Lowland Investment Company plc Registered as an investment company in England and Wales Registration number: 670489 Registered office: 201 Bishopsgate, London EC2M 3AE. SEDOL/ISIN number: 0536806/GB00 053680 62 London Stock Exchange (TDIM) Code: LWI Global Intermediary Identification Number (GIIN): 2KBHLK.99999.SL826 Legal Entity Identifier (LEI): 2138008RHG5363FEHV19 Telephone: 0800 832 832 Email: [email protected] www.lowlandinvestment.com Lowland Investment Company plc – Annual Report for the year ended 30 September 2018 Lowland Investment Company plc Shareholder Shareholder Communication Communication Awards Awards 2017 2018 WINNER WINNER Winner UK Equity Income Fund of the Year This report is printed on cocoon silk 60% recycled, a recycled paper containing 60% recycled waste and 40% virgin fibre and manufactured at a mill certified with ISO 14001 environmental management standard. The pulp used in this product is bleached using an Elemental Chlorine Free process (ECF). 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Printed by PurePrint JHI9222/2018 Lowland Investment Company plc Annual Report 2018 Contents Strategic Report Corporate Report Key Data 3 Report of the Directors 26 Historical Performance 4 Statement of Directors’ Responsibilities 27 Chairman’s Statement 5-6 Directors’ Remuneration Report 28-29 Performance 5 Corporate Governance Statement 30-33 Dividends 5 Investment Review and Gearing 5 Report of the Audit Committee 34-35 Ongoing Charge 5 Independent Auditor’s Report 36-41 Discount 5 Corporate Governance 6 Financial Statements Contact with Shareholders 6 Annual General Meeting 6 Income Statement 42 Board 6 Statement of Changes in Equity 43 Outlook 6 Statement of Financial Position 44 Fund Managers’ Report 7-11 Investment Approach 7 Statement of Cash Flows 45 Investment Background 8 Notes to the Financial Statements 46-59 Performance Attribution 9 Portfolio Positioning 10 Investment Activity 11 Securities Financing Transactions 60-61 Outlook 11 General Shareholder Information 62 Portfolio Analysis 12 Glossary 63 Twenty Largest Holdings 13-15 Alternative Performance Measures 64 Investment Portfolio 16-18 Business Model 19 Background 19 Investment Objective 19 Investment Policy 19 Management 19 Biographies 20-21 Corporate Information 22-25 Registered Office 22 Service Providers 22 Independent Auditor 22 Financial Calendar 22 Information Sources 22 Follow Janus Henderson Investment Trusts on Twitter, YouTube and Facebook 22 Investing 22 Nominee Share Code 22 Status 23 Principal Risks and Uncertainties 23 Viability Statement 24 Key Performance Indicators 24 Borrowings 25 Future Developments 25 Corporate Responsibility 25 Board Diversity and Experience 25 Lowland Investment Company plc Annual Report 2018 Investment Objective The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term by investing in a broad spread of predominantly UK companies. The Company measures its performance against the FTSE All-Share Index Total Return. Lowland Investment Company plc Annual Report 2018 Strategic Report: Key Data Net Asset Benchmark Value Total Total Return1 Return2 2.7% 5.9% Growth Dividend in for the Dividend Year3 10.2% 54.0p Year ended Year ended 30 September 30 September 2018 2017 NAV per share at year end 1,625p 1,628p Share Price at year end4 1,515p 1,504p Market Capitalisation £409m £406m Dividend per share 54.0p3 49.0p Ongoing Charge including the Performance Fee 0.57% 0.68% Ongoing Charge excluding the Performance Fee 0.57% 0.58% Dividend Yield5 3.6% 3.3% Gearing at year end 12.2% 6.3% Discount at year end6 6.8% 7.6% 1 Net asset value per share total return (including dividends reinvested) in the prior year was 17.0% 2 FTSE All-Share Index. The amount includes dividends reinvested 3 Includes the final dividend of 14.0p per ordinary share for the year ended 30 September 2018 that will be put to shareholders for approval at the Annual General Meeting on Monday 28 January 2019 4 Mid-market closing price 5 Based on dividends paid in respect of the previous 12 months and the share price at year-end 6 Calculated using year-end audited NAVs including current year revenue Sources: Morningstar for the AIC, Janus Henderson, Datastream A glossary of terms and alternative performance measures definitions are included on pages 63 and 64 3 Lowland Investment Company plc Annual Report 2018 Strategic Report: Historical Performance Lowland’s Share Price and Net Asset Value have outperformed the FTSE All-Share Index over the past 25 years 3,200 Lowland Net Asset Value (CAGR 10.6%) AIC UK Equity Income Sector (CAGR 8.9%) 1,600 FTSE All-Share Index (CAGR 7.7%) Lowland Share Price (CAGR 10.5%) 800 400 200 100 50 1 1 7 7 2 2 3 3 5 5 8 8 4 4 6 9 6 0 0 201 201 201 1997 201 201 201 201 201 1993 200 201 1995 1998 1994 1996 1999 200 200 200 200 200 200 200 200 200 Total Return basis and shown on a logarithmic scale (30 September 1993 = 100) CAGR – Compound Annual Growth Rate Source: Thomson Financial, Datastream Lowland’s Dividend Growth over the past 25 years as compared to the Retail Price Index 800 Lowland Dividend (CAGR 7.3%) Retail Price Index (CAGR 2.8%) 400 200 100 1 1 7 7 2 2 3 3 5 5 8 8 4 4 6 9 6 0 0 201 201 201 1997 201 201 201 201 201 1993 200 201 1995 1998 1994 1996 1999 200 200 200 200 200 200 200 200 200 Total Return basis and shown on a logarithmic scale (30 September 1993 = 100) Source: Janus Henderson Historical Performance Total return/ Net revenue Dividend per (loss) per return per Net asset value Share price Year ended ordinary share in ordinary share in ordinary share in Total net assets per ordinary per ordinary 30 September pence pence pence in £’000 share in pence share in pence 2008 26.5 (344.4) 33.0 178,411 675.4 625.0 2009 26.5 8.4 22.7 173,633 657.3 610.0 2010 27.0 139.5 22.5 203,484 770.3 699.5 2011 28.0 68.3 28.8 214,251 811.0 762.5 2012 30.5 229.9 31.1 266,401 1,008.4 991.5 2013 34.0 330.1 36.7 347,202 1,306.9 1,325.0 2014 37.0 73.3 39.4 361,856 1,345.6 1,355.0 2015 41.0 11.8 46.4 354,563 1,318.4 1,287.0 2016 45.0 156.4 47.7 386,910 1,432.0 1,336.5 2017 49.0 243.2 49.1 439,896 1,628.1 1,504.0 2018 54.01 47.4 58.6 438,934 1,624.6 1,515.0 1 Includes the final dividend of 14.0p per ordinary share for the year ended 30 September 2018 that will be put to shareholders for approval at the Annual General Meeting on Monday 28 January 2019 4 Lowland Investment Company plc Annual Report 2018 Strategic Report: Chairman’s Statement Performance We aspire to maintain the quarterly progressive policy described above. In this regard we will have greater flexibility as a result of the The year saw a combination of modest capital growth and strong previously announced decision to allocate 50% of expenses to the revenue growth. Our total NAV return was a positive 2.7%. This is Capital Account and 50% to the Revenue Account. This policy, disappointing measured against our long-term target – the FTSE which reflects the anticipated derivation of total return, is in line All-Share index – which returned 5.9%. with our competitors. The new policy was adopted with effect from 1 October 2018. We believe it will provide flexibility, not only for This NAV performance can be assessed in the light of two major dividends, but also for investment policy. It has long been our belief factors. Firstly, the UK market dramatically underperformed the rest that growing our capital will enable us to grow the income which of the developed world, reflecting uncertainties about Brexit and the derives from it; it is important that our Fund Managers have the stability of the UK government. Secondly, Lowland’s investment freedom to invest for capital growth and are not pushed into ‘chasing style, weighted in favour of stocks perceived to be undervalued, income’ from stocks which may prove to be ‘value traps’. has fared less well than portfolios with a bias towards growth stocks. While the Portfolio Managers have positioned the portfolio a little more defensively than usual, the intention is to refocus on smaller Investment Review and Gearing companies and cyclical companies when the management team We increased gearing during the year from around 6% to circa 12% spot sufficiently attractive opportunities. Our strategy has rewarded in the second half. With the Board’s support, the Fund Managers shareholders well over the long term. The Board sees no reason increased the borrowing to take advantage of a number of to waver. opportunities they perceived to be keenly valued. In doing so they have not greatly increased the risk profile, as they have mainly Dividends invested in higher-yielding large-cap companies. For instance, they increased the positions in Royal Dutch Shell, GlaxoSmithKline and The fundamental health of our portfolio is demonstrated by the National Grid. They established new positions in Severn Trent and growing income it has generated. Earnings per share grew by Land Securities. At the year-end, FTSE-100 companies comprised 19.3% to 58.6p including special dividends, and by 18.6% to 55.4p 39% of the portfolio compared with 36% at the end of last year.