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Invesco Perpetual Select Trust plc ANNUAL FINANCIAL REPORT YEAR ENDED 31 MAY 2018 IP Select_coverA4.qxp 31/07/2018 18:23 Page IFC1
The Company in Brief Nature of the Company Invesco Perpetual Select Trust plc (the ‘Company’) is a public listed Investment Company whose shares are traded on the London Stock Exchange. The business of the Company is to invest shareholders’ funds with the aim of spreading investment risk and generating returns for shareholders. The Company has an indefinite life and is intended as a long-term investment vehicle. The Company provides shareholders with a choice of investment policies and objectives, each intended to generate attractive risk-adjusted returns from segregated portfolios. The Company’s share capital comprises the following four share classes, each of which has its own separate Portfolio of assets and liabilities: • UK Equity www.invescoperpetual.co.uk/selectuk • Global Equity Income www.invescoperpetual.co.uk/selectglobal • Balanced Risk Allocation www.invescoperpetual.co.uk/selectbr • Managed Liquidity www.invescoperpetual.co.uk/selectml Investment Policy The Company’s Investment Policy, which includes objectives, policies, risks and investment limits for the Company and the separate Portfolios, is disclosed in full on pages 30 to 33. Borrowings and Gearing The two equity portfolios may use bank borrowings, the proceeds from which can be invested, gearing up exposure to the stock market with the aim of enhancing returns to shareholders. The Balanced Risk Allocation portfolio is geared by means of the financial derivative instruments used to implement its investment policy. Business Model The Company has contracted with an external investment manager, Invesco Fund Managers Limited (the ‘Manager’), to manage its investments and for the Company’s general administration. Other administrative functions are contracted to external service providers. The Company has a Board of non-executive directors who oversee and monitor the activities of the Manager and other service providers on behalf of shareholders and ensure that the investment policy is adhered to. The Company has no employees. Share Class Conversion The Company enables shareholders to alter their asset allocation to reflect their views of prevailing markets through the opportunity to convert between share classes every three months, on or around 1 February, 1 May, 1 August and 1 November. Notice from a shareholder to convert any class of Share on any conversion date will be accepted up to ten days prior to the relevant conversion date. Forms for conversion are available on the web pages of all the share classes on the Manager’s website (see above) and from the Company Secretary. Conversion from one class of Shares into another will be on the basis of a ratio derived from the prevailing underlying net asset value of each class of relevant Share, calculated shortly before the date of conversion. The Directors have been advised that conversion of one class of Share into another will not be treated as a disposal for the purposes of UK Capital Gains Tax. The Company’s four share classes are each eligible for investment in an ISA and qualify to be considered as mainstream investment products suitable for promotion to retail investors.
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Contents
02 Financial Performance 03 Chairman’s Statement 06 UK Equity Share Portfolio: 06 Performance Record 07 Manager’s Report 11 List of Investments
UK EQUITY 12 Income Statement 12 Summary of Net Assets 13 Global Equity Income Share Portfolio: 13 Performance Record 14 Manager’s Report 18 List of Investments INCOME 19 Income Statement
GLOBAL EQUITY 19 Summary of Net Assets 20 Balanced Risk Allocation Share Portfolio: 20 Performance Record STRATEGY 21 Manager’s Report 24 List of Derivative Instruments 25 List of Investments
ALLOCATION 26 Income Statement BALANCED RISK 26 Summary of Net Assets 27 Managed Liquidity Share Portfolio: 27 Performance Record 28 Manager’s Report 29 List of Investments LIQUIDITY
MANAGED 29 Income Statement 29 Summary of Net Assets 30 Business Review
41 Directors 43 The Company’s Governance Framework 44 Corporate Governance Statement 45 Audit Committee Report 48 Directors’ Report
GOVERNANCE 57 Directors’ Remuneration Report
60 Statement of Directors’ Responsibilities 61 Independent Auditor’s Report 67 Income Statement 68 Statement of Changes in Equity 69 Balance Sheet
FINANCIAL 71 Cash Flow Statement 72 Notes to the Financial Statements
97 Notice of Annual General Meeting 102 Advisers and Principal Service Providers 103 Shareholder Information FOR 104 Glossary of Terms and Alternative Performance Measures 106 Alternative Investment Fund Managers Directive Disclosures INFORMATION INFORMATION SHAREHOLDERS
If you have any queries about Invesco Perpetual Select Trust plc or any of the other specialist funds managed by Invesco, please contact the Invesco Client Services team on: ☎ 0800 085 8677 www.invescoperpetual.co.uk/investmenttrusts
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FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS(1) TO 31 MAY 2018 UK Equity Portfolio ONE THREE FIVE YEAR YEARS YEARS Net Asset Value 1.1% 21.6% 66.1% Share Price 0.3% 20.1% 53.7% FTSE All-Share Index 6.5% 24.3% 45.4%
Global Equity Income Portfolio ONE THREE FIVE YEAR YEARS YEARS Net Asset Value 7.8% 38.9% 72.3% Share Price 5.7% 34.6% 69.3% MSCI World Index (£) 8.2% 43.1% 78.6%
Balanced Risk Allocation Portfolio ONE THREE FIVE YEAR YEARS YEARS Net Asset Value 6.4% 16.4% 27.7% Share Price 4.5% 14.6% 25.7% Merrill Lynch 3 month LIBOR +5% pa 5.4% 16.5% 27.6%
Managed Liquidity Portfolio ONE THREE FIVE YEAR YEARS YEARS Net Asset Value 0.3% 0.3% 0.4% Share Price 0.5% 0.1% 1.0%
(1) Defined in the Glossary of Terms and Alternative Performance Measures on page 105 Source: Thomson Reuters.
YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT NET ASSET SHARE VALUE PRICE SHARE CLASS (PENCE) (PENCE) DISCOUNT UK Equity 189.0 186.0 1.6% Global Equity Income 207.2 202.0 2.5% Balanced Risk Allocation 143.4 139.5 2.7% Managed Liquidity 103.5 102.0 1.4%
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CHAIRMAN’S STATEMENT
The Company The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns. The Company’s share capital comprises four share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives and policies of all of the Portfolios are set out on pages 30 to 33. The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. As set out on the inside of the front cover, shareholders have the opportunity to convert between share classes, free of capital gains tax, every three months. Performance The NAV total return of the UK Equity Portfolio over the year was +1.1%, which compares with the total return of +6.5% posted by the FTSE All-Share Index. The NAV total return of the Global Equity Income Portfolio over the year was +7.8%, compared with the MSCI World Index (£), net of withholding tax, return of +8.2%. The Balanced Risk Allocation Portfolio returned +6.4% compared with the total return of +5.4% for its benchmark of 3 months LIBOR plus 5% per annum. The Managed Liquidity Portfolio performance continued to be affected by the ongoing low interest environment, with an NAV total return of +0.3%. The performance of the UK Equity Portfolio was disappointing. The Board believes it is highly probable that the Manager’s policy of investing in well-financed, cash generative companies on reasonable valuations will be successful. However, there have been setbacks in its delivery, notably from a few stock-specific problems. Aversion to the mining industry during a cyclical upswing and the entirely reasonable unwillingness to chase highly valued technology companies also contributed to underperformance. It is, however, the case that the Managerhasan excellent longer term record, which gives us confidence that good performance can be delivered. The Global Equity Income Portfolio’s very minor underperformance can almost entirely be attributed to reluctance, detailed in the portfolio manager’s report, to invest in very highly valued technology companies and the fact that these do not really fit in a portfolio whose aims include delivering above average and growing income. The Balanced Risk Allocation Portfolio had another good year, again outperforming its benchmark of 3 month LIBOR plus 5% and cementing its strong showing since the adoption of the strategy in 2012. It has performed much better than many of its competitors who seek to provide stable returns with relatively low correlations, particularly to equity markets. The table attached to that portfolio manager’s report shows the gross contributions made by the three major asset classes and by tactical asset allocation. It is very encouraging to note how well the portfolio withstood both a very severe bear market in commodities and now a period of very low or negative bond returns. Asset allocation changes have generally been positive in varying market conditions and have handled sharp changes in volatility effectively. Despite this good performance, the share class has failed to secure strong support although the investment objective clearly has considerable appeal. The strategy is very scalable and potential investors should not be put off by the small current size of the share class. The Board is committed to a policy of tight discount control and therefore there should always be a narrow spread in the share prices. As announced in February this year, we decided to amend the name of this share class to Balanced Risk Allocation on the basis that this expansion of the name better reflects the Managers’ investment process and brings it into line with the naming convention used for the Invesco group’s other products using the same strategy. The Managed Liquidity Portfolio was again dominated by the continuing very low level of short term interest rates, although correction of a management fee rebates error, explained in my half-year report, has brought a modest improvement in the return compared with last year. Investors who held shares during the period the rebates issue persisted will be reimbursed directly by Invesco, which has made a proposal to HMRC to simplify the tax treatment of the restitution, including the interest thereon, in the hands of both the past and present shareholders affected. As I confirmed in my half-yearly statement, the form of the restitution means that historical net asset value records and share conversion calculations are not affected.
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CHAIRMAN’S STATEMENT CONTINUED
“It is a tale told by an idiot, full of sound and fury, signifying nothing”. Thus soliloquized MacBeth, but there have been many moments in the last year which have evoked such sentiments, whether on the domestic UK scene or more internationally. They have served to obscure a generally conventional evolution of policy, especially by central banks, and its effects on markets. There has, however, been amajor example of unconventional policy in the substantial easing of US fiscal policy at a time when the economy was already expanding quickly. Markets, most obviously the US, have seen rising interest rates and reversals or reductions in quantitative easing. While these have caused bond markets to be very dull or negative, equity markets have benefited from a better environment for profits and have therefore continued to make progress, very approximately at the same rate as their return on equity, aided in the US by the reduction of corporate tax rates. Outlook The quotation from MacBeth was appropriate for our last financial year. There is a strong possibility that political events will have more actual impact during this year. A Brexit settlement will be reached, the US will have mid-term elections and serious discriminatory tariffs may be imposed. The problem is that one is merely guessing at the likely outcome of non-binary issues. However, it does still appear to be in both the UK and the EU’s interest to avoid the “No-deal” scenario. The US elections are most likely to see a swing away from the Republican party in line with mid-term tradition though whether control of Congress will change is unclear. One can only hope that the realisation will dawn on the US government that a trade war is at least as harmful to the US as to its trading partners. Economically it still seems likely that there is reasonable momentum in the current acceleration of growth worldwide and that we should therefore expect further upward movements in short term interest rates. However, in the likely absence of a concerted investment effort to thwart climate change, the underlying deflationary trends should mean that rates and inflation remain relatively subdued compared to previous cycles. It is, however, very difficult to judge whether this expansion will end with a bang or a whimper or when either will happen. In the meantime our portfolio managers will continue to deploy a well-tested investment philosophy in which we have considerable confidence. On the regulatory front it is worth noting that MiFID II threatens to be a case of “be careful what you wish for”. The changes that it is causing in the structure of the investment industry are far-reaching and their consequences for both the industry and securities markets may not be benign. The Board We have continued the process of Board renewal. The Board appointed a new non-executive Director, Graham Kitchen, with effect from 1 June 2018. He has a wealth of investment experience both as a fund manager and manager of fund managers. I recommend that shareholders support his election at the forthcoming AGM. Sir Michael Bunbury will retire from the Board at the Annual General Meeting in October and I would like to take this opportunity to record my thanks for his contributions to the Board and particularly for his able chairmanship of the Company’s Audit Committee until July 2017. Dividends For the last three financial years we have applied the dividend policy whereby for both UK Equity and Global Equity Income Shares, dividends are paid by way of three equal interim dividends declared in July, October and January with a larger ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for both Share classes were 1.45p per share. The fourth dividends were 2.1p per share for the UK Equity Shares, bringing the total to 6.45p per share for the year, and 2.35p per share for the Global Equity Income Shares, bringing that total to 6.7p per share for the year. For the Global Equity Income Shares the revenue earned in the year plus the brought forward revenue reserve was sufficient to cover the dividends paid and no contribution from capital was required (2017: 0.8p per share). However, for the UK Equity Shares revenue earned in the year plus the brought forward revenue reserve was not enough to cover the dividends paid, so this was achieved with a contribution from capital of approximately 0.3p (2017: 0.9p) per share. We intend to continue with this policy and have set a target for each Portfolio for the year ending 31 May 2019 of at least maintaining the dividend level. However, we are conscious that since dividends are all announced on a quarterly timeframe linked to the quarterly share class conversion
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opportunities shareholders do not get an opportunity to vote on the dividends. Accordingly, we have introduced an advisory ordinary resolution in the notice of meeting this year to give shareholders of the equity investment share classes the opportunity to vote on the dividend payment policy. The first interim dividends in respect of the year to May 2019 were 1.5p per share for both the UK Equity and Global Equity Income share classes. It continues to be the case that in order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. No dividends have been paid on the Balanced Risk Allocation Shares. The Managed Liquidity shareholders have not received any dividends since May 2012. It remains the Directors’ intention to distribute substantially all net revenues earned shortly before conversion dates, but this Portfolio currently generates insufficient net revenue, due to continued very low interest rates together with that Portfolio’s share of administrative costs. Discount Policy The Company adopted a discount control policy for all four Share classes in January 2013, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the prices of the Shares at close to their respective net asset values. The policy has been successful to date and the level of share buy backs since its adoption has been modest. The ongoing implementation of this policy is dependent upon the Company’s authority to buy back Shares, and the Directors’ authority to issue Shares for cash on a non pre-emptive basis being renewed at general meetings of the Company. Share Capital Movements During the year to 31 May 2018, the Company bought back and placed in treasury 685,000 UK Equity Shares, 825,000 Global Equity Income Shares, 483,000 Balanced Risk Allocation Shares and 232,000 Managed Liquidity Shares. Other than as an artefact of the share conversion process no Shares were issued or sold from treasury and no treasury shares were cancelled. Since the year end a further 450,000 UK Equity Shares, 566,000 Global Equity Income Shares and 248,000 Balanced Risk Allocation Shares have been bought back into treasury. The Board intends to use the Company’s buy back and issuance authorities when this will benefit existing shareholders as a whole and to operate the discount control policy mentioned above, and will ask shareholders to renew the authorities as and when appropriate. Share Class Conversions The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. Shareholders have the opportunity to convert their holdings of Shares into any other class of Share, without incurring any tax charge (under current legislation). The conversion dates for the forthcoming year are as follows: 1 August 2018; 1 November 2018; 1 February 2019; and 1 May 2019. Should you wish to convert Shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts, or CREST instructions must be received at least 10 days before the relevant conversion date. Annual General Meeting (‘AGM’) The business of the AGM is summarised in the Directors’ Report on pages 55 and 56. The AGM will be held at 1st Floor, 43-45 Portman Square, London W1H 6LY at 11.30 am on 4 October 2018 and shareholders are cordially invited to attend. Refreshments will be provided. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intend to do in respect of their own Shares.
Patrick Gifford Chairman 30 July 2018
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STRATEGY UK EQUITY
STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO PERFORMANCE RECORD
Total Return For the year ended 31 May
2018 2017 2016 2015 2014 Net Asset Value 1.1% 22.0% –1.4% 15.4% 18.3% Share Price 0.3% 22.5% –2.2% 17.2% 9.2% FTSE All-Share Index 6.5% 24.5% –6.3% 7.5% 8.9%
Revenue return per share 5.49p 5.38p 5.81p 6.38p 5.40p Dividend 6.45p 6.25p 6.15p 6.15p 5.30p
Source: Thomson Reuters.
Five Year Total Return Rebased to 100 at 31 May 2013
170 Net Asset Value Share Price 160 FTSE All-Share Index
150
140
130
120
110
100
90 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18
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STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO MANAGER’S REPORT
Investment Objective The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities. Market and Economic Review The UK stock market delivered positive returns over the twelve months to 31 May 2018. However, the market’s mid-single digit performance masked periods of significant volatility during the year, which included notable weakness in the first three months of 2018. The FTSE All-share Index reached record highs in late 2017 and again towards the end of the Company’s financial year, fuelled by bouts of sterling weakness against the US dollar. Ongoing domestic political concerns, which centred around the weakened Conservative government following the June 2017 snap election and continuing Brexit negotiations, weighed on the pound’s value relative to other currencies. The dollar’s relative strength supported the performance of the UK market’s many international constituents, explaining the perhaps counterintuitive reality that periods of significant sterling weakness lead to improved UK stock market returns. For much of the period, the UK stock market also benefited from the rally seen in mining stocks, with rising commodity prices aiding the performance of the sector during 2017. Strength in the oil price, which broke through US$75 per barrel in April 2018, also supported market returns. However, there were notable periods of negative performance during the 12 months, including the first quarter of the New Year. A post-referendum peak in the relative strength of the domestic currency, spurred by news of a record high in the UK employment rate and coupled with improving news on Brexit negotiations, weighed on UK stock market performance, while protectionist rhetoric from President Trump fuelled global market unease. Expectations around central bank monetary policy proved another dominant theme during the period, with both the Bank of England (BoE) and US Federal Reserve raising rates during the twelve months under review. The BoE’s Monetary Policy Committee implemented the first UK interest rate rise in a decade in November, voting to increase the UK interest rate to 0.5%. Speculation around further UK interest rate rises built throughout the first quarter of 2018, before weaker than expected domestic growth figures released in April tempered prospects of a further rise. No further rate rise was implemented during the period under review. Portfolio Performance On a total return basis, the Net Asset Value of the UK Equity Shares rose by 1.1% over the 12 months to the end of May 2018, compared to 6.5% by the FTSE All-Share Index.
Indicative Performance Attribution – by Sector Year to 31 May 2018
30% Basic MaterialsConsumer GoodsConsumer ServicesFinancials Health Care Industrials Oil & Gas Technology TelecommunicationsInvestment Entities/OtherUtilities Cash* 20% 10%
0% -10%
-20% -30%
-40% -50% Portfolio Sector Return Relative Portfolio Over/ Under Weight Impact on Relative to Benchmark Total Return Relative to the Benchmark Performance * Cash reflects gearing effect from borrowing.
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STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO MANAGER’S REPORT CONTINUED Portfolio Strategy and Review The portfolio delivered a positive return over the period, but failed to match the rise of the index. The main drivers of this underperformance were both stock-specific, notably SafeStyle UK, Micro Focus, Acacia Mining and Provident Financial, as well as relative, with a lack of exposure to the strong industrial metals sector and a smaller weighting in the oil and gas sector than that of the index. Shares in windows and doors company SafeStyle UK fell dramatically following a disappointing trading update released in April – the fifth in less than 12 months – as revenue misses stemming from cyclical weakness were compounded by the formation of a competitor by Safestyle’s founder. Whilst there is ample room for a fourth national player in what remains an extremely fragmented industry, this new business has specifically targeted Safestyle by establishing branches close to their locations, recruiting sales staff and operating under a strikingly similar brand. Safestyle have now hired to rebuild their sales and marketing functions and a legal challenge is underway to protect the brand.This remains a market leading business with the potential to return to winning ways under a new chief executive, pressing home the advantages of its brand and best-in-class cost structure to deliver once again the consistent market share gains enjoyed in recent years. The holding has been maintained in anticipation of this recovery. The holding in Micro Focus fell very sharply as the company warned in March that revenues were declining more quickly than expected, due to problems stemming from its £6.6 billion acquisition last year of the software arm of Hewlett Packard. The company also announced the departure of its chief executive, just six months after taking the role. Whilst disappointing, the precipitous fall in the share price appears excessive for the problems affecting the company. The position has been retained, in the belief that revenues will stabilise and additional cost savings will be found to steady earnings and see the valuation recover from its currently depressed level. Acacia Mining, a Tanzania-based gold miner, also detracted from the portfolio’s performance during the period following a dispute with the Tanzanian government, which prevented the export of gold in concentrate from the country. One of the two principal mines has now been mothballed. The government alleges historic underreporting of exports and resultant underpayment of taxes. Barrick Gold, who own 64% of the company, are negotiating on Acacia’s behalf but the outcome remains uncertain. Given the company’s position as the leading miner in Tanzania and the fiscal contribution that entails, I believe that a satisfactory settlement will be reached and that value in the shares will re-emerge. The holding has therefore been maintained. The portfolio’s holding in Provident Financial (PFG) delivered negative returns over the period in aggregate. In August 2017 the company issued a dramatic profit warning, emanating from its Consumer Credit Division. Additionally, it announced that subsidiary Vanquis Bank was subject to, and co-operating with, an FCA investigation into its Repayment Option Plan ancillary product. The dividend was withdrawn and the hitherto highly regarded chief executive resigned. Prior to the warning the position had been reduced by around half and in the days following, unable to quantify the potential regulatory liability, I took advantage of a rebound in the share price to sell the rest of the position. In February of this year, earlier than anticipated by the market, PFG reached a settlement in respect of the FCA investigation, announced it was raising £300 million to strengthen the balance sheet (thereby maintaining its investment grade credit rating) and said dividends would restart this year, with a “progressive” dividend policy to be instituted in 2019. Considering the investment case to be de-risked and the valuation on that basis highly attractive, I participated in the capital raise and reintroduced PFG to the portfolio. The portfolio’s underweight position, compared to the index, within the metals and mining sector provided an additional drag to relative returns as the diversified mining companies delivered strong performance in the first part of the period through to the end of 2017 – the result of a rally in metals prices (notably copper). I remain cautious on the outlook for these companies, principally on concerns as to the sustainability of China’s credit cycle. With the earnings and share prices of mining companies so heavily correlated to commodity prices there is too much uncertainty to warrant investment in the sector at prevailing valuations. The portfolio’s holdings in the financials sector provided mixed returns over the year. The largest holding, Barclays, was a negative contributor to returns over the period as a whole, despite providing some positive returns in the latter half. The size of the position reflects conviction that the current low valuation of Barclays implies an overly pessimistic assessment of its earnings outlook and capital generation potential – and therefore the prospect of capital being returned to shareholders in the
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form of increased dividends and potential share buybacks. I remain confident that return targets for 2019 and 2020 appear conservatively struck, on which basis the shares appear to be materially undervalued. More positively, a number of the portfolio’s holdings performed very strongly over the period, with Tesco, Sigma Capital, Next and Ashtead amongst the largest contributors to performance. Retail giant Tesco posted strong results for the year 2017/18, including the company’s first annual dividend since 2014, and completed the acquisition of Booker, which has the potential to prove transformational. Trading has now demonstrably turned better, reflecting efforts of the management team over the last three years’ to stabilise the business. Both the core Tesco business and the Booker wholesale business are now seeing accelerating market share gains and sales growth. This is a top-5 holding and looks set to continue to deliver positive performance. Specialist fund manager Sigma Capital saw its share price rise following a statement that PRS REIT, the residential real estate investment trust that Sigma manages, had successfully raised an additional £250 million via a placing. This will increase the fees that Sigma earns for managing the assets. There is potential for significant further growth of the REIT, in which this Portfolio has also invested. In combination these two companies occupy the market leading position in institutional grade, rented family housing, a sector that enjoys support from both local and central government, who see it as a key plank of the strategy to resolve the historic under-provision of housing in the UK. Next posted positive returns despite the widespread pessimism affecting the UK high street. The company’s strong online offering, coupled with flexibility in its leasehold property base, leaves the retailer better positioned than many competitors to respond to the changing landscape of clothing retail. Meanwhile, the management’s well established focus on shareholder returns saw the share buyback programme restored and this boosted earnings per share. Despite the significant recovery in share price already witnessed, I believe the current valuation fails to reflect the strength of Next’s business or to distinguish the company from the high street’s weaker general merchandisers. It remains in the top five holdings in the portfolio. Ashtead continues to consolidate the US market for construction equipment rental. With a strategy of careful organic expansion into attractive regions, exerting the advantages of its scale and high service offering, the market share gains of the last decade show no signs of abating. Underlining the management’s confidence in the outlook and the strength of the balance sheet, the company announced a £1 billion share buyback in December 2017, which has helped to maintain momentum in the share price. The portfolio also benefited from its holdings in the oil and gas sector. Both BP and Royal Dutch Shell provided significant contributions to returns over the period. The sector’s performance has proven particularly strong in the latter half of the period, further confirmation of successful cost cutting by both businesses. The ongoing capital discipline exhibited across the sector should see increasing value returned to shareholders and valuations in the sector should continue to progress to reflect generous dividend streams that are now entirely cash backed. Whilst the portfolio is less exposed to the sector than the benchmark, these are very significant weightings in absolute terms and both are among the top five holdings. Outlook The recent bout of volatility has been followed by a change in leadership in equity markets. By the end of the period the FTSE All-Share Index had recovered over half of the losses sustained in the early February sell-off and the mood in the market now feels quite different: the last few years have seen a dramatic divergence in performance of certain styles and sectors. “Global Value” stocks reached multi-decade relative lows to “Global Growth” stocks and this was compounded in the UK market in the wake of the EU referendum as we witnessed an equally extreme decline in domestically focused stocks relative to exporters. The global position could be said to have reversed for a number of reasons, but the sharp move higher in US interest rates (both 3 month Libor and 10 year rates are up significantly) and the issues affecting the previously loved US tech sector (President Trump publicly criticising Amazon which may portend government intervention to limit its increasing dominance in numerous markets, the well documented data privacy issues affecting Facebook, production misses at Tesla, amongst others) are the two that stand out as having driven widespread asset class and sector rotation.
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STRATEGY UK EQUITY
STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO MANAGER’S REPORT CONTINUED At the same time a less antagonistic climate in the Brexit negotiations and the long awaited turning point in UK disposable incomes have combined to strengthen the pound and prompt a reassessment of the UK market. Whilst it is too early to call a definitive end to such a long-established low growth, low inflation and low interest rate regime and to the equity market phenomena that have followed in its wake, it does not feel a stretch to say that this is the closest markets have been to a turning point since the financial crisis. The portfolio has been positioned for the anticipated recovery in value stocks, especially in UK domestic cyclicals, and has limited exposure to the parts of the market that have seen valuations expand the most in recent years. I am therefore cautiously optimistic in light of recent developments. As ever though, risk abounds. The current list of things to worry about includes, but is not limited to: UK political risk with Labour waiting in the wings as the Conservative Party attempts to coalesce around a common vision for Brexit, signs of cyclical weakness in global leading indicators, broad geopolitical uncertainties not least the escalating frictions in global trade, China credit, governments that remain significantly indebted, challenges to the US dollar’s reserve status, the withdrawal and reversal of quantitative easing and of course higher interest rates, which may have unpredictable consequences, particularly in certain emerging markets. I am watching these issues carefully but I believe that this diversified portfolio of well positioned and attractively valued businesses, with the additional protection afforded by a meaningful allocation to gold-related equities, is well placed to navigate what lies ahead. This confidence is reflected by the portfolio’s gearing which is maintained at just under 20%.
James Goldstone Portfolio Manager 30 July 2018
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STRATEGY UK EQUITY
STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO LIST OF INVESTMENTS AT 31 MAY 2018 Ordinary shares listed in the UK unless stated otherwise MARKET VALUE % OF COMPANY SECTOR† £’000 PORTFOLIO BP Oil & Gas Producers 4,055 5.0 Barclays Banks 3,704 4.5 Royal Dutch Shell – B shares Oil & Gas Producers 2,736 3.4 Next General Retailers 2,627 3.2 Legal & General Life Insurance 2,431 3.0 Coats General Industrials 2,288 2.8 Tesco Food & Drug Retailers 2,210 2.7 RELX Media 2,161 2.6 Aviva Life Insurance 2,099 2.6 Babcock International Support Services 1,971 2.4 Shire Pharmaceuticals & Biotechnology 1,930 2.4 British American Tobacco Tobacco 1,783 2.2 JD Sports Fashion General Retailers 1,549 1.9 Ashtead Support Services 1,524 1.9 Cairn Homes Household Goods & Home Construction 1,435 1.8 Imperial Brands Tobacco 1,417 1.7 easyJet Travel & Leisure 1,416 1.7 Victoria Household Goods & Home Construction 1,409 1.7 A J Bell – Unquoted Financial Services 1,408 1.7 Royal Bank of Scotland Banks 1,382 1.7 Melrose Industries Construction & Materials 1,378 1.7 XPS Pensions Financial Services 1,345 1.6 Johnson Service Support Services 1,240 1.5 Summit Germany Real Estate Investment & Services 1,126 1.4 Derwent London Real Estate Investment Trusts 1,103 1.4 N Brown General Retailers 1,096 1.3 Hollywood Bowl Travel & Leisure 1,083 1.3 Sigma Capital Financial Services 1,083 1.3 McBride Household Goods & Home Construction 1,059 –B shares 11 } 1.3 Dairy Crest Food Producers 1,033 1.3 BCA Marketplace Financial Services 1,031 1.3 TP ICAP Financial Services 993 1.2 Chesnara Life Insurance 985 1.2 BT Fixed Line Telecommunications 897 1.1 Endeavour Mining – Canadian common stock Mining 889 1.1 MJ Gleeson Household Goods & Home Construction 861 1.1 Drax Electricity 848 1.0 Howden Joinery Support Services 846 1.0 Secure Trust Bank Banks 843 1.0 PRS REIT Real Estate Investment Trusts 832 1.0 International Consolidated Airlines Travel & Leisure 823 1.0 Harworth Real Estate Investment & Services 818 1.0 Phoenix Spree Deutschland Real Estate Investment & Services 818 1.0 Balfour Beatty Construction & Materials 806 1.0 Newmont Mining – US common stock Mining 782 1.0 Hibernia REIT – Irish common stock Real Estate Investment Trusts 762 0.9 HomeServe Support Services 757 0.9 P2P Global Investments Equity Investment Instruments 738 0.9 CVS General Retailers 731 0.9 Gamma Communications Mobile Telecommunications 722 0.9 Sherborne Investors (Guernsey) C Financial Services 713 0.9 Agnico Eagle Mines – Canadian common stock Mining 702 0.9 Micro Focus Software & Computer Services 698 0.9 Capita Support Services 690 0.8 Ultra Electronics Aerospace & Defense 689 0.8 Randgold Resources Mining 684 0.8 Standard Life Aberdeen Financial Services 654 0.8 Provident Financial Financial Services 648 0.8 Acacia Mining Mining 615 0.8 On the Beach Travel & Leisure 608 0.7 Bushveld Minerals Mining 577 0.7 Hadrian’s Wall Secured Investments Equity Investment Instruments 575 0.7 Diurnal Pharmaceuticals & Biotechnology 554 0.7 Cranswick Food Producers 531 0.7 TruFin Financial Services 469 0.6 Mears Support Services 463 0.6 Electra Private Equity Equity Investment Instruments 393 0.5 Zegona Communications Non-equity Investment Instruments 361 0.4 Tungsten Financial Services 353 0.4 Safestyle UK General Retailers 323 0.4 Debenhams General Retailers 295 0.4 Sherborne Investors (Guernsey) B – A shares Financial Services 181 0.2 Barclays Bank – Nuclear Power Notes Non-equity Investment Instruments 3 – 28 Feb 2019 HaloSource Chemicals 2 –
Total Investments (75) 81,655 100.0 † FTSE Industry Classification Benchmark.
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STRATEGY UK EQUITY
STRATEGIC REPORT UK EQUITY SHARE PORTFOLIO INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £’000 £’000 £’000 £’000 £’000 £’000 (Losses)/gains on investments at fair value – (1,490) (1,490) – 11,022 11,022 Foreign exchange losses – (14) (14) – (7) (7) Income 2,403 455 2,858 2,513 699 3,212 Investment management fee (112) (262) (374) (135) (316) (451) Performance fee written back – 4 4 – 280 280 Other expenses (192) (1) (193) (199) (1) (200)
Net return before finance costs and taxation 2,099 (1,308) 791 2,179 11,677 13,856 Finance costs (47) (109) (156) (36) (83) (119)
Net return before taxation 2,052 (1,417) 635 2,143 11,594 13,737 Tax (14) – (14) (41) – (41)
Return after taxation for the financial year 2,038 (1,417) 621 2,102 11,594 13,696
Basic return per ordinary share 5.49p (3.82)p 1.67p 5.38p 29.67p 35.05p
SUMMARY OF NET ASSETS AT 31 MAY 2018 2017 £’000 £’000 Fixed assets 81,655 84,734 Current assets 687 602 Creditors falling due within one year, excluding borrowings (684) (1,195) Bank loan (13,650) (10,600) Provision for performance fee – (4)
Net assets 68,008 73,537
Net asset value per share 189.0p 193.5p
Gearing: – gross 20.1% 14.4% – net 19.6% 14.2%
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STRATEGY GLOBAL EQUITY INCOME
STRATEGIC REPORT GLOBAL EQUITY INCOME SHARE PORTFOLIO PERFORMANCE RECORD
Total Return For the year ended 31 May 2018 2017 2016 2015 2014 Net Asset Value 7.8% 29.2% –0.2% 13.2% 9.6% Share Price 5.7% 31.1% –2.8% 16.1% 8.3% MSCI World Index (£) 8.2% 31.3% 0.7% 16.2% 7.4%
Revenue return per share 6.50p 5.62p 5.51p 4.68p 4.22p Dividend 6.70p 6.40p 6.00p 4.60p 3.55p Source: Thomson Reuters.
Five Year Total Return Rebased to 100 at 31 May 2013
180 Net Asset Value
170 Share Price MSCI World Index (£) 160
150
140
130
120
110
100
90 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18
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STRATEGY GLOBAL EQUITY INCOME
STRATEGIC REPORT GLOBAL EQUITY INCOME SHARE PORTFOLIO MANAGER’S REPORT
Investment Objective The investment objective of the Global Equity Income Share Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.
Market and Economic Review Global equity markets ended 2017 near all-time highs amid solid corporate earnings and accelerating economic growth. Indeed, former US Federal Reserve chair Janet Yellen told the Joint Economic Committee in November: “The economic expansion is increasingly broad based across (US) sectors as well as across much of the global economy.” Performance in December helped global equity markets achieve their best annual performance since the post financial crisis recovery.
The year 2018 got off to an equally strong start for global equity markets. Strength in corporate earnings, synchronised economic growth and optimism over US tax cuts helped drive up prices in many markets across the world to their highest on record. However, volatility made a return at the beginning of February as fears around inflation fuelled heightened expectations of interest rate hikes in the US, leading Treasury yields higher. Geopolitics, rising trade tensions between the US and China, and a technology-led correction in March rounded off the worst quarter for global equities in more than two years. Attention turned to the corporate earnings season in April and by May easing trade tensions helped restore some confidence. However, the prospect of snap Italian elections – which could have effectively become a referendum on the euro–brought the vulnerability of the European Union back into focus, and financial markets reacted accordingly.
Portfolio Performance On a total return basis, the Portfolio’s net asset value increased by 7.8% over the year to 31 May 2018, compared to a rise of 8.2% in the MSCI World index (£, total return, net of withholding tax).
Indicative Performance Attribution – by Sector Year to 31 May 2018
30%
Consumer DiscretionaryConsumer StaplesEnergy Financials Health Care Industrials Information TechnologyMaterials Real Estate TelecommunicationUtilities ServicesCash* 20%
10%
0%
-10%
-20%
-30%
-40%
-50% Portfolio Sector Return Portfolio Over/ Under Weight Impact on Relative Relative to Benchmark Relative to the Benchmark Performance Total Return
* Cash reflects gearing effect from borrowing.
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STRATEGY GLOBAL EQUITY INCOME
Portfolio Strategy and Review Indicative Performance Attribution – by Region Year to 31 May 2018
Portfolio Regional Return Portfolio Over/ Under Weight Impact on Relative Relative to Benchmark Relative to the Benchmark Performance 30% Total Return
20%
10%
0%
-10%
-20%
-30%
-40% UK Japan Cash*
North America Europe ex UK Latin America
Asia Pacific ex Japan Middle East & Africa * Cash reflects gearing effect from borrowing. Performance versus the benchmark index was disadvantaged by the portfolio’s underweight position in the Information Technology sector, in particular the e-commerce companies. This was one of the strongest performing sectors over the 12 months. However, these companies pay no dividends and appear expensive on many metrics. The technology-driven market correction in March 2018, sparked by company-specific news from Facebook, did little to dent the sector’s performance. However, our investment process is unchanged and we have not felt compelled to chase after performing, momentum-driven equities, many of which we see as grossly overvalued. The portfolio’s exposure to the telecoms sector also disappointed, driven by stock-specific news around BT. The company was hit by a range of problems in 2017, including fraud in the Italian business and concerns over its relationship with its government regulator Ofcom, especially regarding its Openreach subsidiary. The healthcare sector underperformed the broader market. While President Trump unveiled a plan in May 2018 to keep drug prices in check, he stopped short of introducing radical measures that would restrain US pharmaceutical firms’ profits. However, continued worries over pharmaceutical prices and the lack of new product launches led to the sector underperforming the benchmark. The sectors that delivered positive performance for the Portfolio during the year included energy and consumer staples, the former helped by a sharp rise in the oil price. Moreover, the efforts by companies to reduce costs have borne fruit and the sector once again began to generate free cashflow. The supply/demand balance for oil looks favourable over the coming years. The share prices of Royal Dutch Shell, BP, Chevron and Canadian Natural Resources all benefited as a result. The consumer staples sector, meanwhile, was weak versus the broader market, as companies struggled to deliver volume growth in the face of growing supermarket ‘own label’ sales and increased fragmentation in consumer tastes. The portfolio’s underweight exposure to the sector was therefore a positive.
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STRATEGY GLOBAL EQUITY INCOME
STRATEGIC REPORT CONTINUED GLOBAL EQUITY INCOME SHARE PORTFOLIO MANAGER’S REPORT
Portfolio Changes Over the period new positions were established in the following stocks: Toyota Motor, which we regard as a high quality automotive business, with a strong balance sheet and good product line up, well positioned in the transition to hybrid and electric vehicles; Next, whose online business is driving growth and market share gains against a tough UK retail backdrop. We favour its solid balance sheet, attractive dividend and on-going share buy-back programme; Telefonica Brasil, which we believe benefits from a well invested network infrastructure, strong 4G spectrum and an over-capitalised balance sheet which can fund higher future dividend payouts; and Sumitomo Mitsui Financial, which is a well-capitalised Japanese bank that we believe will benefit both from rising interest rates globally and a strengthening Japanese economy. We also introduced a new position in Broadcom, which is a semiconductor company with strong franchise positions within wireless communications, wired infrastructure and enterprise storage. The high margin and strong cash flow generation of this business appears to be under-appreciated by the market, which has been concerned with ongoing acquisition speculation. The recent blocking of their attempted acquisition of Qualcomm frees up substantial cash flows for further accretive M&A activity, while also supporting continued significant dividend growth and the potential for share buybacks. Two further new holdings were TE Connectivity and Royal Bank of Scotland. TE Connectivity provides connectors and sensors to many industries worldwide. With major exposure to the auto and general industrials sectors, the company is a beneficiary of both the electrification of cars and the automation of factories. The bulk of restructuring work has now been completed at the Royal Bank of Scotland. With the capital position of the bank now very strong, we expect to see significant increases to dividends over the coming years. We also rotated the financials exposure slightly away from the US and more towards Europe with a new position in BNP Paribas. It is a stock we have held in the past and it looked attractive to us at its current valuation. We switched out of Honda, selling the position in its entirety, as the share price of Toyota Motor looked cheaper and its prospects for the long term appeared to be better. We sold the position in PNC Financial Services as we felt, following strong share price performance, that the valuation looked expensive compared to peers. In our view the company is still well placed but there were better opportunities elsewhere. We reviewed our investment case for Centrica and decided there was better value elsewhere, so sold the holding. In the case of London Stock Exchange, Deutsche Boerse and Nexion we sold the positions following strong share price performance, believing these companies had become fairly valued. We sold the long standing position in RELX, the Anglo Dutch professional publisher, as we felt it had become fully valued. Our decision to sell the position in Nordea Bank was based partly on valuation grounds and partly because we believed there to be greater opportunities within other European financial stocks. We also sold the position in BT, discussed above, as we do not see a rapid recovery in the company’s prospects. Outlook Tough trade talk is nothing new for 2018, but there is a sense that stress is ratcheting up between the US and its trading partners, particularly China. This could take its toll on markets amid concerns that global trade restrictions could curb global economic growth. Notwithstanding this risk, and whilst there are some warning signs of the potential for more difficult economic conditions ahead (a flattening US yield curve for example), we consider the global economic outlook at present to be relatively benign, with modest economic growth and few signs of significant inflationary pressure. From a valuation and income perspective we continue to favour Europe and Asia over the US. Nine years into an economic and stock market recovery, it gets harder to find attractively valued companies. We believe some opportunities remain, though these are primarily in the sectors unloved by investors such as energy, telecoms, financials and indeed certain stocks reliant on the UK domestic economy as the Brexit cloud looms larger.
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Overall, our strategy remains consistent: to invest in high quality companies at attractive valuations. We view such companies as those that can sustain profit margins and deliver positive returns through the economic cycle. We see growing and sustainable dividends as clear evidence of these sorts of companies. In aggregate, therefore, we target companies that offer attractive yields, dividend growth prospects and capital upside.
Nick Mustoe Portfolio Manager 30 July 2018
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STRATEGY GLOBAL EQUITY INCOME
STRATEGIC REPORT GLOBAL EQUITY INCOME SHARE PORTFOLIO LIST OF INVESTMENTS AT 31 MAY 2018 Ordinary shares unless stated otherwise. MARKET VALUE % OF COMPANY INDUSTRY GROUP† COUNTRY £’000 PORTFOLIO Royal Dutch Shell – A shares Energy Netherlands 2,343 3.2 Chevron Energy US 2,214 3.0 Orange Telecommunication Services France 2,179 3.0 BP Energy UK 2,175 3.0 Equinor (formerly Statoil) Energy Norway 2,049 2.8 Total Energy France 2,022 2.8 JPMorgan Chase Banks US 1,950 2.7 Pfizer Pharmaceuticals, Biotechnology & Life Sciences US 1,800 2.5 Nasdaq Diversified Financials US 1,753 2.4 Next Retailing UK 1,746 2.4 Canadian Natural Resources Energy Canada 1,689 2.3 Taiwan Semiconductor Manufacturing Semiconductors & Semiconductor Equipment Taiwan 1,684 2.3 United Technologies Capital Goods US 1,663 2.3 Koninklijke Ahold Delhaize Food & Staples Retailing Netherlands 1,627 2.3 Caixabank Banks Spain 1,619 2.2 Aon – A shares Insurance US 1,601 2.2 Novartis Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,574 2.2 ING Banks Netherlands 1,571 2.2 Microsoft Software & Services US 1,540 2.1 Legal & General Insurance UK 1,539 2.1 Wells Fargo Banks US 1,516 2.1 BASF Materials Germany 1,484 2.1 Roche Pharmaceuticals, Biotechnology & Life Sciences Switzerland 1,484 2.0 Intesa Sanpaolo Banks Italy 1,462 2.0 easyJet Transportation UK 1,457 2.0 Deutsche Post Transportation Germany 1,445 2.0 Citigroup Banks US 1,414 2.0 Amgen Pharmaceuticals, Biotechnology & Life Sciences US 1,411 1.9 Toyota Motor Automobiles & Components Japan 1,374 1.9 Tesco Food & Staples Retailing UK 1,373 1.9 Las Vegas Sands Consumer Services US 1,360 1.9 British American Tobacco Food Beverage & Tobacco UK 1,339 1.8 BNP Paribas Banks France 1,328 1.8 Allianz Insurance Germany 1,269 1.7 Gilead Sciences Pharmaceuticals, Biotechnology & Life Sciences US 1,243 1.7 Williams-Sonoma Retailing US 1,211 1.7 Nielsen Commercial & Professional Services US 1,136 1.6 Broadcom Semiconductors & Semiconductor Equipment US 1,122 1.5 TE Connectivity Technology Hardware & Equipment Switzerland 1,098 1.5 BAE Systems Capital Goods UK 1,097 1.5 Royal Bank of Scotland Banks UK 1,071 1.5 Sumitomo Mitsui Financial Banks Japan 1,050 1.5 Adecco Commercial & Professional Services Switzerland 1,018 1.4 Amcor Materials Australia 985 1.4 China Mobile – R Telecommunication Services Hong Kong 934 1.3 Union Pacific Transportation US 829 1.1 Airbus Capital Goods France 744 1.0 Hiscox Insurance UK 711 1.0 Telefonica Brasil Telecommunication Services Brazil 666 0.9 Hyundai Motor – preference shares Automobiles & Components South Korea 538 0.7 Kangwon Land Consumer Services South Korea 481 0.7 Yue Yuen Industrial Consumer Durables & Apparel Hong Kong 353 0.5 Zhejiang Expressway –H Transportation Hong Kong 323 0.4
Total Investments (53) 72,664 100.0 † MSCI and Standard & Poor’s Global Industry Classification Standard. H: H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange. R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
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STRATEGY GLOBAL EQUITY INCOME
STRATEGIC REPORT GLOBAL EQUITY INCOME SHARE PORTFOLIO INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £’000 £’000 £’000 £’000 £’000 £’000 Gains on investments at fair value – 3,176 3,176 – 13,429 13,429 Foreign exchange losses – (10) (10) – (1) (1) Income 2,710 2 2,712 2,350 – 2,350 Investment management fee (113) (264) (377) (121) (281) (402) Other expenses (187) (1) (188) (171) (3) (174)
Net return before finance costs and taxation 2,410 2,903 5,313 2,058 13,144 15,202 Finance costs (19) (45) (64) (18) (43) (61)
Net return before taxation 2,391 2,858 5,249 2,040 13,101 15,141 Tax (242) – (242) (201) – (201)
Return after taxation for the financial year 2,149 2,858 5,007 1,839 13,101 14,940
Basic return per ordinary share 6.50p 8.65p 15.15p 5.62p 40.05p 45.67p
SUMMARY OF NET ASSETS AT 31 MAY 2018 2017 £’000 £’000 Fixed assets 72,664 69,290 Current assets 569 618 Creditors falling due within one year, excluding borrowings (336) (259) Bank overdraft (1,140) – Bank loan (2,700) (4,600)
Net assets 69,057 65,049
Net asset value per share 207.2p 198.6p
Gearing: – gross 5.6% 7.1% – net 5.6% 6.8%
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STRATEGY BALANCED RISK ALLOCATION
STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO PERFORMANCE RECORD
Total Return For the year ended 31 May 2018 2017 2016 2015 2014 Net Asset Value 6.4% 9.8% –0.3% 4.1% 5.5% Share Price 4.5% 11.9% –2.1% 5.0% 4.5% 3 month LIBOR +5% 5.4% 5.5% 5.6% 5.6% 5.5% Source: Thomson Reuters.
Five Year Total Return Rebased to 100 at 31 May 2013
130 Net Asset Value
Share Price 125 3 Month LIBOR +5%
120
115
110
105
100
95 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18
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STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO MANAGER’S REPORT
Investment Objective The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities, and commodities. Market and Economic Review After a mixed start to the Company’s financial year, equities posted positive returns across most markets over the third and fourth quarters of 2017, setting new highs amid low volatility. Commodity markets started the financial year well and posted positive returns in aggregate over the third and fourth quarters of 2017, led by energy and industrial metals. Government bond prices suffered pullbacks through much of 2017 as demand for safe-haven assets fell and fears of central bank tapering took hold, causing yields to rise. Despite a strong start to 2018, equities ultimately posted negative results over the first quarter of the new calendar year as volatility returned in February and March. In April and May, however, all equity markets in which the strategy invests bounced back, led by UK and US small-cap equities, to finish with positive gains up to the Company’s year end. Performance across government bond markets was mixed from the start of 2018 and ultimately negative in aggregate up to the Company’s year end. Commodities finished the first quarter of 2018 with a small decline as market volatility surged on fears of rising interest rates and a potential trade war with China. Then, up to the end of May, commodity prices largely advanced, with gains across all complexes. Portfolio Performance The Balanced Risk Allocation Portfolio posted a positive return for the year of 6.4%, compared with +5.4% for the benchmark, Merrill Lynch 3 month LIBOR plus 5%.
Contributions to Gross Return Contributions to Gross Return Contributions to Gross Return for Year to 31 May 2018 for 3 Years to 31 May 2018 from 8 February 2012* to (annualised) 31 May 2018 (annualised) 4% 4% 4%
2% 2% 2%
0% 0% 0%
–2% –2% -2%
–4% –4% -4% Cash Cash Bonds Cash Bonds Bonds Equities Tactical Equities Tactical Equities Tactical
Commodities Commodities Commodities *The name and objective of this Portfolio were changed with effect from 8 February 2012. Portfolio Strategy and Update The Balanced Risk Allocation strategy seeks to achieve returns through balancing risk exposure between three asset classes: developed market equities, global government bonds and commodities. The asset class weightings are determined using a proprietary investment process, with assets being selected according to three key criteria: a correlation matrix to ensure diversification; the ability to generate excess returns relative to cash; and specific liquidity and transparency criteria. Exposure to the asset classes is principally obtained through highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. For the year to 31 May 2018 exposure to commodities was the largest positive contributor to performance followed by equities. Bonds were the sole detractor from results from an asset class perspective for the fiscal year.
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STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO MANAGER’S REPORT CONTINUED After a mixed June 2017, with three of the four complexes experiencing declines, commodity markets led results for the fiscal year. Performance was especially positive for energy commodities during the third and fourth quarters of 2017, as crude prices rebounded and as distillates saw prices jump, in part due to the shuttering of refining capabilities in the wake of Hurricane Harvey. Industrial metals prices also posted gains over the same period as robust economic data from China spurred expectations of demand and environmental crack downs in China curtailed production of aluminium. Agricultural commodity prices struggled with oversupply in some markets during the third quarter and then rallied during the fourth quarter due to powerful moves in cotton, sugar and meats. Precious metals prices were mixed; gold posted gains largely on safe-haven demand in response to geopolitical tensions, while silver posted mild losses. Commodities finished the first quarter of 2018 with a small decline as market volatility surged on fears of rising interest rates and potential trade war with China. Results were mixed across the sub-complexes as agriculture and energy provided gains while industrial metals and precious metals declined. Then, up to the Company’s year end, commodities delivered positive results, mainly driven by positive results in energy and industrial metals. Energy commodities benefited as the US re-imposed economic sanctions on Iran. Industrial metals posted mild gains up to year end as well, as prices for aluminium and copper rose on better-than-expected China manufacturing data and reduced stocks of aluminium. Agriculture commodities delivered mixed results over the last two months of the Company’s fiscal year, with soybeans and soymeal prices retreating the most on lingering China trade war fears, while cotton and wheat prices jumped on drought fears in the US. Precious metals were a detractor in aggregate over the last two months as the price of gold declined on a stronger dollar and rising rate concerns, while silver managed a modest increase. Equity markets began the fiscal year on a positive but muted note, with slight gains across four of the six markets in which the strategy invests advancing. Equity performance strengthened over the third and fourth quarters of 2017. Asian markets led all regions as both Hong Kong and Japanese equities posted gains. US markets also saw price appreciation with both large- and small-cap equities climbing higher. Results across the European region were positive as well, with UK equities enjoying gains while shares on the continent were more subdued. 2018 began with a bang for equity markets as investor optimism and signs of broad economic growth combined to push index levels higher. Then, through the middle of the first quarter, equities suffered drawdowns amid uncertainty about future central bank actions and protectionist rhetoric from the US leading to fears of a trade war. However, equity markets bounced back in the latter two months of the fiscal year, led by UK and US small-cap equities. UK equities benefited from weakness in sterling while US small-caps rallied to post a new all-time high. Gains across the other international markets were mostly due to central bank actions leaving policy rates unchanged. Government bonds were the sole detractor from an asset class perspective during the fiscal year. To start the period, bonds suffered pullbacks across the board as all six markets in which the strategy invests declined. This continued through the third quarter of 2017, with Canadian, Australian and UK government bond yields rising. German bund and US Treasuries managed to post gains during the period as demand for safe-havens increased in the face of tensions between North Korea and the rest of the world. In the fourth quarter, government bond exposure helped results, as all five markets in which the strategy was invested saw yields fall over the period. Australian bonds led results as performance strengthened mid-quarter in a response to industrial metals prices falling due to temporary weakening of Chinese economic data. German bunds were the weakest contributor as investors became nervous about the impending start of tapering of quantitative easing and associated bond purchases by the European Central Bank. Performance across government bond markets during the first quarter of 2018 saw a reversal during the period as early period fears of rising rates and strong equity returns pushed yields higher while the return of volatility in equities had investors scrambling for safe-havens through the latter months. Results across markets were mixed with Australia and Germany providing slight contributions, while the US, UK and Canada ended the quarter with losses. The run up to the Company’s financial year end was slightly better as yields fell in response to flight-to-safety flows. German bunds and UK gilts were the leading markets as European investors sought shelter amid fears of the new Italian government taking actions that would precipitate an exit from the European Union. US, Canadian and Australian bonds finished with negative results.
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STRATEGY BALANCED RISK ALLOCATION
Outlook At the date of this report there are two main issues in focus. The first is the impact of higher US interest rate expectations. These have been fuelled by the US Federal Reserve’s (Fed’s) statements, in which officials seem committed to a course of additional rate hikes, and by the ongoing reduction of the Fed balance sheet, which results in quantitative tightening. This combination has caused havoc across several emerging market currency and equity markets, leaving investors on edge. Further compounding the problem is the second issue, which is the ongoing war of words between the Trump administration and multiple trading partners, which seems to be leading inexorably toward one or more trade wars. These fears have already begun to weigh on economic activity, as evidenced by slowing manufacturing purchasing managers’ index data across several regions. An unsatisfactory conclusion to either of these issues could spur a bout of risk-off behaviour among market participants. From a notional exposure standpoint, tactical positioning continues to overweight all six equity markets and bonds are also being overweighted for all markets, except the US, which is modestly underweight. Japanese bonds continue to be absent from the strategy. Positioning in commodities is decidedly defensive, with underweights to all agricultural commodities and metals, while energy commodities continue to have overweight positions.
Scott Wolle Portfolio Manager 30 July 2018
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STRATEGY BALANCED RISK ALLOCATION
STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO LIST OF DERIVATIVE INSTRUMENTS AT 31 MAY 2018 NOTIONAL NOTIONAL EXPOSURE EXPOSURE AS % OF £’000 NET ASSETS Government Bond Futures: Canada 1,497 16.1 Australia 1,470 15.8 Germany 1,281 13.8 UK 988 10.6 US 653 7.0 Total Bond Futures (5) 5,889 63.3 Equity Futures: Hong Kong 732 7.9 Japan 725 7.8 UK 690 7.4 Europe 688 7.4 US small cap 618 6.7 US large cap 511 5.5 Total Equity Futures (6) 3,964 42.7 Commodity Futures: Agriculture Cotton 344 3.7 Sugar 303 3.3 Soy bean 268 2.9 Soybean meal 254 2.7 Corn 74 0.8 Soybean oil 71 0.8 Coffee 69 0.7 Wheat 59 0.6 Energy Gasoline 273 2.9 Brent crude 175 1.9 Gas-oil (diesel) 103 1.1 WTI crude 99 1.1 Natural gas 93 1.0 New York Harbor ultra-low sulphur diesel 70 0.8 Industrial Metals Copper 387 4.2 Aluminium 256 2.8 Precious Metals Gold 393 4.2 Silver 248 2.7 Total Commodity Futures (18) 3,539 38.2 Total Derivative Instruments (29) 13,392 144.2
TARGET ANNUALISED RISK The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows: ASSET CLASS RISK CONTRIBUTION Bonds 2.6% 26.7% Equities 4.4% 45.9% Commodities 2.6% 27.4% 9.6% 100.0%
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STRATEGY BALANCED RISK ALLOCATION
STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO LIST OF INVESTMENTS AT 31 MAY 2018 MARKET % OF YIELD VALUE NET % £’000 ASSETS Short Term Investments UK Treasury Bill 19 Nov 2018 0.54 2,992 40.8 Short-Term Investments Company (Global Series) 0.56 2,273 31.0 UK Treasury Bill 20 Aug 2018 0.46 1,099 15.0 UK Treasury Bill 10 Sep 2018 0.49 549 7.5 UK Treasury Bill 28 Aug 2018 0.48 400 5.5
Total Short Term Investments 7,313 99.8
Hedge Funds(1) Harbinger Class PE Holdings 18 0.2 Harbinger Class L Holdings 2 –
Total Hedge Funds 20 0.2
Total Fixed Asset Investments 7,333 100.0
(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments. Derivative instruments held in the Balanced Risk Allocation Share Portfolio are shown on the previous page. At the year end all the derivative instruments held in the Balanced Risk Allocation Share Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy on page 32.
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STRATEGY BALANCED RISK ALLOCATION
STRATEGIC REPORT BALANCED RISK ALLOCATION SHARE PORTFOLIO INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £’000 £’000 £’000 £’000 £’000 £’000 Gains on derivative instruments – note 10 47 641 688 45 775 820 Foreign exchange (losses)/gains – (22) (22) – 112 112 Gains on investments at fair value – 5 5 – 1 1 Income 30 – 30 26 – 26 Investment management fee (22) (50) (72) (21) (48) (69) Other expenses (38) – (38) (41) – (41)
Net return before taxation 17 574 591 9 840 849 Tax – – – – – –
Return after taxation for the financial year 17 574 591 9 840 849
Basic return per ordinary share 0.24p 8.24p 8.48p 0.13p 11.81p 11.94p
SUMMARY OF NET ASSETS AT 31 MAY 2018 2017 £’000 £’000 Fixed assets 7,333 8,352 Derivative assets held at fair value through profit or loss 281 209 Current assets – debtors, cash and cash equivalents 1,868 1,105 Derivative liabilities held at fair value through profit or loss (54) (142) Creditors falling due within one year, excluding borrowings (55) (39) Bank overdraft (86) –
Net assets 9,287 9,485
Net asset value per share 143.4p 134.7p
Notional exposure of derivative instruments as % of net assets 144.2% 159.7%
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STRATEGY MANAGED LIQUIDITY
STRATEGIC REPORT MANAGED LIQUIDITY SHARE PORTFOLIO PERFORMANCE RECORD
Total Return For the year ended 31 May 2018 2017 2016 2015 2014 Net Asset Value 0.3% 0.0% –0.1% –0.1% 0.2% Share Price 0.5% 0.5% –0.9% 0.5% 0.4%
Revenue return per share 0.24p (0.04)p (0.14)p (0.12)p 0.02p Dividend nil nil nil nil nil Source: Thomson Reuters.
Five Year Total Return Rebased to 100 at 31 May 2013
102.0 Net Asset Value
Share Price
101.5
101.0
100.5
100.0
99.5
99.0 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18
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STRATEGY MANAGED LIQUIDITY
STRATEGIC REPORT MANAGED LIQUIDITY SHARE PORTFOLIO MANAGER’S REPORT
Investment Objective The investment objective of the Managed Liquidity Share Portfolio is to produce an appropriate level of income return combined with a high degree of security. Market and Economic Review Bank of England (BOE) monetary policy was the biggest determinant of sterling short-term interest rates over the year. November 2017 was the first time since July 2007 that the BOE raised the cost of UK borrowing with the Bank Rate hiked from 0.25% to 0.50%. This reversed the cut made in the rate following the European Union referendum vote in 2016. Strong economic growth at the start of 2018 raised expectations that the rate would be raised again in May and by early April the market viewed a May increase as almost certain. However, a series of weaker economic data releases saw these expectations recede, and by the time of the May meeting, the market’s expectations were aligned with the bank’s eventual decision to keep the rate on hold at 0.50%. After the November 2017 hike, 3-month LIBOR (the rate at which the largest banks lend to one another) increased to 0.52%. From early February, the speculation that the bank would increase the rate again in May led to a further rise in the LIBOR rate. The rate peaked at 0.79% in April before then receding as the likelihood of a hike diminished. Portfolio Performance The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2018 was 0.3%. Portfolio Strategy and Review Our investment strategy is achieved by investing in the Invesco Perpetual Money Fund and the Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc, each of which invests in a diversified portfolio of high quality sterling denominated short-term money market instruments. The Invesco Perpetual Money Fund has positions in a number of government, quasi-government and corporate bonds. In order to limit the exposure to interest rate risk and credit risk (the likelihood of an issuer defaulting), these bonds are both short-dated and of high quality. The fund also has an allocation to floating rate notes. The interest rates on these bonds reset at regular intervals and so can mitigate the effect of rising rates on fund performance. The Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc invests in high quality sterling denominated money market instruments such as commercial paper, certificates of deposit, floating rate notes, time deposits and asset-backed commercial paper, all with a minimum rating of A-1. At 31 May 2018 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor's and AAAmmf by Fitch Ratings. Outlook The BoE has consistently guided the market that any tightening of monetary policy will be gradual and limited and we anticipate that this approach will continue. However, both investment vehicles hold a number of floating rate notes. They remain invested in a range of short-dated, high quality instruments from the government, quasi-government, banking and corporate sectors.
Stuart Edwards Portfolio Manager 30 July 2018
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STRATEGY MANAGED LIQUIDITY
STRATEGIC REPORT MANAGED LIQUIDITY SHARE PORTFOLIO LIST OF INVESTMENTS AS AT 31 MAY 2018 2017 MARKET MARKET VALUE % OF VALUE % OF £’000 PORTFOLIO £’000 PORTFOLIO Invesco Perpetual Money Fund* 4,905 99.0 4,900 89.9 Short-Term Investments Company (Global Series) 48 1.0 548 10.1
4,953 100.0 5,448 100.0
* At the year end the Managed Liquidity Share Portfolio held 4.69% (2017: 5.85%) of the outstanding shares in the Invesco Perpetual Money Fund.
MANAGED LIQUIDITY SHARE PORTFOLIO INCOME STATEMENT FOR THE YEAR ENDED 31 MAY 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL £’000 £’000 £’000 £’000 £’000 £’000 Gains on investments at fair value – 1 1 – – – Income 30 – 30 21 – 21 Investment management fee (6) – (6) (6) – (6) Other expenses (12) – (12) (17) – (17)
Net return before taxation 12 1 13 (2) – (2) Tax – – – – – –
Return after taxation for the financial year 12 1 13 (2) – (2)
Basic return per ordinary share 0.24p 0.02p 0.26p (0.04)p – (0.04)p
SUMMARY OF NET ASSETS AT 31 MAY 2018 2017 £’000 £’000 Fixed assets 4,953 5,448 Current assets 54 53 Creditors falling due within one year, excluding borrowings (143) (142)
Net assets 4,864 5,359
Net asset value per share 103.5p 103.2p
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STRATEGY
STRATEGIC REPORT
BUSINESS REVIEW Invesco Perpetual Select Trust plc is a UK investment company with four Share classes, each of which has separate investment objectives, as set out below, and is represented by a separate Portfolio. The strategy the Board follows to achieve its overall objective and those of each Share class is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below. The business model the Company has adopted to achieve its objective has been to contract the services of Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’) to manage the portfolios in accordance with the Board’s strategy and under its oversight. The Manager is also responsible for providing company secretarial, marketing, accounting and general administration services. In practice, many of these services are performed under delegated authority by Invesco Asset Management Limited (IAML), a company related to IFML. References to the Manager in this annual financial report should consequently be considered to include both entities. All administrative support is provided by third parties under the oversight of the Board. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Link Asset Services to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian. BNYMIL became the depositary following novation of the depositary agreement with BNY Mellon Trust & Depositary (UK) Limited on 1 December 2017. The transfer has had no substantive effect on the services received by the Company. Investment Policy The Company’s and respective Share classes’ investment objectives, investment policies and risk and investment limits combine to form the ‘Investment Policy’ of the Company. The Company Investment Objective and Policy The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns. The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives, policies and risks and limits of the Portfolios for these Share classes follow. With the exception of borrowings, the limits for the Company and the four Share classes are measured at the point of acquisition of investments, unless otherwise stated.
Investment Limits of the Company The Board has prescribed limits on the Investment Policy of the Company, which include the following: – no more than 15% of the gross assets of the Company may be invested in a single investment; and – no more than 10% of the gross assets of the Company may be invested in other listed investment companies (excluding REITs).
UK Equity Share Portfolio Investment Objective The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.
Investment Policy and Risk The UK Equity Portfolio is invested primarily in UK equities and equity-related securities of UK companies across all market sectors. The Manager invests the UK Equity Portfolio so as to maximise exposure to the most attractive sectors and securities, within a portfolio structure that reflects the Manager’s view of the macroeconomic environment. The Manager does not set out to manage the risk characteristics of the UK Equity Portfolio relative to the FTSE All-Share Index (the ‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark. The size of weightings will reflect the Manager’s view of the attractiveness of a security and the degree of conviction held. If a security is not considered to be a good investment, it will not be held in the UK Equity Portfolio, irrespective of its weight in the benchmark index.
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STRATEGY
The Manager controls the stock-specific risk of individual securities by ensuring that the UK Equity Portfolio is always diversified across market sectors. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security. It is expected that, typically, the Portfolio will hold between 45 and 80 securities. The Directors believe that the use of borrowings can enhance returns to shareholders and the UK Equity Portfolio will generally use borrowings in pursuing its investment objective.
Investment Limits The Board has prescribed limits on the investment policy of the UK Equity Portfolio, which include the following: – no more than 12% of the gross assets of the UK Equity Portfolio may be held in a single investment; – no more than 10% of the gross assets of the UK Equity Portfolio may be held in other listed investment companies (excluding REITs); – no more than 20% of the gross assets of the UK Equity Portfolio may be held in overseas assets; and – borrowings may be used to raise equity exposure up to a maximum of 25% of the net assets of the UK Equity Portfolio when it is considered appropriate.
Global Equity Income Share Portfolio Investment Objective The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide. Investment Policy and Risk The Portfolio will be invested predominantly in a portfolio of listed, quoted or traded equities worldwide, but may also hold other securities from time to time including, inter alia, fixed interest securities, preference shares, convertible securities and depositary receipts. Investment may also be made in regulated or authorised collective investment schemes. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded. The Manager will at all times invest and manage the Portfolio’s assets in a manner that is consistent with spreading investment risk, but there will be no rigid industry, sector, region or country restrictions. The Portfolio may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Portfolio’s direct investments, as described above. It is expected that, typically, the Portfolio will hold between 45 and 80 securities. The Directors believe that the use of borrowings can enhance returns to shareholders, and the Global Equity Income Portfolio may use borrowings in pursuing its investment objective. The Company’s foreign currency investments will not be hedged to sterling as a matter of general policy. However, the Manager may employ currency hedging, either back to sterling or between currencies (i.e. cross hedging of portfolio investments). Investment Limits The Board has prescribed the following limits on the investment policy of the Global Equity Income Portfolio: – no more than 20% of the gross assets of the Global Equity Income Portfolio may be invested in fixed interest securities; – no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in a single investment; – no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in other listed investment companies (excluding REITs); and
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STRATEGY
STRATEGIC REPORT continued
– borrowings may be used to raise equity exposure up to a maximum of 20% of the net assets of the Global Equity Income Portfolio, when it is considered appropriate. Balanced Risk Allocation Share Portfolio Investment Objective The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities. Investment Policy and Risk The Portfolio utilises two main strategies: the first seeks to balance the risk contribution from each of three asset classes (equities, bonds and commodities), with the aim of reducing the probability, magnitude and duration of capital losses, and the second seeks to shift tactically the allocation among the assets with the aim of improving expected returns. The Portfolio is constructed so as to achieve appropriate diversity and to balance risk by asset class (bonds, equities and commodities) and by asset within each asset class. Neutral risk weighting is achieved when each asset class contributes an equal proportion of the total Portfolio risk and each asset contributes an equal proportion of the total risk for its respective asset class. The Manager is permitted to actively vary asset class weightings, subject to a maximum of 150% and a minimum of 50% of each asset class’s neutral weight. The Manager is also permitted to actively vary individual asset weightings, provided the asset class guidelines are not violated. Asset weights may not be less than zero (short) and may on occasion exceed twice the neutral weight. The Portfolio will be mainly invested directly in highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. However, the Portfolio may also be invested in equities, equity-related securities and debt securities (including floating rate notes). Financial derivative instruments (including but not limited to futures and total return swaps) are used only to achieve long exposure to the three asset classes. The Portfolio may also use financial derivative instruments, including currency futures and forwards, for efficient portfolio management, hedging and investment purposes. Financial derivative instruments will not be used to create net short positions in any asset class. The derivatives portfolio will typically comprise between 20 and 33 investment positions. It is expected that the Portfolio’s investments will mainly be denominated in sterling. Any non-sterling derivative investments may be hedged back into sterling at the discretion of the Manager when it is economic to do so. Investment Limit The Board has prescribed the following limits on the investment policy of the Balanced Risk Allocation Portfolio: – the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Allocation Portfolio; and – no more than 10% of the gross assets of the Balanced Risk Allocation Portfolio may be held in other listed investment companies. Managed Liquidity Share Portfolio Investment Objective The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.
Investment Policy and Risk The Managed Liquidity Portfolio invests in a range of sterling-based or related money market fund assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through money market funds, including funds managed by Invesco. The Managed Liquidity Portfolio generally invests in money market funds authorised as UCITS schemes (Undertakings for Collective Investments in Transferable Securities, being open ended retail investment funds in the EU), which are required under governing regulations to provide a prudent spread of risk. In the event that the Managed Liquidity Portfolio is invested directly in securities and instruments, the Manager will observe investment restrictions and risk diversification policies that are consistent with UCITS regulations.
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STRATEGY
Investment Limits The Board has prescribed limits on the investment policy of the Managed Liquidity Portfolio, which include the following: – no more than 10% of the gross assets of the Managed Liquidity Portfolio may be held in a single investment, other than authorised money market funds or high quality sovereign debt securities; and – no more than 5% of the gross assets of the Managed Liquidity Portfolio may be held in unquoted investments, other than authorised money market funds. Investors should note that the Managed Liquidity Shares are not designed to replicate the returns or other characteristics of a bank or building society deposit or money market fund. Key Performance Indicators The Board reviews the performance of the Company by reference to a number of Key Performance Indicators, at either a Company or Portfolio level, which include the following: • Investment Performance • Revenue and Dividends • Discount/Premium • Ongoing Charges
Investment Performance To assess investment performance the Board monitors the net asset value (NAV) performance of the individual Share classes relative to that of benchmark indices it considers to be appropriate. However, given the requirements and constraints of the investment objectives and policies followed, no index can be expected to fully represent the performance that might reasonably be expected from any one or all of the Company’s Share classes. The NAV total return performance of each of the Portfolios over the year to 31 May 2018 and of relevant benchmark indices were as follows:
UK Equity Portfolio 1.1% FTSE All-Share Index 6.5%
Global Equity Income Portfolio 7.8% MSCI World Index (£) 8.2%
Balanced Risk Allocation Portfolio 6.4% 3 month LIBOR plus 5% 5.4%
Managed Liquidity Portfolio 0.3% Source: Thomson Reuters. Other performance periods, together with share price total returns, are shown on page 2.
Revenue and Dividends The Directors review revenue estimates and prospective dividend levels at each Board meeting. For the equity share classes the Directors have become more focused on total return since sanctioning contributions to dividends from capital, but dividends paid continue to be mostly constituted from revenue and revenue is an important element of overall Portfolio returns.
UK Equity Shares Revenue earnings per Share for the UK Equity Portfolio was 5.49p (2017: 5.38p), based on net revenue for the year of £2,038,000 (2017: £2,102,000), which included receipts of £110,000 (2017: £39,000) of non-recurring special dividends, equivalent to 0.30p (2017: 0.10p). Dividend Policy: The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. Further, they have implemented a model
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STRATEGY
STRATEGIC REPORT continued
of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the target. Dividends Declared: The Directors have declared and paid four interim dividends for the year ended 31 May 2018 totalling 6.45p per UK Equity Share (2017: 6.25p) of which 6.16p was met from revenue earned in the year and revenue reserves brought forward. The aggregate of dividends paid in respect of the year was £2,397,000 (2017: £2,434,000). A first interim dividend for the year to 31 May 2019 of 1.5p was declared on 18 July 2018, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Global Equity Income Shares Revenue earnings per Share for the Global Equity Income Portfolio was 6.50p (2017: 5.62p), based on net revenue for the year of £2,149,000 (2017: £1,839,000), which included £14,000 (2017: nil) of special dividends. Dividend Policy: The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual Global Equity Income dividends per share from year to year. Further, they have implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the target. Dividends Declared: The Directors have declared and paid four interim dividends for the year ended 31 May 2018 totalling 6.7p (2017: 6.4p) per Global Equity Income Share, all of which was met from revenue earned in the year and revenue reserves brought forward. The aggregate of dividends paid in respect of the year was £2,211,000 (2017: £2,092,000). A first interim dividend for the year to 31 May 2019 of 1.5p was declared on 18 July 2018, setting the level for the next two dividends, in the absence of unforeseen circumstances.
Balanced Risk Allocation Shares In order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust under section 1158 of the Corporation Tax Act 2010. No dividends are required to be declared or paid for the year to retain investment trust status.
Managed Liquidity Shares The Board intends to declare dividends on the Managed Liquidity Portfolio when the level of income available allows. The Managed Liquidity Portfolio recorded a net revenue profit for the year, but with interest rates continuing to be very low it was quite small, at £12,000 (2017: £2,000 loss).In view of the administrative costs involved, no interim dividend was declared on the Managed Liquidity Shares for the year ended 31 May 2018 (2017: nil).
Discount/(Premium) The Company has a discount control policy in place for all four Share classes, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the market price of the shares at close to their respective net asset values and, by so doing, avoid significant overhangs or shortages in the market. It is the Board’s policy to buy back shares and to sell shares from treasury on terms that do not dilute the net asset value attributable to existing shareholders at the time of the transaction. The operation of this policy is dependent upon the authorities to buy back and issue shares being renewed by shareholders. Notwithstanding the intended effect of this policy, there can be no guarantee that the Company’s shares will trade at close to their respective net asset values. Shareholders should also be aware that there is a risk that this discount policy may lead to a reduction in the size of the Company over time.
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STRATEGY
The Board and the Manager closely monitor movements in the Company’s share prices and dealings in the Company’s shares. Share movements in the year are summarised on page 36. At 31 May 2018, the share prices, net asset values (NAV) and the discounts of the four Share classes were as follows: 2018 2017 NET ASSET SHARE NET ASSET SHARE VALUE PRICE VALUE PRICE SHARE CLASS (PENCE) (PENCE) DISCOUNT (PENCE) (PENCE) DISCOUNT UK Equity 189.0 186.0 1.6% 193.5 192.0 0.8% Global Equity Income 207.2 202.0 2.5% 198.6 197.5 0.6% Balanced Risk Allocation 143.4 139.5 2.7% 134.7 133.5 0.9% Managed Liquidity 103.5 102.0 1.4% 103.2 101.5 1.6%
The following charts show the (discount)/premium at which the Shares traded over the two years to 31 May 2018. 10 10 UK Equity Portfolio Global Equity Imcome Portfolio 8 8
6 6
4 4
2 2
0 0
–2 –2
–4 –4 (Discount)/Premium % (Discount)/Premium (Discount)/Premium % (Discount)/Premium –6 –6
–8 –8
–10 –10
May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18
10 Balanced Risk Allocation Portfolio 10 Managed Liquidity Portfolio 8 8
6 6
4 4
2 2
0 0
–2 –2
–4 –4 (Discount)/Premium % (Discount)/Premium (Discount)/Premium % (Discount)/Premium –6 –6
–8 –8
–10 –10
May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 Source: Thomson Reuters.
Ongoing Charges The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure is calculated by dividing the annualised ongoing charges, including those charged to capital, by the average daily net asset value during the year, expressed as a percentage.
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STRATEGY
STRATEGIC REPORT continued
At the year end the ongoing charges figure of the Company and that for the different Share classes, excluding any performance fees, were as follows: GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY 2018 0.81% 0.80% 0.81% 1.14% 0.35% 2017 0.94% 0.94% 0.94% 1.18% 0.40% UK Equity and Global Income ongoing charges reduced in the current year as a result of the management fee rates being reduced from 1 June 2017. During the past year neither the UK Equity nor Global Equity Income Portfolios outperformed their benchmarks. In addition, the UK Equity Portfolio wrote back £4,000 (2017: £280,000) of performance fee previously provided, and the impact follows: UK COMPANY EQUITY 2018 nil –0.01% 2017 –0.20% –0.41% Financial Position Assets and Liabilities The Company’s balance sheet on page 69 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 12(b) of the financial statements on page 83, with interest paid (finance costs) in note 5. Due to the readily realisable nature of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchases and sales of investments and the income from investments against which must be set the costs of borrowing and management expenses.
Borrowing Policy Borrowing policy is under the control of the Board, which has established effective parameters for the Portfolios. Borrowing levels are regularly reviewed. As part of the Company’s Investment Policy, the approved borrowing limits are 25% of the net assets of the UK Equity Portfolio and 20% of net assets of the Global Equity Income Portfolio. The Balanced Risk Allocation Portfolio does not use borrowings, but is geared by means of the derivative instruments used to implement its investment policy. The Managed Liquidity Portfolio does not use borrowings. Issued Share Capital All Share classes have a nominal value of 1p per Share. The following table summarises the Company’s share capital at the year end and movements during the year. GLOBAL BALANCED UK EQUITY RISK MANAGED NUMBER OF SHARES EQUITY INCOME ALLOCATION LIQUIDITY Shares in issue at the year end: – excluding treasury 35,986,971 33,322,219 6,477,892 4,700,708 – held in treasury 8,203,540 4,879,000 4,781,000 7,333,785 Movements during the year: Increase/(decrease) arising from conversions (1,337,484) 1,399,306 (82,993) (262,557) Shares bought back into treasury (685,000) (825,000) (483,000) (232,000) Average price thereon 181.4p 202.0p 138.6p 101.0p
Since the year end another 450,000 UK Equity Shares, 566,000 Global Equity Income Shares and 248,000 Balanced Risk Allocation Shares have been bought into treasury at prices of 184.9p, 202.0p and 139.0p, respectively. Further details on net changes in issued share capital are set out in note 14 to the financial statements on pages 83 and 84. No treasury shares were cancelled during the year.
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Current and Future Developments As part of the Company’s overall strategy, the Company seeks to manage its affairs so as to maximise returns for shareholders. The Board also has a longer-term objective to increase the size of the Company in the belief that increasing the assets of the Company in this way will make the Company’s Shares more attractive to investors and improve the liquidity of the Shares. Details of trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the portfolio managers’ reports and further details as to the risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below. Principal Risks and Uncertainties The audit committee regularly undertakes a robust assessment of the risks the Company faces, on behalf of the Board (see Audit Committee Report on pages 45 to 47). The following are considered to be the most significant risks to the Company and to shareholders in relation to their investments in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 17 to the financial statements.
Investment Objectives There is no guarantee that the Investment Policy of the Company and of each Portfolio will provide the returns sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives. The Board monitors the performance of the Company and each Portfolio and has established guidelines to ensure that the Investment Policy of the Company and each Portfolio is pursued by the Manager.
Market Movements and Portfolio Performance Individual Portfolio performance is substantially dependent on the performance of the securities (including derivative instruments) held within the Portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies; interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The Manager strives to maximise the total return from Portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences on the performance of each Portfolio. Further risks specifically applicable to the Balanced Risk Allocation Shares are set out on page 39. The performance of the Manager is carefully monitored by the Board, and the continuation of the Manager’s mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of Share are pursued by the Manager. For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different Portfolios of the Company, please see both the Chairman’s Statement on pages 3 to 5 and the portfolio managers’ reports starting on page 7.
Risks Applicable to the Company’s Shares Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be no guarantee that any appreciation in the value of the Company’s Shares will occur and investors may not get back the full value of their investments. Owing to the potential difference between the mid-market price of the Shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect their mid-market price. The market value of a Share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield, where applicable, and prevailing interest rates, amongst other factors. As such, the market value of a Share can fluctuate and may not reflect its underlying NAV. Shares may therefore trade at discounts to their NAVs. However, the Board has adopted a discount control policy that applies to all Share classes and the Board and the Manager monitor the market rating of each Share class. Past performance of the Company’s Shares is not necessarily indicative of future performance.
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STRATEGIC REPORT continued
While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective Portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the Shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity Portfolio dividends at specified target levels (see pages 33 and 34).
Viability and Compulsory Conversion of a Class of Share It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the Company’s share classes could result in the relevant Portfolio becoming too small to be viable. The Board monitors share conversions and Portfolio sizes and liaises with the Manager on the continued viability of each Share class. The Board has received assurances from the Manager that the size of the portfolios is not critical to the Manager being able to continue to offer its investment management services in respect of any of the Company’s four portfolio strategies. The continued listing on the Official List of each class of Share is dependent on at least 25% of the Shares in that class being held in public hands. This means that if more than 75% of the Shares of any class were held by, inter alia, the Directors, persons connected with Directors or persons interested in 5% or more of the relevant Shares, the listing of that class of Share might be suspended or cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but in the event that the listing of any class of Shares were cancelled the Company would lose its investment trust status. Accordingly, if at any time the Board considers that the listing of any class of Share on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant Shares requiring them to convert their Shares into another Share class.
Liability of a Portfolio for the Liabilities of Another Portfolio The Directors intend that, in the absence of unforeseen circumstances, each Portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors: • As a matter of law, the Company is a single entity. Therefore, in the event that any of the Portfolios has insufficient funds or assets to meet all of its liabilities, on a winding-up or otherwise, such a shortfall would become a liability of the other Portfolios and would be payable out of the assets of the other Portfolios in such proportions as the Board may determine; and • The Companies Act 2006 prohibits the Directors from declaring any dividends in circumstances where the Company’s assets represent less than one and a half times the aggregate of its liabilities. If the Company were to incur material liabilities in the future, a significant fall in the value of the Company’s assets as a whole may affect the Company’s ability to pay dividends on a particular class of Share, even though there are distributable profits attributable to the relevant Portfolio. Gearing Performance may be geared by use of the £25 million 364 day multicurrency revolving credit facility. The Company also has an uncommitted overdraft facility of up to 10% of net assets. There is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities. The Balanced Risk Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 32) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Allocation Shares. Gearing levels of the different Portfolios will change from time to time in accordance with the respective portfolio managers’ assessments of risk and reward. Where market exposure is geared, any reduction in the value of the geared Portfolio’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to affect Share prices adversely). Any reduction in the number of Shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in a Portfolio’s gearing.
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Whilst the use of borrowings by the Company should enhance the total return on a particular class of Share where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling, further reducing the total return on that Share class. Similarly, the use of gearing by investment companies or funds in which the Company invests increases the volatility of those investments.
Hedging The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time.
Regulatory and Tax Related The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being subject to Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations. The Manager reviews the level of compliance with the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager’s compliance and internal audit officers report regularly to the Company’s Audit Committee. The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 17 to the financial statements.
Additional Risks Applicable to Balanced Risk Allocation Shares The use of financial derivative instruments forms part of the investment policy and strategy of the Balanced Risk Allocation Portfolio. The Portfolio’s ability to use these instruments may be limited by market conditions, regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to liquidate a financial derivative instrument at an advantageous price. However, the Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the Portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements.
Reliance on Third Party Service Providers The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function. In particular, the Manager performs services that are integral to the operation of the Company and the custodian appointed by the depositary holds assets on its behalf. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its Investment Policy. The Manager may be exposed to reputational risks. In particular, the Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in potential counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to successfully pursue its Investment Policy.
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STRATEGIC REPORT continued
Viability Statement The Directors’ view of the Company’s viability has not changed since last year. The Company is an investment company which operates as a collective investment vehicle, designed and managed for long term investment. The Board considers long term for this purpose to be at least three years and so has assessed the Company’s viability over this period. However, the life of the Company is not intended to be limited to that or any other period. In assessing the viability of the Company the Board considered the principal risks to which it is exposed, as set out on pages 37 to 40, together with mitigating factors. The risks of failure to meet the Company’s and the Portfolios’ investment objectives, contributory market and investment risks and the challenges of lack of scale were considered to be of particular importance. The Board also took into account the capabilities of the Manager and the varying market conditions already experienced by the Company since its launch in 2006. On the question of scale, the Board has concluded that if an individual Portfolio became too small it should not cause the Company itself to be unviable. In terms of financial risks to viability, materially all of the investments comprising the portfolios are readily realisable. The equity portfolios also produce a stream of dividend income, which may fluctuate but which the Board expects to continue. The Company has no long term liabilities and the total value of the portfolios is a multiple of the value of the Company’s short term liabilities and annual operating costs. Consequently, there appears little to no prospect of the Company not being able to meet its financial obligations as they fall due in the next three years. Based on the above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment. Corporate Governance The Board is committed to maintaining high standards of Corporate Governance. The Corporate Governance Statement required by the UKLA Listing Rules is set out on page 44. Audit Committee Report The extended audit committee report required by the UK Corporate Governance Code is set out on pages 45 to 47. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders. Board Diversity The Company’s policy on diversity is set out on page 50. At the year end the Board comprised four male and one female non-executive Directors resulting in female representation of 20%. Although the number of male Board members increased by one on 1 June 2018 the year end proportion remains representative, since the Board normally comprises five Directors and one of the other male Directors will not be continuing after the AGM. Summary biographical details of all the Directors are set out on pages41and 42. The Company has no employees. Social and Environmental Matters As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make investment decisions on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment. Modern Slavery Act The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
This Strategic Report was approved by the Board on 30 July 2018.
Invesco Asset Management Limited Company Secretary
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DIRECTORS
Patrick Gifford Alan Clifton Chairman of the Board Senior Independent and Nomination Director Committee Mr Clifton was Mr Gifford has served appointed as a Director as a Director since the on 10 January 2008. Company’s He is a former managing incorporation in August partner of the 2006 and was a director stockbrokers, Kitcat & of the Company’s Aitken, and from 1990 predecessor, Merrill Lynch Asset Allocator plc. until 2001 was the managing director of Morley He was previously the chief executive of Fleming Fund Management (now Aviva Investors), the Investment Trust Management and a director asset management arm of Aviva plc, the UK’s of Robert Fleming Holdings. Past non-executive largest insurance group. He is chairman of appointments include being chairman of Murray JPMorgan Japanese Smaller Companies Trust plc, Income Trust plc and of Martin Currie Pacific a director of Macau Property Opportunities Trust plc and a director of JPMorgan Russian Fund Ltd. and retired as Chairman of Securities plc. International Biotechnology Trust plc in 2017. Mr Clifton will become chairman of the Management Engagement Committee from the conclusion of the AGM.
Sir Michael Bunbury Victoria Muir Chairman of the Ms Muir was appointed Management as a Director with effect Engagement Committee from 1 July 2015. She is Sir Michael was also a non-executive appointed as a Director director of Christie on 10 January 2008. Group plc, Premier He is a former chairman Global Infrastructure of Smith & Williamson, Trust plc, PGIT Securities following which he 2020 plc, Sterling ISA continued as a consultant to the firm until May Managers Ltd and State Street Trustees Ltd. She 2017. He is chairman of BH Global Ltd and was Global Head of Investor Relations at BlueBay HarbourVest Global Private Equity Ltd. Past Asset Management LLP until 2017 and was non-executive appointments include being previously Head of Client Account Management chairman of JPMorgan Claverhouse Investment at Royal London Asset Management Ltd, which Trust plc and a director of Foreign & Colonial position was the culmination of a 12 year Investment Trust plc. Sir Michael will retire from progression in sales, marketing and client the Board at the conclusion of the AGM. relationship related positions, and was also a director of a number of Royal London Group companies. She is a Chartered Director and a Fellow of the Institute of Directors.
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DIRECTORS continued
Craig Cleland Graham Kitchen Chairman of the Audit Mr Kitchen was Committee appointed as a Director Mr Cleland was on 1 June 2018. He was appointed as a Director Global Head of Equities with effect from at Janus Henderson 1 November 2016 and Investors until March became Chairman of the 2018, having joined in Audit Committee on 2005. He was briefly at 31 July 2017. He is Head Threadneedle of Corporate Development: Investment Trusts, at Investments before that, having previously spent CQS (UK) LLP. He was previously at JPMorgan 13 years at Invesco as a UK Fund Manager and Asset Management (UK) Limited, latterly as Co-Head of Investment. He is a non-executive Managing Director, and led their technical groups director of The Mercantile Investment Trust plc in the investment trust business. Prior to that he and Places for People, is Chair of the Investment was a Director and senior company secretary at Committee for the Cancer Research Pension Fund, Fleming Investment Trust Management, and is a member of the Investment Committee of transferring to JPMorgan Asset Management after the charity Independent Age. He is a member of Chase Manhattan Bank acquired Robert Fleming the Chartered Financial Analyst Society of the UK. Holdings Limited.
All Directors are, in the opinion of the Board, independent of the management company and all Directors are members of the Audit, Management Engagement and Nomination Committees. All Directors are non-executive.
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THE COMPANY’S GOVERNANCE FRAMEWORK AT 31 MAY 2018
The Board and Committees Responsibility for good governance lies with the Board. The governance framework of the Company reflects the fact that as an Investment Company it has no employees and outsources investment management to the Manager and administration to the Manager and other external service providers.
The Board Five non-executive directors (NEDs) Chairman – Patrick Gifford Key responsibilities: – to set strategy, values and standards; – to provide leadership within a framework of prudent effective controls which enable risk to be assessed and managed; and – to appoint service providers and to challenge constructively and scrutinise their performance.
Nomination Management Audit Remuneration Committee Engagement Committee Committee Committee Function (page 50) (page 51) (page 45) (page 48)
All NEDs All NEDs All NEDs The Board as a whole performs this function Chairman – Chairman – Chairman – Patrick Gifford Sir Michael Bunbury Craig Cleland Key responsibilities: Key responsibilities: Key responsibilities: Key responsibility: – to review regularly – to review the – to oversee – to set the the Board’s performance of financial reporting remuneration structure and the Manager; and and the control policy of the composition; and – to review other environment; and Company. – to make any new service providers. – to manage the appointments. relationship with the external auditor.
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CORPORATE GOVERNANCE STATEMENT FOR THE YEAR ENDED 31 MAY 2018
The Board is committed to maintaining high standards of Corporate Governance and is accountable to shareholders for the governance of the Company’s affairs. The Directors have considered the principles and recommendations of the latest AIC Code of Corporate Governance (AIC Code) by reference to the AIC Corporate Governance Guide for Investment Companies (AIC Guide). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the 2016 UK Corporate Governance Code (UK Code), as well as setting out additional principles and recommendations on issues that are of specific relevance to investment trusts. The AIC Code is available from the Association of Investment Companies (www.theaic.co.uk). The UK Code is available from the Financial Reporting Council website (www.frc.org.uk). The Company has complied with the recommendations of the AIC Code and provisions of the UK Code, except the provisions relating to: • the role of the chief executive; • executive directors’ remuneration; and • the need for an internal audit function. For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers these provisions are not relevant to the position of Invesco Perpetual Select Trust plc, being an externally managed investment company with no executive employees and, in relation to the third, in view of the Manager having an internal audit function. Information on how the Company has applied the principles of the AIC Code and the UK Code follows: The composition and operation of the Board and its committees are summarised on pages 48 to 51 and, in respect of the Audit Committee, on pages 45 to 47. The Company’s approach to internal control and risk management is summarised on pages 46 and 47. The contractual arrangements with, and assessment of, the Manager are summarised on page 52. The Company’s capital structure and voting rights are summarised on page 53. The most substantial shareholders in the Company are listed on pages 54 and 55. The rules concerning the appointment and replacement of directors are contained in the Company’s Articles of Association and are discussed on page 50. There are no agreements between the Company and its Directors concerning compensation for loss of office. Powers to issue or buy back the Company’s shares, which are sought annually, and any amendment of the Company’s Articles of Association require approval by shareholders.
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AUDIT COMMITTEE REPORT FOR THE YEAR ENDED 31 MAY 2018
The Audit Committee comprises all of the Directors on the Board. The Committee members consider that collectively they are appropriately experienced to fulfil the role required. A separate risk committee has not been established. Review of the Company’s internal control and risk management fall within the terms of reference of the Audit Committee. Audit Committee Responsibilities The responsibilities of the Audit Committee include: – reviewing the systems of internal control and the management of financial risks; – consideration of the Manager’s internal audit programme and the results reported therefrom; also monitoring the effectiveness of the Manager’s internal audit function and the adequacy of its resources; – review of the performance fee calculations; – reviewing each aspect of the financial reporting process, the annual and half-yearly financial reports and announcements of the Company and ensuring compliance with relevant statutory and listing requirements; – management of the relationship with the external auditor, including their appointment and remuneration, and the scope, effectiveness, independence and objectivity of their audit; and – advising the board on whether the Committee believes the annual financial report taken as a whole is fair, balanced and understandable and provides the necessary information for shareholders to assess the Company’s position and performance, business model and strategy. The Audit Committee meets at least three times each year to review the internal financial and non-financial controls, to approve the contents of the draft annual and half-yearly financial reports to shareholders, to review the Company’s accounting policies and to approve the audit plan. In addition, the Audit Committee reviews the auditor’s independence, objectivity and effectiveness; the service organisation controls of the service providers to the Company; the effectiveness of the audit process; and, together with the Manager, reviews the Company’s compliance with financial reporting and regulatory requirements. The Manager’s internal audit and compliance teams report to the Committee at least twice each year and the depositary reports at least annually. Representatives of Grant Thornton UK LLP, the Company’s auditor, attended the Audit Committee meeting at which the draft annual financial report was reviewed and were given the opportunity to speak to Committee members without the presence of representatives of the Manager. The audit plan is agreed with the auditor in advance of the financial year end. At this stage, matters for audit focus are discussed and agreed. These matters are given particular attention during the audit process and, among other matters, are reported on by the auditor in their audit results report to the Committee. This report is considered by the Committee and discussed with the auditor and the Manager prior to the approval and signing of the financial statements. Accounting Matters and Significant Areas For the year end the accounting matters that were subject to specific consideration by the Committee and consultation with the auditor, where necessary, were as follows: SIGNIFICANT AREA HOW ADDRESSED Portfolio Ownership The investments are held on behalf of the Company by the Company’s and Valuation custodian. The Manager confirmed to the Committee that the Company’s records, both throughout the year and at the year end, had been agreed to the custodian’s records. The depositary also undertook an independent monthly reconciliation to custodian records, including at the balance sheet date. Actively traded listed investments are valued using stock exchange prices provided by third party pricing vendors. Investments that are unlisted or not actively traded are valued as set out in the accounting policy 1(b)(v), and any such valuations are reviewed by the Manager’s pricing committee and the Audit Committee.
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AUDIT COMMITTEE REPORT FOR THE YEAR ENDED 31 MAY 2018 continued
SIGNIFICANT AREA HOW ADDRESSED Income Recognition The Manager confirmed to the Committee that each stock line had been reviewed to ensure that those marked ex-dividend in the year were included in the income statement and that any special dividends were appropriately attributed to revenue or capital. Performance Fees The UK Equity and Global Equity Income year end performance fee calculations were prepared and reviewed by the Manager and reviewed in depth by the Committee, all with reference to the investment management agreement. These matters were discussed with the Manager and the auditor in pre year end audit planning, and were satisfactorily addressed as described above and through consideration of reports provided by, and discussed with, the Manager and the auditor at the conclusion of the audit process. Following a thorough review of the 2018 annual financial report, the Audit Committee is satisfied that taken as a whole the report is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. I will attend the AGM to deal with questions relating to the financial statements. Auditor Grant Thornton UK LLP was selected to be the Company’s external auditor following a tender exercise in 2016 and was appointed by shareholders on 4 October 2016. This year’s audit of the Company’s annual financial report was the second performed by Grant Thornton UK LLP. Marcus Swales has served as the audit partner responsible for the Company’s audit since appointment. The Committee assessed the effectiveness of the external audit process, having reviewed the audit plan, its execution and reporting, through discussions with the Manager and the auditor and consideration of review points raised. In addition, the Committee considered the independence of the external auditor and the objectivity of the audit process and is satisfied that Grant Thornton UK LLP has fulfilled its obligations to shareholders as independent auditor to the Company. It is the Company’s policy not to seek substantial non-audit services from its auditor. No non-audit services were provided during the year. All non-audit services require approval in advance by the Audit Committee. Prior to any engagement, the Committee would consider whether the particular skills and experience of the audit firm would make them a suitable supplier of those services and ensure that there would be no threat to the objectivity and independence in the conduct of the audit arising as a result. Internal Controls and Risk Management The Committee undertakes a robust assessment of the risks to which the Company is exposed by reference to a risk control summary, which maps the risks, mitigating controls in place and relevant information reported to the Directors. Potential implications of Brexit are considered in this process. The resultant ratings of the mitigated risks, in the form of a risk heat map, allow the Directors to concentrate on those risks that they assess to be most significant to the Company’s operations. These are reflected in the list of principal risks and uncertainties brought to the attention of investors in the Strategic Report on pages 37 to 40. The Audit Committee, on behalf of the Board, is responsible for ensuring that the Company maintains a sound system of internal control to mitigate risk and safeguard shareholders’ investments and the Company’s assets. The Company relies on external service providers for all of its operations and on the controls they operate on behalf of the Company. Consequently these are integral to the effectiveness of the Company’s system of internal controls. The Committee receives and considers at least annually, together with representatives of the Manager, service organisation control reports from the relevant service provider in relation to the operational controls of the investment manager, company secretary, accounting administrator, custodian and registrar. These each include an independent auditor’s opinion on the fairness of the presentation of the description, the suitability of the design and the operating effectiveness of the controls to achieve the related control objectives stated in that description, based on their examination.
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The Committee ensures that appropriate action is taken to remedy any significant failings or weaknesses identified from its reviews. No significant items were identified in the year. The Audit Committee also receives regular reports from the depositary and the Manager’s internal audit and compliance teams, as discussed earlier in this report. The risk management and internal control system have been in place throughout the year and up to the date of this report. The Committee has reviewed and accepted the Manager’s ‘Whistleblowing’ policy under which staff of Invesco Fund Managers Limited can, in confidence, raise concerns about possible improprieties or irregularities in matters affecting the Company. Internal Audit Due to the nature of the Company, being an externally managed investment company with no executive employees, and in view of the Manager having an internal audit function, the Company does not have its own internal audit function.
Craig Cleland Chairman of the Audit Committee 30 July 2018
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DIRECTORS’ REPORT FOR THE YEAR ENDED 31 MAY 2018
Business and Status The Company was incorporated and registered in England and Wales on 25 August 2006 as a public limited company, registered number 5916642. It is an investment company as defined by section 833 of the Companies Act 2006 and operates as an investment trust within the meaning of the Corporation Tax Act 2010 (CTA) and the Investment Trusts (Approved Company) (Tax) Regulations 2011. HM Revenue & Customs has approved the Company’s status as an investment trust and, in the opinion of the Directors, the Company has conducted its affairs so as to enable it to maintain such approval. The Board The Company normally has a Board of five non-executive directors who oversee and monitor the activities of the Manager and other service providers on behalf of shareholders and ensure that the investment policy is adhered to. Details of the Board’s responsibilities, the information it relies upon and the number of meetings it holds follow. Certain aspects of the Company’s affairs are dealt with by the Directors sitting as Committees of the Board, descriptions of which also follow. The Board has resolved that a remuneration committee is not appropriate for a company of this nature with a Board of this size. Remuneration is therefore regarded as part of the Board’s responsibilities. For information on the Directors’ remuneration please refer to the Directors’ Remuneration Report on pages 57 to 59. The Board considers that all of the Directors are wholly independent of the Company’s Manager. The Directors have a range of business, financial and asset management skills as well as experience relevant to the direction and control of the Company. Brief biographical details of the members of the Board are shown on pages 41 and 42.
Chairman The Chairman is responsible for the leadership of the Board and ensuring its effectiveness. The Chairman is Patrick Gifford, a non-executive and independent Director, who has no conflicting relationships.
Senior Independent Director and Chief Executive Officer Alan Clifton is the Senior Independent Director. He is available to shareholders if they have concerns which contact through the normal channels of Chairman, Manager or Company Secretary have failed to resolve or for which such contact is inappropriate. Since all Directors are non-executive and day-to-day management responsibilities are subcontracted to the Manager, the Company does not have a Chief Executive Officer.
Board Responsibilities The Directors have a duty to promote the success of the Company taking into consideration the likely consequences of any decision in the long-term; the need to foster the Company’s business relationships with its Manager; the impact of the Company’s operations on the community and the environment; the desire for the Company to maintain a reputation for high standards of business conduct; and the need to act fairly between stakeholders of the Company. The Board directs the Company in accordance with these duties and ensures that it operates within a framework of effective controls which enable risk to be assessed and managed. A formal schedule of matters reserved for the Board has been established. The schedule of matters is reviewed annually to ensure compliance with latest best practice and the AIC Code and is available for inspection at the AGM, at the registered office of the Company, and on the Manager’s website. The main responsibilities of the Board include: setting policies and standards; ensuring that the Company’s obligations to shareholders and others are understood and complied with; approving accounting and dividend policies; managing the capital structure; setting long-term objectives and strategy; assessing risk; reviewing investment performance; approving loans and borrowing; approving recommendations presented by the Company’s respective Board Committees; controlling risks; and the ongoing assessment of the Manager. The Board also seeks to ensure that shareholders are provided with sufficient information in order to understand the risk/reward balance to which they are exposed by holding their Shares, through the portfolio details given in the annual and half-yearly financial reports, and regulatory information service announcements, including daily NAV disclosures.
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The Board is committed to the prevention of corruption in the conduct of the Company’s affairs and, taking account of the nature of the Company’s business and operations, has put in place procedures that the Board considers adequate to prevent persons associated with it from engaging in bribery for and on behalf of the Company. The Board has a zero tolerance approach towards the facilitation of tax evasion. As stated above, the Board as a whole periodically undertakes the responsibilities which would otherwise be assumed by a remuneration committee.
Supply of Information To enable the members of the Board to fulfil their roles, the Manager and Company Secretary ensure that Directors have timely access to all relevant management, financial and regulatory information. The Board meets on a regular basis at least five times each year and additional meetings are arranged as necessary. Regular contact is maintained between the Manager, Company Secretary and the Board outside formal meetings. Board meetings follow a formal agenda, which includes a review of each Portfolio with a report from the respective portfolio manager on the current investment position and outlook; strategic direction; performance against relevant indices and the Portfolio’s peer group (where appropriate); asset allocation; gearing policy; cash management; revenue forecasts for the financial year; marketing and shareholder relations; corporate governance; and industry and other issues. On being appointed to the Board, Directors are fully briefed as to their responsibilities and are continually updated throughout their term in office on industry and regulatory matters. The Company Secretary and the Board have formulated a programme of induction training for newly appointed Directors. They have also put arrangements in place to address ongoing training requirements of Directors which include briefings from key members of the Manager’s staff and which ensure that Directors can keep up to date with new legislation and changing risks.
Committees of the Board As the Company is considered small for the purposes of the AIC Code, all Directors are members of the Nomination, Management Engagement and Audit committees. Each committee has written terms of reference which clearly define its responsibilities and duties, are in line with best practice and the AIC Code, and are reviewed annually. The terms of reference for each committee are available for inspection at the registered office of the Company, at the Company’s correspondence address (see page 102), on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts, and will be available at the AGM. In addition, the Board has appointed standing committees of at least one Director to approve the quarterly share conversions and dividend declarations and may appoint committees on an ad hoc basis to deal with other matters.
Board, Committee and Directors’ Performance Appraisals The Directors recognise the importance of the AIC Code, particularly in terms of evaluating the performance of the Board as a whole, the respective Committees and individual Directors. Performance of the Board, Committees and Directors has been assessed during the year, amongst other things, in terms of: • attendance at Board and Committee meetings; • the independence of individual Directors; • the ability of Directors to make an effective contribution to the Board and Committees due to the diversity of skills and experience each Director brings to the meetings; and • the Board’s ability to challenge the Manager’s recommendations, select topics for discussion and fix timetables for consideration of the future strategy of the Company. Alan Clifton was responsible for the performance evaluation of the Chairman, taking into account the views of the other Directors. The Board conducted its performance evaluation through questionnaires and discussion between the Directors and the Chairman. The review concluded that the Board and its Committees collectively, and the Directors individually, continue to be effective and that the Directors demonstrate commitment to the role.
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Attendance at Board and Committee Meetings The number of meetings held during the year to 31 May 2018 and the attendance of individual Directors are shown in the table below: MANAGEMENT SCHEDULED AUDIT NOMINATION ENGAGEMENT BOARD COMMITTEE COMMITTEE COMMITTEE MEETINGS MEETINGS MEETINGS MEETINGS Number of Meetings: 5 3 3 1 Attendance Patrick Gifford 5 3 3 1 Sir Michael Bunbury 5 3 3 1 Craig Cleland 5 3 3 1 Alan Clifton 5 3 3 1 Victoria Muir 5 3 3 1
Board members also attended a number of additional ad-hoc Board and Committee meetings during the year to deal with various items, including those held for share conversions and dividend declarations.
Appointment, Re-election and Tenure of Directors New Directors are appointed by the Board, following recommendation by the Nomination Committee, and are then subject to election by shareholders at the first Annual General Meeting (AGM) following their appointment. The Board appointed a new Director, Graham Kitchen, on 1 June 2018 and he will stand for election by shareholders at the forthcoming AGM. No Director has a contract of employment with the Company. Directors’ terms and conditions of appointment are set out in letters of appointment, copies of which are on the Manager’s website. The Articles of Association require that each Director shall retire and be subject to election at the first AGM after appointment and re-election at least every three years thereafter. A Director’s normal tenure of office will be for three terms of three years, except that the Board may determine otherwise if it is considered that the continued participation on the Board of an individual Director is in the best interests of the Company and its shareholders. If this is the case, then a long-serving Director will stand for annual re-election at the Company’s AGM. Craig Cleland was elected by shareholders at the 2017 AGM and will therefore stand for re-election at the AGM in 2020. Victoria Muir, having been appointed for three years, offers herself for re-election at the forthcoming AGM. Patrick Gifford and Alan Clifton having served for more than nine years will seek re-election at the forthcoming AGM due to their length of service. The Board confirms that all of these Directors continue to perform effectively and to demonstrate commitment to their roles and recommends that shareholders vote in favour of resolutions 5 to 7, for their re-election. Notwithstanding their length of service, the Board considers that Patrick Gifford and Alan Clifton remain independent in character and judgement from the Company’s Manager, a view which has been demonstrated by their actions on behalf of the Company. Nomination Committee The chairman is Patrick Gifford. The main responsibilities of the Nomination Committee are to review the size, structure, skills and diversity of the Board and to make recommendations to the Board with regard to any changes considered necessary or new appointments. The Board’s policy on diversity is that the Board seeks to ensure that its structure, size and composition, including the skills, knowledge, diversity (including gender) and experience of directors, is sufficient for the effective direction and control of the Company. The Board has not set any measurable objectives in respect of this policy. The Board has formulated a formal, rigorous and transparent procedure for the selection and appointment of new directors to the Board. The Nomination Committee carries out the procedure with a view to making recommendations to the Board. The Nomination Committee may consider using an executive search consultancy or open advertising when seeking new candidates for appointment, or they may alternatively decide that candidates found from sources within the Company and through its advisers are of a sufficiently high quality.
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Following the recommendation of the Nomination Committee, the Board appointed a new Director on 1 June 2018, Graham Kitchen, as part of its cycle of refreshment. An independent consultancy, First Flight Non-Executive Directors Ltd, was engaged to assist in the recruitment process. Management Engagement Committee (MEC) The chairman is currently Sir Michael Bunbury. Sir Michael will be succeeded as Chairman of the Committee by Alan Clifton at the conclusion of the AGM. The MEC meets at least once a year to review the Management Agreement and the performance and quality of service provided by the Manager and other service providers. Audit Committee and Audit Information The composition and activities of the Audit Committee are summarised in the Audit Committee Report on pages 45 to 47, which is included in this Directors’ Report by reference. Similarly, the Directors representations required by the Companies Act 2006 on audit information, which are included with other representations in the Directors’ Responsibilities Statement on page 60, are also included in this Directors’ Report by reference. Directors Conflicts of Interest A Director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or has the potential to conflict with the Company’s interests. The Articles of Association of the Company give the Directors authority to authorise potential conflicts of interest and there are safeguards that apply when Directors decide whether to do so. First, only Directors who have no interest in the matter being considered will be able to take the relevant decision, and second, in taking the decision the Directors must act in a way they consider, in good faith, is most likely to promote the Company’s success. The Directors are able to impose limits or conditions when giving authorisation if they think this is appropriate. The Directors have declared any potential conflicts of interest to the Company. These are entered into the Company’s Register of Potential Conflicts, which is reviewed regularly by the Board. This Register is kept at the registered office of the Company. The Directors are obliged to advise the Company Secretary and/or Chairman as soon as they become aware of any potential conflicts of interest. Directors will not participate in Board decisions on issues where they may be conflicted.
Disclosable Interests The Directors’ interests in the ordinary share capital of the Company are disclosed in the Directors’ Remuneration Report on page 58. No Director was a party to, or had any interests in, any contract or arrangement with the Company at any time during the year or at the year end other than in respect of indemnification and insurance as set out below.
Directors’ Indemnification and Insurance The Company maintains a Directors’ and Officers’ liability insurance policy. A Deed of Indemnity has been executed by the Company under the terms of which, to the extent permitted by law and the Company’s Articles of Association, the Company will indemnify the Directors against liabilities incurred in connection with their office as Directors of the Company and fund reasonable expenditure incurred by them in defending proceedings brought against them in connection with their position as Directors of the Company. The indemnity does not apply in certain circumstances, including to the extent that the costs are recoverable under the Directors’ and Officers’ liability insurance policy maintained by the Company or from any other insurance maintained by the Director. Going Concern The financial statements have been prepared on a going concern basis. The Directors consider this to be appropriate as the Company has adequate resources to continue in operational existence for the foreseeable future, taken as 12 months from the signing of the balance sheet for this purpose. This conclusion is consistent with the longer term viability statement on page40and in reaching it the Directors took into account the value of net assets; the Company’s Investment Policy; its risk management policies; the diversified portfolio of readily realisable securities which can be used to meet
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funding commitments; the credit facility and the overdraft which can be used for short-term funding requirements; the liquidity of the investments which could be used to repay the credit facility in the event that the facility could not be renewed or replaced; its revenue; and the ability of the Company in the light of these factors to meet all of its liabilities and ongoing expenses. The Manager Invesco Fund Managers Limited (IFML or the Manager) is the Company’s alternative investment fund manager (AIFM). It is responsible for the management of the Company’s investment portfolio and for providing administration and company secretarial services to the Company.
Investment Management Agreement (IMA) The Manager’s services are provided under the terms of an IMA, dated 22 July 2014 and subsequently amended, that can be terminated by either party giving six months’ notice or, in certain limited circumstances, without notice. As explained in the Strategic Report on page 30 Invesco Asset Management Limited (IAML), a company related to IFML provides many of the services under the agreement on delegated authority from IFML. References to the Manager should consequently be considered to include both entities. During the year the Manager was entitled to a basic fee (payable quarterly) in respect of each Portfolio as follows: 0.55% per annum (previously 0.65%) of net assets in the case of UK Equity and Global Equity Income, 0.75% per annum for Balanced Risk Allocation and 0.12% per annum of net assets in the case of Managed Liquidity. The IMA provides for the basic fee to be reduced by any fee payable separately to the Manager on any investments in other funds managed by the Manager. The Manager is also entitled to receive performance fees in respect of the UK Equity and Global Equity Income Portfolios of 12.5% of the increase in net assets per relevant Share in excess of a hurdle of the relevant benchmark plus 1% per annum. The amount of the performance fee that can be paid in any one year has been capped at 0.55% (previously 0.65%) of the net assets of the relevant Portfolio and payment is subject to a high water mark. If a performance fee is earned in any year, but the net asset value per share does not meet the high water mark at the year end, the amount of fee up to the cap for that year is carried forward as a creditor and will be paid when the high water mark and cap allow. A provision for performance fee arises when the amount earned exceeds the cap for fees payable in any one year. Such provision is carried forward to be paid in future periods or offset against future underperformance. In addition, if in any year a performance fee below the cap is earned but not paid, any provision brought forward up to the cap also becomes a creditor. So far as the cap allows, the provision, less any amounts offset, will become payable in any future year in which the closing net asset value is greater than the high water mark. No performance fee can be earned until any past underperformance is offset. No performance fees were earned in the year.
The Manager’s Responsibilities The Manager is responsible for the day-to-day investment management activities of the Company, seeking and evaluating investment opportunities and analysing the results of investee companies and funds. The individual portfolio managers have full discretion to manage the assets of the respective Portfolios in accordance with the Company’s stated Investment Policy as determined from time to time by the Board and approved by shareholders. The portfolio managers have discretion to make purchases and sales, make and withdraw cash deposits and exercise all rights over the investment portfolio. The portfolio managers also advise on borrowings. The Manager is also responsible for the provision of company secretarial and administration services to the Company, ensuring that the Company complies with all legal, regulatory and corporate governance requirements and attending on the Directors at Board meetings and shareholders’ meetings. The Manager additionally maintains records of the Company’s investment transactions, portfolio and all monetary transactions, from which the annual and half-yearly financial reports and various statistical reports and information are prepared on behalf of the Company.
Assessment of the Manager The performance of the Manager is subject both to continual review by the Board and regular annual reviews of the management contract by the Management Engagement Committee. The individual portfolio managers determine stock and fund selection and asset allocation with a view to achieving the Company‘s and Portfolios’ Investment Policies and meeting shareholder expectations. The Board has reviewed the Manager’s performance and, taking into account the performance of the individual Portfolios, the other services provided by the Manager and the risk and governance
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environment in which the Company operates, the Board considers that the continuation of the appointment of the Manager on the current terms is in the best interests of shareholders. Company Secretary The Board has direct access to the advice and services of the company secretary, Invesco Asset Management Limited (acting under delegated authority from Invesco Fund Managers Limited), which is responsible for ensuring that the Board and Committee procedures are followed and that applicable rules and regulations are complied with. The company secretary is also responsible for advising the Board through the Chairman on all governance matters. The company secretary ensures that all non-spam correspondence addressed to the Company is reported to the Board and dealt with in a timely manner. The appointment and ongoing assessment and review of the company secretary are matters for the Board as a whole. Corporate Governance The Corporate Governance Statement set out on page 44 is included in this Directors’ Report by reference. Performance and Dividends Details of the Company’s and its Portfolio’s performance, prospects and dividends are included in the Strategic Report, which is on pages 6 to 40, and incorporated in this Directors’ Report by reference. Stewardship The Board considers that the Company has a responsibility as a shareholder towards ensuring that high standards of corporate governance are maintained by the companies in which it invests. The Company’s stewardship functions have been delegated to the Manager, who exercises the Company’s voting rights and reports back to the Board. The Manager has adopted a clear and considered policy towards its responsibility as a shareholder on behalf of the Company. As part of this policy, the Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The most recent copy of the Manager’s Policy on Stewardship can be found at www.invescoperpetual.co.uk.
Greenhouse Gas Emissions The Company has no employees or property, it does not combust any fuel or operate any facility. The Company does not purchase electricity, heat, steam or cooling for its own use. Accordingly, the quantifiable amount of carbon dioxide produced by the Company annually is zero tonnes. Capital Structure The Company’s share capital comprises four classes of Share, each represented by a separate Portfolio. Movements in share capital over the course of the year are set out in note 14 to the financial statements on pages 83 and 84.
Rights Attaching to Shares The rights attached to the Shares, in addition to those conferred on their holders by law, are set out in the Company’s Articles of Association (Articles). The Articles may only be changed by the shareholders by special resolution. The holders of each class of Shares have the right to receive the revenue profits of the Company (including accumulated revenue reserves) attributable to the Portfolio established for that class and available for distribution. On a return of assets on a liquidation or otherwise, the surplus assets of the Company in each Portfolio, after satisfaction of all liabilities, shall be paid to the holders of the class of Shares for which the relevant Portfolio was established (and distributed amongst such holders rateably according to the amounts paid up on the Shares of the relevant class). The holders of each class of Shares have the right to receive notice of and to attend, speak and vote at any general meeting of the Company, except that the holders of any class of Shares do not have the right to vote on any resolution relating to the payment of a dividend on any other class of Shares. Details of the voting rights attaching to the different classes of Shares are given in note 11 to the Notice of Meeting on page 101.
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Shares are convertible at the option of holders into any other class of Shares on or around 1 February, 1 May, 1 August and 1 November each year.
Restrictions on Shares Subject to statute, market rules and the requirements of the UK Listing Authority the Directors may, in certain circumstances including where it is in favour of more than four persons jointly, refuse to register a transfer of Shares. The Directors may also restrict voting powers, dividends and transfers where shareholders fail to provide information with respect to interests in voting rights when so requested. The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or voting rights.
Substantial Shareholdings As far as the Company was aware, the holdings of 3% and over of each class of the Company’s issued share capital were: AT 30 JUNE 2018 AT 31 MAY 2018 UK EQUITY SHARES HOLDINGS % HOLDINGS % Julius Baer Private Banking 3,928,685 10.9 3,795,355 10.6 D Price 2,428,200 6.8 2,428,200 6.8 P Radburn 2,001,285 5.6 2,001,285 5.6 S Price 1,773,927 4.9 1,773,927 4.9 Rathbone Investment Management 1,526,787 4.2 1,585,789 4.4 JM Finn & Co 1,428,111 4.0 1,561,441 4.3 Perkins Echo Trust 1,395,800 3.9 1,395,800 3.9 Hargreaves Lansdown 1,369,203 3.8 1,384,869 3.9 Investec Wealth & Investment 1,290,740 3.6 1,398,740 3.9 N Bachop 1,209,867 3.4 1,209,867 3.4 Close Brothers Asset Management 1,187,669 3.3 1,187,669 3.3
AT 30 JUNE 2018 AT 31 MAY 2018 GLOBAL EQUITY INCOME SHARES HOLDINGS % HOLDINGS % Brewin Dolphin 1,663,383 5.1 1,724,814 5.2 Hargreaves Lansdown 1,618,550 4.9 1,624,072 4.9 Charles Stanley 1,411,375 4.3 1,412,731 4.2 Smith & Williamson 1,371,686 4.2 1,371,686 4.1 P Davidson 1,367,965 4.2 1,367,965 4.1 Julius Baer Private Banking 1,312,860 4.0 1,312,860 3.9 Schroder & Co 1,217,831 3.7 1,217,831 3.7 Halifax Share Dealing 1,197,578 3.7 1,200,204 3.6 Alliance Trust Savings 1,140,976 3.5 1,143,219 3.4 P Radburn 1,005,289 3.1 1,005,289 3.0 P Stormonth Darling 882,916 2.7 1,338,393 4.0
AT 30 JUNE 2018 AT 31 MAY 2018 BALANCED RISK ALLOCATION SHARES HOLDINGS % HOLDINGS % Schroder & Co 907,259 14.6 907,259 13.1 P Davidson 774,594 12.4 774,594 11.2 Investec Wealth & Investment 517,703 8.3 517,703 7.5 J Pfeil 407,279 6.5 407,279 5.9 J Salkeld 279,443 4.5 527,443 7.6 Halifax Share Dealing 276,232 4.4 274,253 4.0 C Jackson 270,000 4.3 270,000 3.9 Hargreaves Lansdown 239,017 3.8 301,389 4.3 HSBC Private Bank 237,080 3.8 237,080 3.4 Smith & Williamson 201,843 3.2 201,843 2.9 Canaccord Genuity 64,912 1.0 461,709 6.7
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AT 30 JUNE 2018 AT 31 MAY 2018 MANAGED LIQUIDITY SHARES HOLDINGS % HOLDINGS % Rathbone Investment Management 938,758 20.0 938,758 20.0 P Stormonth Darling 844,880 18.0 844,880 18.0 PSigma Investment Management 410,000 8.7 450,000 9.6 Speirs & Jeffrey 190,000 4.0 190,000 4.0 HSBC Private Bank 178,012 3.8 178,012 3.8 Smith & Williamson 166,711 3.6 166,711 3.6 Disclosure Required by Listing Rule 9.8.4 The above rule requires listed companies to report certain information in a single identifiable section of their annual financial reports. No disclosures are required under the rule for the year to 31 May 2018. Shareholder Relations Shareholder relations are given high priority by the Board and the Manager. The prime means by which the Company communicates with shareholders are the annual and half-yearly financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and its results. This information is supplemented by daily publication of the NAVs of the Company’s shares via the London Stock Exchange, ad hoc regulatory announcements, monthly and daily factsheets and other information on the Manager’s website. Shareholders have the opportunity to communicate directly with the Board, Chairman and the Chairmen of the Committees of the Board at the AGM. All shareholders are encouraged to attend the AGM. The meeting venue has wheelchair access. There is a regular dialogue between the Manager and individual major shareholders to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop a balanced understanding of their issues and concerns. The Company’s corporate broker, Canaccord Genuity Limited, is also consulted. General presentations to institutional shareholders and analysts take place throughout the year. All meetings between the Manager and institutional shareholders are reported to the Board. It is the intention of the Board that the annual financial report and the notice of the AGM be issued to shareholders so as to provide at least twenty working days’ notice of the AGM. Shareholders wishing to lodge questions in advance of the AGM are invited to do so, either on the reverse of the proxy card or in writing to the Company Secretary at the address given on page 102. Shareholders can visit the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts in order to access copies of annual and half-yearly financial reports; shareholder circulars; Company factsheets and key information documents; Stock Exchange announcements; Portfolio disclosures; schedule of matters reserved for the Board; terms of reference of Board Committees; Directors’ letters of appointment; the Company’s Share price; and proxy voting results. Annual General Meeting (AGM) The following summarises the business of the forthcoming AGM of the Company, which is to be held at 1st Floor, 43-45 Portman Square, London W1H 6LY at 11.30 a.m. on 4 October 2018. Refreshments will be provided. The Notice of the AGM and related notes can be found on pages 97 to 101. Resolution 1 is for members to receive this Annual Financial Report, including the financial statements and Auditor’s Report. Resolution 2 is to approve the Directors’ Remuneration Policy. It is now a requirement for the Directors’ Remuneration Policy to be approved by shareholders at least every three years. The Board has taken the decision to submit the policy for approval annually. This vote is binding. The Directors’ Remuneration Policy is set out on page 57 of this Annual Financial Report. Resolution 3 is to approve the Annual Statement and Report on Remuneration. It is mandatory for listed companies to put their Annual Statement and Report on Remuneration to an advisory shareholder vote. The Annual Statement and Report on Remuneration are set out on pages 57 to 59 of this Annual Financial Report. Resolutions 4 to 7 are to elect Graham Kitchen and to re-elect Victoria Muir, Patrick Gifford and Alan Clifton. The Board has confirmed that all of these Directors perform effectively and demonstrate
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independence and commitment to their roles and consequently recommends their election and re-election respectively. Brief biographical details are set out on pages 41 and 42. Resolution 8 is to re-appoint Grant Thornton UK LLP as auditor and to authorise the Audit Committee to determine the auditor’s remuneration. Resolution 9 is to renew the Directors’ authority to allot shares. Your Directors are asking for authority to allot new ordinary shares up to an aggregate nominal value of £1,000,000 for each of the four Share classes in issue. This will allow Directors to issue shares within the prescribed limits should any favourable opportunities arise to the advantage of shareholders. The powers authorised will not be exercised at a price below NAV of the relevant Share class so that the interests of existing shareholders are not diluted. This authority will expire at the AGM in 2019. Resolution 10 is to renew the authority to disapply pre-emption rights. Your Directors are asking for the usual authority to issue new Shares for cash in each share class, either pursuant to a rights issue or otherwise, up to an aggregate nominal amount of £35,536 in UK Equity Shares, £32,756 in Global Equity Income Shares, £6,229 in Balanced Risk Allocation Shares and £4,700 in Managed Liquidity Shares (10% of the issued share capital of each Share class, excluding treasury shares) disapplying pre- emption rights. This will allow Shares to be issued to new shareholders without them having to be offered to existing shareholders first, thus broadening the shareholder base of the Company. This authority will expire at the AGM in 2019. Resolution 11 is to renew the authority for the Company to purchase its own shares. Your Directors are seeking to renew the authority to buy back up to 14.99% of the shares in circulation of each Share class, being approximately 5,326,991 UK Equity Shares, 4,910,157 Global Equity Income Shares, 933,860 Balanced Risk Allocation Shares and 704,636 Managed Liquidity Shares, subject to the restrictions referred to in the notice of the AGM. This authority will expire at the AGM in 2019. Your Directors are proposing that Shares bought back by the Company either be cancelled or, alternatively, be held as treasury shares with a view to their resale, if appropriate, or later cancellation. Any resale of treasury shares will only take place on terms that are in the best interests of shareholders as a whole. Resolution 12 is to permit the Company to hold general meetings (other than annual general meetings) on 14 days notice, which is the minimum notice period permitted by the Companies Act 2006. The EU Shareholder Rights Directive increases the minimum notice period to 21 days unless two conditions are met. The first condition is that the company offers facilities for shareholders to vote by electronic means. The second condition is that there is an annual resolution of shareholders approving the reduction in the minimum notice period from 21 days to 14 days, hence this resolution being proposed. It is intended that this flexibility will be used only where the Board believes it is in the interests of shareholders as a whole. Resolutions 13 and 14 are to approve the dividend policies, which are set out on pages 33 and 34, that apply to the UK Equity and Global Equity Income Share Portfolios. Only holders of Shares in those Portfolios may vote on these resolutions, which are advisory and not binding. Shareholders normally only have the opportunity to vote on final dividends and, since all dividends are declared as interim dividends in accordance with the timeframe dictated by the quarterly share conversion opportunities, these resolutions are being proposed to give shareholders the opportunity to vote on the policies applied. It is not currently intended that these resolutions will be put to further AGMs unless the policies change. By order of the Board
Invesco Asset Management Limited Company Secretary 30 July 2018
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DIRECTORS’ REMUNERATION REPORT FOR THE YEAR ENDED 31 MAY 2018
This Remuneration Report has been prepared in accordance with The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (the ‘Regulations’) and the Listing Rules of the Financial Conduct Authority. Ordinary resolutions for the approval of the Directors’ Remuneration Policy (binding) and the Chairman’s Annual Statement and Report on Remuneration (advisory) will be put to shareholders at the Annual General Meeting. The Company’s auditor is required to audit certain of the disclosures provided in this report. Where disclosures have been audited, they are indicated in this report. The independent auditor’s opinion is included on pages 61 to 66. Remuneration Responsibilities The Board has resolved that a remuneration committee is not appropriate for a company of this size and nature. Remuneration is therefore regarded as part of the Board’s responsibilities, to be addressed regularly. All Directors are non-executive and all participate in meetings of the Board at which Directors’ remuneration is considered. Directors’ Remuneration Policy The Board’s policy is that the remuneration of non-executive directors should be fair and reasonable in relation to the time commitment and responsibilities of the directors. Fees for directors are determined by the Board within the limit stated in the Company’s Articles of Association (Articles). The Articles limit the aggregate fees to £200,000 per annum and any change to this limit requires shareholder approval. Directors do not have service contracts. Directors are appointed under letters of appointment, copies of which are available for inspection at the registered office of the Company, at its correspondence address (see page 102), and on the Manager’s website. Directors are entitled to be reimbursed for any reasonable expenses properly incurred by them in connection with the performance of their duties and attendance at board and general meetings and committees. Directors are not eligible for bonuses, pension benefits, share options or other incentives or benefits. Directors may, in the furtherance of their duties, take legal advice at the Company’s expense up to an initial outlay of £10,000 per Director, having first consulted with the Chairman. There are no agreements between the Company and its Directors concerning compensation for loss of office. The Directors’ fees are subject to regular review by the Board having regard to the above factors and fee trends in the investment company sector. The same principles apply to any new appointments. Notwithstanding the above, the Company’s Articles also provide that additional discretionary payments can be made for services which in the opinion of the Board are outside the scope of the ordinary duties of a Director. Any such payment would reflect the Board's assessment of the value to the Company of such services. This Directors’ Remuneration Policy is the same as that approved by shareholders at the last AGM. This Policy is intended to take effect immediately upon its approval by shareholders. The Company has no employees and consequently has no policy on the remuneration of employees. The Board will consider, where raised, shareholders’ views on Directors’ remuneration. Annual Statement on Directors’ Remuneration For the year to 31 May 2018 the Chairman of the Company was paid fees at the rate of £33,000 per annum, the Chairman of the Audit Committee was paid fees at the rate of £27,000 per annum, the Senior Independent Director was paid fees at the rate of £24,000 per annum and the other Directors were paid fees at the rate of £22,000 per annum. No additional discretionary payments were made in the year, or in the previous year. The Board reviewed the level of Directors’ fees during the year and concluded that the fees should increase to the following from 1 June 2018: Chairman £36,000; Audit Committee Chairman £30,000; Senior Independent Director £28,000; Other Directors £25,000. Aside from instituting a differentiated fee for the Senior Independent Director in 2015, it is five years since the fees were last increased, during which period the level of regulatory and corporate governance obligations of directors have inexorably increased.
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DIRECTORS’ REMUNERATION REPORT FOR THE YEAR ENDED 31 MAY 2018 continued
Report on Remuneration for the Year Ended 31 May 2018 The Company’s Performance The Regulations require that a performance graph be included with the Directors’ Remuneration Report which compares the total return to each class of shareholder to a notional total return of a broad market index. The Directors do not consider that a single graph for the Company’s Portfolios would be meaningful. However, graphs for each of the Portfolios are shown on pages 6, 13, 20 and 27.
Single Total Figure of Remuneration for the year (Audited) The single total figure of remuneration for each Director is detailed below, together with the prior year comparative: 2018 2017 TAXABLE(1) TAXABLE(1) FEES BENEFITS TOTAL FEES BENEFITS TOTAL £ £ £ £ £ £ Patrick Gifford (Chairman) 33,000 1,192 34,192 33,000 2,322 35,322 Craig Cleland (appointed Chairman of the Audit Committee 1 August 2017) 26,167 – 26,167 12,843 – 12,843 Alan Clifton (Senior Independent Director) 24,000 2,898 26,898 24,000 1,703 25,703 Sir Michael Bunbury (resigned Chairman of the Audit Committee 1 August 2017) 22,833 – 22,833 27,000 – 27,000 Victoria Muir 22,000 191 22,291 22,000 – 22,000 David Rosier (retired 4 October 2016) – – – 7,564 – 7,564 Total 128,000 4,281 132,281 126,407 4,025 130,432
(1) Taxable benefits relate to grossed up costs of travel.
Directors’ Shareholdings and Share Interests (Audited) The beneficial interests of the Directors in the ordinary share capital of the Company at 31 May 2017 and 31 May 2018 are set out below: GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY 31 May 2018 Patrick Gifford* 9,050 – – – Sir Michael Bunbury† 11,500 30,000 22,000 – Alan Clifton 25,000 25,000 25,000 – Victoria Muir 2,500 2,500 2,500 2,500 Craig Cleland 10,000 10,000 10,000 –
31 May 2017 Patrick Gifford* 9,050 – – – Sir Michael Bunbury† 11,500 30,000 22,000 – Alan Clifton 25,000 25,000 25,000 – Victoria Muir 2,500 2,500 2,500 2,500 Craig Cleland 5,000 5,000 5,000 – * Patrick Gifford also had non-beneficial interests in 9,577 UK Equity Shares, 73,518 Global Equity Income Shares and 128,173 Balanced Risk Allocation Shares at each date. The non-beneficial interest in 9,577 UK Equity Shares was sold subsequent to the year end. † Sir Michael Bunbury also had non-beneficial interests in 31,000 Global Equity Income Shares and 66,000 Balanced Risk Allocation Shares at each date.
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Graham Kitchen became a Director on 1 June 2018. He held no shares in the Company on his appointment. During June 2018 he purchased 5,800 Global Equity Income Shares and an associated person (as defined in the Market Abuse Regulation) purchased 6,300 UK Equity Shares and 8,400 Balanced Risk Allocation Shares. Save as aforesaid, no Director had any interests, beneficial or otherwise, in the securities of the Company during the year or since, up to the date of this report. Directors hold shares in the Company at their discretion. Share ownership is encouraged, but no guidelines have been set.
Relative Importance of Spend on Pay The following table compares the remuneration paid to the Directors with aggregate distributions to shareholders (all share classes combined) in the year to 31 May 2018 and the prior year. 2018 2017 CHANGE £’000 £’000 £’000 Total Directors’ Remuneration 132 130 +2 Total Dividends Paid to Shareholders 4,608 4,526 +82 Total Cost of Shares Bought Back 3,838 4,125 –287
Voting at Last Annual General Meeting At the Annual General Meeting of the Company held on 19 September 2017 resolutions were put to shareholders to approve the Directors’ Remuneration Policy (binding) and the Annual Statement and Report on Remuneration (advisory). These were both passed. The proxy votes registered in respect of these resolutions were as follows: VOTES VOTES VOTES FOR % AGAINST % WITHHELD Directors’ Remuneration Policy 24,578,871 99.6 101,903 0.4 173 Annual Statement and Report on Remuneration 24,578,871 99.6 101,903 0.4 173 Approval The Directors’ Remuneration Report was approved by the Board of Directors on 30 July 2018.
Signed on behalf of the Board of Directors Patrick Gifford Chairman
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STATEMENT OF DIRECTORS’ RESPONSIBILITIES in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland.’ Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration Report that comply with that law and those regulations. The Directors confirm that: • in so far as they are aware, there is no relevant audit information of which the Company’s Auditor is unaware; and • each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information. The Directors of the Company each confirm to the best of their knowledge that: • the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and • this annual financial report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces. The Directors consider that this annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Signed on behalf of the Board of Directors
Patrick Gifford Chairman 30 July 2018 Electronic Publication The annual financial report is published on the Manager’s website www.invescoperpetual.co.uk/investmenttrusts. The work carried out by the auditor does not involve consideration of the maintenance and integrity of this website and accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions.
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INDEPENDENT AUDITOR’S REPORT to the members of Invesco Perpetual Select Trust plc
Opinion Our opinion on the financial statements is unmodified. We have audited the financial statements of Invesco Perpetual Select Trust plc (the ‘Company’) for the year ended 31 May 2018, which comprise the Income Statement, the Statement of Changes in Equity, the Balance Sheet, the Cash Flow Statement and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (United Kingdom Generally Accepted Accounting Practice). In our opinion, the financial statements: • give a true and fair view of the state of the Company’s affairs as at 31 May 2018 and of its return for the year then ended; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (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. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Who we are reporting to This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members 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 Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages37to 40 that describe the principal risks and explain how they are being managed or mitigated; • the Directors’ confirmation, set out on page 46 of the annual report, that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity; • the Directors’ statement, set out on pages51and 52 of the financial statements, about whether the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the Directors’ identification of any material uncertainties to the Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the Directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or • the Directors’ explanation, set out on page 40 of the annual report, as to how they have assessed the prospects of the Company, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
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INDEPENDENT AUDITOR’S REPORT continued
Overview of our audit approach Overall materiality: £1,512,000 which represents 1% of the Company's net asset value. Key audit matters were identified as valuation, existence and ownership of investments; accuracy, occurrence and completeness of investment income; and accuracy and completeness of performance fees. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Our application of materiality
Key Audit Matter How the matter was addressed in the audit
Valuation, existence and ownership of Our audit work included, but was not restricted to: investments •assessing whether the Company’s accounting policy for The Company’s business objective is to provide the valuation of investments is in accordance with shareholders with a choice of investment United Kingdom Generally Accepted Accounting strategies and policies, each intended to Practice and the Statement of Recommended Practice generate attractive risk-adjusted returns. The ‘Financial Statements of Investment Trust Companies investment portfolio at £166,605,000 is and Venture Capital Trusts’ (the ‘SORP’) and testing a significant material balance in the statement of whether management have accounted for valuation in financial position at year-end and the main accordance with that policy; driver of the Company’s performance. •testing the existence and the ownership of investments Investments might not be valued appropriately by agreeing the holdings listed in the portfolio at year or might not exist or be owned by the Company. end to an independent confirmation we received directly from the Company’s custodian; We therefore identified valuation, existence and ownership of investments as a significant risk, • testing the application of the accounting policy by which was one of the most significant assessed independently pricing 100% of the listed equity risks of material misstatement. portfolio by obtaining the bid prices from an independent market source, calculating the total valuation based on the Company’s investment holdings and comparing it to the Company’s valuation; and •extracting a report of trading volumes in the five trading days before and after year end from an independent market source for the equity investments held to test that investments are actively traded. The Company’s accounting policy on valuation of investments is shown in note 1(b) to the financial statements and related disclosures are included in note 9. The Audit Committee identified valuation and ownership of investments as a significant issue in its report on page 45, where the Committee has also described the action that it has taken to address this issue. Key observations Our audit work did not identify any material misstatements concerning the valuation, existence and ownership of investments.
Accuracy, occurrence and completeness of Our audit work included, but was not restricted to: investment income •assessing whether the Company’s accounting policy for Investment income is the Company’s major revenue recognition is in accordance with United Kingdom source of revenue and a significant material Generally Accepted Accounting Practice and the SORP; balance in the Statement of Comprehensive •obtaining an understanding of the Company’s process for Income. Investment income might be incomplete recognising revenue in accordance with the Company’s or inaccurate. stated accounting policy;
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Key Audit Matter How the matter was addressed in the audit
Under ISA (UK) 240 ‘The auditor's •testing that dividend income transactions were recognised responsibilities relating to fraud in an audit of in accordance with the policy by selecting a sample of financial statements’ there is a presumed risk quoted investments and obtaining the respective dividend that revenue may be misstated due to improper rate entitlements for those quoted equities from an recognition of revenue. We have not rebutted independent source. Also, we developed an expectation of this presumed risk. dividend income based on investment holdings and checked against the amounts recorded in the Company’s We therefore identified accuracy, occurrence accounting records maintained by the administrator. In and completeness of investment income as addition, we agreed the receipt of the dividend income to a significant risk, which was one of the most bank statements; significant assessed risks of material misstatement. •performing, on a sample basis, a search for special dividends on the equity investments held during the year to check whether dividend income attributable to those investments has been properly recognised. We checked the categorisation of special dividends as either revenue or capital receipts; •testing that the income recorded had actually occurred by selecting a sample of dividend income recorded in the income ledger and agreeing the relevant income receivable for those quoted equities to the respective dividend rate entitlements from independent sources and agreeing the investments held to Company’s accounting records maintained by the administrator. In addition, we agreed the receipt of the dividend income recorded to bank statements; and •testing that the realised gains on futures occurred and were accurate by selecting a sample of settled futures and agreeing the respective gains to broker statements and bank statements. The Company’s accounting policy on income is shown in note 1(e) to the financial statements and related disclosures are included in note 2. The Audit Committee identified recognition of investment income as a significant issue in its report on page 46, where the Committee also described the action that it has taken to address this issue. Key observations Our audit work did not identify any material misstatements concerning the accuracy, occurrence and completeness of investment income.
Accuracy and completeness of performance Our audit work included, but was not restricted to: fees • checking that the allocation of expenses between revenue Performance fees are applicable to the UK Equity and capital is in accordance with the Company’s and Global Equity Income Portfolios’ accounting policy; outperformance over their relative benchmarks. • obtaining an understanding of the basis for the There is a risk that performance fees are not performance fee calculations by reading the investment properly calculated due to complexity in the management agreement (IMA); calculations. • recalculating the performance fees in accordance with the We therefore identified accuracy and IMA and confirming that no performance fee was earned completeness of performance fees as by the UK Equity and Global Equity Income Portfolios for a significant risk, which was one of the most the current year due to underperformance against their significant assessed risks of material relative benchmarks; misstatement. • agreeing that both performance fees accrued and any performance fee provisions are correctly calculated and accounted for; and • agreeing that any underperformance has been correctly calculated.
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INDEPENDENT AUDITOR’S REPORT continued
Key Audit Matter How the matter was addressed in the audit
The Company’s accounting policy on expenses and finance costs is shown in note 1(f) to the financial statements and related disclosures are included in note 3. The Audit Committee identified performance fees as a significant area in its report on page 46, where the Committee also described the action that it has taken to address this area. Key observations Our audit work did not identify any material misstatements concerning the accuracy and completeness of performance fees.
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent of our work and in evaluating the results of that work. We determined materiality for the audit of the financial statements as a whole to be £1,512,000, which is 1% of the Company's net asset value. This benchmark is considered the most appropriate because net assets, which is primarily composed of the Company's investment portfolio, is considered to be the key driver of the Company's total return performance. Materiality for the current year is lower than the level we determined for the year ended 31 May 2017 reflecting the decrease in the Company’s net assets in the current year. We use a different level of materiality, performance materiality, to drive the extent of our testing and this was set at 75% of financial statement materiality. We also determine a lower level of specific materiality for investment income, performance fees and management fees of 5% of total revenue for each portfolio. We determined the threshold at which we will communicate misstatements to the audit committee to be £76,000. In addition we will communicate misstatements below that threshold that, in our view, warrant reporting on qualitative grounds. An overview of the scope of our audit Our audit approach was a risk-based substantive approach founded on a thorough understanding of the Company’s business, its environment and risk profile. The day-to-day management of the Company’s investment portfolio, the custody of its investments and the maintenance of the Company’s accounting records is outsourced to third party service providers. Therefore our audit work was focused on: •obtaining an understanding of, and evaluating, relevant internal controls at both the Company and third-party service providers. This included reading internal control reports prepared by a third party auditor detailing the description, design and operating effectiveness of internal controls implemented by the administrator and at other relevant third-party service providers; and •performing substantive testing by obtaining direct confirmations on existence, ownership and valuation of the investments; and agreeing the investment income to an independent source and bank for accuracy, occurrence and completeness. Other information The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially
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misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 60 – the statement given by the Directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting set out on pages 45 to 47 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on page44– the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Our opinions on other matters prescribed by the Companies Act 2006 are unmodified In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. Matter on which we are required to report under the Companies Act 2006 In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report. Matters on which we are required to report by exception We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or • the financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Responsibilities of directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on page 60, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to
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INDEPENDENT AUDITOR’S REPORT continued
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect 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 influence the economic decisions of users taken on the basis of these financial statements. We are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the ISAs (UK). Our audit approach is a risk-based approach and is explained more fully in the ‘An overview of the scope of our audit’ section of our audit report. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Other matters which we are required to address We were appointed by the Audit Committee on 4 October 2016. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is two years. The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Company and we remain independent of the Company in conducting our audit. Our audit opinion is consistent with the additional report to the audit committee.
Marcus Swales Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants London 30 July 2018
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INCOME STATEMENT FOR THE YEAR ENDED 31 MAY
2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL NOTES £’000 £’000 £’000 £’000 £’000 £’000 Gains on investments at fair value 9 – 1,692 1,692 – 24,452 24,452 Gains on derivative instruments 10 47 641 688 45 775 820 Foreign exchange (losses)/gains – (46) (46) – 104 104 Income 2 5,173 457 5,630 4,910 699 5,609 Investment management fees 3 (253) (576) (829) (283) (645) (928) Performance fees 3 – 4 4 – 280 280 Other expenses 4 (429) (2) (431) (428) (4) (432)
Net return before finance costs and taxation 4,538 2,170 6,708 4,244 25,661 29,905 Finance costs 5 (66) (154) (220) (54) (126) (180)
Net return before taxation 4,472 2,016 6,488 4,190 25,535 29,725 Tax 6 (256) – (256) (242) – (242)
Return after taxation for the financial year 4,216 2,016 6,232 3,948 25,535 29,483
Basic return per ordinary share: 7 – UK Equity Share Portfolio 5.49p (3.82)p 1.67p 5.38p 29.67p 35.05p – Global Equity Income Share Portfolio 6.50p 8.65p 15.15p 5.62p 40.05p 45.67p – Balanced Risk Allocation Share Portfolio 0.24p 8.24p 8.48p 0.13p 11.81p 11.94p – Managed Liquidity Share Portfolio 0.24p 0.02p 0.26p (0.04)p – (0.04)p
The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year. Income Statements for the different Share classes are shown on pages 12, 19, 26 and 29 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.
The accompanying notes are an integral part of this statement.
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STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MAY
CAPITAL SHARE SHARE SPECIAL REDEMPTION CAPITAL REVENUE CAPITAL PREMIUM RESERVE RESERVE RESERVE RESERVE TOTAL £’000 £’000 £’000 £’000 £’000 £’000 £’000 At 31 May 2016 1,062 1,290 85,252 345 44,073 576 132,598 Cancellation of deferred shares – – (2) 2 – – – Shares bought back and held in treasury – – (4,125) – – – (4,125) Share conversions (2) – 2 – – – – Return after taxation per the income statement – – – – 25,535 3,948 29,483 Dividends paid – note 8 – – (585) – – (3,941) (4,526)
At 31 May 2017 1,060 1,290 80,542 347 69,608 583 153,430
Cancellation of deferred shares – – (4) 4 – – – Shares bought back and held in treasury – – (3,838) – – – (3,838) Share conversions (3) – 3 – – – – Return after taxation per the income statement – – – – 2,016 4,216 6,232 Dividends paid – note 8 – – (109) – – (4,499) (4,608)
As at 31 May 2018 1,057 1,290 76,594 351 71,624 300 151,216
The accompanying notes are an integral part of this statement.
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BALANCE SHEET AS AT 31 MAY 2018
GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL NOTES £’000 £’000 £’000 £’000 £’000 Fixed assets Investments held at fair value through profit or loss 9 81,655 72,664 7,333 4,953 166,605 Current assets Derivative assets held at fair value through profit or loss 10 – – 281 – 281 Debtors 11 379 569 268 4 1,220 Cash and cash equivalents 308 – 1,600 50 1,958
687 569 2,149 54 3,459 Creditors: amounts falling due within one year Derivative liabilities held at fair value through profit or loss 10 – – (54) – (54) Other creditors 12(a) (684) (336) (55) (143) (1,218) Bank overdraft 12(b) – (1,140) (86) – (1,226) Bank loan 12(b) (13,650) (2,700) – – (16,350)
(14,334) (4,176) (195) (143) (18,848)
Net current (liabilities)/assets (13,647) (3,607) 1,954 (89) (15,389) Provision 13 – – – – –
Net assets 68,008 69,057 9,287 4,864 151,216
Capital and reserves Share capital 14(a) 442 382 113 120 1,057 Share premium 15 – – 1,290 – 1,290 Special reserve 15 33,960 34,030 4,287 4,317 76,594 Capital redemption reserve 15 74 78 25 174 351 Capital reserve 15 33,532 34,196 3,653 243 71,624 Revenue reserve 15 – 371 (81) 10 300
Shareholders' funds 68,008 69,057 9,287 4,864 151,216
Net asset value per ordinary share Basic 16 189.0p 207.2p 143.4p 103.5p
These financial statements were approved and authorised for issue by the Board of Directors on 30 July 2018.
Signed on behalf of the Board of Directors Patrick Gifford Chairman
The accompanying notes are an integral part of this statement.
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BALANCE SHEET AS AT 31 MAY 2017
GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL NOTES £’000 £’000 £’000 £’000 £’000 Fixed assets Investments held at fair value through profit or loss 9 84,734 69,290 8,352 5,448 167,824 Current assets Derivative assets held at fair value through profit or loss 10 – – 209 – 209 Debtors 11 454 451 479 2 1,386 Cash and cash equivalents 148 167 626 51 992
602 618 1,314 53 2,587 Creditors: amounts falling due within one year Derivative liabilities held at fair value through profit or loss 10 – – (142) – (142) Other creditors 12(a) (1,195) (259) (39) (142) (1,635) Bank loan 12(b) (10,600) (4,600) – – (15,200)
(11,795) (4,859) (181) (142) (16,977)
Net current (liabilities)/assets (11,193) (4,241) 1,133 (89) (14,390) Provision 13 (4) – – – (4)
Net assets 73,537 65,049 9,485 5,359 153,430
Capital and reserves Share capital 14(a) 455 368 114 123 1,060 Share premium 15 – – 1,290 – 1,290 Special reserve 15 37,810 32,832 5,076 4,824 80,542 Capital redemption reserve 15 73 78 24 172 347 Capital reserve 15 34,949 31,338 3,079 242 69,608 Revenue reserve 15 250 433 (98) (2) 583
Shareholders’ funds 73,537 65,049 9,485 5,359 153,430
Net asset value per ordinary share Basic 16 193.5p 198.6p 134.7p 103.2p
The accompanying notes are an integral part of this statement.
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CASH FLOW STATEMENT FOR THE YEAR ENDED 31 MAY
2018 2017 NOTES £’000 £’000 Cash flows from operating activities Net return before finance costs and taxation 6,708 29,905 Adjustments for: Purchase of investments (52,735) (74,206) Sale of investments 55,743 74,792 Sale of futures 531 1,066 3,539 1,652 Scrip dividends (83) (32) Gains on investments (1,692) (24,452) Gains on derivatives (688) (820) Decrease/(increase) in debtors 240 (276) Decrease in creditors and provision (517) (263) Tax on overseas income (256) (242)
Net cash inflow from operating activities 7,251 5,472
Cash flows from financing activities Interest paid on bank borrowings (225) (180) Increase in bank borrowings 2,376 1,450 Share buy back costs (3,828) (4,125) Equity dividends paid 8 (4,608) (4,526)
Net cash outflow from financing activities (6,285) (7,381)
Net increase/(decrease) in cash and cash equivalents 966 (1,909) Cash and cash equivalents at the start of the year 992 2,901
Cash and cash equivalents at the end of the year 1,958 992
Reconciliation of cash and cash equivalents to the Balance Sheet is as follows: Cash held at custodian 358 992 Cash held on term deposit 1,600 –
Cash and cash equivalents 1,958 992
Cash flow from operating activities includes: Interest received 55 64 Dividends received 5,184 5,152
The accompanying notes are an integral part of this statement.
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NOTES TO THE FINANCIAL STATEMENTS
1. Accounting policies Accounting policies describe the Company’s approach to recognising and measuring transactions during the year and the position of the Company at the year end. The principal accounting policies are set out below.
(a) Basis of preparation (i) Accounting Standards applied The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards, including FRS102 ‘the Financial Reporting Standard applicable in the UK and Republic of Ireland’, and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies (AIC) in November 2014 (SORP) as updated in February 2018. The financial statements are issued on a going concern basis as disclosed on page 51. The accounting policies applied to these financial statements are consistent with those applied for the preceding year. (ii) Definitions used in the financial statements ‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Allocation Share Portfolio and/or the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or may include, an investment portfolio, derivative instruments, cash, loans, debtors and other creditors, which together make up the net assets as shown in the balance sheet. ‘Share’ UK Equity Share, Global Equity Income Share, Balanced Risk Allocation Share, Managed Liquidity Share and/or Deferred Share (as the case may be). The financial statements for the Company comprise the income statement, reconciliation of movements in shareholders’ funds, the total column of the balance sheet and the company totals shown in the notes to the financial statements. The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios’ income statements and summaries of net assets do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice and are not audited. These have been disclosed to assist shareholders’ understanding of the assets and liabilities, and income and expenses of the different Share classes. In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement. (iii) Functional and presentational currency The Financial Statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency of the Company’s share capital and the predominant currency in which the Company’s shareholders operate. This is also the currency in which these accounts are prepared. (iv) Transactions and balances Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.
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(b) Financial instruments The Company has chosen to apply the provisions of Sections 11 and 12 of FRS102 in full in respect of the financial instruments, which is explained below. (i) Recognition of financial assets and financial liabilities The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis. (ii) Derecognition of financial assets The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset. (iii) Derecognition of financial liabilities The Company derecognises financial liabilities when its obligations are discharged, cancelled or expire. (iv) Trade date accounting Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets. (v) Classification and measurement of financial assets and financial liabilities Financial assets The Company’s investments, including financial derivative instruments, are classified as held at fair value through profit or loss. Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value. Fair value for investments, including financial derivative instruments, that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value with regard to the International Private Equity and Venture Capital Valuation Guidelines and on recommendations from Invesco’s Pricing Committee, both of which use valuation techniques such as earnings multiples, recent arm’s length transactions and net assets. Financial liabilities Financial liabilities, excluding financial derivative instruments but including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method. (c) Derivatives and hedging Derivative instruments are valued at fair value in the balance sheet. Derivative instruments may be capital or revenue in nature and, accordingly, changes in their fair value are recognised in revenue or capital in the income statement as appropriate. Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are included in capital reserves. Futures contracts may be entered into for hedging purposes and any profits and losses on the closure or revaluation of positions are included in capital reserves. Where futures contracts are used for investment exposure any income element arising on bond futures is recognised as a gain on derivative instruments in the income statement and shown in revenue.
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NOTES TO THE FINANCIAL STATEMENTS continued
1. Accounting policies (continued) (d) Cash and cash equivalents Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond. For the Balanced Risk Allocation and Managed Liquidity Portfolios, cash and cash equivalents do not include investments in Short Term Investments Company (Global Series) plc as this forms part of those Portfolio’s fixed assets.
(e) Income Dividend income from investments is recognised when the shareholders’ right to receive payment has been established, normally the ex-dividend date. UK dividends are stated net of related tax credits. Interest income arising from cash is recognised on an accruals basis and underwriting commission is recognised as earned. Special dividends are taken to revenue unless they arise from a return of capital, when they are allocated to capital in the income statement. Income from fixed income securities is recognised in the income statement using the effective interest method.
(f) Expenses and finance costs All expenses are accounted for on an accruals basis. Expenses are charged to the income statement and shown in revenue except where expenses are presented as capital items when a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and thus management fees and finance costs are charged to revenue and capital to reflect the Directors’ expected long-term view of the nature of the investment returns of each Portfolio. Expenses charged to the Company in relation to a specific Portfolio are charged directly to that Portfolio. Expenses charged to the Company that are common to more than one Portfolio are allocated between those Portfolios in the same proportions as the net assets of each Portfolio at the latest conversion date. Finance costs are accounted for on an accruals basis using the effective interest rate method. The management fees and finance costs are charged in accordance with the Board’s expected split of long-term returns, in the form of capital gains and income, to the applicable Portfolio as follows: REVENUE CAPITAL PORTFOLIO RESERVE RESERVE UK Equity 30% 70% Global Equity Income 30% 70% Balanced Risk Allocation 30% 70% Managed Liquidity 100% – Any entitlement to any investment performance fee which is attributable to the UK Equity and/or the Global Equity Income Portfolio is allocated 100% to capital as it is principally attributable to the capital performance of the investments in that Portfolio.
(g) Dividends Dividends are accrued in the financial statements when there is an obligation to pay the dividends at the balance sheet date.
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(h) Taxation Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. For the Company, any allocation of tax relief to capital is based on the marginal basis, such that tax allowable capital expenses are offset against taxable income. Where individual Portfolios have extra tax capacity arising from unused tax allowable expenses which can be used by a different Portfolio, this extra tax capacity is transferred between the Portfolios at a valuation of 1% of the amount transferred. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods. A deferred tax asset has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these. Investment trusts which have approval under the appropriate tax regulations are not liable for taxation on capital gains. 2. Income This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source. GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Income from investments UK dividends: – ordinary dividends 1,933 514 – – 2,447 – special dividends 110 14 – – 124
2,043 528 – – 2,571 UK scrip dividends 83 – – – 83 Overseas dividends – ordinary dividends 233 2,067 9 1 2,310 – special dividends – 114 – – 114 Unfranked investment income 44 – – 4 48 Interest from Treasury bills – – 17 – 17
2,403 2,709 26 5 5,143 Other income Deposit interest – 1 4 – 5 Rebates of management fee – – – 25 25
Total income 2,403 2,710 30 30 5,173
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NOTES TO THE FINANCIAL STATEMENTS continued
2. Income (continued) GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2017 £’000 £’000 £’000 £’000 £’000 Income from investments UK dividends: – ordinary dividends 2,060 559 – – 2,619 – special dividends 39 – – – 39
2,099 559 – – 2,658 UK scrip dividends 17 15 – – 32 Overseas dividends – ordinary dividends 355 1,776 9 2 2,142 Unfranked investment income 42 – – 7 49 Interest from Treasury bills – – 15 – 15
2,513 2,350 24 9 4,896 Other income Deposit interest – – 2 – 2 Rebates of management fee – – – 12 12
Total income 2,513 2,350 26 21 4,910
Special dividends of £455,000 in respect of the UK Equity Portfolio and £2,000 in respect of the Global Equity Income Portfolio were recognised in capital during the year (2017: £699,000 in respect of the UK Equity Portfolio and £nil in respect of the Global Equity Income Portfolio). 3. Investment management and performance fees This note shows the fees paid to the Manager. These are made up of the individual Portfolio investment management fees calculated quarterly on the basis of their net asset values and the performance fees of the UK Equity and Global Equity Income Portfolios. GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Investment management fee: – charged to revenue 112 113 22 6 253 – charged to capital 262 264 50 – 576
Total investment management fee 374 377 72 6 829
Performance fee provision written back to capital (4) – – – (4)
2017 Investment management fee: – charged to revenue 135 121 21 6 283 – charged to capital 316 281 48 – 645
Total investment management fee 451 402 69 6 928
Performance fee provision written back to capital (280) – – – (280)
Details of the investment management agreement are given on page 52 in the Directors’ Report. As explained in the Chairman's Statement, the Managed Liquidity Portfolio did not receive some rebates it was due in respect of underlying management fees. To correct this the Manager has offered, with which the Company has agreed, to reimburse affected shareholders directly, including interest thereon. Accordingly, no adjustments have been required to the management fees recognised in these financial statements.
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The performance fee written back is solely in respect of the UK Equity Portfolio. No performance fees were earned on the UK Equity or Global Equity Income Portfolios for the current or previous year. Any underperformance must be fully offset by overperformance before any performance fee can be paid. Movements in the UK Equity and Global Equity Income Portfolios’ overperformance and underperformance follow: GLOBAL GLOBAL UK EQUITY UK EQUITY EQUITY INCOME EQUITY INCOME 2018 2018 2017 2017 £’000 £’000 £’000 £’000 Over/(under) performance brought forward 4 (778) 284 (607) Under performance in the year (544) (115) (280) (171)
(Under)/over performance carried forward (540) (893) 4 (778)
4. Other expenses The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified. GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Charged to revenue: Directors’ remuneration (i) 61 58 8 5 132 Auditor’s fees (ii): – for the audit of the Company’s financial statements 12 14 2 1 29 Other expenses (iii) 119 115 28 6 268
192 187 38 12 429 Charged to capital: Custodian transaction charges 1 1 – – 2
Total 193 188 38 12 431
GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2017 £’000 £’000 £’000 £’000 £’000 Charged to revenue: Directors’ remuneration (i) 64 52 9 5 130 Auditor’s fees (ii): – for the audit of the Company’s financial statements 13 12 2 1 28 Other expenses (iii) 122 107 30 11 270
199 171 41 17 428 Charged to capital: Custodian transaction charges 1 3 – – 4
Total 200 174 41 17 432
(i) The Directors’ Remuneration Report provides information on Directors’ fees. Included within other expenses is £13,000 (2017: £11,000) of employer's national insurance payable on Directors’ remuneration. As at 31 May 2018, the amounts outstanding on Directors’ fees and employer’s national insurance was £23,000 (2017: £24,000). (ii) Auditor’s fees are shown excluding VAT, which is included in other expenses. (iii) Includes fees for depositary, broker and registrar, and also printing, postage and listing costs.
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NOTES TO THE FINANCIAL STATEMENTS continued
5. Finance costs Finance costs are the cost of borrowing facilities. These are made up of costs incurred to have the facility in place and any interest charged when the facility is used. GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Interest payable on borrowings repayable within one year as follows: Charged to revenue 47 19 – – 66 Charged to capital 109 45 – – 154
Total 156 64 – – 220
2017 Interest payable on borrowings repayable within one year as follows: Charged to revenue 36 18 – – 54 Charged to capital 83 43 – – 126
Total 119 61 – – 180
6. Tax As an investment trust, the Company pays no tax on capital gains. However, the Company suffers tax on certain overseas dividends that is irrecoverable and this note shows details of the tax charge. In addition, this note clarifies the basis for the Company having no deferred tax asset or liability. (a) Tax charge GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Overseas tax 14 242 – – 256
2017 Overseas tax 41 201 – – 242
The accounting policy for taxation is disclosed in note 1(h). (b) Reconciliation of tax charge GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL 2018 £’000 £’000 £’000 £’000 £’000 Return before taxation 635 5,249 591 13 6,488
Theoretical tax at the current UK Corporation Tax rate of 19.00% (2017: 19.83%) 121 997 112 2 1,232 Effect of: – Non-taxable losses/(gains) on investments and derivatives 283 (604) (123) – (444) – Non-taxable losses on foreign exchange 2 2 4 – 8 – Non-taxable scrip dividends (16) – – – (16) – Non-taxable UK dividends (363) (97) – – (460) – Non-taxable UK special dividends (21) (3) – – (24) – Non-taxable overseas dividends (44) (393) – – (437) – Non-taxable overseas special dividends (86) (22) – – (108) – Overseas tax 14 242 – – 256 – Disallowable expenses 1 1 – – 2 – Excess of allowable expenses over taxable income 123 119 7 (2) 247
Tax charge for the year 14 242 – – 256
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GLOBAL BALANCED UK EQUITY RISK MANAGED COMPANY EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2017 Return before taxation 13,737 15,141 849 (2) 29,725
Theoretical tax at the current UK Corporation Tax rate of 19.83% (2016: 20.00%) 2,724 3,003 168 – 5,895 Effect of: – Non-taxable gains on investments and derivatives (2,186) (2,663) (154) – (5,003) – Non-taxable losses/(gains) on foreign exchange 2 – (22) – (20) – Non-taxable scrip dividends (3) (3) – – (6) – Non-taxable UK dividends (394) (111) – – (505) – Non-taxable UK special dividends (8) – – – (8) – Non-taxable overseas dividends (70) (352) – – (422) – Non-taxable overseas special dividends (139) – – – (139) – Overseas tax 41 201 – – 242 – Excess of allowable expenses over taxable income 74 126 8 – 208
Tax charge for the year 41 201 – – 242
Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to retain such status for the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments. (c) Factors that may affect future tax charges The Company has excess management expenses and loan relationship deficits of £12,311,000 (2017: £11,018,000) that are available to offset future taxable revenue. A deferred tax asset of £2,093,000 (2017: £1,873,000), measured at the standard corporation tax substantively enacted rate of 17% (2017: 17%) has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which the deferred tax assets can be offset. 7. Basic return per Ordinary Share Return per share is the amount of gain (or loss) generated for each share class in the financial year divided by the weighted average number of the shares in issue. Basic revenue, capital and total return per ordinary share is based on each of the returns after taxation shown by the income statement for the applicable Share class and on the following numbers of Shares being the weighted average number of Shares in issue throughout the year for each Share class: WEIGHTED AVERAGE NUMBER OF SHARES SHARE 2018 2017 UK Equity 37,138,452 39,070,682 Global Equity Income 33,043,420 32,711,960 Balanced Risk Allocation 6,965,490 7,109,098 Managed Liquidity 5,025,445 5,574,251
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NOTES TO THE FINANCIAL STATEMENTS continued
8. Dividends Dividends represent distributions of income less expenses to shareholders. Dividends are paid as an amount per share held. Dividends paid for each applicable Share class, which represent distributions for the purpose of s1159 of the Corporation Tax Act 2010, are as follows: 2018 2017 NUMBER DIVIDEND TOTAL NUMBER DIVIDEND TOTAL OF SHARES RATE (PENCE) £’000 OF SHARES RATE (PENCE) £’000 UK Equity First interim 38,009,255 1.45 551 39,763,023 1.40 557 Second interim 37,256,932 1.45 540 39,317,155 1.40 550 Third interim 36,991,597 1.45 536 39,047,478 1.40 547 Fourth interim 36,648,217 2.10 770 38,030,323 2.05 780
6.45 2,397 6.25 2,434 Global Equity Income First interim 32,747,913 1.45 475 32,377,852 1.40 453 Second interim 32,708,411 1.45 474 32,609,001 1.40 457 Third interim 32,973,355 1.45 478 32,695,170 1.40 457 Fourth interim 33,333,896 2.35 784 32,947,505 2.20 725
6.70 2,211 6.40 2,092 Total paid in respect of the year 4,608 4,526
No dividends have been paid to Balanced Risk Allocation and Managed Liquidity shareholders during the year (2017: nil). The Company’s dividend policy permits the payment of dividends by the UK Equity and Global Equity Income Portfolios from capital. An analysis of dividends paid for the year from revenue and capital follows. GLOBAL UK EQUITY COMPANY EQUITY INCOME TOTAL 2018 £’000 £’000 £’000 Dividends paid in respect of the year: From revenue – current year 2,038 2,149 4,187 From revenue – reserves brought forward 250 62 312
From revenue – total 2,288 2,211 4,499 From capital 109 – 109
2,397 2,211 4,608
GLOBAL UK EQUITY COMPANY EQUITY INCOME TOTAL 2017 £’000 £’000 £’000 Dividends paid in respect of the year: From revenue 2,102 1,839 3,941 From capital 332 253 585
2,434 2,092 4,526
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9. Investments held at fair value The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange, and a small proportion of investments which are valued by the Directors as they are unlisted or not regularly traded. Gains and losses are either: • realised, usually arising when investments are sold; or • unrealised, being the difference from cost of those investments still held at the year end.
(a) Analysis of investments by listing status 2018 2017 £’000 £’000 UK listed investments 98,132 100,596 UK unlisted investments 1,407 714 Overseas listed investments(i) 67,046 66,496 Unquoted hedge fund investments 20 18
166,605 167,824
(i) Includes the Short-Term Investments Company (Global Series) plc positions held by the Balanced Risk Allocation Portfolio of £2,273,000 (2017: £2,440,000) and Managed Liquidity Portfolio of £48,000 (2017: £548,000).
(b) Analysis of investment gains 2018 2017 £’000 £’000 Opening valuation 167,824 144,258 Movements in year: Purchases at cost 52,896 73,749 Sales – proceeds (55,807) (74,635) – net realised gains on sales 11,749 21,527 Movement in investment holding gains in year (10,057) 2,925
Closing valuation 166,605 167,824
Closing book cost 145,229 136,391 Closing investment holding gains 21,376 31,433
Closing valuation 166,605 167,824
Realised gains based on historical cost 11,749 21,527 Movement in investment holding gains in year (10,057) 2,925
Gains on investments 1,692 24,452
(c) Transaction costs Transaction costs were £138,000 (2017: £110,000) on purchases and £37,000 (2017: £55,000) on sales.
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NOTES TO THE FINANCIAL STATEMENTS continued
10. Derivative instruments Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Allocation Portfolio uses futures, which represent agreements to buy or sell commodities or financial instruments at a pre-determined price in the future. Excluding forward currency contracts used for currency hedging purposes. 2018 2017 £’000 £’000 Opening derivative assets held at fair value through profit or loss 209 388 Opening derivative liabilities held at fair value through profit or loss (142) (68)
Opening net derivative assets held at fair value shown in the balance sheet 67 320
Closing derivative assets held at fair value through profit or loss 281 209 Closing derivative liabilities held at fair value through profit or loss (54) (142)
Closing net derivative assets held at fair value shown in the balance sheet 227 67
Movement in derivative holding gains 160 (253) Net realised gains on derivative instruments 481 1,028
Net capital gain on derivative instruments as shown in the income statement 641 775 Net income arising on derivatives 47 45
Total gain on derivatives instruments 688 820
The derivative assets/liabilities shown in the balance sheet are the unrealised gains/losses arising from the revaluation to fair value of futures contracts held in the Balanced Risk Allocation Share Portfolio, as shown on page 24. 11. Debtors Debtors are amounts due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received. 2018 2017 £’000 £’000 Amounts due from brokers 102 28 Collateral pledged for futures contracts 223 443 Tax recoverable 184 166 Prepayments and accrued income 711 749
1,220 1,386
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12(a). Other creditors Creditors are amounts owed by the Company and include amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor. 2018 2017 £’000 £’000 Shares bought back 10 – Tax payable 137 137 Amounts due to brokers 210 119 Performance fee accrued 531 1,021 Accruals 330 358
1,218 1,635
12(b). Bank overdraft and loans At the year end the Company had a maximum uncommitted overdraft facility of 10% of net assets available for settlement purposes; and a £25 million (2017: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 17 May 2019 (2017: 18 May 2018). Both facilities are with The Bank of New York Mellon and the interest payable on the credit facility is based on LIBOR +0.85% on amounts drawndown. 13. Provision The provision arises from the UK Equity Portfolio’s performance fee. The movements in the performance fee provision are as follows: 2018 2017 £’000 £’000 Provision brought forward 4 284 Underperformance offset in year (4) (280)
Provision carried forward – 4
14. Share capital Share capital represents the total number of shares in issue. All shares have a nominal value of 1 penny.
(a) Movements in Share Capital during the Year Issued and fully paid: GLOBAL BALANCED TOTAL UK EQUITY RISK MANAGED SHARE EQUITY INCOME ALLOCATION LIQUIDITY CAPITAL ORDINARY SHARES (NUMBER) At 31 May 2017 38,009,455 32,747,913 7,043,885 5,195,265 82,996,518 Shares bought back into treasury (685,000) (825,000) (483,000) (232,000) (2,225,000) Arising on share conversion: – August 2017 (217,323) 210,498 (29,081) 16,121 (19,785) – November 2017 (265,335) 264,944 (35,802) – (36,193) – February 2018 (343,580) 360,541 (48,626) (43,835) (75,500) – May 2018 (511,246) 563,323 30,516 (234,843) (152,250)
At 31 May 2018 35,986,971 33,322,219 6,477,892 4,700,708 80,487,790
TREASURY SHARES (NUMBER) At 31 May 2017 7,518,540 4,054,000 4,298,000 7,101,785 22,972,325 Shares bought back into treasury 685,000 825,000 483,000 232,000 2,225,000
At 31 May 2018 8,203,540 4,879,000 4,781,000 7,333,785 25,197,325
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NOTES TO THE FINANCIAL STATEMENTS continued
14. Share capital (continued) (a) Movements in Share Capital during the Year (continued) GLOBAL BALANCED TOTAL UK EQUITY RISK MANAGED SHARE EQUITY INCOME ALLOCATION LIQUIDITY CAPITAL ORDINARY SHARES OF 1 PENNY EACH (£’000) At 31 May 2017 380 328 71 52 831 Shares bought back into treasury (7) (8) (5) (2) (22) Arising on share conversion: – August 2017 (2) 2 – – – – November 2017 (3) 3 – – – – February 2018 (3) 3 (1) (1) (2) – May 2018 (5) 6 – (2) (1)
At 31 May 2018 360 334 65 47 806
TREASURY SHARES OF 1 PENNY EACH (£’000) At 31 May 2017 75 40 43 71 229 Shares bought back into treasury 7 8 5 2 22
At 31 May 2018 82 48 48 73 251 TOTAL SHARE CAPITAL (£’000) Ordinary share capital 360 334 65 47 806 Treasury share capital 82 48 48 73 251
At 31 May 2018 442 382 113 120 1,057
Average buy back price 181.4p 202.0p 138.6p 101.0p
The total cost of share buy backs was £3,838,000 (2017: £4,126,000). As part of the conversion process 400,431 (2017: 256,895) deferred shares of 1p each were created and subsequently cancelled during the year. No deferred shares were in issue at the start or end of the year. No ordinary shares were issued from treasury during the year (2017: nil). (b) Movements in Share Capital after the Year End Since the year end, 450,000 UK Equity Shares were bought back at a price of 184.9p; 566,000 Global Equity Income Shares were bought back at a price of 202.0p; and 248,000 Balanced Risk Allocation Shares were bought back at a price of 139.0p. All were bought back into treasury.
(c) Voting Rights Rights attaching to the Shares are described in the Directors’ Report on page 53.
(d) Deferred Shares The Deferred shares do not carry any rights to participate in the Company’s profits, do not entitle the holder to any repayment of capital on a return of assets (except for the sum of 1p) and do not carry any right to receive notice of or attend or vote at any general meeting of the Company. Any Deferred shares that arise as a result of conversions of Shares are cancelled in the same reporting period.
(e) Future Convertibility of the Shares Shares are convertible at the option of the holder into any other class of Share. Further conversion details are given on the inside front cover and in the Shareholder Information on page 103. 15. Reserves This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds. The share premium comprises the net proceeds received by the Company following the issue of new shares, after deduction of the nominal amount of 1 penny and any applicable costs. The special reserve arose from the cancellation of the share premium account, in January 2007, and is available as distributable profits to be used for all purposes under the Companies Act 2006, including buy back of shares and payment of dividends. The capital redemption reserve arises from the nominal value of shares bought back and cancelled; this and the share premium are non-distributable.
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Capital investment gains and losses are shown in note 9(b), and form part of the capital reserve. The revenue reserve shows the net revenue retained after payments of any dividends. The capital and revenue reserves are distributable. 16. Net asset value per Share The total net assets (total assets less total liabilities) attributable to a share class are often termed shareholders’ funds and are converted into net asset value per share by dividing by the number of shares in issue. The net asset value per Share and the net assets attributable at the year end were as follows: ORDINARY SHARES 2018 2017 NET ASSET NET ASSET VALUE PER NET ASSETS VALUE PER NET ASSETS SHARE ATTRIBUTABLE SHARE ATTRIBUTABLE PENCE £’000 PENCE £’000 UK Equity 189.0 68,008 193.5 73,537 Global Equity Income 207.2 69,057 198.6 65,049 Balanced Risk Allocation 143.4 9,287 134.7 9,485 Managed Liquidity 103.5 4,864 103.2 5,359
Net asset value per Share is based on net assets at the year end and on the number of Shares in issue (excluding Treasury Shares) for each Share class at the year end.
17. Financial instruments This note summarises the risks deriving from the financial instruments that comprise the Company’s assets and liabilities. The Company’s financial instruments comprise the following: – investments in equities, fixed interest securities and liquidity funds which are held in accordance with the Company’s investment objectives and the investment objectives of the four Portfolios; – short-term debtors, creditors and cash arising directly from operations; – short-term forward foreign currency and futures contracts; and – bank loans and short-term overdrafts, used to finance operations. The financial instruments held in each of the four investment portfolios are shown on pages 11, 18, 24, 25 and 29. The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for these financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured. The Company’s principal risks and uncertainties are outlined in the Strategic Report on pages 37 to 40. This note expands on risk areas in relation to the Company’s financial instruments. The portfolios are managed in accordance with the Company’s investment policies and objectives, which are set out on pages 30 to 33. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 45 and 46. The principal risks that an investment company faces in its portfolio management activities are set out below: Market risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk: Currency risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates; Interest rate risk – arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and Other price risk – arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.
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NOTES TO THE FINANCIAL STATEMENTS continued
17. Financial instruments (continued) Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities. Credit risk, incorporating counterparty risk – arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation. Risk Management Policies and Procedures As an investment trust the Company invests in equities and other investments for the long-term in accordance with its investment policies so as to meet its investment objectives. In pursuing its objectives, the Company is exposed to a variety of risks that could result in a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the Directors’ policies for managing these risks follow. These have not changed from those applying in the previous year. The Directors have delegated to the Manager the responsibility for the day-to-day investment activities of the Company as more fully described in the Directors’ Report. The main risk that the Company faces arising from its financial instruments is market risk – this risk is reviewed in detail below. Since the Company mainly invests in quoted investments and derivative instruments traded on recognised exchanges, liquidity risk and credit risk are significantly mitigated. 17.1 Market Risk Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (17.1.1), interest rate risk (17.1.2) and other price risk (17.1.3). The Company’s portfolio managers assess the individual investment portfolio exposures when making each investment decision for their Portfolios, and monitor the overall level of market risk on the whole of their investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance for the four Portfolios and the Company, as disclosed in the Board Responsibilities section of the Directors’ Report on page 48. Borrowings can be used by the UK Equity and Global Equity Income Portfolios, which will increase the Company’s exposure to market risk and volatility. The borrowing limits for these Portfolios are 25% and 20% of attributable net assets, respectively. 17.1.1 Currency Risk A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Allocation Portfolio and a small proportion of the UK Equity Portfolio consist of assets, liabilities and income denominated in currencies other than sterling. As a result, movements in exchange rates will affect the sterling value of those items. Management of Currency Risk The portfolio managers monitor the separate Portfolios’ exposure to foreign currencies on a daily basis and report to the Board on a regular basis. Forward foreign currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates and to achieve portfolio characteristics that assist the Company in meeting its investment objectives in line with its investment policies. All contracts are limited to currencies and amounts commensurate with the exposure to those currencies. No such contracts were in place at the current or preceding year end. Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is accrued and its receipt. Foreign Currency Exposure The fair value or amortised cost of the Company’s monetary items that have foreign currency exposure at 31 May are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency they have been included separately in the analysis in order to show the overall level of exposure.
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UK EQUITY PORTFOLIO: TOTAL INVESTMENTS FOREIGN AT FAIR DEBTORS CREDITORS CURRENCY VALUE (DUE FROM (DUE TO EXPOSURE THROUGH TOTAL NET BROKERS CASH/ BROKERS ON NET PROFIT OR FOREIGN AND (OVERDRAFT) AND MONETARY LOSS THAT CURRENCY DIVIDENDS) AT BANK ACCRUALS) ITEMS ARE EQUITIES EXPOSURE CURRENCY £’000 £’000 £’000 £’000 £’000 £’000 YEAR ENDED 31 MAY 2018 Canadian Dollar – – – – 889 889 Euro 11 – – 11 3,323 3,334 Swiss Franc 46 – – 46 – 46 US Dollar 1 – – 1 1,484 1,485
58 – – 58 5,696 5,754
YEAR ENDED 31 MAY 2017 Euro 2 – – 2 3,154 3,156 Swiss Franc 48 – – 48 2,307 2,355 US Dollar – – – – 2,959 2,959
50 – – 50 8,420 8,470
GLOBAL EQUITY INCOME PORTFOLIO: TOTAL INVESTMENTS FOREIGN AT FAIR DEBTORS CREDITORS CURRENCY VALUE (DUE FROM (DUE TO EXPOSURE THROUGH TOTAL NET BROKERS CASH/ BROKERS ON NET PROFIT OR FOREIGN AND (OVERDRAFT) AND MONETARY LOSS THAT CURRENCY DIVIDENDS) AT BANK ACCRUALS) ITEMS ARE EQUITIES EXPOSURE CURRENCY £’000 £’000 £’000 £’000 £’000 £’000 YEAR ENDED 31 MAY 2018 Australian Dollar – – – – 985 985 Brazilian Real 15 – – 15 666 681 Canadian Dollar 1 – – 1 1,689 1,690 Euro 140 – – 140 19,092 19,232 Hong Kong Dollar 83 (22) – 61 1,610 1,671 Japanese Yen 19 175 (175) 19 2,424 2,443 Korean Won – – – – 1,019 1,019 Norwegian Krone – – – – 2,049 2,049 Swiss Franc 86 – – 86 4,075 4,161 Taiwanese Dollar – – – – 1,684 1,684 US Dollar 71 – – 71 24,861 24,932
415 153 (175) 393 60,154 60,547
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NOTES TO THE FINANCIAL STATEMENTS continued
17. Financial instruments (continued) 17.1 Market Risk (continued) 17.1.1 Currency Risk (continued) Foreign Currency Exposure (continued) TOTAL INVESTMENTS FOREIGN AT FAIR DEBTORS CREDITORS CURRENCY VALUE (DUE FROM (DUE TO EXPOSURE THROUGH TOTAL NET BROKERS CASH/ BROKERS ON NET PROFIT OR FOREIGN AND (OVERDRAFT) AND MONETARY LOSS THAT CURRENCY DIVIDENDS) AT BANK ACCRUALS) ITEMS ARE EQUITIES EXPOSURE CURRENCY £’000 £’000 £’000 £’000 £’000 £’000 YEAR ENDED 31 MAY 2017 Australian Dollar – – – – 1,087 1,087 Canadian Dollar – – – – 1,168 1,168 Euro 63 – – 63 19,565 19,628 Hong Kong Dollar 42 – – 42 2,323 2,365 Japanese Yen 4 – – 4 1,328 1,332 Korean Won – – (104) (104) 915 811 Norwegian Krone 29 – – 29 1,524 1,553 Swedish Krona 57 9 – 66 905 971 Swiss Franc – – – – 4,661 4,661 Taiwanese Dollar – – – – 1,684 1,684 US Dollar 68 – – 68 21,810 21,878
263 9 (104) 168 56,970 57,138
BALANCED RISK ALLOCATION PORTFOLIO:
DEBTORS TOTAL INVESTMENTS DERIVATIVE DERIVATIVE DUE FROM/ FOREIGN AT FAIR ASSETS AT LIABILITIES AT (CREDITORS CURRENCY VALUE FAIR VALUE FAIR VALUE DUE TO) EXPOSURE THROUGH TOTAL NET THROUGH THROUGH BROKERS & ON NET PROFIT OR FOREIGN PROFIT OR CASH PROFIT OR DIVIDENDS/ MONETARY LOSS THAT CURRENCY LOSS AT BANK LOSS (ACCRUALS)* ITEMS ARE EQUITIES EXPOSURE CURRENCY £’000 £’000 £’000 £’000 £’000 £’000 £’000 YEAR ENDED 31 MAY 2018 Australian Dollar – 41 – 31 72 – 72 Canadian Dollar 25 35 – (1) 59 – 59 Euro 49 45 – 17 111 – 111 Hong Kong Dollar – 42 (1) 65 106 – 106 Japanese Yen 15 57 – (3) 69 – 69 US Dollar 132 188 (53) 140 407 20 427
221 408 (54) 249 824 20 844
YEAR ENDED 31 MAY 2017 Australian Dollar 82 73 – (32) 123 – 123 Canadian Dollar 15 65 – 19 99 – 99 Euro 49 84 – 24 157 – 157 Hong Kong Dollar 3 83 – 45 131 – 131 Japanese Yen 14 46 – 14 74 – 74 US Dollar 19 198 (142) 357 432 18 450
182 549 (142) 427 1,016 18 1,034
* Debtors includes collateral pledged for futures contracts. Foreign Currency Sensitivity The preceding exposure analysis is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts, if used, that offset the effects of changes in currency exchange rates.
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The effect of strengthening or weakening of sterling against other currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean, giving the following exchange rate fluctuations: 2018 2017 £/Australian Dollar +/– 3.5% +/– 4.9% £/Brazilian Real +/– 5.8% +/– 6.8% £/Canadian Dollar +/– 3.4% +/– 3.6% £/Euro +/– 1.4% +/– 3.0% £/Hong Kong Dollar +/– 3.4% +/– 4.3% £/Japanese Yen +/– 2.6% +/– 4.7% £/Korean Won +/– 1.9% +/– 4.8% £/Norwegian Krone +/– 2.6% +/– 4.1% £/Swedish Krona +/– 3.9% +/– 2.4% £/Swiss Franc +/– 3.1% +/– 3.3% £/Taiwan Dollar +/– 2.0% +/– 5.5% £/US Dollar +/– 3.2% +/– 4.3%
The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial non-sterling assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Allocation Portfolios using the exchange rate fluctuations shown above. If sterling had strengthened against other currencies by the exchange rate fluctuations shown in the table above, this would have had the following after tax effect: UK EQUITY PORTFOLIO: 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL RETURN RETURN RETURN RETURN RETURN RETURN £’000 £’000 £’000 £’000 £’000 £’000 Canadian Dollar – (30) (30) – – – Euro (1) (47) (48) – (95) (95) Swiss Franc (1) – (1) (4) (76) (80) US Dollar (1) (47) (48) (7) (127) (134)
(3) (124) (127) (11) (298) (309)
GLOBAL EQUITY INCOME PORTFOLIO: 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL RETURN RETURN RETURN RETURN RETURN RETURN £’000 £’000 £’000 £’000 £’000 £’000 Australian Dollar (1) (34) (35) (2) (53) (55) Brazilian Real (1) (39) (40) – – – Canadian Dollar (1) (57) (58) – (42) (42) Euro (12) (267) (279) (18) (587) (605) Hong Kong Dollar (7) (56) (63) (4) (100) (104) Japanese Yen (1) (63) (64) (2) (62) (64) Korean Won (1) (19) (20) – (39) (39) Norwegian Krone (2) (53) (55) (3) (62) (65) Swedish Krona – – – (1) (22) (23) Swiss Franc (4) (126) (130) (2) (154) (156) Taiwan Dollar (1) (34) (35) (2) (93) (95) US Dollar (17) (796) (813) (24) (938) (962)
(48) (1,544) (1,592) (58) (2,152) (2,210)
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NOTES TO THE FINANCIAL STATEMENTS continued
17. Financial instruments (continued) 17.1 Market Risk (continued) 17.1.1 Currency Risk (continued) Foreign Currency Sensitivity (continued) BALANCED RISK ALLOCATION PORTFOLIO: 2018 2017 REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL RETURN RETURN RETURN RETURN RETURN RETURN £’000 £’000 £’000 £’000 £’000 £’000 Australian Dollar (1) (3) (4) (1) (6) (7) Canadian Dollar – (2) (2) – (4) (4) Euro – (2) (2) – (5) (5) Hong Kong Dollar – (4) (4) – (6) (6) Japanese Yen – (2) (2) – (3) (3) US Dollar – (14) (14) – (19) (19)
(1) (27) (28) (1) (43) (44)
If sterling had weakened against the currencies shown, the effect would have been the converse. 17.1.2 Interest Rate Risk Interest rate movements may affect: – the fair value of the investments in fixed-interest rate securities; – the level of income receivable on cash deposits; and – the interest payable on variable rate borrowings. Management of interest rate risk The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the portfolio managers. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels. When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian or deposit taker. The Company has a £25 million (2017: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 17 May 2019. The Company uses the facility when required at levels approved and monitored by the Board. Interest rate exposure The Company also has available an uncommitted overdraft facility for settlement purposes and interest is dependent on the base rate determined by the custodian. At 31 May the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to: – floating interest rates (giving cash flow interest rate risk) – when the interest rate is due to be reset; and – fixed interest rates (giving fair value interest rate risk) – when the financial instrument is due for repayment.
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The following table sets out the financial assets and financial liabilities exposure at the year end: GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2018 Exposure to floating interest rates: Investments held at fair value through profit or loss(1) – – 2,273 4,953 7,226 Cash and cash equivalents 308 – 1,600 50 1,958 Bank loan (13,650) (2,700) – – (16,350) Bank overdraft – (1,140) (86) – (1,226)
(13,342) (3,840) 3,787 5,003 (8,392) Exposure to fixed interest rates: Investments held at fair value through profit or loss including UK Treasury Bills – – 5,040 – 5,040
Net exposure to interest rates (13,342) (3,840) 8,827 5,003 (3,352)
GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2017 Exposure to floating interest rates: Investments held at fair value through profit or loss(1) – – 2,440 5,448 7,888 Cash and cash equivalents 148 167 626 51 992 Bank loans (10,600) (4,600) – – (15,200)
(10,452) (4,433) 3,066 5,499 (6,320) Exposure to fixed interest rates: Investments held at fair value through profit or loss including UK Treasury Bills – – 5,894 – 5,894
Net exposure to interest rates (10,452) (4,433) 8,960 5,499 (426)
(1) Comprises holdings in Short-Term Investments (Global Series) and Invesco Perpetual Money Fund. The income on the Invesco Perpetual Money Fund and Short Term Investments Company (Global Series) investments is affected by interbank lending rates; the principal amount should normally remain stable regardless of interest rate movements. Interest rate sensitivity At the maximum possible borrowing of £25 million (2017: £25 million), the effect over one year of a 0.5% movement in interest rates would result in a £125,000 (2017: £125,000) maximum movement in the Company’s income and net assets. The effect over one year of a 1% movement in the interest rates on fixed interest investments held at fair value through profit or loss would result in a £19,000 (2017: £28,000) maximum movement in the Company’s income and net assets. The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently throughout the year. Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the role of the portfolio managers to manage the Portfolios to achieve the best returns they can.
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NOTES TO THE FINANCIAL STATEMENTS continued
17. Financial instruments (continued) 17.1 Market Risk (continued) 17.1.3 Other Price Risk Management of Other Price Risk The Directors monitor the market price risks inherent in the investment portfolios by meeting regularly to review performance. The Company’s investment portfolios are the result of the Manager’s investment processes and as a result are not wholly correlated with the individual Portfolios’ benchmarks or the markets in which the Portfolios invest. The value of the investment portfolios will not move in line with the markets but will move as a result of the performance of the shares held within the investment portfolios. If the value of an investment portfolio moved by 10% at the balance sheet date, the profit after tax and net assets for the year would increase/decrease by the following amounts: BALANCED GLOBAL EQUITY RISK MANAGED UK EQUITY INCOME ALLOCATION LIQUIDITY £’000 £’000 £’000 £’000 2018 Profit after tax increase/decrease due to rise/fall of 10% 8,166 7,266 733 495 2017 Profit after tax increase/decrease due to rise/fall of 10% 8,473 6,929 835 545 17.2 Liquidity Risk Management of liquidity risk Liquidity risk is minimised as the investments held by the Company’s four portfolios are diversified and the majority are readily realisable securities which can be sold to meet funding commitments. If required, the Company’s borrowing facilities provide additional long-term and short-term flexibility. The Directors' policy is that in normal market conditions short-term borrowings be used to manage short term liabilities and working capital requirements rather than to realise investments. Liquidity risk The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:
GLOBAL EQUITY BALANCED RISK MANAGED UK EQUITY INCOME ALLOCATION LIQUIDITY 3 MONTHS MORE THAN 3 MONTHS 3 MONTHS MORE THAN 3 MONTHS COMPANY OR LESS 3 MONTHS OR LESS OR LESS 3 MONTHS OR LESS TOTAL £’000 £’000 £’000 £’000 £’000 £’000 £’000 2018 Bank overdraft – – 1,140 86 – – 1,226 Bank loan 13,650 – 2,700 – – – 16,350 Amount due to brokers 7 – 175 27 – 1 210 Other creditors and accruals 146 – 161 28 – 142 477 Performance fee accrued – 531 – – – – 531 Derivative financial instruments – – – 37 17 – 54
13,803 531 4,176 178 17 143 18,848
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GLOBAL EQUITY BALANCED RISK MANAGED UK EQUITY INCOME ALLOCATION LIQUIDITY 3 MONTHS MORE THAN 3 MONTHS 3 MONTHS MORE THAN 3 MONTHS COMPANY OR LESS 3 MONTHS OR LESS OR LESS 3 MONTHS OR LESS TOTAL £’000 £’000 £’000 £’000 £’000 £’000 £’000 2017 Bank loan 10,600 – 4,600 – – – 15,200 Amount due to brokers 1 – 104 14 – – 119 Other creditors and accruals 173 – 155 25 – 142 495 Performance fee accrued and provided – 1,025 – – – – 1,025 Derivative financial instruments – – – 61 81 – 142
10,774 1,025 4,859 100 81 142 16,981
Credit risk is that the failure of the counterparty in a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows: – investment transactions are carried out with a selection of brokers, approved by the Manager and settled on a delivery versus payment basis. Brokers’ credit ratings are regularly reviewed by the Manager, so as to minimise the risk of default to the Company; – the derivative financial instruments are all exchange traded and the exchange guarantees their settlement; – the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the daily review of failed trade reports and the use of daily stock and cash reconciliations. Only approved counterparties are used; – the Company’s ability to operate in the short-term may be adversely affected if the Company’s Manager, other outsource service providers, or their delegates suffer insolvency or other financial difficulties. The Board reviews annual controls reports from major service providers; – where an investment is made in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; and – cash balances are limited to a maximum of £2.5 million for each Portfolio with any one deposit taker (other than cash collateral on derivative instruments), with only deposit takers approved by the Manager being used. Cash held at brokers includes any cash collateral on futures contracts and during the year only one futures clearing broker, Merrill Lynch, was used. The following table sets out the maximum credit risk exposure at the year end: GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2018 Bonds (UK Treasury bills) – – 5,040 – 5,040 Invesco Perpetual Money Fund – – – 4,905 4,905 Cash held as short-term investment(1) – – 2,273 48 2,321 Unquoted securities 1,408 – 20 – 1,428 Derivative financial Instruments – – 227 – 227 Debtors(2) 379 569 268 4 1,220 Cash and cash equivalents 308 – 1,600 50 1,958
2,095 569 9,428 5,007 17,099
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NOTES TO THE FINANCIAL STATEMENTS continued
17. Financial instruments (continued) 17.3 Credit Risk (continued) GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2017 Bonds (UK Treasury bills) – – 5,894 – 5,894 Invesco Perpetual Money Fund – – – 4,900 4,900 Cash held as short term investment(1) – – 2,440 548 2,988 Unquoted securities 714 – 18 – 732 Derivative financial Instruments – – 67 – 67 Debtors(2) 454 451 479 2 1,386 Cash and cash equivalents 148 167 626 51 992
1,316 618 9,524 5,501 16,959
(1) Comprises holdings in the Short-Term Investments Company (Global Series). (2) Cash collateral pledged for futures contracts of £223,000 is included in debtors (2017: £444,000). 18. Fair Values of Financial Assets and Financial Liabilities ‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. This note sets out the fair value hierarchy comprising three ‘levels’ and the aggregate amount of investments in each level. The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivative instruments), or the balance sheet amount is a reasonable approximation of fair value. FRS 102 as amended for fair value hierarchy disclosures (March 2016) sets out three fair value levels. These are: Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date. Level 2 – Inputs other than quoted prices included within Level 1 that are observable (ie developed using market data) for the asset or liability, either directly or indirectly. Level 3 – Inputs are unobservable (ie for which market data is unavailable) for the asset or liability. Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability. The valuation techniques used by the Company are explained in the accounting policies note. The majority of the Company’s investments are quoted equity investments and Treasury bills which are deemed to be Level 1. Level 2 comprises all other quoted fixed income investments, the UK Equity Portfolio’s holdings of Barclays Bank Nuclear Power Notes, derivative instruments and liquidity funds held in the Balanced Risk Allocation and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Allocation Portfolio.
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GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2018 Financial assets at fair value through profit or loss: Level 1 80,244 72,664 5,040 – 157,948 Level 2 3 – 2,554 4,953 7,510 Level 3 1,408 – 20 – 1,428
Total for financial assets 81,655 72,664 7,614 4,953 166,886
Financial liabilities: Level 2 – Derivative instruments – – 54 – 54
GLOBAL BALANCED UK EQUITY RISK MANAGED EQUITY INCOME ALLOCATION LIQUIDITY TOTAL £’000 £’000 £’000 £’000 £’000 2017 Financial assets at fair value through profit or loss: Level 1 84,019 69,290 5,894 – 159,203 Level 2 1 – 2,649 5,448 8,098 Level 3 714 – 18 – 732
Total for financial assets 84,734 69,290 8,561 5,448 168,033
Financial liabilities: Level 2 – Derivative instruments – – 142 – 142
A reconciliation of the fair value movement in Level 3 is set out below. BALANCED UK RISK EQUITY ALLOCATION TOTAL £’000 £’000 £’000 2018 Opening fair value 714 18 732 Movement in investment holding gains 694 2 696
Closing fair value of Level 3 1,408 20 1,428
2017 Opening fair value 750 18 768 Sales – proceeds – (4) (4) – net realised losses – (1) (1) Movement in investment holding gains (36) 5 (31)
Closing fair value of Level 3 714 18 732
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NOTES TO THE FINANCIAL STATEMENTS continued
19. Capital Management This note is designed to set out the Company’s objectives, policies and processes for managing its capital. The capital is funded from monies invested in the Company by shareholders (both initial investment and any retained amounts) and any borrowings by the Company. The Company’s total capital employed at 31 May 2018 was £168,792,000 (2017: £168,630,000) comprising borrowings of £17,576,000 (2017: £15,200,000) and equity share capital and other reserves of £151,216,000 (2017: £153,430,000). The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 30 to 33, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, maximum gross gearing was 17.3% (2017: 16.3%). The Company’s policies and processes for managing capital are unchanged from the preceding year. The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 37 to 40. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio's investment objective and policy and that this will amplify the effect on equity of changes in the value of the portfolio. The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments. The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by the Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the overdraft facility, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year. Borrowings comprise any drawings on the credit and/or overdraft facilities, details of which are given in note 12. 20. Contingencies, guarantees and financial commitments Any liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed. There were no contingencies, guarantees or financial commitments of the Company at the year end (2017: £nil). 21. Related party transactions and transactions with the Manager A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party. Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on pages 57 to 59 with additional disclosures in note 4. No other related parties have been identified. Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 52 and note 3.
22. Post Balance Sheet Events Any significant events that occurred after the Company’s financial year end but before the signing of the balance sheet will be shown here. There are no significant events after the end of the reporting period requiring disclosure.
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THIS NOTICE OF ANNUAL GENERAL MEETING IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate independent professional adviser authorised under the Financial Services and Markets Act 2000. If you have sold or otherwise transferred all your Shares in Invesco Perpetual Select Trust plc, please forward this document and the accompanying Form of Proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Perpetual Select Trust plc will be held at 1st Floor, 43-45 Portman Square, London W1H 6LY at 11.30amon4 October 2018 for the following purposes: Ordinary Business of the Company 1. To receive the Annual Financial Report for the year ended 31 May 2018. 2. To approve the Directors’ Remuneration Policy. 3. To approve the Annual Statement and Report on Remuneration. 4. To elect Graham Kitchen a Director of the Company. 5. To re-elect Victoria Muir a Director of the Company. 6. To re-elect Patrick Gifford a Director of the Company. 7. To re-elect Alan Clifton a Director of the Company. 8. To re-appoint Grant Thornton UK LLP as Auditor to the Company and authorise the Audit Committee to determine the Auditor’s remuneration. Special Business of the Company To consider and, if thought fit, to pass the following resolution which will be proposed as an Ordinary Resolution: 9. THAT: the Directors be and they are hereby generally and unconditionally authorised, for the purpose of section 551 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to exercise all the powers of the Company to allot relevant securities (as defined in sections 551(3) and (6) of the 2006 Act) up to an aggregate nominal amount equal to £1,000,000 of UK Equity Shares, £1,000,000 of Global Equity Income Shares, £1,000,000 of Balanced Risk Allocation Shares and £1,000,000 of Managed Liquidity Shares, provided that this authority shall expire at the conclusion of the next AGM of the Company or the date falling fifteen months after the passing of this resolution, whichever is the earlier, but so that such authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offers or agreements as if the power conferred hereby had not expired. To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions: 10. THAT: the Directors be and they are hereby empowered, in accordance with sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (‘2006 Act’) to allot Shares in each class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity) for cash, either pursuant to the authority given by resolution 9 set out above or (if such allotment constitutes the sale of relevant Shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, as if section 561 of the 2006 Act did not apply to any such allotment, provided that this power shall be limited: (a) to the allotment of Shares in connection with a rights issue in favour of all holders of a class of Share where the Shares attributable respectively to the interests of all holders of Shares of such class are either proportionate (as nearly as may be) to the respective numbers of relevant Shares held by them or are otherwise allotted in accordance with the
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NOTICE OF ANNUAL GENERAL MEETING continued
rights attaching to such Shares (subject in either case to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise); (b) to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £35,536 of UK Equity Shares, £32,756 of Global Equity Income Shares, £6,229 of Balanced Risk Allocation Shares and £4,700 of Managed Liquidity Shares; and (c) to the allotment of equity securities at a price of not less than the net asset value per Share as close as practicable to the allotment or sale and this power shall expire at the conclusion of the next AGM of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry of this power which would or might require equity securities to be allotted after such expiry as if the power conferred by this resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the 2006 Act shall bear the same meanings in this resolution. 11. THAT: the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its issued Shares in each Share class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity). PROVIDED ALWAYS THAT (i) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of each class of the Company’s share capital at 4 October 2018, the date of the Annual General Meeting (equivalent, at 27 July 2018, to 5,326,991 UK Equity Shares, 4,910,157 Global Equity Income Shares, 933,860 Balanced Risk Allocation Shares and 704,636 Managed Liquidity Shares); (ii) the minimum price which may be paid for a Share shall be 1p; (iii) the maximum price which may be paid for a Share in each Share class shall be an amount equal to 105% of the average of the middle market quotations for a Share taken from and calculated by reference to the London Stock Exchange Daily Official List for five business days immediately preceding the day on which the Share is purchased; (iv) any purchase of Shares will be made in the market for cash at prices below the prevailing net asset value per Share (as determined by the Directors); (v) the authority hereby conferred shall expire at the conclusion of the next AGM of the Company or, if earlier, on the expiry of 15 months from the passing of this resolution unless the authority is renewed at any other general meeting prior to such time; and (vi) the Company may make a contract to purchase Shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiration of such authority and may make a purchase of Shares pursuant to any such contract. 12. THAT: the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 days. Ordinary Business of the UK Equity Share Class Only holders of UK Equity Shares may vote on this resolution, which will be proposed as an Ordinary Resolution: 13. To approve the UK Equity Share Class Portfolio dividend payment policy as set out on pages33 and 34 of the 2018 annual financial report.
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Ordinary Business of the Global Equity Income Share Class Only holders of Global Equity Income Shares may vote on this resolution, which will be proposed as an Ordinary Resolution: 14. To approve the Global Equity Income Share Class Portfolio dividend payment policy as set out on page 34 of the 2018 annual financial report. All Resolutions are explained further in the Directors’ Report on pages 55 and 56.
Dated 30th July 2018 By order of the Board
Invesco Asset Management Limited Company Secretary
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NOTICE OF ANNUAL GENERAL MEETING continued
Notes: 1. A form of appointment of proxy accompanies this annual financial report. A member entitled to attend and vote at the AGM is entitled to appoint one or more proxies to attend, speak and vote in his stead. Where more than one proxy is appointed, each proxy must be appointed to exercise the rights attached to a different Share or Shares. A proxy need not be a member of the Company. In order to be valid an appointment of proxy must be returned by one of the following methods: • via the registrar’s website www.signalshares.com; or • in hard copy form by post, to the Company’s registrar, Link Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU; or • by hand or courier to Link Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU; or • in the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below. and in each case to be received by the Company not less than 48 hours before the time of the AGM. The appointment of a proxy (whether by completion of a form of appointment of proxy, or other instrument appointing a proxy or any CREST proxy instruction) does not prevent a member from attending and voting at the AGM. 2. CREST members who wish to appoint a proxy or proxies by utilising the CREST electronic proxy appointment service may do so by utilising the procedures described in the CREST Manual. CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s) who will be able to take the appropriate action on their behalf. In order for a proxy appointment made by means of CREST to be valid, the appropriate CREST message (a ‘CREST Proxy Instruction’) must be properly authenticated in accordance with CRESTCo’s specifications and must contain the information required for such instructions as described in the CREST Manual. The message, regardless of whether it relates to the appointment of a proxy or to an amendment to the instruction given to a previously appointed proxy, must, in order to be valid, be transmitted so as to be received by the issuer’s agent (ID RA10) by the latest time for receipt of proxy appointments specified in this document. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message by the CREST Applications Host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. CREST members and, where applicable, their CREST sponsors or voting service provider(s) should note that CRESTCo does not make available special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take or, if the CREST member is a CREST personal member or sponsored member or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s), such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection CREST members and, where applicable, their CREST sponsors or voting service providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. 3. A person entered on the Register of Members at close of business on 2 October 2018 (a ‘member’) is entitled to attend and vote at the Meeting pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001. Any changes to the Register of Members after such time and date shall be disregarded in determining the rights of any person to attend and/or vote at the Meeting. If the Meeting is adjourned, entitlement to attend and vote at the adjourned meeting, and the number of votes which may be cast thereat, will be determined by reference to the Company’s register of members 48 hours before the time fixed for the adjourned meeting. 4. The Register of Directors’ interests; the schedule of matters reserved for the Board; the terms of reference of the Audit, Management Engagement and Nomination Committees; and the letters of appointment for Directors will be available for inspection for at least 15 minutes prior to and during the Company’s AGM. 5. The Articles of Association are available for inspection at the Registered Office of the Company during normal business hours on any business day (excluding public holidays), at the Company’s correspondence address (see page 102) and will also be available at the AGM for at least 15 minutes prior to and during the Meeting.
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6. Any corporation which is a shareholder can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a shareholder provided that they do not do so in relation to the same shares. 7. Any person to whom this Notice is sent who is a person nominated under section 146 of the Companies Act 2006 to enjoy information rights (a ‘Nominated Person’) may have a right, under an agreement between him/her and the shareholder by whom he/she was nominated, to be appointed (or to have someone else appointed) as a proxy for the meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may have a right, under such an agreement, to give instructions to the shareholder as to the exercise of voting rights. The statement of the above rights of the shareholders in relation to the appointment of proxies in paragraph 1 above does not apply to Nominated Persons. Those rights can only be exercised by shareholders of the Company. 8. Any member attending the AGM has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the AGM but no such answer need be given if: (a) to do so would interfere unduly with the preparation for the AGM or involve the disclosure of confidential information; (b) the answer has already been given on a website in the form of an answer to a question; or (c) it is undesirable in the interests of the Company or the good order of the AGM that the question be answered. 9. You may not use any electronic address (within the meaning of section 333(4) of the Companies Act 2006) provided in this Notice (or in any related documents including the proxy form) to communicate with the Company for any purposes other than those expressly stated. 10. As at 27 July 2018 (being the last practicable day prior to the publication of this Notice) the Company’s issued share capital consists of 35,536,971 UK Equity Shares, 32,756,219 Global Equity Income Shares, 6,229,892 Balanced Risk Allocation Shares and 4,700,708 Managed Liquidity Shares (all excluding shares held in treasury). 11. Subject to the Articles, voting takes place on a show of hands with every member who is present in person or by proxy having a right to one vote (except that if a proxy’s instructions include votes for and against (in respect of different shares) the proxy has one vote for and one vote against on a show of hands). On a poll the number of votes per Share of each class will vary with the Net Asset Value (‘NAV’) of the respective underlying Portfolio and is determined in accordance with the following formula: V = A÷B WHERE: V is the number of votes for each Share of a particular class; A is the Portfolio NAV for the relevant Share class; and B is the number of Shares of the relevant class in issue (excluding treasury shares). The value of A÷B (the net asset value per Share) for each class is calculated and announced (expressed in pence) daily. For the purposes of the AGM, the number of votes which may be cast and the total voting rights will be determined by the number of Shares in issue and the NAV as at a date no more than ten business days prior to the date of the AGM. 12. A copy of this notice (contained within the 2018 annual financial report), and other information required by section 311A of the Companies Act 2006, can be found at www.invescoperpetual.co.uk/investmenttrusts. 13. Shareholders should note that it is possible that, pursuant to requests made by members of the Company under section 527 of the Companies Act 2006 (‘2006 Act’), the Company may be required to publish on a website a statement setting out any matter relating to: (i) the audit of the Company’s accounts (including the auditor’s report and the conduct of the audit) that are to be laid before the AGM; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which the annual financial report was laid in accordance with section 437 of the 2006 Act (in each case) that the members propose to raise at the relevant Annual General Meeting. The Company may not require the members requesting any such website publication to pay its expenses in complying with sections 527 or 528 of the 2006 Act. Where the Company is required to place a statement on a website under section 527 of the 2006 Act, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the AGM includes any statement that the Company has been required under section 527 of the 2006 Act to publish on a website.
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ADVISERS AND PRINCIPAL SERVICE PROVIDERS
Registered Office Registrar Perpetual Park, Link Asset Services Perpetual Park Drive The Registry Henley-on-Thames 34 Beckenham Road Oxfordshire Beckenham RG9 1HH Kent BR3 4TU Company Number If you hold shares directly and have a query Registered in England and Wales relating to your shareholding and hold your Number 5916642 shares in your own name, you should contact the registrar on: Alternative Investment Fund Manager ☎ 0871 664 0300. (Manager) Calls cost 12p per minute plus your phone Invesco Fund Managers Limited. company’s access charge. Company Secretary From outside the UK: +44 371 664 0300. Calls Invesco Asset Management Limited. from outside the United Kingdom will be charged at the applicable international rate. Lines Company Secretarial contact: Paul Griggs are open from 9am to 5.30pm, Monday to Friday Correspondence Address (excluding bank holidays). 6th Floor Shareholders can also access their holding details 125 London Wall via Link’s website: www.signalshares.com London EC2Y 5AS The registrar provides an on-line and telephone ☎ 020 3753 1000 share dealing service to existing shareholders email: [email protected] who are not seeking advice on buying or selling. Auditor This service is available at www.linksharedeal.com or 0371 664 0445 Grant Thornton UK LLP ☎ 30 Finsbury Square Calls cost 12p per minute plus your phone London EC2P 2YU company’s access charge. Depositary and Custodian From outside the UK: +44 371 664 0445. Calls from outside the UK will be charged at the The Bank of New York Mellon (International) applicable international rate. Limited 1 Canada Square Lines are open from 8am to 4.30pm, Monday to London E14 5AL Friday (excluding bank holidays). Corporate Broker Canaccord Genuity Limited 88 Wood Street London EC2V 7QR
Be ScamSmart Avoid investment fraud Report a Scam 1 Reject cold calls If you suspect that you have been If you’ve received unsolicited contact about approached by fraudsters please tell the an investment opportunity, chances are FCA using the reporting form at Investment scams are it’s a high risk investment or a scam. You www.fca.org.uk/consumers/report- should treat the call with extreme caution. scam-unauthorised- rm. You can also call designed to look like The safest thing to do is to hang up. the FCA Consumer Helpline on genuine investments 2 Check the FCA Warning List 0800 111 6768 The FCA Warning List is a list of rms and Spot the warning signs If you have lost money to investment fraud, individuals we know are operating without you should report it to Action Fraud on Have you been: our authorisation. 0300 123 2040 or online at • contacted out of the blue 3 Get impartial advice www.actionfraud.police.uk • promised tempting returns Think about getting impartial nancial and told the investment is safe advice before you hand over any money. Find out more at • called repeatedly, or Seek advice from someone unconnected to www.fca.org.uk/scamsmart • told the offer is only available the rm that has approached you. for a limited time? If so, you might have been contacted by fraudsters. Remember: if it sounds too good to be true, it probably is!
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SHAREHOLDER INFORMATION
The different Share classes of Invesco Perpetual Financial Calendar Select Trust plc (the ‘Company’) are quoted on the Annual Financial Results July 2018 London Stock Exchange. Interim Dividends Announced July 2018 † NAV Publication Share Conversion 1 August 2018 AGM 4 October 2018 Net asset values (NAVs) for all of the Share classes Interim Dividends Announced October 2018 are calculated by the Manager on a daily basis and Share Conversion† 1 November 2018 notified to the Stock Exchange on the next business Interim Dividends Announced January 2019 day. NAVs are published daily in the newspapers Half-Yearly Financial Results January 2019 detailed below. Share Conversion† 1 February 2019 Interim Dividends Announced April 2019 Share Price Listings Share Conversion† 1 May 2019 The price of your Shares can be found in Year End 31 May 2019 The Financial Times, Daily Telegraph and The Times. In addition, Share price information can be † Share conversion requests must be received not less than 10 days found under the following ticker codes: before the relevant conversion date. Forms and instructions are available online on the web pages for all the Share classes at UK Equity Shares IVPU www.invescoperpetual.co.uk/investmenttrusts and from the Global Equity Income Shares IVPG Company Secretary. Balanced Risk Allocation Shares IVPB Managed Liquidity Shares IVPM Location of Annual General Meeting Manager’s Website The Annual General Meeting will be held at Information relating to the Company can be found 11.30am on 4 October 2018 at 1st Floor, on the Manager’s website, 43-45 Portman Square, London W1H 6LY. www.invescoperpetual.co.uk/investmenttrusts.
Alternatively, direct links to the web pages G E O R G E S T dedicated to the four share classes are: B A K E R S T www.invescoperpetual.co.uk/selectuk P O R T M A N C L O S E F I T Z H A R D I N G E S T www.invescoperpetual.co.uk/selectglobal www.invescoperpetual.co.uk/selectbr S E Y M O U R M E W S U P P E R B E R K E L E Y S T PORTMAN www.invescoperpetual.co.uk/selectml D U K E ST SQUARE W I G M O R E S T
O R C H A R D S T P O R T M A N S T E D W A R D S M E W S The content of websites referred to in this J A M E S S T 43-45 PORTMAN document or accessible from links within those SQUARE websites are not incorporated into, nor do they SELFRIDGES B R Y A N S T O N S T form part of this annual financial report. MARBLE ARCH BOND The Association of Investment O X F O R D S T R E E T STREET Companies The Company is a member of the Association of Investment Companies. Contact details are as follows: ☎ 020 7282 5555. Email: [email protected] Website: www.theaic.co.uk General Data Protection Regulation (GDPR) GDPR, which is intended to improve controls over personal data and how it is used, came into effect on 25 May 2018. The Company’s privacy notice, which can be found on the web page of each of the Company’s Share classes or can be requested from company secretary at the correspondence address shown on page 102, sets out what personal data is collected and how and why it is used.
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GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES
Discount and Premium Shares are described as being at a discount when the share price is lower than the NAV per share (including accrued income). The size of the discount is calculated by subtracting the share price from the NAV per share and is expressed as a percentage (%) of the NAV per share. If the share price is higher than the NAV per share the shares are described as being at a premium. Gearing The gearing percentage reflects the amount of borrowings that a company has invested and is indicative of the extra amount by which shareholders’ funds would move if a company’s investments were to rise or fall. A positive percentage indicates the extent to which shareholders’ funds are geared; i.e. a nil gearing percentage, or ‘nil’, shows a company is ungeared. A negative percentage indicates that a company is not fully invested. There are several methods of calculating gearing and the following have been used in this report:
Gross Gearing This reflects the amount of gross borrowings by a company and takes no account of any cash balances. It is based on gross borrowings as a percentage of shareholders’ funds.
Net Gearing This reflects the amount of net borrowings invested, ie borrowings less cash. It is based on net borrowings as a percentage of shareholders’ funds. Leverage Leverage, for the purposes of the Alternative Investment Fund Managers Directive (AIFMD), is not synonymous with gearing as defined above. In addition to borrowings, it encompasses anything that increases the Company’s exposure, including foreign currency and exposure gained through derivatives. Leverage expresses the Company’s exposure as a ratio of the Company’s net asset value. Accordingly, if a Company’s exposure was equal to its net assets it would have leverage of 100%. Two methods of calculating such exposure are set out in the AIFMD, gross and commitment. Under the gross method, exposure represents the aggregate of all the Company’s exposures other than cash balances held in base currency and without any offsetting. The commitment method takes into account hedging and other netting arrangements designed to limit risk, offsetting them against the underlying exposure. Net Asset Value (NAV) The value of the Company’s assets, principally investments made in other companies and cash being held, minus any liabilities for which the Company is responsible (for example, money owed). The NAV is also described as ‘shareholders’ funds’. The NAV is often expressed in pence per share after being divided by the number of shares which have been issued. The NAV per share is not necessarily the same as the share price, which is the price at which the Company’s shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply for the shares. NAV is widely used by the investment company sector for reporting of performance, premium or discount, gearing and ongoing charges. Net Cash This reflects the Company’s net exposure to cash and cash equivalents expressed as a percentage of shareholders’ funds after any offset against its borrowings. Notional Exposure Notional exposure in relation to a future, or other derivative contract, is the value of the assets referenced by the contract that could alternatively be held to provide an identical return.
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Ongoing Charges Figure This is calculated in accordance with guidance issued by the AIC as follows: the annualised ongoing charges, including those charged to capital but excluding interest, incurred by the Company, expressed as a percentage of the average undiluted net asset value (at market value) reported in the period. Total Return Total returns can be calculated in a number of ways. The total returns used in this annual financial report, and their basis, follow. Benchmark Total return on the benchmark, on a mid-market value basis, assuming all dividends received were reinvested, without transaction costs, into the shares of the underlying companies at the time the shares were quoted ex-dividend. Share Price Total return to shareholders, on a mid-market price basis, assuming all dividends received were re-invested, without transaction costs, into the shares of the Company at the time the shares were quoted ex-dividend. Net Asset Value Total return on net asset value per share assuming dividends paid by the Company were reinvested into the shares of the Company at the NAV per share at the time the shares were quoted ex-dividend. Volatility Volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. It is a statistical measure of the dispersion of returns for a given security or market index measured by using the standard deviation or variance of returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.
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ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE DISCLOSURES
Alternative Investment Fund Manager (AIFM) and the Alternative Investment Fund Managers Directive (the ‘AIFMD’, the Directive) The Company falls within the definition of an Alternative Investment Fund (AIF) under the Directive and, as such, is required to have (or be) an authorised AIFM. Invesco Fund Managers Limited (IFML) was authorised as an AIFM, and appointed by the Company as such, with effect from 22 July 2014. Amongst other things, regulations implementing AIFMD require certain information to be provided to prospective investors. This information can be found in each Share class’ section of the Manager’s website (see links on page 103) in downloadable documents entitled ‘AIFMD Investor Information’. The changes to this information since 31 May 2017 are as follows: as announced on 7 July 2017, described in the 2017 annual financial report and on page 52 of this report, the investment management fee arrangements for the UK Equity and Global Equity Income Portfolios changed with effect from 1 June 2017; the Company’s registrar changed its name to Link Asset Services from Capita Asset Services on a change of ownership in November 2017; the legal entity appointed as depositary changed to The Bank of New York Mellon (International) Limited from BNY Mellon Trust & Depositary (UK) Limited with effect from 1 December 2017; and the name of the Balanced Risk Share Portfolio was changed to Balanced Risk Allocation Share Portfolio with effect from 1 March 2018. Any information requiring immediate disclosure pursuant to the Directive will be disclosed through a primary information provider. In addition, the Directive requires information in relation to the Company’s leverage (both ‘gross’ and ‘commitment’ – see Glossary on page 104) and the remuneration of the Company’s AIFM (IFML) to be made available to investors. Accordingly: • the leverage calculated for the Company’s portfolios at the year end and the limits the AIFM has set for them are as follows:
AIFMD LEVERAGE AIFMD LEVERAGE AT 31 MAY 2018 LIMIT GROSS COMMITMENT GROSS COMMITMENT UK Equity 121% 121% 250% 200% Global Equity Income 106% 106% 250% 200% Balanced Risk Allocation 179% 172% 350% 300% Managed Liquidity 101% 101% 175% 150% • the AIFM remuneration paid for the year to 31 December 2017 is set out below.
AIFM Remuneration The AIFM remuneration paid is based on the latest financial year of the AIFM, which was to 31 December 2017. IFML does not employ any staff directly. All staff involved in the AIF related activities of IFML are employed and paid by Invesco UK Limited or other entities in the Invesco Limited Group. Remuneration for staff involved in AIF related activities has been apportioned based on the average assets under management of £3,632 million for the nine AIFs managed by IFML during the reporting period. The aggregate total remuneration apportioned to IFML’s AIF related activities for performance year 2017 is £8.64 million, of which £4.71 million is fixed remuneration and £3.93 million is variable remuneration. The number of beneficiaries is 35. IFML has identified individuals considered to have a material impact on the risk profile of IFML or the AIFs it manages (‘Identified Staff’), including board members of IFML, senior management, heads of control functions, other risk takers and any employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers whose professional activities can exert material influence on IFML’s risk profile or on an AIF it manages. The aggregate total remuneration paid to the Identified Staff of IFML for AIF related activities is £1.63 million, of which £0.41 million is paid to senior management and £1.22 million is paid to other Identified Staff. Please note that remuneration for AIFMD Identified Staff includes remuneration for staff employed by delegates.
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The Manager of Invesco Perpetual Select Trust plc is Invesco Fund Managers Limited.
Invesco Fund Managers Limited is a wholly owned subsidiary of Invesco Limited and is authorised and regulated by the Financial Conduct Authority.
Invesco is one of the largest independent global investment management firms, with funds under management of $963 billion.*
Invesco aims to provide the highest returns available from markets, through active management, but in a controlled manner, conscious of the risks involved and within clients’ objectives.
* Funds under Management as at 30 June 2018.
INVESCO PERPETUAL SELECT TRUST PLC 107 IP Select_pp97_108.qxp 31/07/2018 18:15 Page 108
INFORMATION FOR SHAREHOLDERS
INVESTMENT COMPANIES MANAGED BY INVESCO
Investing for Income, Income Growth and Capital Growth (from equities and fixed interest securities)
City Merchants High Yield Trust Limited Invesco Perpetual Select Trust plc – UK Equity Portfolio A Jersey-incorporated closed-ended Company that aims Aims to provide shareholders with an attractive real long-term to generate a high level of income from a variety of fixed total return by investing primarily in UK quoted equities. The income instruments. The Company may use bank portfolio may use bank borrowings. borrowings. Keystone Investment Trust plc Invesco Income Growth Trust plc Aims to provide shareholders with long-term growth of Aims to produce income and capital growth superior to that capital mainly from UK investments. The Company has two of the UK stock market and a stream of dividends paid debenture stocks in issue. quarterly that, over time, grow at above the rate of inflation. The Company may use bank borrowings. Perpetual Income and Growth Investment Trust plc Aims to provide shareholders with capital growth and real Invesco Perpetual Enhanced Income Limited growth in dividends over the medium to longer term from A Jersey-incorporated closed-ended Company that aims to a portfolio of securities listed mainly in the UK equity market. provide a high level of income, paid gross to UK investors, The Company has secured loan notes in issue and, in whilst seeking to maximise total return through investing, addition, may use bank borrowings. primarily in a diversified portfolio of high-yielding corporate and government bonds. The Company seeks to balance the The Edinburgh Investment Trust plc attraction of high-yield securities with the need for protection of Invests primarily in UK securities with the long-term objective capital and to manage volatility. The Company uses repo of achieving: financing to enhance returns. 1. an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and Invesco Perpetual Select Trust plc – Managed Liquidity Portfolio 2. growth in dividends per share in excess of the rate of UK Aims to generate income from a variety of fixed income inflation. instruments combined with a high degree of security. Income The Company has a debenture stock in issue and, in addition, will reduce during periods of very low interest rates. may use bank borrowings.
Investing in Smaller Companies Invesco Perpetual UK Smaller Companies Investment Trust plc Aims to achieve long-term total returns for the Company’s of small to medium sized UK-quoted companies. shareholders primarily by investment in a broad cross-section The Company may use bank borrowings.
Investing Internationally Invesco Asia Trust plc Invesco Perpetual Select Trust plc – Global Equity Income Aims to provide long-term capital growth by investing in Portfolio a diversified portfolio of Asian and Australasian securities. Aims to provide an attractive and growing level of income The Company aims to achieve growth in its net asset value return and capital appreciation over the long term, in excess of the MSCI AC Asia Ex Japan Index, total return, predominantly through investment in a diversified portfolio in sterling terms. The Company may use bank borrowings. of equities worldwide. The portfolio may use bank borrowings.
Investing for Total Returns Invesco Perpetual Select Trust plc – Balanced Risk Allocation Portfolio Aims to provide shareholders with an attractive total return in The portfolio is constructed so as to balance risk, is long-only, differing economic and inflationary environments and with using mainly transparently-priced exchange-traded futures low correlation to equity and bond market indices by gaining contracts and other derivative instruments to gain such exposure to three asset classes: debt securities, equities and exposure and to provide leverage. commodities.
Investing in Multiple Asset Classes Invesco Perpetual Select Trust plc • UK Equity Portfolio A choice of four investment policies and objectives, each • Global Equity Income Portfolio intended to generate attractive risk-adjusted returns from • Managed Liquidity Portfolio segregated portfolios, with the ability to switch between • Balanced Risk Allocation Portfolio them, four times a year, free from capital gains tax liability. Dividends paid quarterly, apart from Balanced Risk Allocation which will not normally pay dividends.
Please contact the Invesco Investor Services Team on 0800 085 8677 if you would like more information about the investment trusts or other specialist funds listed above. Further details are also available on the following website: www.invescoperpetual.co.uk/investmenttrusts.
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