State Street AUT UK Screened (Ex Controversies and CW) Index
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Report and Financial Statements For the year ended 31st December 2020 State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund (formerly State Street UK Equity Tracker Fund) State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund Contents Page Manager's Report* 1 Portfolio Statement* 9 Director's Report to Unitholders* 27 Manager's Statement of Responsibilities 28 Statement of the Depositary’s Responsibilities 29 Report of the Depositary to the Unitholders 29 Independent Auditors’ Report 30 Comparative Table* 33 Financial statements: 34 Statement of Total Return 34 Statement of Change in Net Assets Attributable to Unitholders 34 Balance Sheet 35 Notes to the Financial Statements 36 Distribution Tables 48 Directory* 49 Appendix I – Remuneration Policy (Unaudited) 50 Appendix II – Assessment of Value (Unaudited) 52 * These collectively comprise the Manager’s Report. State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund Manager’s Report For the year ended 31st December 2020 Authorised Status The State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund (the “Fund”) is an Authorised Unit Trust Scheme as defined in section 243 of the Financial Services and Markets Act 2000 and it is a UCITS Retail Scheme within the meaning of the FCA Collective Investment Schemes sourcebook. The unitholders are not liable for the debts of the Fund. The Fund's name was changed to State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund on 18th December 2020 (formerly State Street UK Equity Tracker Fund). Investment Objective and Policy The objective of the Fund is to replicate, as closely as possible and on a “gross of fees” basis, the return of the United Kingdom equity market as represented by the FTSE All-Share ex Controversies ex CW Index (the “Index”), net of withholding taxes. The Manager will seek to achieve this objective principally by investing in the shares of certain companies included from time to time in the Index considered by the Investment Adviser to reflect accurately the performance of that Index. The Fund may also invest in transferrable securities, money market instruments, warrants, units in collective investment schemes, deposits and derivatives. The Fund may invest in collective investment schemes managed or operated by companies in the same group as the Manager or the Investment Adviser. The Fund will seek to track the performance of the Index whilst seeking to minimise as far as possible the tracking error between the Fund’s performance and that of the Index. The Index includes a negative screen that exclude securities from the Index based on two criteria: 1. Controversial weapons (including chemical & biological weapons, cluster munitions, anti-personnel landmines), and 2. Controversies as defined by the ten principles of the UN Global Compact: Human Rights a) Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and b) Principle 2: make sure that they are not complicit in human rights abuses. Labour c) Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; d) Principle 4: the elimination of all forms of forced and compulsory labour; e) Principle 5: the effective abolition of child labour; and f) Principle 6: the elimination of discrimination in respect of employment and occupation. Environment g) Principle 7: Businesses should support a precautionary approach to environmental challenges; h) Principle 8: undertake initiatives to promote greater environmental responsibility; and i) Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption j) Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. The negative screens will therefore apply when the Schemes invest in shares of companies included in the Index (but not in respect of other investments held by the Scheme from time to time). The Index contains investment trusts (ICB subsector 8985) whose holdings are not screened for the excluded activities contained in the name of the Index. 1 State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund Manager's Report (continued) For the year ended 31st December 2020 Strategy The Fund is constructed to track, on a gross of fees basis, the performance of the FTSE All-Share ex-Controversies ex-CW Index (the “Index”). The Fund had a benchmark change on 18th December 2020 from FTSE All-Share Index to FTSE All-Share ex-Controversies ex-CW Index. The Fund is managed on a fully replicated basis, and currently has a portfolio of approximately 426 stocks. The emphasis is on maintaining tracking precision, and a combination of stocks is selected to minimise deviation from the index. The Fund is managed to remain neutral on all factors contributing to risk. Performance The Fund returned -10.16% on a net basis for the 12-month period ended 31 December 2020 (the “Reporting Period”), compared to the Index return of -9.86%. The size of the Fund’s tracking difference for the Reporting Period was -0.30%. The underperformance versus the Index was largely attributable to an accounting difference between Custody and SSGA. Market Review UK equities fell by 10.43% over the Reporting Period as the ongoing uncertainty related to Brexit was further elevated by the spread of coronavirus COVID-19. The UK formally exited the European Union in January and entered into a transition period. As a part of the policy response to the pandemic, the UK announced a coordinated response with the Bank of England reducing the bank rate by 50 basis points (among other measures) and the UK government put forth a budget with an additional £30 billion in fiscal stimulus. The UK market saw a rebound in April on the back of unprecedented fiscal and monetary support early in the second quarter. UK equities had their strongest three-months performance during Q2 as massive economic stimulus actions and signs that coronavirus outbreak was easing drew buyers into equity markets. According to the Office for National Statistics, the UK economy collapsed by more than 20% in April alone (the first full month of lockdown), which was the sharpest contraction since 1979. According to the Bank of England, the coronavirus pandemic has plunged Britain into its worst recession in 100 years, with the economy on track to shrink by 9.5% this year. The government began to ease lockdown measures and a phased reopening of various industry sectors was confirmed on 24th May. In June, the UK moved to stage 2, as outdoor retail and primary schools with other non-essential retailers begun to reopen. Equities started off the third quarter lagging behind other regions – extending their year-to-date underperformance. Uncertainty and concerns remained in relation to both the second wave of coronavirus COVID-19 infections and further Brexit talks nearing their deadline without any resolution. A number of UK focused areas of the market performed poorly over September following the re-imposition of localised restrictions necessitated by the rising infection rates and fears about their impact on the UK economy. Notwithstanding these new measures, the country’s economic recovery continued as coronavirus COVID-19 restrictions were generally eased. In November, the UK approved the use of vaccine produced by Pfizer/BioNTech as well as one developed by AstraZeneca and Oxford University. The market responded well to the vaccine news and the UK exiting the EU on 31 December, with domestically-focused areas of the market outperforming. By year end, the UK government had extended its strictest restrictions across three-quarters of England, seeking to curb the spread of a new variant of the coronavirus. Index Activity The Index is subject to a rebalance in March, June, September and December. In March there was one inclusion (Octopus Renewables Infrastructure Trust), three exclusions, one up weight and two down weights. In June there were seven inclusions (the largest being Calisen), nine exclusions, three up weights and six down weights. In September there were three inclusions (the largest being Diversified Gas & Oil), one exclusion, two up weights and one down weight. In December there was one inclusion, no exclusion, one up weight and two down weights. Figures in USD unless specified otherwise. For Institutional Use Only – Not for Use with the Public. Sources: Bloomberg, FactSet, J.P. Morgan, Financial Times, Barron’s, Bank of America-Merrill Lynch, Credit Suisse, Citigroup, The Wall Street Journal, MSCI, as of 1 January 2021. 2 State Street AUT UK Screened (ex Controversies and CW) Index Equity Fund Manager's Report (continued) For the year ended 31st December 2020 Risk and Reward Profile Risk Disclaimer The risk category above is not a measure of capital loss or gains but of how significant the rises and falls in the Fund’s return have been historically. For example a fund whose return has experienced significant rises and falls will be in a higher risk category, whereas a fund whose return has experienced less significant rises and falls will be in a lower risk category. The lowest category (i.e. category 1) does not mean that a fund is a risk free investment. As the Fund’s risk category has been calculated using historical data, it may not be a reliable indication of the Fund’s future risk profile. The Fund’s risk category shown is not guaranteed and may change in the future. Why is this Fund in this category? The Fund is in risk category 6 as its return has experienced very high rises and falls historically. The following are material risks relevant to the Fund which are not adequately captured by the risk category. Index Tracking Risk: The Fund's performance may not exactly track the Index.