades. Counterparties must be
pre-approved by the Manager's credit committee.
Exposure to the Custodian
The custodian of the Company's assets is HSBC Bank plc which has
long-term Credit Ratings of AA- with Fitch and Aa3 with Moody's.
The Company's investments are held in accounts which are segregated
from the custodian's own trading assets. If the custodian were to
become insolvent, the Company's right of ownership of its
investments is clear and they are therefore protected. However the
Company's cash balances are all deposited with the custodian as
banker and held on the custodian's balance sheet. Accordingly, in
accordance with usual banking practice, the Company will rank as a
general creditor to the custodian in respect of cash balances.
Credit risk exposure
The following amounts shown in the Statement of Financial
Position, represent the maximum exposure to credit risk at the
current and comparative year end.
2023 2022
Balance Maximum Balance Maximum
sheet exposure sheet exposure
GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------------------- ------- -------- ------- --------
Fixed assets
-------------------------------------------- ------- -------- ------- --------
Investments held at fair value through
profit or loss 229,714 - 230,497 -
-------------------------------------------- ------- -------- ------- --------
Current assets
-------------------------------------------- ------- -------- ------- --------
Debtors - dividends and interest receivable
and other debtors 2,557 2,557 2,737 2,737
-------------------------------------------- ------- -------- ------- --------
Cash at bank and in hand 1,560 1,560 2,305 2,305
-------------------------------------------- ------- -------- ------- --------
233,831 4,117 235,539 5,042
-------------------------------------------- ------- -------- ------- --------
No debtors are past their due date and none have been written
down or deemed to be impaired.
(d) Fair values of financial assets and financial liabilities
All financial assets and liabilities are either carried at fair
value or the amount in the Statement of Financial Position is a
reasonable approximation of fair value.
20. Capital management policies and procedures
The Company's objectives, policies and processes for managing
capital are unchanged from the preceding year.
The Company's debt and capital structure comprises the
following:
2023 2022
GBP'000 GBP'000
------------------------ ------- -------
Debt
------------------------ ------- -------
Bank loan 29,500 30,000
------------------------ ------- -------
Equity
------------------------ ------- -------
Called-up share capital 6,946 6,946
------------------------ ------- -------
Reserves 196,986 198,154
------------------------ ------- -------
203,932 205,100
------------------------ ------- -------
Total debt and equity 233,432 235,100
------------------------ ------- -------
The Company's capital management objectives are to ensure that
it will continue as a going concern and to maximise the return to
its equity shareholders through an appropriate level of
gearing.
The Board's policy is to permit gearing up to 25% where gearing
is defined as borrowings used for investment purposes, less cash,
expressed as a percentage of net assets.
2023 2022
GBP'000 GBP'000
--------------------------------------------------- ------- -------
Borrowings used for investment purposes, less cash 27,940 27,695
--------------------------------------------------- ------- -------
Net assets 203,932 205,100
--------------------------------------------------- ------- -------
Gearing 13.7% 13.5%
--------------------------------------------------- ------- -------
The Board, with the assistance of the Manager, monitors and
reviews the broad structure of the Company's capital on an ongoing
basis. This review includes:
- the planned level of gearing, which takes into account the Manager's views on the market;
- the need to buy back the Company's own shares for cancellation
or to hold in treasury, which takes into account the share price
discount;
- the opportunities for issues of new shares; and
- the amount of dividend to be paid, in excess of that which is required to be distributed.
Status of announcement
2022 Financial Information
The figures and financial information for 2022 are extracted
from the published Annual Report and Accounts for the year ended 31
August 2022 and do not constitute the statutory accounts for that
year. The 2022 Annual Report and Accounts have been delivered to
the Registrar of Companies and included the Report of the
Independent Auditors which was unqualified and did not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted
from the Annual Report and Accounts for the year ended 31 August
2023 and do not constitute the statutory accounts for the year. The
2023 Annual Report and Accounts include the Report of the
Independent Auditors which is unqualified and does not contain a
statement under either section 498(2) or section 498(3) of the
Companies Act 2006. The 2023 Annual Report and Accounts will be
delivered to the Registrar of Companies in due course.
Neither the contents of the Company's webpages nor the contents
of any website accessible from hyperlinks on the Company's webpages
(or any other website) is incorporated into, or forms part of, this
announcement.
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