Annual report BlackRock UK Special Situations Fund
For the year ended 28 February 2019 Contents General Information
Manager & Registrar General Information 2 BlackRock Fund Managers Limited About the Fund 3 12 Throgmorton Avenue, London EC2N 2DL
Investment Objective & Policy 3 Member of The Investment Association and authorised and regulated by the Financial Conduct Authority (“FCA”).
Fund Managers 3 Directors of the Manager G D Bamping* C L Carter M B Cook (appointed 2 May 2018) W I Cullen* Significant Events 3 R A Damm (resigned 31 December 2018) R A R Hayes A M Lawrence Risk and Reward Profile 4 L E Watkins (appointed 16 May 2018, resigned 1 March 2019) M T Zemek*
Performance Table 5 * Non-executive Director.
Classification of Investments 6 Trustee* & Custodian The Bank of New York Mellon (International) Limited Investment Report 7 One Canada Square, London E14 5AL
Performance Record 9 Authorised by the Prudential Regulation Authority and regulated by the FCA and the Prudential Distribution Tables 13 Regulation Authority. * On 18 June 2018 the Trustee changed from BNY Mellon Trust & Depositary (UK) Limited to The Bank of New York Mellon (International) Limited. Report on Remuneration 14
Portfolio Statement 20 Investment Manager BlackRock Investment Management (UK) Limited Statement of Total Return 24 12 Throgmorton Avenue, London EC2N 2DL
Statement of Change in Net Assets Attributable to Unitholders 24 Authorised and regulated by the FCA.
Balance Sheet 25 Securities Lending Agent Notes to Financial Statements 26 BlackRock Advisors (UK) Limited 12 Throgmorton Avenue, London EC2N 2DL Statement of Manager’s Responsibilities 41 Authorised and regulated by the FCA. Statement of the Trustee’s Responsibilities in Respect of the Fund and Report of the 42 Trustee to the Unitholders of the Fund for the Year Ended 28 February 2019 Auditor Independent Auditor’s Report 43 Ernst & Young LLP Atria One, 144 Morrison Street, Edinburgh EH3 8EX Supplementary Information 46
BlackRock’s proxy voting agent is ISS (Institutional Shareholder Services).
This Report relates to the packaged products of and is issued by: BlackRock Fund Managers Limited 12 Throgmorton Avenue, London EC2N 2DL Telephone: 020 7743 3000 Dealing and Investor Services: 0800 44 55 22 blackrock.co.uk
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1 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 2 About the Fund Risk and Reward Profile
BlackRock UK Special Situations Fund (the “Fund”) is a UCITS scheme under the COLL Sourcebook. Lower risk Higher risk The Fund was established on 27 January 1981. The name of the Fund was changed to Mercury Recovery Typically lower rewards Typically higher rewards Fund (from Mercury Income and Recovery Fund) in February 1984, to Merrill Lynch Recovery Fund on Unit Class 30 September 2000, to Merrill Lynch UK Value Fund on 10 September 2001 and to Merrill Lynch UK Special Situations Fund on 1 September 2004. The Fund changed its investment objective on 1 October 2006. A Income 1 2 3 4 5 6 7 The Fund adopted its present name with effect from 28 April 2008. The Fund’s FCA product reference A Accumulation 1 2 3 4 5 6 7 number is 108425. D Income 1 2 3 4 5 6 7 D Accumulation 1 2 3 4 5 6 7 Investment Objective & Policy X Income 1 2 3 4 5 6 7 X Accumulation 1 2 3 4 5 6 7
The aim of the Fund is to achieve long-term capital growth for investors. The Fund invests primarily in the shares S Income 1 2 3 4 5 6 7 of companies incorporated or listed in the UK and will normally have an emphasis on small or medium sized S Accumulation 1 2 3 4 5 6 7 companies. The Fund may also invest in collective investment schemes. Small and medium sized companies are those whose market capitalisation is lower than that of companies in the FTSE 100 Index at the time of the • The risk indicator was calculated incorporating historical or simulated historical data and may not be a Fund’s investment. reliable indication of the future risk profile of the Fund. • The risk category shown is not guaranteed and may change over time. Fund Managers • The lowest category does not mean risk free. For more information on this, please see the Fund’s Key Investor Information Documents (“KIIDs”), which are available at www.blackrock.com. As at 28 February 2019, the Fund Managers of the Fund are Roland Arnold and Luke Chappell.
Significant Events
Changes in the Directors of the Manager M B Cook was appointed as a Director effective 2 May 2018. L E Watkins was appointed as a Director effective 16 May 2018, and resigned as a Director effective 1 March 2019. R A Damm resigned as a Director effective 31 December 2018.
Changes to the Trustee On 18 June 2018 the Trustee changed from BNY Mellon Trust & Depositary (UK) Limited to The Bank of New York Mellon (International) Limited.
3 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 4 Performance Table Classification of Investments
The following charts provide an analysis of the portfolio weightings as at 28 February 2019 and For the year For the three years For the five years to 28.2.2019 to 28.2.2019 to 28.2.2019 28 February 2018 by their respective equity sector allocations. TOTAL RETURN (with net income reinvested) 28 February 2019 Class D Accumulation Units Banks 6.38% BlackRock UK Special Situations Fund -1.4% +38.7% +29.2% Beverages 1.24% IA UK All Companies Sector Index^† -1.3% +25.1% +22.9% Construction & Materials 2.87% Financial Services 7.85% All Fund figures quoted are based on bid-to-bid dealing prices (the price at which units are sold) and are calculated net of fees. Performance returns are cumulative. All returns are in Sterling. General Retailers 4.63% ^ Figures from Morningstar. Household Goods & Home Construction 2.82% † The IA UK All Companies Sector Index is the Fund’s peer group performance measure. Industrial Engineering 5.47% Life Insurance 3.15% All financial investments involve an element of risk. Therefore, the value of your investment and the income Media 14.57% from it will vary and the return of your initial investment amount cannot be guaranteed. Changes in exchange Mining 6.37% rates may cause the value of an investment to fluctuate. Past performance is not a guide to future performance Non-Life Insurance 1.79% and should not be the sole factor of consideration when selecting a product. Oil & Gas Producers 8.41% Pharmaceuticals & Biotechnology 2.98% Real Estate Investment Trusts 4.50% Software & Computer Services 1.28% Support Services 9.09% Tobacco 2.58% Travel & Leisure 6.49% Other 7.53%
28 February 2018
Banks 5.21% Beverages 1.64% Construction & Materials 1.12% Financial Services 6.66% General Retailers 5.01% Household Goods & Home Construction 4.15% Industrial Engineering 6.75% Life Insurance 3.14% Media 11.98% Mining 6.99% Non-Life Insurance 2.93% Oil & Gas Producers 8.89% Pharmaceuticals & Biotechnology 5.83% Real Estate Investment Trusts 3.20% Software & Computer Services 3.60% Support Services 9.76% Tobacco 3.48% Travel & Leisure 4.78% Other 4.88%
5 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 6 Investment Report
Summary of Performance over the Year Outlook The Fund returned -1.4%* over the year to 28 February 2019, underperforming its performance measure, the We remain in a low growth world, but see signs of greater divergence between economies and increased IA UK All Companies Sector Index**, which returned -1.3%. The FTSE All-Share Index returned 1.7% over volatility in financial markets. UK growth remains weaker than many other developed economies. The Bank the same period. Over the six-month period to 28 February 2019, the Fund returned -9.1%*, very regrettably of England’s decision to raise the base rate to 0.75%, the highest level since March 2009, provided a sign underperforming its performance measure, which returned -6.7%. of confidence in the strength of the UK; however, further rises from here should be modest. UK companies have been reporting good results, although we have seen some consumer related profit warnings, reinforcing Market Review our cautious view on the outlook for the sector. Uncertainty around Brexit negotiations and the UK’s future The value of broader UK equities ended the period higher but smaller company stocks were down. Brexit was relationship with the EU may have an impact on business investment decisions. Given this backdrop, the Fund an ongoing source of angst, acting as an impediment to both the UK economy and stock market. Although remains focused on companies with sufficiently strong business franchises and balance sheets to succeed in Prime Minister Theresa May agreed on a deal with the European Union (“EU”), this failed to gain support in a low growth world. Parliament. The possibility of the UK leaving the EU without a deal caused recurring bouts of anxiety over the period, weighing on markets. More positively, sterling weakness helped propel the FTSE 100 Index to a new March 2019 intra-day high in May (large cap stocks generate most of their revenues overseas, so a depreciation in sterling makes them more competitive). UK stocks subsequently fell, as concerns about global growth and trade soured sentiment. In the final days of the period, the Labour Party’s decision to back a second referendum supported sterling.
Fund Performance and Activity The decrease in expectations for economic growth in the fourth quarter of 2018 resulted in changes in market leadership, with many of the previously best performing shares becoming the worst performers. The declines in the UK market were mostly felt by the small and mid cap companies as they underperformed larger companies. For context, the FTSE All-Share Index fell by 10.3% during the final quarter, while the Numis Smaller Companies index fell by 14.6%. There was a notable rotation away from the highly rated growth shares that have performed so strongly in the last few years, resulting in growth (companies that are expected to grow earnings faster than the market) underperforming value (companies that look cheap at face value). This phenomenon resulted in a challenging environment for the Fund, given our structural bias towards small and mid cap companies and our growth style bias. Many of the largest detractors were predominantly companies that were caught up in the sell off, and the share price falls were not linked to any negative stock specific newsflow; for example, Learning Technologies and Fever-Tree. We remain confident that our theses on each of these remains intact.
Fashion brand Superdry fell after the company issued a number of profit warnings during the year. Some elements, such as the ‘Beast from the East’ cold weather event, were beyond their control; however, there were also system issues resulting in clearance activity that impacted gross margins. With a lack of clarity on the solution to these issues, we fully sold the position during the period.
Faroe Petroleum soared following an ultimately successful hostile bid from its largest shareholder, Norwegian oil and gas firm DNO. Our long term holding in industrial engineering business Spirax-Sarco continues to deliver strong organic revenue and profit growth across all geographies, while recent acquisitions are also bedding in well. Pharmaceutical company Shire was a top contributor to performance following the successful acquisition by Japanese company Takeda, for a significant premium to the share price at the time of the bid.
During the period, we purchased new holdings in easyJet, Next and SSP, while adding to our holdings in Standard Chartered and Workspace. We reduced Weir and Melrose Industries, and fully sold Shire following the completion of the takeover by Takeda.
* Performance figures quoted are based on bid-to-bid, dealing prices (the price at which units are sold). Performance is calculated net of fees and reported for the Fund’s class D Accumulation Units. ** The IA UK All Companies Sector Average Index is the Fund’s peer group performance measure.
7 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 8 Performance Record
Comparative Table Comparative Table
A Income Units A Accumulation Units D Income Units D Accumulation Units
For the year For the year For the year For the year For the year For the year For the year For the year For the year For the year For the year For the year to 28.2.2019 to 28.2.2018 to 28.2.2017 to 28.2.2019 to 28.2.2018 to 28.2.2017 to 28.2.2019 to 28.2.2018 to 28.2.2017 to 28.2.2019 to 28.2.2018 to 28.2.2017
Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit
Change in net assets per unit Change in net assets per unit
Opening net asset value per unit 2,446 2,174 1,803 4,314 3,796 3,107 Opening net asset value per unit 2,452 2,176 1,803 4,576 3,996 3,246
Return before operating charges (11.15) 335.7 430.4 (22.24) 587.7 746.1 Return before operating charges (10.46) 336.5 432.6 (24.57) 620.2 783.1
Operating charges (41.14) (39.77) (32.98) (72.88) (69.80) (57.15) Operating charges (22.77) (21.97) (18.21) (42.74) (40.64) (33.02)
Return after operating charges (52.29) 295.9 397.4 (95.12) 517.9 688.9 Return after operating charges (33.23) 314.5 414.4 (67.31) 579.6 750.1
Distributions (25.86) (24.24) (26.73) (46.04) (42.34) (46.14) Distributions (44.81) (38.72) (41.78) (83.93) (71.40) (75.57)
Retained distributions on Retained distributions on accumulation units N/A N/A N/A 46.04 42.34 46.14 accumulation units N/A N/A N/A 83.93 71.40 75.57
Closing net asset value per unit 2,368 2,446 2,174 4,219 4,314 3,796 Closing net asset value per unit 2,374 2,452 2,176 4,509 4,576 3,996
After direct transaction costs of (3.30) (2.38) (2.96) (5.85) (4.18) (5.13) After direct transaction costs of (3.32) (2.39) (2.97) (6.23) (4.42) (5.38)
Performance Performance
Return after charges1 (2.14)% 13.61% 22.04% (2.20)% 13.64% 22.17% Return after charges1 (1.36)% 14.45% 22.98% (1.47)% 14.50% 23.11%
Other information Other information
Closing net asset value (£000’s) 23,268 41,072 40,744 297,422 328,809 329,958 Closing net asset value (£000’s) 44,237 48,185 77,021 159,992 163,966 188,831
Closing number of units 982,646 1,679,388 1,874,420 7,049,791 7,622,093 8,692,390 Closing number of units 1,863,415 1,965,305 3,540,153 3,548,518 3,583,480 4,725,372
Operating charges2 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% Operating charges2 0.92% 0.92% 0.92% 0.92% 0.92% 0.92%
Direct transaction costs3 0.13% 0.10% 0.15% 0.13% 0.10% 0.15% Direct transaction costs3 0.13% 0.10% 0.15% 0.13% 0.10% 0.15%
Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit
Highest offer unit price 2,839 2,704 2,326 5,007 4,769 4,050 Highest offer unit price 2,718 2,586 2,225 5,072 4,814 4,060
Lowest bid unit price 2,145 2,193 1,738 3,817 3,830 2,996 Lowest bid unit price 2,156 2,197 1,746 4,074 4,034 3,142
1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in 1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/trustee and entry/exit charges paid to an underlying collective 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/trustee and entry/exit charges paid to an underlying collective investment scheme (if any). investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund’s purchase and sale of equity instruments. 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund’s purchase and sale of equity instruments. See note 13 for further details. See note 13 for further details.
9 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 10 Performance Record continued
Comparative Table Comparative Table
X Income Units X Accumulation Units S Income Units S Accumulation Units
For the year For the year For the year For the period from For the year For the year For the year For the year For the year For the year to 28.2.2019 to 28.2.2018 to 28.2.2017 17.8.2018^ to 28.2.2019 to 28.2.2019 to 28.2.2018 to 28.2.2017 to 28.2.2019 to 28.2.2018 to 28.2.2017
Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit
Change in net assets per unit Change in net assets per unit
Opening net asset value per unit 2,406 2,138 1,771 100.0 Opening net asset value per unit 121.9 108.2 89.67 129.4 112.9 91.64
Return before operating charges 18.49 328.2 425.5 (8.46) Return before operating charges (0.48) 16.70 21.51 (0.70) 17.50 22.11
Operating charges (0.49) (0.47) 0.00 (0.01) Operating charges (1.03) (1.00) (0.82) (1.10) (1.05) (0.84)
Return after operating charges 18.00 327.7 425.5 (8.47) Return after operating charges (1.51) 15.70 20.69 (1.80) 16.50 21.27
Distributions (96.64) (59.89) (58.70) (0.89) Distributions (2.33) (2.02) (2.17) (2.48) (2.12) (2.22)
Retained distributions on accumulation units N/A N/A N/A 0.89 Retained distributions on accumulation units N/A N/A N/A 2.48 2.12 2.22 Closing net asset value per unit 2,327 2,406 2,138 91.53 Closing net asset value per unit 118.1 121.9 108.2 127.6 129.4 112.9 After direct transaction costs of (3.28) (2.35) (2.92) (0.07) After direct transaction costs of (0.17) (0.12) (0.15) (0.18) (0.12) (0.15) Performance Performance Return after charges1 0.75% 15.33% 24.02% (8.47)% Return after charges1 (1.24)% 14.56% 23.07% (1.39)% 14.61% 23.21% Other information Other information Closing net asset value (£000’s) 2 –§ –§ 10,653 Closing net asset value (£000’s) 13,013 14,969 18,213 64,964 64,366 67,867 Closing number of units 102 6 6 11,639,611 Closing number of units 11,022,695 12,277,175 16,834,766 50,912,028 49,745,949 60,106,925 Operating charges2 0.02% 0.02% 0.02% 0.02% Operating charges2 0.84% 0.84% 0.83% 0.84% 0.84% 0.83% Direct transaction costs3 0.13% 0.10% 0.15% 0.25% Direct transaction costs3 0.13% 0.10% 0.15% 0.13% 0.10% 0.15% Prices Pence per unit Pence per unit Pence per unit Pence per unit Prices Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Pence per unit Highest offer unit price 2,677 2,541 2,193 101.6 Highest offer unit price 142.0 135.1 116.2 150.7 142.9 120.5 Lowest bid unit price 2,150 2,160 1,719 82.59 Lowest bid unit price 107.2 109.2 86.72 115.3 114.0 88.62 ^ The date of commencement of operations. 1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in 1 The return after charges figures are based on the net asset value reported for financial statements purposes and are not the same as the performance returns figures quoted in the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). the Performance Table and the Investment Report which are based on bid-to-bid dealing prices (the price at which units are sold). 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/trustee and entry/exit charges paid to an underlying collective 2 Operating charges are annualised and exclude portfolio trade-related costs, except costs paid to the custodian/trustee and entry/exit charges paid to an underlying collective investment scheme (if any). investment scheme (if any). 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund’s purchase and sale of equity instruments. 3 Direct transaction costs are annualised and principally comprise commissions and taxes, attributable to the Fund’s purchase and sale of equity instruments. See note 13 for further details. See note 13 for further details. § Amounts less than £500 are rounded to zero.
11 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 12 Distribution Tables Report on Remuneration for the year ended 28 February 2019
Final Distribution in Pence per Unit The below disclosures are made in respect of the remuneration policies of the BlackRock group (“BlackRock”), Group 1 – Units purchased prior to 1 September 2018 as they apply to BlackRock Fund Managers Limited (the “Manager”). The disclosures are made in accordance Group 2 – Units purchased 1 September 2018 to 28 February 2019 with the Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”), as amended, including in particular A Income A Accumulation D Income D Accumulation X Income X Accumulation S Income S Accumulation by Directive 2014/91/EU of the European Parliament and of the council of 23 July 2014, (the “Directive”), the Units Units Units Units Units Units* Units Units “Guidelines on sound remuneration policies under the UCITS Directive and AIFMD” issued by the European Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Securities and Markets Authority, the Financial Conduct Authority Handbook SYSC 19E: The UCITS Remuneration Net revenue (dividend) 2.6062 1.7452 5.0668 4.1152 11.6780 6.0934 22.0827 14.2444 52.6150 5.8898 0.8484 0.3968 0.6269 0.3813 0.6740 0.4022 Code (the “UCITS Remuneration Code”), and COLL 4.5.7 R(7). Equalisation† – 0.8610 – 0.9516 – 5.5846 – 7.8383 – 46.7252 – 0.4516 – 0.2456 – 0.2718 Distribution paid 30.4.2019 2.6062 2.6062 5.0668 5.0668 11.6780 11.6780 22.0827 22.0827 52.6150 52.6150 0.8484 0.8484 0.6269 0.6269 0.6740 0.6740 BlackRock’s UCITS Remuneration Policy (the “UCITS Remuneration Policy”) will apply to the EEA entities Distribution paid 30.4.2018 0.0000 0.0000 0.0000 0.0000 5.6784 5.6784 10.6238 10.6238 16.8691 16.8691 N/A N/A 0.3322 0.3322 0.3530 0.3530 within the BlackRock group authorised as a manager of alternative investment funds in accordance with the Directive, and will ensure compliance with the requirements of Article 14b of the Directive and the UCITS Interim Distribution in Pence per Unit Remuneration Code. Group 1 – Units purchased prior to 1 March 2018 Group 2 – Units purchased 1 March 2018 to 31 August 2018 The Manager has adopted the UCITS Remuneration Policy, a summary of which is set out below.
A Income A Accumulation D Income D Accumulation X Income X Accumulation S Income S Accumulation Units Units Units Units Units Units* Units Units Remuneration Governance
Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 BlackRock’s remuneration governance in EMEA operates as a tiered structure which includes: (a) the Management Development and Compensation Committee (“MDCC”) (which is the global, independent Net revenue (dividend) 23.2548 7.9891 40.9698 13.8892 33.1274 11.9505 61.8487 22.7927 44.0283 44.0283 0.0400 0.0000 1.7017 0.6663 1.8064 0.6113 remuneration committee for BlackRock, Inc. and all of its subsidiaries, including the Manager); and (b) the Equalisation† – 15.2657 – 27.0806 – 21.1769 – 39.0560 – 0.0000 – 0.0400 – 1.0354 – 1.1951 Manager’s board of directors (the “Manager’s Board”). These bodies are responsible for the determination Distribution paid 31.10.2018 23.2548 23.2548 40.9698 40.9698 33.1274 33.1274 61.8487 61.8487 44.0283 44.0283 0.0400 0.0400 1.7017 1.7017 1.8064 1.8064 of BlackRock’s remuneration policies. Distribution paid 31.10.2017 24.2416 24.2416 42.3354 42.3354 33.0412 33.0412 60.7738 60.7738 43.0162 43.0162 N/A N/A 1.6920 1.6920 1.7662 1.7662
* X Accumulation class launched 17 August 2018. (a) MDCC † Equalisation applies only to units purchased during the distribution period (Group 2 units). It is the average amount of revenue included in the purchase price of all Group 2 units and is refunded to holders of these units as a return of capital. Being capital, it is not liable to income tax but must be deducted from the cost of units for capital gains tax The MDCC’s purposes include: purposes. • providing oversight of: – BlackRock’s executive compensation programmes;
– BlackRock’s employee benefit plans; and
– such other compensation plans as may be established by BlackRock from time to time for which the MDCC is deemed as administrator;
• reviewing and discussing the compensation discussion and analysis included in the BlackRock, Inc. annual proxy statement with management and approving the MDCC’s report for inclusion in the proxy statement; • reviewing, assessing and making reports and recommendations to the BlackRock, Inc. board of directors (the “BlackRock, Inc. Board”) as appropriate on BlackRock’s talent development and succession planning, with the emphasis on performance and succession at the highest management levels; and • in accordance with applicable UK and European regulations and guidance, to act as the Remuneration Committee for BlackRock’s EMEA regulated entities.
The MDCC directly retains its own independent compensation consultant, Semler Brossy Consulting Group LLC, who has no relationship with BlackRock, Inc. or the BlackRock, Inc. Board that would interfere with its ability to provide independent advice to the MDCC on compensation matters.
13 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 14 Report on Remuneration continued
The BlackRock, Inc. Board has determined that all of the members of the MDCC are “independent” within The MDCC regularly considers management’s recommendation as to the percentage of preincentive operating the meaning of the listing standards of the New York Stock Exchange (NYSE), which requires each meet a income that will be accrued and reflected as a compensation expense throughout the year for the cash portion “non-employee director” standard. of the total annual bonus pool (the “accrual rate”). The accrual rate of the cash portion of the total annual bonus pool may be modified by the MDCC during the year based on its review of the financial information described The MDCC held 10 meetings during 2018. The MDCC charter is available on BlackRock, Inc.’s website above. The MDCC does not apply any particular weighting or formula to the information it considers when (www.blackrock.com). determining the size of the total bonus pool or the accruals made for the cash portion of the total bonus pool.
Through its regular reviews, the MDCC continues to be satisfied with the principles of BlackRock’s Following the end of the performance year, the MDCC approves the final bonus pool amount. compensation policy and approach. As part of the year-end review process the Enterprise Risk and Regulatory Compliance departments report to (b) The Manager’s Board the MDCC on any activities, incidents or events that warrant consideration in making compensation decisions. The Manager’s Board has the task of supervising and providing oversight of the UCITS Remuneration Policy as it applies to the Manager and its Identified Staff. Individuals are not involved in setting their own remuneration.
The Manager’s Board (through independent review by the relevant control functions) remains satisfied with the Control functions implementation of the UCITS Remuneration Policy as it applies to the Manager and its Identified Staff. Each of the control functions (Enterprise Risk, Legal & Compliance, and Internal Audit) has its own organisational structure which is independent of the business units. The head of each control function is either a member of Decision-making process the Global Executive Committee (“GEC”), the global management committee, or has a reporting obligation to Remuneration decisions for employees are made once annually in January following the end of the performance the board of directors of BlackRock Group Limited, the parent company of all of BlackRock’s EMEA regulated year. This timing allows full-year financial results to be considered along with other non-financial goals entities, including the Manager. and objectives. Although the framework for remuneration decision-making is tied to financial performance, significant discretion is used to determine individual variable remuneration based on achievement of strategic Functional bonus pools are determined with reference to the performance of each individual function. The and operating results and other considerations such as management and leadership capabilities. remuneration of the senior members of control functions is directly overseen by the MDCC.
No set formulas are established and no fixed benchmarks are used in determining annual incentive awards. In Link between pay and performance determining specific individual remuneration amounts, a number of factors are considered including non-financial There is a clear and well defined pay-for-performance philosophy and compensation programmes which are goals and objectives and overall financial and investment performance. These results are viewed in the aggregate designed to meet the following key objectives as detailed below: without any specific weighting, and there is no direct correlation between any particular performance measure and the resulting annual incentive award. The variable remuneration awarded to any individual(s) for a particular • appropriately balance BlackRock’s financial results between shareholders and employees; performance year may also be zero. • attract, retain and motivate employees capable of making significant contributions to the long-term success of the business; Annual incentive awards are paid from a bonus pool. • align the interests of senior employees with those of shareholders by awarding BlackRock Inc.’s stock as a significant part of both annual and long-term incentive awards; The size of the projected bonus pool, including cash and equity awards, is reviewed throughout the year by the MDCC and the final total bonus pool is approved after year-end. As part of this review, the MDCC receives actual • control fixed costs by ensuring that compensation expense varies with profitability; and projected financial information over the course of the year as well as final year-end information. The financial • link a significant portion of an employee’s total compensation to the financial and operational performance information that the MDCC receives and considers includes the current year projected income statement of the business as well as its common stock performance; and other financial measures compared with prior year results and the current year budget. The MDCC • discourage excessive risk-taking; and additionally reviews other metrics of BlackRock’s financial performance (e.g., net inflows of AUM and investment • ensure that client interests are not negatively impacted by remuneration awarded on a short-term, mid-term performance) as well as information regarding market conditions and competitive compensation levels. and/or long-term basis.
15 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 16 Report on Remuneration continued
Driving a high-performance culture is dependent on the ability to measure performance against objectives, Supplementary to the annual discretionary bonus as described above, equity awards from the “Partner Plan” values and behaviours in a clear and consistent way. Managers use a 5-point rating scale to provide an and “Targeted Equity Award Plan” are made to select senior leaders to provide greater linkage with future overall assessment of an employee’s performance, and employees also provide a self-evaluation. The overall, business results. The long-term incentive awards have been established individually to provide meaningful final rating is reconciled during each employee’s performance appraisal. Employees are assessed on the incentive for continued performance over a multi-year period recognising the scope of the individual’s role, manner in which performance is attained as well as the absolute performance itself. business expertise and leadership skills.
In keeping with the pay-for-performance philosophy, ratings are used to differentiate and reward individual Selected senior leaders are eligible to receive performance-adjusted equity-based awards from the “BlackRock performance – but don’t pre-determine compensation outcomes. Compensation decisions remain Performance Incentive Plan” (“BPIP”). Awards made from the BPIP have a three-year performance period discretionary and are made as part of the year-end compensation process. based on a measurement of As Adjusted Operating Margin1 and Organic Revenue Growth2. Determination of pay-out will be made based on the firm’s achievement relative to target financial results at the conclusion of When setting remuneration levels other factors are considered, as well as individual performance, which the performance period. The maximum number of shares that can be earned is 165% of the award in those may include: situations where both metrics achieve pre-determined financial targets. No shares will be earned where the firm’s financial performance in both of the above metrics is below a pre-determined performance threshold. • the performance of the Manager, the funds managed by the Manager and/or the relevant functional These metrics have been selected as key measures of shareholder value which endure across market cycles. department; • factors relevant to an employee individually; relationships with clients and colleagues; teamwork; skills; any A limited number of investment professionals have a portion of their annual discretionary bonus (as described conduct issues; and, subject to any applicable policy, the impact that any relevant leave of absence may above) awarded as deferred cash that notionally tracks investment in selected products managed by the have on contribution to the business); employee. The intention of these awards is to align investment professionals with the investment returns of the products they manage through the deferral of compensation into those products. Clients and external • the management of risk within the risk profiles appropriate for BlackRock’s clients; evaluators have increasingly viewed more favourably those products where key investors have “skin in the • strategic business needs, including intentions regarding retention; game” through significant personal investments. • market intelligence; and • criticality to business. Identified Staff The UCITS Remuneration Policy sets out the process that will be applied to identify staff as Identified Staff, A primary product tool is risk management and, while employees are compensated for strong performance in being categories of staff of the Manager, including senior management, risk takers, control functions and their management of client assets, they are required to manage risk within the risk profiles appropriate for their any employee receiving total remuneration that takes them into the same remuneration bracket as senior clients. Therefore, employees are not rewarded for engaging in high-risk transactions outside of established management and risk takers, whose professional activities have a material impact on the risk profiles of the parameters. Remuneration practices do not provide undue incentives for short-term planning or short-term Manager or of the funds it manages. financial rewards, do not reward unreasonable risk and provide a reasonable balance between the many and substantial risks inherent within the business of investment management, risk management and advisory services. The list of Identified Staff will be subject to regular review, being formally reviewed in the event of, but not limited to: BlackRock operates a total compensation model for remuneration which includes a base salary, which is contractual, and a discretionary bonus scheme. • organisational changes; • new business initiatives; BlackRock operates an annual discretionary bonus scheme. Although all employees are eligible to be • changes in significant influence function lists; considered for a discretionary bonus, there is no contractual obligation to make any award to an employee • changes in role responsibilities; and under its discretionary bonus scheme. In exercising discretion to award a discretionary bonus, the factors listed above (under the heading “Link between pay and performance”) may be taken into account in addition • revised regulatory direction. to any other matters which become relevant to the exercise of discretion in the course of the performance year.
Discretionary bonus awards for all employees, including executive officers, are subject to a guideline that determines the portion paid in cash and the portion paid in BlackRock, Inc. stock and subject to additional vesting/clawback conditions. Stock awards are subject to further performance adjustment through variation in BlackRock, Inc.’s share price over the vesting period. As total annual compensation increases, a greater portion is deferred into stock. The MDCC adopted this approach in 2006 to substantially increase the retention value and shareholder alignment of the compensation package for eligible employees, including the executive 1 As Adjusted Operating Margin: As reported in BlackRock’s external filings, reflects adjusted Operating Income divided by Total Revenue net of distribution and servicing expenses and amortisation of deferred sales commissions. officers. The portion deferred into stock vests into three equal instalments over the three years following grant. 2 Organic Revenue Growth: Equal to net new base fees plus net new Aladdin revenue generated in the year (in dollars).
17 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 18 Report on Remuneration continued Portfolio Statement at 28 February 2019
Quantitative Remuneration Disclosure Holding or Market % of The Manager is required under UCITS to make quantitative disclosures of remuneration. These disclosures Nominal Value Total Net are made in line with BlackRock’s interpretation of currently available regulatory guidance on quantitative Value Investment £000’s Assets remuneration disclosures. As market or regulatory practice develops BlackRock may consider it appropriate EQUITIES – 95.21%; 28.2.2018 99.36% to make changes to the way in which quantitative remuneration disclosures are calculated. Where such changes are made, this may result in disclosures in relation to a fund not being comparable to the disclosures UNITED KINGDOM – 95.21%; 28.2.2018 98.89% made in the prior year, or in relation to other BlackRock fund disclosures in that same year. Aerospace & Defence – 1.36%; 28.2.2018 0.00% 2,750,093 QinetiQ 8,360 1.36 Disclosures are provided in relation to (a) the staff of the Manager; (b) staff who are senior management; Banks – 6.38%; 28.2.2018 5.21% and (c) staff who have the ability to materially affect the risk profile of the Fund, including individuals who, 2,100,000 HSBC 12,894 2.10 although not directly employed by the Manager, are assigned by their employer to carry out services directly 15,000,000 Lloyds Banking 9,450 1.54 for the Manager. 2,800,000 Standard Chartered 16,808 2.74 39,152 6.38 All individuals included in the aggregated figures disclosed are rewarded in line with BlackRock’s remuneration policy for their responsibilities across the relevant BlackRock business area. As all individuals Beverages – 1.24%; 28.2.2018 1.64% have a number of areas of responsibilities, only the portion of remuneration for those individuals’ services 290,000 Fever-Tree DrinksØ 7,624 1.24 attributable to the Fund is included in the aggregate figures disclosed. Chemicals – 0.00%; 28.2.2018 0.77% Construction & Materials – 2.87%; 28.2.2018 1.12% Members of staff and senior management of the Manager typically provide both UCITS and non-UCITS related 2,400,000 Balfour Beatty 6,888 1.12 services in respect of multiple funds, clients and functions of the Manager and across the broader BlackRock 210,000 Ferguson 10,744 1.75 group. Therefore, the figures disclosed are a sum of each individual’s portion of remuneration attributable to the Manager according to an objective apportionment methodology which acknowledges the multiple-service 17,632 2.87 nature of the Manager. Accordingly the figures are not representative of any individual’s actual remuneration Electronic & Electrical Equipment – 0.58%; 28.2.2018 0.00% or their remuneration structure. 360,000 Oxford Instruments 3,589 0.58 Financial Services – 7.85%; 28.2.2018 6.66% The amount of the total remuneration awarded by the Manager to its staff which has been attributed to the 787,500 3i 7,392 1.20 Manager’s UCITS-related business in respect of the Manager’s financial year ending 31 December 2018 is 1,289,736 AJ Bell 3,767 0.61 GBP 20.5 million. This figure is comprised of fixed remuneration of GBP 1.5 million and variable remuneration 1,720,223 Ashmore 7,228 1.18 of GBP 19.0 million. There were a total of 59 beneficiaries of the remuneration described above. 840,000 Draper Esprit 4,410 0.72 1,890,750 IntegraFin 6,647 1.08 The amount of the aggregate remuneration awarded by the Manager, which has been attributed to the 565,743 Liontrust 3,394 0.55 Manager’s UCITS-related business in respect of the Manager’s financial year ending 31 December 2018, to 280,000 London Stock Exchange 12,687 2.07 its senior management was GBP 0.6 million, and to other members of its staff whose actions have a material 2,000,000 XPS Pensions 2,700 0.44 impact on the risk profile of the Manager’s UCITS-related business was GBP 19.9 million. 48,225 7.85 Food Producers – 0.00%; 28.2.2018 0.74% General Industrials – 0.00%; 28.2.2018 0.74% General Retailers – 4.63%; 28.2.2018 5.01% 1,767,375 B&M European Value Retail 6,200 1.01 1,505,928 Joules 4,307 0.70 565,000 Just EatØ 4,190 0.68 209,486 Next 10,583 1.72 154,636 WH Smith 3,204 0.52 28,484 4.63
19 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 20 Portfolio Statement continued
Holding or Market % of Holding or Market % of Nominal Value Total Net Nominal Value Total Net Value Investment £000’s Assets Value Investment £000’s Assets
Healthcare Equipment & Services – 0.80%; 28.2.2018 0.57% Personal Goods – 0.00%; 28.2.2018 1.42% 1,628,328 Advanced Medical Solutions 4,885 0.80 Pharmaceuticals & Biotechnology – 2.98%; 28.2.2018 5.83% Household Goods & Home Construction – 2.82%; 28.2.2018 4.15% 504,200 Abcam 6,378 1.04 251,809 Bellway 7,557 1.23 490,718 Dechra Pharmaceuticals 11,885 1.94 1,408,219 Countryside Properties 4,523 0.74 18,263 2.98 90,000 Reckitt BenckiserØ 5,202 0.85 Real Estate Investment Trusts – 4.50%; 28.2.2018 3.20% 17,282 2.82 520,993 Big Yellow 5,009 0.82 Industrial Engineering – 5.47%; 28.2.2018 6.75% 436,607 Great Portland EstatesØ 3,288 0.54 927,680 Bodycote 7,037 1.15 12,352,171 Sirius Real Estate 7,411 1.21 3,047,820 Melrose Industries 5,283 0.86 1,226,738 Workspace 11,844 1.93 272,000 Spirax-Sarco Engineering 18,006 2.93 27,552 4.50 199,812 Weir 3,226 0.53 Software & Computer Services – 1.28%; 28.2.2018 3.60% 33,552 5.47 1,630,000 GB 7,848 1.28 Life Insurance – 3.15%; 28.2.2018 3.14% Support Services – 9.09%; 28.2.2018 9.29% 1,225,000 Prudential 19,343 3.15 530,000 Ashtead 10,468 1.71 Media – 14.57%; 28.2.2018 11.98% 1,023,904 HomeServe 9,768 1.59 501,665 4imprint 10,033 1.63 4,142,371 Learning TechnologiesØ 2,809 0.46 3,891,839 Ascential 14,283 2.33 2,585,641 Premier Technical Services 3,155 0.51 1,900,000 Auto Trader 9,061 1.48 3,150,000 Rentokil Initial 10,915 1.78 2,137,212 Moneysupermarket.com 7,286 1.19 38,881 Restore 111 0.02 1,780,000 RELX 30,669 5.00 1,877,469 Robert Walters 10,026 1.63 1,937,777 RightmoveØ 9,319 1.52 730,000 RWS 3,387 0.55 1,872,310 YouGov 8,688 1.42 993,144 Sanne 5,125 0.84 89,339 14.57 55,764 9.09 Mining – 6.37%; 28.2.2018 6.99% Tobacco – 2.58%; 28.2.2018 3.48% 2,115,947 Central Asia Metals 5,353 0.87 575,000 British American Tobacco 15,813 2.58 780,378 Rio Tinto 33,759 5.50 Travel & Leisure – 6.49%; 28.2.2018 4.78% 39,112 6.37 661,848 Compass 11,036 1.80 Non-Life Insurance – 1.79%; 28.2.2018 2.93% 560,189 easyJet 6,969 1.13 696,197 Hiscox 10,979 1.79 774,112 Fuller Smith & Turner class ‘A’ shares 8,283 1.35 772,401 Patisserie^ – 0.00 Oil & Gas Producers – 8.41%; 28.2.2018 8.89% 920,827 SSP 6,122 1.00 1,711,064 BP 9,113 1.49 240,000 Young & Co’s Brewery (non-voting) 2,496 0.41 Ø 4,209,777 Cairn Energy 8,588 1.40 325,000 Young & Co’s Brewery class ‘A’ shares 4,891 0.80 6,708,870 Diversified Gas & Oil 7,581 1.24 39,797 6.49 1,289,671 Kosmos Energy 6,451 1.05 835,000 Royal Dutch Shell class ‘B’ shares 19,848 3.23 51,581 8.41
21 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 22 Portfolio Statement continued Statement of Total Return for the year ended 28 February 2019
Holding or Market % of For the year For the year Nominal Value Total Net to 28.2.2019 to 28.2.2018 Value Investment £000’s Assets Notes £000’s £000’s £000’s £000’s
IRELAND – 0.00%; 28.2.2018 0.47% Income Support Services – 0.00%; 28.2.2018 0.47% Net capital (losses)/gains 3 (22,244) 84,884 Revenue 4 17,925 18,338 Portfolio of investments 584,176 95.21 Expenses 5 (8,547) (9,271) CASH EQUIVALENTS Net revenue before taxation 9,378 9,067 Short-term Money Market Funds – 5.00%; 28.2.2018 1.09% Taxation 6 (24) (30) 30,687,701 Institutional Cash Series plc – Institutional Sterling Net revenue after taxation 9,354 9,037 Liquidity Fund* 30,688 5.00 Total return before distributions (12,890) 93,921 Net other liabilities (1,313) (0.21) Distributions 7 (9,160) (9,568) Total net assets 613,551 100.00 Change in net assets Unless otherwise stated, all securities are either listed on a recognised exchange or traded on an eligible securities market. attributable to unitholders * Managed by a related party. from investment activities (22,050) 84,353 ^ Suspended investments fair valued at zero. Ø All or a portion of this investment represents a security on loan, see note 2(b)(iii) for further details.
Statement of Change in Net Assets Attributable to Unitholders for the year ended 28 February 2019
For the year For the year to 28.2.2019 to 28.2.2018 £000’s £000’s £000’s £000’s Opening net assets attributable to unitholders 661,367 722,634 Amounts receivable on issue of units 152,546 37,377 Amounts payable on cancellation of units (185,941) (190,338) (33,395) (152,961) Change in net assets attributable to unitholders from investment activities (22,050) 84,353 Retained distribution on accumulation units 7,622 7,337 Unclaimed distributions over 6 years old 7 4 Closing net assets attributable to unitholders 613,551 661,367
23 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 24 Balance Sheet Notes to Financial Statements at 28 February 2019 for the year ended 28 February 2019
1. Accounting and Distribution Policies 28.2.2019 28.2.2018 Notes £000’s £000’s Accounting Policies Assets: (a) The financial statements have been prepared in accordance with the Statement of Recommended Practice for Authorised Funds (the “SORP”) issued by the Investment Management Association (now Fixed assets known as the Investment Association) in May 2014 and amended in June 2017. – Investment assets 584,176 657,187 (b) Dividends on quoted ordinary shares and preference shares are recognised when the securities are Current assets quoted ex-dividend. Where such securities are not quoted, dividends are recognised when the right to – Debtors 8 1,673 1,325 receive payment is established. – Cash and bank balances 879 1,385 All distributions from Collective Investment Schemes (“CIS”) are recognised when the securities are – Cash equivalents 9 30,688 7,187 quoted ex-dividend. All distributions from holdings in CIS are treated as revenue with the exception of the Total assets 617,416 667,084 equalisation element, which is treated as capital. Liabilities: All revenue is recognised as a gross amount that takes account of any withholding taxes but excludes any Creditors other taxes such as attributable tax credits. – Distributions payable (312) (152) Revenue from securities lending is accounted for net of associated costs and is recognised on an accruals basis. – Other creditors 10 (3,553) (5,565) Bank interest is recognised on an accruals basis. Total liabilities (3,865) (5,717) (c) Ordinary stock dividends are recognised wholly as revenue and are based on the market value of the Net assets attributable to unitholders 613,551 661,367 shares on the date they are quoted ex-dividend. Where an enhancement is offered, the amount by which the market value of the shares (on the date they are quoted ex-dividend) exceeds the cash dividend is taken to capital. G D Bamping (Director) (d) The underlying circumstances behind both special dividends and share buy backs are reviewed on a R A R Hayes (Director) case by case basis in determining whether the amount is revenue or capital in nature. Any tax treatment BlackRock Fund Managers Limited will follow the accounting treatment of the principal amount. 2 May 2019 (e) Underwriting commission is wholly recognised as revenue when the issue takes place, except where the Fund is required to take up some or all of the shares underwritten, in which case an appropriate proportion of the commission received is deducted from the cost of those shares. (f) All expenses, except those relating to the purchase and sale of investments are charged against revenue. All expenses are recognised on an accruals basis. (g) Provision for corporation tax is made at the current rate on the excess of taxable revenue over allowable expenses. Provision is made on all material timing differences arising from the different treatment of items for accounting and tax purposes. A deferred tax asset is recognised only to the extent that it is considered more likely than not that there will be taxable profits in the future against which the asset can be offset. (h) The investments of the Fund have been valued at market values, defined as fair value, which is usually bid value at 12 noon on the last business day of the accounting period. In the case of an investment which is not quoted, listed or dealt in on a recognised market, or in respect of which a listed, traded or dealt price or quotation is not available at the time of valuation, the fair value of such investment shall be estimated with care and in good faith by a competent professional person, body, firm or corporation including the Manager’s pricing committee and such fair value shall be determined on the basis of the probable realisation value of the investment. The Manager shall be entitled to adopt an alternative method of valuing any particular asset if it considers that the methods of valuation set out above do not provide a fair valuation of a particular asset or liability. Investments in single priced Collective Investment Schemes have been valued at market values, defined as fair value, which is usually the latest available price at the Fund’s 12 noon valuation point on the last business day of the accounting period.
25 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 26 Notes to Financial Statements continued
(i) Any transactions in foreign currencies are translated into Sterling at the rates of exchange ruling on the The principal risk exposure of the Fund is set out as follows date of any such transaction. Assets and liabilities in foreign currencies are translated into Sterling at the exchange rates ruling at 12 noon on the last business day of the accounting period. Revenue items in a) Market risk foreign currencies are translated into Sterling at the exchange rate when the revenue is received. Market risk arises mainly from uncertainty about future values of financial instruments influenced by other (j) Where appropriate, certain permitted financial instruments such as derivatives are used for efficient price, currency and interest rate movements. It represents the potential loss the Fund may suffer through portfolio management. Where such financial instruments are used to protect or enhance revenue, the holding market positions in the face of market movements. The Fund is exposed to market risk by virtue of revenue and expenses derived therefrom are included in ‘Revenue’ in the Statement of Total Return. its investments in equities. Where such financial instruments are used to protect or enhance capital, the gains and losses derived A key metric the RQA Group uses to measure market risk is Value-at-Risk (“VaR”) which encompasses therefrom are included in ‘Net capital (losses)/gains’ in the Statement of Total Return. price, currency and interest rate risk. VaR is a statistical risk measure that estimates the potential (k) Cash and bank balances consist of deposits held on call with banks and cash held with clearing brokers portfolio loss from adverse market moves in an ordinary market environment. VaR analysis reflects the and counterparties. Cash equivalents are short-term highly liquid investments that are readily convertible interdependencies between risk variables, unlike a traditional sensitivity analysis. to known amounts of cash and which are subject to an insignificant risk of changes in value. The VaR calculations are based on an adjusted historical simulation model with a confidence level of 99%, Distribution Policies a holding period of one day and a historical observation period of not less than one year (250 days). A (l) The ordinary element of stock dividends is treated as revenue and forms part of the distribution. VaR number is defined at a specified probability and a specified time horizon. A 99% one day VaR means that the expectation is that 99% of the time over a one day period the Fund will lose less than this number (m) Special dividends and share buy backs recognised as revenue form part of the distribution. in percentage terms. Therefore, higher VaR numbers indicate higher risk. (n) All of the net revenue available for distribution at the final accounting period end will be distributed to unitholders with the balance attributable to accumulation unitholders retained within the Fund. In order It is noted that the use of the VaR methodology has limitations, namely that the use of historical market to conduct a controlled dividend flow to unitholders, interim distributions may be made at the Manager’s data as a basis for estimating future events does not encompass all possible scenarios, particularly those discretion, up to a maximum of the distributable revenue available for the period. Should expenses and that are of an extreme nature and that the use of a specified confidence level (e.g. 99%) does not take taxation together exceed revenue, there will be no distribution and the shortfall will be met from capital. into account losses that occur beyond this level. There is some probability that the loss could be greater than the VaR amounts. These limitations and the nature of the VaR measure mean that the Fund can 2. Financial Instruments and Risks neither guarantee that losses will not exceed the VaR amounts indicated, nor that losses in excess of the The Fund’s investment activities expose it to the various types of risk which are associated with the VaR amounts will not occur more frequently. financial instruments and markets in which it invests. The following information is not intended to be a The one day VaR as at 28 February 2019 and 28 February 2018 based on a 99% confidence level was comprehensive summary of all risks and investors should refer to the Prospectus for a more detailed 2.22% and 2.02% respectively. discussion of the risks inherent in investing in the Fund. i) Market risk arising from foreign currency risk Risk management framework Exposure to foreign currency risk The Manager has delegated the day-to-day administration of the investment programme to the Investment Manager. The Investment Manager is also responsible for ensuring that the Fund is managed within the Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will terms of its investment guidelines and limits set out in the Prospectus. The Manager reserves to itself the fluctuate because of changes in foreign exchange rates. investment performance, product risk monitoring and oversight and the responsibility for the monitoring Management of foreign currency risk and oversight of regulatory and operational risk for the Fund. The net assets of the Fund are denominated mainly in Sterling, therefore the Balance Sheet and Statement The Manager has appointed a risk manager who has responsibility for the daily risk management process of Total Return are unlikely to be directly affected by currency movements. with assistance from key risk management personnel of the Investment Manager, including members of the BlackRock Risk and Quantitative Analysis Group (“RQA Group”) which is a centralised group which ii) Market risk arising from other price risk performs an independent risk management function. The RQA Group independently identifies, measures Exposure to other price risk and monitors investment risk. The RQA Group tracks the actual risk management practices being Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate deployed across the different funds. By breaking down the components of the process, the RQA Group because of changes in market prices (other than those arising from interest rate risk or currency risk), has the ability to determine if the appropriate risk management processes are in place for the Fund. This whether those changes are caused by factors specific to the individual financial instrument or its issuer, or captures the risk management tools employed, how the levels of risk are controlled, ensuring risk/return is factors affecting similar financial instruments traded in the market. considered in portfolio construction and reviewing outcomes. The Fund is exposed to other price risk arising from its investments. The exposure of the Fund to other price risk is the market value of the investments held as shown in the portfolio statement of the Fund.
27 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 28 Notes to Financial Statements continued
Management of other price risk i) Trustee and Custodian The Investment Manager manages the Fund’s other price risk on a daily basis in accordance with the The Fund’s Trustee and Custodian is The Bank of New York Mellon (International) Limited (the “Trustee” Fund’s investment objective. and “Custodian”).
By diversifying the portfolio, where this is appropriate and consistent with the Fund’s objectives, the risk All of the investments of the Fund are held by the Custodian at year end. Investments are segregated that a price change of a particular investment will have a material impact on the Net Asset Value (“NAV”) from the assets of the Custodian, with ownership rights remaining with the Fund. Bankruptcy or insolvency of the Fund is minimised. The investment concentrations within the portfolio are disclosed in the portfolio of the Custodian may cause the Fund’s rights with respect to its investments held by the Custodian to be statement by investment type. delayed or limited. The maximum exposure to this risk is the total amount of equity and bond investments disclosed in the portfolio statement. iii) Market risk arising from interest rate risk The Fund will be exposed to the credit risk of the Custodian, or any depositary used by the Trustee Exposure to interest rate risk regarding cash balances held in accounts with same. In the event of insolvency or bankruptcy of the Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate Custodian or any depositary used by the Trustee, the Fund will be treated as a general creditor of the because of changes in market interest rates. Trustee. The Fund is exposed to interest rate risk on its cash and bank balances held at The Bank of New York Management of counterparty credit risk related to the Trustee and Custodian Mellon (International) Limited and its cash equivalent holdings. Cash held on deposit at The Bank of To mitigate the Fund’s credit risk with respect to the Trustee, the Investment Manager of the Fund employs New York Mellon (International) Limited receives/incurs interest at the prevailing daily rate which may be specific procedures to ensure that the Trustee employed is a reputable institution and that the associated negative depending on the currency in which the cash is held. credit risk is acceptable to the Fund. The Fund only transacts with counterparties that are regulated At 28 February 2019 and 28 February 2018, no interest bearing investments were held by the Fund, hence entities subject to prudential supervision, or with high credit-ratings assigned by international credit-rating no interest rate risk exposure table has been presented. agencies.
Management of interest rate risk The long term credit rating of the parent company of the Trustee and Custodian, The Bank of New York Interest rate risk exposure is managed by constantly monitoring the position for deviations outside a Mellon Corporation, as at 28 February 2019 was A (28 February 2018: A) (Standard & Poor’s rating). pre-determined tolerance level and, when necessary, rebalancing back to the original desired parameters. ii) Counterparties b) Counterparty credit risk All transactions in listed securities are settled/paid for upon delivery using approved brokers. The risk of Exposure to counterparty credit risk default is considered minimal, as delivery of securities sold is only made once the broker has received Counterparty credit risk is the risk that one party to a financial instrument will cause a financial loss for the payment. Payment is made on a purchase once the securities have been received by the broker. The other party by failing to discharge an obligation. trade will fail if either party fails to meet its obligation.
The Fund is exposed to counterparty credit risk from the parties with which it trades and will bear the risk Counterparty credit risk arising on transactions with brokers relates to transactions awaiting settlement. of settlement default. Risk relating to unsettled transactions is considered small due to the short settlement period involved and the high credit quality of the brokers used. Management of counterparty credit risk Counterparty credit risk is monitored and managed by BlackRock’s RQA Counterparty & Concentration Management of counterparty credit risk related to Counterparties Risk Team. The team is headed by BlackRock’s Chief Counterparty Credit Officer who reports directly to The Manager monitors the credit rating and financial position of the brokers used to further mitigate the Global Head of RQA. Credit authority resides with the Chief Counterparty Credit Officer and selected this risk. team members to whom specific credit authority has been delegated. As such, counterparty approvals may be granted by the Chief Counterparty Credit Officer or by identified RQA Credit Risk Officers who have been formally delegated authority by the Chief Counterparty Credit Officer as deemed appropriate.
BlackRock’s RQA Counterparty & Concentration Risk Team completes a formal review of each new counterparty, monitors and reviews all approved counterparties on an ongoing basis and maintains an active oversight of counterparty exposures.
The Manager maintains a list of approved counterparties. This list is regularly monitored and revised for changes based on the counterparty’s creditworthiness, market reputation and expectations of future financial performance. Transactions will only be opened with financial intermediaries on the approved counterparties list.
29 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 30 Notes to Financial Statements continued iii) Securities lending c) Liquidity risk The Fund engages in security lending activities which expose the Fund to counterparty credit risk. The Exposure to liquidity risk maximum exposure to the Fund is equal to the value of the securities loaned. Liquidity risk is the risk that the Fund will encounter difficulties in meeting its obligations associated with financial liabilities. Securities lending transactions entered into by the Fund are subject to a written legal agreement between the Fund and the Securities Lending Agent, BlackRock Advisors (UK) Limited, a related party to the Liquidity risk to the Fund arises from the redemption requests of unitholders and the liquidity of the Fund, and separately between the Securities Lending Agent and the approved borrowing counterparty. underlying investments the Fund is invested in. The Fund’s unitholders may redeem their units on the Collateral received in exchange for securities lent is transferred under a title transfer arrangement and is close of any daily dealing deadline for cash equal to a proportionate share of the Fund’s NAV. The Fund is delivered to and held in an account with a tri-party collateral manager in the name of The Bank of New therefore potentially exposed to the liquidity risk of meeting the unitholders’ redemptions and may need to York Mellon (International) Limited on behalf of the Fund. Collateral received is segregated from the sell assets at prevailing market prices to meet liquidity demands. assets belonging to the Fund’s Trustee or the Lending Agent. The Fund invests primarily in companies incorporated or listed in the United Kingdom, which is typically The following table details the value of securities on loan (individually identified in the portfolio statement) considered to be a territory operating with high levels of liquidity. From time to time, however, market and associated collateral received, analysed by borrowing counterparty as at the Balance Sheet date. liquidity may be affected by economic events.
28 February 2019 28 February 2018 All financial liabilities including distributions payable held by the Fund as at 28 February 2019 and 28 February 2018, based on contractual maturities, fall due within one to three months. Counterparty’s Securities Collateral Securities Collateral country of on loan received on loan received Management of liquidity risk Counterparty establishment £000’s £000’s £000’s £000’s Liquidity risk is minimised by holding sufficient liquid investments which can be readily realised Credit Suisse Securities (Europe) UK 3,811 4,037 933 981 to meet liquidity demands. Limited Deutsche Bank AG Germany 1,264 1,425 909 988 At times of excessive redemptions the Manager may decide to defer redemptions at any valuation point Goldman Sachs International UK 335 439 – – to the next valuation point where the requested aggregate redemptions exceed 10 per cent of the Fund’s NAV. This will therefore allow the Manager to protect the interests of continuing unitholders by allowing Merrill Lynch International UK 3,891 4,189 10,997 11,742 the Manager to match the sale of scheme property to the level of redemptions. This should reduce the Morgan Stanley & Co. International Plc UK 7,126 7,833 – – impact of dilution on the Fund. All unitholders who have sought to redeem units at any valuation point at Société Générale SA France 2,135 2,434 2,084 2,233 which redemptions are deferred will be treated consistently and any redemption requests received in the The Bank of Nova Scotia Canada 6,035 6,661 5,162 5,773 meantime will not be processed until the redemption requests that have been deferred to the subsequent UBS AG Switzerland – – 7,776 8,654 valuation points have been processed. Total 24,597 27,018 27,861 30,371 The Fund’s liquidity risk is managed on a daily basis by the Investment Manager in accordance with established policies and procedures in place. The portfolio managers review daily forward looking cash At 28 February 2019, collateral received from these borrowing counterparties comprised of 26.11% in reports which project cash obligations. These reports allow them to manage the Fund’s cash obligations. debt securities and 73.89% in equity securities (28 February 2018: 39.97% in debt securities and 60.03% d) Valuation of financial instruments in equity securities). The Fund classifies financial instruments measured at fair value using a fair value hierarchy. The fair value Collateral accepted is non-cash in the form of sovereign debt rated AA or better from approved hierarchy has the following categories: governments only, supranational debt obligations rated AAA or better, equity securities and exchange traded funds listed on a recognised exchange. Level 1 – Unadjusted quoted prices for identical instruments in active markets A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly Management of counterparty credit risk related to securities lending available and those prices represent actual and regularly occurring market transactions on an arm’s To mitigate this risk, the Fund receives either cash or securities as collateral equal to a certain percentage length basis. The Fund does not adjust the quoted price for these instruments. in excess of the fair value of the securities loaned. The Investment Manager monitors the fair value of the securities loaned and additional collateral is obtained, if necessary. As at 28 February 2019 Level 2 – Valuation techniques using observable inputs other than quoted prices in level 1 and 28 February 2018, all non-cash collateral received consists of securities admitted to or dealt on a This category includes instruments valued using quoted prices in active markets for similar instruments; recognised exchange. quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. The Fund also benefits from a borrower default indemnity provided by BlackRock Inc. The indemnity allows for full replacement of securities lent. BlackRock Inc. bears the cost of indemnification against borrower default.
31 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 32 Notes to Financial Statements continued
Valuation techniques used for non-standardised financial instruments such as OTC derivatives, include the e) Global exposure use of comparable recent arm’s length transactions, reference to other instruments that are substantially The Manager is required by the COLL Sourcebook to employ a risk management process in respect of the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly the Fund which enables it to accurately monitor and manage the global exposure from Financial Derivative used by market participants making the maximum use of market inputs and relying as little as possible on Instruments (“FDIs”). entity determined inputs. The Manager uses a methodology known as the Commitment Approach in order to measure the global Level 3 – Valuation techniques using significant unobservable inputs exposure of the Fund. The Commitment Approach is a methodology that aggregates the underlying This category includes all instruments where the valuation techniques used include inputs not based on market or notional values to determine the degree of global exposure of the Fund to FDIs. market data and these inputs could have a significant impact on the instrument’s valuation. In accordance with the COLL Sourcebook, global exposure for a fund utilising the Commitment Approach This category also includes instruments that are valued based on quoted prices for similar instruments must not exceed 100% of the Fund’s NAV. The calculation of global exposure represents only one element where significant entity determined adjustments or assumptions are required to reflect differences of the Fund’s risk management process and in that respect the Manager will continue to report VaR as a between the instruments and instruments for which there is no active market. market risk measure to the Board of Directors.
The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety The Fund did not hold any FDIs at 28 February 2019 and 28 February 2018. is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in 3. Net Capital (Losses)/Gains its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a level 3 measurement. For the year For the year to 28.2.2019 to 28.2.2018 Assessing the significance of a particular input to the fair value measurement in its entirety requires £000’s £000’s judgement, considering factors specific to the asset or liability. The determination of what constitutes The net capital (losses)/gains comprise: ‘observable’ inputs requires significant judgement by the Investment Manager. The Investment Manager considers observable inputs to be that market data that is readily available, regularly distributed or (Losses)/gains on non-derivative securities (22,225) 84,891 updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively Currency (losses)/gains (13) 3 involved in the relevant market. Custodian transaction costs (6) (10) The table below is an analysis of the Fund’s investment assets and investment liabilities measured at fair Net capital (losses)/gains (22,244) 84,884 value at the Balance Sheet date. 4. Revenue Level 1 Level 2 Level 3 Total £000’s £000’s £000’s £000’s For the year For the year to 28.2.2019 to 28.2.2018 28 February 2019 £000’s £000’s Investment assets 584,176 – –* 584,176 Interest from UK bank deposits 4 – Investment liabilities – – – – Overseas dividends 995 795 Revenue from short-term money market funds 124 11 28 February 2018 Securities lending revenue 32 40 Investment assets 657,187 – – 657,187 Stock dividends 297 188 Investment liabilities – – – – UK dividends 16,058 16,694 * Includes suspended investments fair valued at zero. These securities are identified on the portfolio statement. UK REIT dividends 382 575 Underwriting commission 33 35 Total revenue 17,925 18,338
33 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 34 Notes to Financial Statements continued
5. Expenses 7. Distributions
For the year For the year For the year For the year to 28.2.2019 to 28.2.2018 to 28.2.2019 to 28.2.2018 £000’s £000’s £000’s £000’s Payable to the Manager or associates of the Manager: Interim distribution 7,229 8,242 – Manager’s charge 7,454 8,090 Final distribution 1,895 709 – Registrar’s fees 985 1,065 9,124 8,951 8,439 9,155 Add: Amounts deducted on cancellation of units 752 706 Other expenses: Less: Amounts received on issue of units (716) (89) – Audit fee 7 7 Distributions 9,160 9,568 – Safe custody fees 16 18 – Trustee’s fees 85 91 The distributable amount has been calculated as follows: 108 116 Net revenue after taxation 9,354 9,037 Total expenses 8,547 9,271 Add: Deficit of unit classes taken to capital – 524 (Less)/add: Equalisation on conversions (194) 7 6. Taxation Distributions 9,160 9,568 (a) Analysis of tax charge Details of the interim and final distributions per unit are set out in the tables on page 13. For the year For the year to 28.2.2019 to 28.2.2018 8. Debtors £000’s £000’s Overseas tax 24 30 28.2.2019 28.2.2018 £000’s £000’s Total tax charge [see note 6(b)] 24 30 Accrued revenue 1,186 1,088 Amounts receivable for issue of units 470 221 (b) Factors affecting the tax charge The tax assessed for the year is lower than the standard rate of corporation tax in the UK for an authorised Overseas tax recoverable – 16 unit trust. The differences are explained below: Sales awaiting settlement 17 – Total debtors 1,673 1,325 For the year For the year to 28.2.2019 to 28.2.2018 £000’s £000’s 9. Cash Equivalents
Net revenue before taxation 9,378 9,067 28.2.2019 28.2.2018 Corporation tax at 20% (28 February 2018: 20%) 1,876 1,813 £000’s £000’s Effects of: Investment in short-term money market funds 30,688 7,187 Excess expenses for which no tax relief taken 1,594 1,722 Total cash equivalents 30,688 7,187 Overseas tax 24 30 Revenue not subject to tax (3,470) (3,535) Total tax charge [see note 6(a)] 24 30
At 28 February 2019, the Fund had surplus management expenses of £207,411,000 (28 February 2018: £199,439,000). It is unlikely that the Fund will generate sufficient taxable profits in the future to utilise these expenses and, therefore, a deferred tax asset of £41,482,000 (28 February 2018: £39,888,000) has not been recognised.
35 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 36 Notes to Financial Statements continued
10. Other Creditors 12. Related Parties continued The Fund’s investments in other BlackRock related party entities are individually identified in the portfolio 28.2.2019 28.2.2018 statement. £000’s £000’s Accrued Audit fee 7 7 As at 28 February 2019 and 28 February 2018, none of the unitholders: Accrued FCA fee 1 1 (i) are funds managed by the BlackRock Group or are affiliates of BlackRock Inc. or Accrued Manager’s charge 1,655 1,283 (ii) are investors, other than those included in (i) above, who held 51% or more of the voting units in issue Accrued Registrar’s fee 217 337 in the Fund and are as a result, considered to be related parties to the Fund. Accrued Safe custody fees 5 6 Accrued Trustee’s fee 19 14 13. Portfolio Transaction Costs Amounts payable for cancellation of units 1,648 1,098 For the year ended 28 February 2019
Custodian transaction costs – 3 Direct Transaction Costs Purchases awaiting settlement 1 2,816 Transaction Value Commissions Taxes Total other creditors 3,553 5,565 Purchases (excluding derivatives) £000’s £000’s % £000’s % Equity instruments 192,559 102 0.05 635 0.33 11. Contingent Assets and Liabilities Total purchases 192,559 102 635 There were no contingent assets or liabilities at the Balance Sheet date (28 February 2018: Nil). Total purchases including transaction costs 193,296 12. Related Parties Parties are considered to be related if one party has the ability to control the other party or exercise Direct Transaction Costs significant influence over the other party in making financial or operational decisions. Transaction Value Commissions Taxes The following entities were related parties of the Fund during the year ended 28 February 2019: Sales (excluding derivatives) £000’s £000’s % £000’s % Equity instruments 244,514 144 0.06 1 0.00 Manager/Registrar: BlackRock Fund Managers Limited Investment Manager: BlackRock Investment Management (UK) Limited Total sales 244,514 144 1 Securities lending agent: BlackRock Advisors (UK) Limited Total sales net of transaction costs 244,369 The ultimate holding company of the Manager, Registrar, Investment Manager and securities lending
agent is BlackRock Inc. (“BlackRock”), a company incorporated in Delaware, USA. PNC Financial Total transaction costs 246 636 Services Group Inc. PNC Financial Services Group Inc. (“PNC”) is a substantial shareholder in BlackRock Inc. PNC did not provide any services to the Fund during the years ended 28 February 2019 and Total transaction costs 28 February 2018. as a % of average net assets 0.04% 0.09%
The Manager acts as either principal or agent for the Trustee in respect of all transactions of units of the Fund. The aggregate monies received through issue and paid through cancellation of units are disclosed in the Statement of Change in Net Assets Attributable to Unitholders and note 7. Any amounts due to or from the Manager at the year end are disclosed in notes 8 and 10. Management fees and registration fees paid to the Manager are shown in note 5. The balances due at the year end in respect of these fees are shown in note 10. Securities lending revenue earned by the Fund is disclosed in note 4.
For holdings in Institutional Cash Series plc (“ICS”), there will be no initial charges or redemption charges payable on investments in the Fund, however, duties and charges may apply. ICS will be subject to fees and expenses which may include fixed management fees, performance fees, administration fees and custodial fees.
37 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 38 Notes to Financial Statements continued
13. Portfolio Transaction Costs continued 14. Units in Issue For the year ended 28 February 2018 The movement in units in issue for the year ended 28 February 2019 is as follows:
Direct Transaction Costs A Income A Accumulation D Income D Accumulation Units Units Units Units Transaction Value Commissions Taxes Purchases (excluding derivatives) £000’s £000’s % £000’s % Balance at the beginning of the year 1,679,388 7,622,093 1,965,305 3,583,480
Equity instruments 148,706 96 0.06 413 0.28 Issued during the year 750,591 722,222 268,036 780,347 Total purchases 148,706 96 413 Cancelled during the year (811,671) (1,275,052) (378,701) (1,154,677)
Total purchases including Converted during the year (635,662) (19,472) 8,775 339,368 transaction costs 149,215 Balance at the end of the year 982,646 7,049,791 1,863,415 3,548,518
Direct Transaction Costs X Income X Accumulation S Income S Accumulation Transaction Value Commissions Taxes Units Units* Units Units Sales (excluding derivatives) £000’s £000’s % £000’s % Balance at the beginning of the year 6 – 12,277,175 49,745,949 Equity instruments 293,559 197 0.07 1 0.00 Issued during the year 919,992 12,410,917 559,257 15,360,279 Total sales 293,559 197 1 Cancelled during the year (468,947) (12,591,805) (1,938,354) (14,400,979) Total sales net of transaction Converted during the year (450,949) 11,820,499 124,617 206,779 costs 293,361 Balance at the end of the year 102 11,639,611 11,022,695 50,912,028
Total transaction costs 293 414 * X Accumulation class launched 17 August 2018.
Total transaction costs Revenue is allocated each day pro rata to the capital value of assets attributable to each class and as a % of average net assets 0.04% 0.06% taxation is computed by reference to the net revenue after expenses attributable to each class. The distribution per unit class is given in the distribution table. All unit classes have the same rights on The above analysis covers direct transaction costs incurred by the Fund during the year. However it is winding up. important to understand the nature of other transaction costs associated with different investment asset classes and instruments types. 15. Post Balance Sheet Events Transactions in money market instruments to manage the Fund’s daily liquidity position are excluded from There have been no significant events subsequent to the year end, which, in the opinion of the Manager, the analysis. may have had an impact on the financial statements for the year ended 28 February 2019.
Separately identifiable direct transaction costs (such as commissions and taxes) are attributable to the Fund’s purchase and sale of equity instruments. Additionally, for equity shares there is a dealing spread cost (the difference between the buying and selling prices) which will be incurred on purchase and sale transactions.
At the Balance Sheet date the average portfolio dealing spread (difference between bid and offer prices of all investments expressed as a percentage of the offer price value) was 0.40% (28 February 2018: 0.28%).
39 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 40 Statement of Manager’s Responsibilities Statement of the Trustee’s Responsibilities in Respect of the Fund and Report of the Trustee to the Unitholders of the Fund The Manager is required by the rules of the COLL Sourcebook to prepare the financial statements for for the Year Ended 28 February 2019 each financial year. These financial statements must be prepared in accordance with generally accepted accounting standards in the United Kingdom to give a true and fair view of the state of affairs of the Fund at the year end and of the net revenue and net losses for the year. The Depositary in its capacity as Trustee of the Fund must ensure that the Fund is managed in accordance with the Financial Conduct Authority’s Collective Investment Schemes Sourcebook, the Financial Services and The financial statements should comply with the disclosure requirements of the Statement of Recommended Markets Act 2000, as amended, (together “the Regulations”), the Trust Deed and Prospectus (together “the Practice (the “SORP”) for Authorised Funds issued by the Investment Management Association (subsequently Scheme documents”) as detailed below. The Investment Association) and must comply with any relevant provisions of the Trust Deed. The Trustee must in the context of its role act honestly, fairly, professionally, independently and in the interests The Manager is responsible for keeping such accounting records as are necessary to enable it to ensure that of the Fund and its investors. the financial statements comply with the COLL Sourcebook, the SORP and the Trust Deed. The Trustee is responsible for the safekeeping of all the custodial assets and maintaining a record of all other assets of the Fund in accordance with the Regulations.
The Trustee must ensure that:
• the Fund’s cash flows are properly monitored and that cash of the Fund is booked in cash accounts in accordance with the Regulations; • the sale, issue, repurchase, redemption and cancellation of units are carried out in accordance with the Regulations; • the value of units of the Fund are calculated in accordance with the Regulations; • any consideration relating to transactions in the Fund’s assets is remitted to the Fund within the usual time limits • the Fund’s income is applied in accordance with the Regulations; and • the instructions of the Authorised Fund Manager (“the AFM”), which is the UCITS Management Company, are carried out (unless they conflict with the Regulations).
The Trustee also has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Regulations and the Scheme documents of the Fund in relation to the investment and borrowing powers applicable to the Fund.
Having carried out such procedures as we considered necessary to discharge our responsibilities as Trustee of the Fund, it is our opinion, based on the information available to us and the explanations provided, that, in all material respects the Fund, acting through the AFM:
(i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Fund’s units and the application of the Fund’s income in accordance with the Regulations and the Scheme documents of the Fund; and
(ii) has observed the investment and borrowing powers and restrictions applicable to the Fund in accordance with the Regulations and the Scheme documents of the Fund.
The Bank of New York Mellon London (International) Limited 2 May 2019
41 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 42 Independent Auditor’s Report to the Unitholders of BlackRock UK Special Situations Fund Other information
The other information comprises the information included in the annual report, other than the
Opinion financial statements and our auditor’s report thereon. The manager is responsible for the other We have audited the financial statements of BlackRock UK Special Situations Fund (“the information. Fund”) for the year ended 28 February 2019 which comprise the Statement of Total Return and Statement of Change in Net Assets Attributable to Unitholders together with the Balance Sheet, Our opinion on the financial statements does not cover the other information and, except to the accounting policies of the Fund, the related notes and the Distribution Tables. The financial the extent otherwise explicitly stated in this report, we do not express any form of assurance reporting framework that has been applied in their preparation is applicable law and United conclusion thereon. Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) In connection with our audit of the financial statements, our responsibility is to read the other including FRS 102 ‘The Financial Reporting Standard applicable to the UK and Republic of information and, in doing so, consider whether the other information is materially inconsistent Ireland’. with the financial statements or our knowledge obtained in the audit or otherwise appears In our opinion, the financial statements: to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the • give a true and fair view of the financial position of the Fund as at 28 February 2019 and of financial statements or a material misstatement of the other information. If, based on the work the net revenue and the net capital losses on the scheme property of the Fund for the year we have performed, we conclude that there is a material misstatement of the other information, then ended; and we are required to report that fact. • have been properly prepared in accordance with United Kingdom Generally Accepted We have nothing to report in this regard. Accounting Practice including FRS 102 ‘The Financial Reporting standard applicable in the UK and Republic of Ireland’. Opinions on other matters prescribed by the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Authority Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs In our opinion: (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. • the financial statements have been properly prepared in accordance with the Statement of We are independent of the fund in accordance with the ethical requirements that are relevant Recommended Practice relating to Authorised Funds, the rules of the Collective Investment to our audit of the financial statements in the UK, including the FRC’s Ethical Standard, and we Schemes Sourcebook of the Financial Conduct Authority and the Trust Deed; have fulfilled our other ethical responsibilities in accordance with these requirements. • the information given in the manager’s report for the financial year for which the financial statements are prepared is consistent with the financial statements; and We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. • there is nothing to indicate that proper accounting records have not been kept or that the financial statements are not in agreement with those records. Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) Matters on which we are required to report by exception require us to report to you where: We have nothing to report in respect of the following matter in relation to which the Collective Investment Schemes Sourcebook of the Financial Conduct Authority rules requires us to report • the manager’s use of the going concern basis of accounting in the preparation of the to you if, in our opinion: financial statements is not appropriate; or • we have not received all the information and explanations which, to the best of our • the manager has not disclosed in the financial statements any identified material knowledge and belief, are necessary for the purposes of our audit. uncertainties that may cast significant doubt about the fund’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.
43 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 44 Supplementary Information
Efficient Portfolio Management Techniques The Manager may, on behalf of the Fund and subject to the conditions and within the limits laid down by the FCA, the Prospectus, as amended from time to time, and the ESMA Guidelines, employ techniques and Responsibilities of the manager instruments relating to transferable securities. These include repurchases/reverse repurchase transactions As explained more fully in the manager’s responsibilities statement set out on page 41, the (“repo transactions”) and securities lending, provided that such techniques and instruments are used for
manager is responsible for the preparation of the financial statements and for being satisfied efficient portfolio management purposes. that they give a true and fair view, and for such internal control as the manager determines is necessary to enable the preparation of financial statements that are free from material Securities Lending misstatement, whether due to fraud or error. The total value of securities on loan as a proportion of the Fund’s NAV and total lendable assets, as at the balance sheet date, is 4.01% and 4.42% respectively. In preparing the financial statements, the manager is responsible for assessing the fund’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and Total lendable assets represents the aggregate value of assets forming part of the Fund’s securities lending using the going concern basis of accounting unless the manager either intends to liquidate the programme. This excludes any assets held by the Fund that are not considered lendable due to any market, fund or to cease operations, or has no realistic alternative but to do so. regulatory, investment or other restriction. Auditor’s responsibilities for the audit of the financial statements The total income earned from securities lending transactions is split between the relevant Fund and the Our objectives are to obtain reasonable assurance about whether the financial statements as Securities Lending Agent. The Fund receives 62.5% while the Securities Lending Agent receives 37.5% of a whole are free from material misstatement, whether due to fraud or error, and to issue an such income, with all operational costs borne out of the Securities Lending Agent’s share. Income earned auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, during the year by the Fund from securities lending transactions is disclosed in the notes to the financial but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect statements. a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to The value of securities on loan and associated collateral analysed by counterparty, as at 28 February 2019, influence the economic decisions of users taken on the basis of these financial statements. is disclosed in the notes to the financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This All securities on loan have an open maturity tenor as they are recallable or terminable on a daily basis. description forms part of our auditor’s report.
Use of our report This report is made solely to the unitholders of the fund, as a body, pursuant to Paragraph 4.5.12 of the rules of the Collective Investment Schemes Sourcebook of the Financial Conduct Authority. Our audit work has been undertaken so that we might state to the unitholders of the fund those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the fund and the unitholders of the fund as a body, for our audit work, for this report, or for the opinions we have formed.
Ernst & Young LLP Edinburgh Statutory Auditor 2 May 2019
45 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 46 Supplementary Information continued
Collateral Collateral continued The Fund engages in activities which may require collateral to be provided to a counterparty (“collateral The following table provides an analysis of the type, quality and maturity tenor of non-cash collateral received posted”) or may hold collateral received (“collateral received”) from a counterparty. by the Fund by way of title transfer collateral arrangement in respect of securities lending transactions, as at 28 February 2019. The following table provides an analysis by currency of the cash and underlying non-cash collateral received by way of title transfer collateral arrangement by the Fund, in respect of securities lending transactions, as at Maturity Tenor 28 February 2019. 0 – 30 31 – 90 91 – 365 More than Open Collateral type and quality days days days 365 days transactions Total Non-cash £000’s £000’s £000’s £000’s £000’s £000’s collateral Currency received Collateral received – securities lending £000’s Securities lending transactions Fixed Income CAD 1,655 Investment grade 745 143 30 6,136 – 7,054 CHF 404 Equities CNY 664 Recognised equity index – – – – 19,448 19,448 DKK 1 ETFs EUR 7,388 Non-UCITS – – – – 516 516 GBP 4,452 Total 745 143 30 6,136 19,964 27,018 HKD 128 Investment grade securities are those issued by an entity with a minimum investment grade credit rating from JPY 3,583 at least one globally recognised credit rating agency; Standard & Poor’s, Moody’s or Fitch. NOK 104 SEK 21 A recognised equity index contains at least 20 equities where no single equity represents more than 20% of SGD 1 the total index and no five equities combined represent more than 60% of the total index. USD 8,617 The maturity tenor analysis for fixed income securities received as collateral is based on the respective Total 27,018 contractual maturity date, while for equity securities and ETFs received as collateral are presented as open transactions as they are not subject to a contractual maturity date. The Fund is the legal owner of inbound collateral and can sell the assets and withhold the cash in the case of default.
Non-cash collateral received by way of title transfer collateral arrangement in relation to securities lending transactions cannot be sold, re-invested or pledged.
47 BlackRock UK Special Situations Fund BlackRock UK Special Situations Fund 48 Supplementary Information continued About us Collateral continued As at 28 February 2019, all non-cash collateral received by the Fund in respect of securities lending BlackRock is a premier provider of asset management, risk management, and advisory services to institutional, transactions is held by the Fund’s Trustee (or through its delegates). intermediary, and individual clients worldwide. As of 31 March 2019, the fi rm manages £4.99 trillion across asset classes in separate accounts, mutual funds, other pooled investment vehicles, and the industry-leading The following table lists all the issuers of non-cash collateral received by the Fund by way of title transfer iShares® exchange-traded funds. collateral arrangement across securities lending transactions as at 28 February 2019. Through BlackRock Solutions®, the fi rm offers risk management and advisory services that combine capital markets expertise with proprietarily-developed analytics, systems, and technology. Through BlackRock Issuer Value % of the Fund’s NAV Solutions, the Firm provides risk management and enterprise investment services for over 200 clients. £000’s Morgan Stanley & Co. International Plc 7,833 1.27 BlackRock serves clients in North and South America, Europe, Asia, Australia, Africa, and the Middle East. The Bank of Nova Scotia 6,661 1.09 Headquartered in New York, the fi rm maintains offi ces in over 30 countries around the world. Merrill Lynch International 4,189 0.68 Credit Suisse Securities (Europe) Limited 4,037 0.66 Société Générale SA 2,434 0.40 Deutsche Bank AG 1,425 0.23 Goldman Sachs International 439 0.07 Total 27,018 4.40
No securities collateral received from a single issuer, in relation to efficient portfolio management, has exceeded 20% of the Fund’s NAV at the year end date.
The Fund has not been fully collateralised in securities issued or guaranteed by an EU member state at the year end date.
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49 BlackRock UK Special Situations Fund