The Association of Investment Companies Annual Report and Accounts Year Ended 30 September 2019 Annual Reports and Accounts 2019 Mission Statement The Association’s mission is to help members add value for shareholders over the longer-term. Membership Information The industry reached the milestone of £200bn of gross assets during the year, finishing with £198bn, of which over 92% were members of the Association. VCT assets increased by 10% over the year to around £4.5bn. A total membership of 362 investment companies was the highest number ever. 2 Annual Reports and Accounts 2019 Contents Chair’s Statement 4 Chief Executive’s Report 8 Board of Directors 12 Committees and Forums 15 Company Information 16 Executive Staff 17 Report of the Directors 18 Notice of Annual General Meeting 22 Statement of Directors’ Responsibilities 23 Independent Auditor’s Report 24 Consolidated Statement of Income and Retained Earnings 27 Consolidated and Company Balance Sheets 28 Consolidated Statement of Cash Flows 29 Notes to the Consolidated Accounts 30 Members of the Association 37 Acronyms 41 3 Annual Reports and Accounts 2019 Chair’s Statement Introduction It gives me great pleasure to write to you after a particularly busy year for the AIC and one in which the profile of the sector, as a home for illiquid or ‘hard to sell’ assets, shot into the headlines as a result of the Woodford Equity Income gating. Industry update The sector overall continues to demonstrate good health. Sector assets stood at £198bn at the end of September, up 5%, or £9.5bn over the period, having broken through the £200bn milestone in July. IPO activity was 25% higher over the 12 month period by value at £2.3bn (year to end September 2018: £1.9bn). It’s worth noting, however, that much of the activity was focussed on the final calendar quarter of 2018, before the fundraising window shut due to the market setbacks around that time. This activity was also dominated by the launch of Smithson Investment Trust which launched in October 2018 at £822m, making it the largest UK investment trust launched ever. There have only been 7 IPOs so far in the calendar year 2019 in comparison with 21 in the calendar year 2018. IPO activity was dwarfed by secondary market issuance which, yet again, recorded strong levels of activity at £6.8bn (year to end September 2018: £6.4bn). Issuance in alternatives with income characteristics continued to be the most significant factor by value. VCTs once again enjoyed strong fundraising conditions, benefitting from their relative attractiveness in the tax advantaged savings market particularly for higher rate tax payers. Whilst the sector has produced strong returns in the calendar year to date, the setbacks in Q4 2018 meant that overall total returns during the 12 months to September were just 2.74%, modestly ahead of the FTSE All-Share. However, the long-term track record of the sector remains extremely strong. Discounts widened a little, particularly towards the end of the period, finishing at 4.6%1 (30th Sept 2018: 3.3%) excluding VCTs. They nonetheless remain relatively low by historic standards and around 30% of the sector is trading at a premium to NAV, of which I write more later. The Chief Executive reports in detail about key regulatory and other developments during the year but I would like to mention three specific areas of focus in our work over the last year. The first is our work to continue to promote investment companies as a suitable investment vehicle for illiquid assets. This is of huge importance to the sector in light of the IA’s proposals for the Long-Term Asset Fund and following the Woodford Equity Income suspension this year and previous gatings of open-ended property funds. The second has been the AIC’s successful lobbying of the FRC, following consultation with members, to allow more flexibility on the tenure of Chairs and their membership of Audit Committees in the AIC’s Corporate Governance Code. Finally, I would encourage you all to use the income finder on the AIC’s website which has been widely lauded in the financial press and is responsible for record visitors to the AIC’s website. 1 Cum income with debt at market value 4 Annual Reports and Accounts 2019 Industry demand and AIC’s business plan The sector has been transformed over the past 10 years. Around 30% of the sector is now trading at a premium to NAV, and many of these companies are issuing shares regularly. There is a theme running through the transformation. In order to generate consistent demand, investment companies need to demonstrate one or more of three characteristics: be able to deliver a high and dependable income stream; use the investment company wrapper to house illiquid or alternative assets which have attractive return characteristics and low correlation to traditional asset classes; or, particularly if investing in more traditional asset classes, have managers with a particularly strong track record and a significant retail following. ESG considerations are also rapidly rising up investor’s wish lists of demonstrable qualities. And of course all of this has to be delivered at a competitive cost, so scale, and its benefits, can be helpful. So whilst those companies that can meet these tests are able to enjoy premium ratings, boards of companies that do not will have to work hard to attract demand and to ensure the long term success of those companies. It is also becoming increasingly challenging to launch IPOs due to minimum size requirements of wealth managers. Shareholders are also increasingly prioritising gender diversity in the light of initiatives such as the Hampton-Alexander review, which is currently targeting 33% female representation on FTSE 350 boards by 2020. Investment companies in the FTSE 350 have made good progress towards this target in the last year, with female representation up from around 25% to 32%. However, shareholders are likely to continue to exert pressure on individual boards which are making less obvious progress towards this target. The AIC Board held a strategy day in February focussing specifically on maximising investor demand and how we might help accelerate many of the positive sectoral demand trends, whilst ameliorating some of the negative ones. The workstreams emerging from this day have informed this year’s business plan and will continue to do so for a number of years ahead. Key areas involve promoting the sector widely as a good home for illiquid assets, including responding to the IA’s proposals for a new Long-Term Asset Fund; continuing to lobby both in Europe and domestically to limit the detrimental impact of PRIIPs KIDs and to campaign ultimately for meaningful reform of these publications; and a number of workstreams to increase the profile of investment companies on platforms and in the advised retail sector. We also plan to continue to communicate the economic and social benefits provided by VCT investment and look to demonstrate the re-targeting of VCT investment to higher risk, growth businesses by undertaking, and promoting the results of, a VCT survey in the New Year. We will be discussing all these areas of focus at our Director Roundtable events so I would really encourage you to attend. Membership levels and feedback Our membership statistics, whilst always high, continue to improve and our 362 members now represent 91% of the industry by number, up from 351 (88%) over the 12 month period. Strong representation makes an enormous difference to us as a trade body as it gives us real authority when representing the industry to stakeholders, including politicians, regulators and policy makers. We are very grateful to members for their support. 5 Annual Reports and Accounts 2019 As a member-led organisation, we depend on feedback from you, our members, to inform our work going forward. Please do keep in touch with us, either face to face at our conferences or Directors’ Roundtables, or by email and phone. We are always keen to hear your views and concerns and the Chief Executive or I would be very happy to attend a board meeting to discuss these and any broader industry issues. I would also like to take this opportunity to thank those individuals that participate in the essential work undertaken by the network of 10 committees which meet regularly and help to inform our work. Finances and subscriptions The accounts for the year to September 2019 show a modest surplus. Subscription rates for 19/20 remain unchanged at 0.75bp of assets for non-VCT members and 1.75bp for VCTs. The maximum fee is also unchanged at £21,000 and the minimum fee has increased from £3,500 to £3,600. Overall the funding from the different membership groups of VCTs, non-UK and UK members broadly reflects the costs of servicing them. Board changes Melville Trimble retired at the AGM in January. Melville was Deputy Chair and Audit Committee Chair during his time on the Board and I would like to thank him for his wise input and dedication to our members over this period. Patrick Reeve has succeeded Melville as Audit Committee Chair. The Board welcomed one new member this year when Peter Niven, a member director and Guernsey resident, was elected. Peter brings experience of a wide range of alternative asset classes as well as experience of running a trade body, from when he was Chief Executive of Guernsey Finance, and he has already made a welcome impact. Harry Morgan and Peter Arthur will both retire from the Board at the 2020 AGM. As an experienced private wealth manager, Harry’s insights have been very much appreciated over a period when this part of the industry’s shareholder base has experienced considerable change in its demand patterns.