Source - PRN

Invesco Income Growth Trust plc

Annual Financial Report Announcement

For the year ended 31 March 2017

Financial Information and Performance Statistics

Total Return(1)(2)(3) (includes net dividends reinvested)
Year Ended
31 March 2017
Year Ended
31 March 2016
Net asset value per ordinary share +15.5% –1.6%
FTSE All-Share Index +22.0% –3.9%
Share price +16.2% –7.8%

The Company’s benchmark(2) is the FTSE All-Share Index.

At 31 March
2017
At 31 March
2016
Change
Capital
Net asset value(1) per ordinary share 328.3p 293.9p +11.7
FTSE All-Share Index(2) 3,990.0 3,395.2 +17.5
Share price(2) 291.0p 260.0p +11.9
Discount(1)(3) per ordinary share 11.4% 11.5%
Gearing
Gross gearing(1) – excluding the effect of cash 3.5% 8.6%
Net gearing(1) – including the effect of cash 3.5% 8.6%
Revenue and Dividends(3)
Year Ended
31 March 2017
Year Ended
31 March 2016
Change
Net revenue after tax (£’000) 6,508 6,763 -3.8
Revenue return per ordinary share 11.1p 11.5p -3.5
Dividends:
– first interim 2.20p 2.15p
– second interim 2.20p 2.15p
– third interim 2.25p 2.20p
– fourth interim (2016: final) 4.00p 3.80p
10.65p 10.30p +3.4
Retail Price Index(2) – annual change 3.1% 1.6%
Ongoing charges(1)(3) 0.80% 0.81%

Notes:

(1) The term is defined in the Glossary of Terms on page 67.

(2) Source: Thomson Reuters Datastream.

(3) Key Performance Indicator.

Chairman’s Statement

Performance

Shareholders who have read my recent statements will be aware of my caution which, I must admit, to date has largely proved unfounded. It certainly was a very interesting year, in particular with Brexit and the election of President Trump, both of which have had, for me, surprisingly positive effects on stock markets. The UK stock market has benefited from the collapse of sterling, although the resulting adverse effects on inflation are increasingly now being felt. The US stock market and many commodity prices reacted positively to the prospects of a Trump economic stimulus, but that is now beginning to look a little less certain.

It is always pleasing to be able to report a positive return and the year to 31 March 2017 saw a total return on our net asset value of 15.5%. As Ciaran explains in greater detail in his Portfolio Manager’s Report, this was achieved despite his caution post Brexit and in the run up to the US Presidential election. This caution meant that, in particular, he remained substantially underweight in the mining sector and so missed the benefit of its rally, particularly post Trump’s election. The mining sector is a significant part of the FTSE All-Share Index and our benchmark’s total return for the year was consequently higher than the Company’s at +22.0%. However, we should recognise that our underweighting in the mining sector has benefited us significantly in recent years, as can be seen from the figures on page 6 which show that, on a longer term view, our NAV total return has outperformed our benchmark over three, five and ten years. Indeed, at the time of writing, the mining sector has lost some of its recent sparkle and there has been rotation back towards the more domestically focused smaller and mid cap stocks, benefiting the portfolio’s relative performance since the year end.

Revenue and Dividends

During the year, earnings per share decreased slightly to 11.1p per share from 11.5p. Notwithstanding this small reduction, we have declared a fourth interim dividend, of 4.0p per share which, together with aggregate interim dividends of 6.65p, gives a total dividend per share for the year of 10.65p (2016: 10.3p), an increase of 3.4%. This is ahead of the annualised inflation rate for the year to 31 March 2017 of 3.1% (as measured by RPI) and is consistent with our objective of growing the dividend at above the rate of inflation. The fourth interim dividend will be paid on 28 July 2017 to shareholders on the register on 30 June 2017.

The date of the annual general meeting (AGM) has been changed this year from July to September in order to move it out of the holiday season and hopefully enable more shareholders to attend. However, this new timing of the AGM and that of the quarterly payment of dividends mean that shareholders will not have an opportunity to vote on a final dividend this year. Recognising this, and not wishing to dilute shareholders’ democracy, we have included an advisory resolution in the notice of the AGM to enable shareholders to vote on the Company’s Dividend Payment Policy, which is shown on page 13.

Succession Planning

The Board takes its corporate governance responsibilities seriously and, as highlighted on page 24 of this report, it conducts its affairs in line with the AIC Code of Corporate Governance. This recognises that, whilst boards must not become ossified, there are clear advantages to boards of investment companies like ours to have a mixture of directors with both complementary skills and length of service. I know from my experience that this mixture has served this Company extremely well, with a board that successfully steered the Company through some challenging times over the last ten years or so. Notwithstanding this, the Board has, as shareholders are aware, started a refreshment process, which saw the recent retirement of Chris Hills and the appointment of Mark Dampier, and this is planned to continue over the next two years in a phased way. This approach will ensure that the Board continues to have an appropriate mixture of skills and experience whilst also benefiting from refreshment.

Outlook

I think that I must accept that I am like a vinyl record where the needle is stuck in a groove because I continue to caution that positive returns are likely to prove harder to generate for a while, particularly in light of the increased uncertainty following the recent indecisive UK election result and the possible impact on the Brexit negotiations that have now started, let alone the reality of Trump. Not that I am upset being like a vinyl record, which for many is still considered the best way to listen to good music and so too, I believe, that investment trusts are the best structure to invest in for the long term and to successfully weather any challenges ahead. So I am confident that Ciaran, like a good music composer, will continue to meet our investment objectives by choosing for our portfolio (‘the score’) those companies (‘the notes’) that when combined together produce a performance (‘the tune’) that would give a vinyl record listener pleasure, let alone us shareholders of this Company. However, we may have to accept that occasionally he may have all the right notes, but not necessarily in the right order (with thanks to the late Morecambe and Wise)!

AGM

This year’s AGM will again be held at Invesco Perpetual’s West End office, 1st Floor, 43-45 Portman Square, London W1H 6LY at 2pm on 15 September 2017. The Notice of the AGM of the Company is on pages 62 to 64 and a summary of the resolutions is set out in the Directors’ Report on pages 35 and 36. Whilst I urge all shareholders to vote in favour of these resolutions by returning their completed voting papers or voting online, I hope that as many shareholders as possible will attend the AGM in person and have the opportunity of hearing from Ciaran about the portfolio and his views on the outlook, as well as meeting myself and my fellow directors.

In the meantime, I would encourage shareholders to look at our section of our Manager’s website at www.invescoperpetual.co.uk/ incomegrowth which, in addition to hosting an electronic version of this annual financial report and a wealth of other useful information, features a video interview of our portfolio manager, Ciaran, that gives some insight into his investment style.

Hugh Twiss MBE
Chairman
28 June 2017

Manager’s Report

For the year ended 31 March 2017

Market Review

After a volatile start to 2016, the UK stock market rose strongly over the Company’s financial year. This was driven initially by rising commodity prices and a continued absence of inflationary pressures globally and then, following the EU referendum, by the sharp fall in the value of sterling. August 2016 also marked a low point in 10 year government bond yields, as expectations increased that the US Federal Reserve would tighten monetary policy in light of ongoing positive US economic momentum and further job creation. The UK equity market rose in response to this economic outlook, a trend which accelerated following the election of Donald Trump as US President. A significant divergence in performance followed the Brexit vote and the rise in the US dollar against sterling, with sector performance influenced by a rotation towards industries perceived as benefiting from a stronger global economic outlook.

Portfolio Review

The Company’s net asset value, including reinvested dividends, delivered a return of 15.5% over the year under review, lagging its benchmark, the FTSE All-Share Index, which delivered a total return of 22.0%.

Against a strong market backdrop, the portfolio’s performance was held back by its zero weighting in the mining sector, which rallied very strongly on the back of recovering commodity prices as well as a stronger US dollar, and by an underweight position in the oil sector, notably Royal Dutch Shell.

The holdings in the utilities sector weighed on the portfolio’s performance – a lack of enthusiasm for these relatively defensive companies, which offer low stable growth, steady dividends and low volatility, prevailed for much of the period. Although delivering positive performance, these companies failed to match the stock market’s rise.

Despite this stock market apathy towards defensive sectors, there was again a strongly positive contribution to performance from the tobacco sector, notably the holding in British American Tobacco. Reynolds American accepted a cash and shares offer from British American Tobacco, which is set to create a combined entity well positioned to exploit next generation products, particularly the US e-cigarette market. The deal is expected to be concluded in the third quarter of 2017.

Notable positive contributions also came from the holdings in the pharmaceutical sector, AstraZeneca and GlaxoSmithKline. Both companies are beneficiaries of the strong US dollar. AstraZeneca also rose on increasing expectations of good results from a number of on-going new drug trials, while GlaxoSmithKline’s results confirmed growth across its three business arms: pharmaceuticals, vaccines and consumer healthcare.

Elsewhere in the portfolio, HSBC’s share price rose strongly as the market was attracted to its globally diversified business and US dollar exposure as well as waning concerns over China’s debt burden and slowing economic growth.

While domestically focused stocks typically saw their share prices fall post the Brexit vote, the portfolio’s holding in Young & Co’s Brewery performed strongly. The company again reported impressive sales growth against a declining beer market, confirming double digit profit growth with its results. Other long term portfolio holdings to perform particularly well over the period included Bunzl, Compass, Croda International, Experian, Nichols and Wolseley.

A more recent addition to the portfolio is Micro Focus International. The company’s shares performed well since its acquisition, including a positive reaction to its proposed merger with Hewlett Packard Enterprise’s Software Business Segment, which is viewed as consistent with Micro Focus’s strategy of acquiring and efficiently managing mature infrastructure software assets.

The year was notable for warnings of lower profits by companies and the stock market was inclined to de-rate companies issuing such warnings. Notable amongst these was Capita, whose share price fell sharply as it downgraded full-year earnings forecasts, blaming a slow-down in specific trading businesses, one-off costs and problems with a major contract with TFL, along with delayed client decision-making since the Brexit vote. The company later confirmed the departure of its chief executive Andy Parker and expects 2017 to be a “transitional year” for the business as it completes a number of disposals, embeds internal structural changes and re-positions for a return to growth in 2018. I see recovery potential in the shares, with the disposal of Capita Asset Services reducing balance sheet concerns and allowing the business to focus on its fundamentally strong outsourcing business.

Another holding to see its value fall sharply over the period was Essentra, formerly known as Filtrona, whose shares fell sharply after the company issued a warning about “challenging” market conditions and poor trading across its business. This was followed by the departure of the chief executive. I am encouraged by the replacement CEO, who has a track record of turning round businesses and has put a recovery plan in place.

BT detracted from performance - an update on accounting irregularities in its Italian division prompted a sharp sell-off, which worsened after a profit warning from the company highlighted a more challenged outlook for domestic public services contracts. Issues with Ofcom over its Openreach subsidiary and its pension fund deficit have distracted investors from the company’s strengths, notably the growth potential of its mobile business following the acquisition of EE, its cash flows and the low rating of the shares.

The portfolio’s holding in Next weighed on performance, following a disappointing Christmas trading update. However, Next’s share price rose at the end of the period as the company maintained its profit outlook for 2017 despite a challenging clothing market, underlining the recovery potential in the shares following their de-rating of the past year.

In terms of portfolio activity during the period, new investments were made in niche life insurance company Chesnara, consultancy engineering business Ricardo, speciality flavourings business Treatt and employee benefit consultancy firm Xafinity. These are relatively small mid-cap companies which I believe have the potential to grow into significantly larger ones. They also fit my criteria of having strong fundamentals (including barriers to entry), with sensible management whose interests are aligned with shareholders and with a low risk balance sheet. The holdings in GKN, Land Securities, MITIE, Pearson and Senior were sold.

Outlook and Portfolio Strategy

Following a brief period of volatility, the UK’s upward trajectory of the last seven years has accelerated over the past year. Meanwhile there remain headwinds to withstand, including the as yet unknown impact of Brexit implementation, with economic growth likely to remain subdued. In the US, there remains uncertainty over the Trump effect, with the risk that the enhanced expectations of economic growth will not be met while, in China, there is a risk of a slowdown in the capital investment cycle later this year. Additionally, sterling could strengthen from current depressed levels, creating uncertainty for UK equities. Finally, the recent UK election result has led to heightened uncertainty over political direction.

Market valuations in terms of historic dividend yields and price earnings ratios are now above long term average levels, but, excluding the one-off impact of weak sterling on companies with overseas revenues, earnings growth for many companies and sectors remains elusive or even negative. There is, however, recovery potential in the Brexit-hit stocks.

I continue to seek to achieve both income and capital growth from the portfolio, with a balance between the current level of income and future growth. Dividend growth in the market in 2017 is likely to prove lower than overall earnings growth, as companies seek to re-build dividend cover from historically low levels. Additionally at current stock market levels, it can prove difficult to find quality companies able to deliver growth in both income and capital. However, the portfolio is currently forecast to generate a higher level of dividend income in the current financial year.

In terms of portfolio gearing, ahead of the UK referendum I became cautious of the potential impact of the result on the stock market and reduced the level of borrowing within the portfolio. I subsequently took advantage of the extreme moves in certain share prices following the vote to make some purchases and continue to look for such opportunities to utilise more gearing. However, it is currently noticeably difficult to find quality small or mid-sized companies at attractive valuations, so gearing continues to be low by historic standards.

I believe it is sensible to remain conservative in my investment approach and I seek to invest in companies whose prospects are not dependent on an improving economic outlook. I remain confident in the long term return potential of the holdings in my portfolio.

Ciaran Mallon
Portfolio Manager
28 June 2017

Business Review

Strategy and Business Model

Invesco Income Growth Trust plc is a UK investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These also follow and have been approved by shareholders.

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 portfolio 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. Invesco Perpetual is a business name of both IFML and IAML. The portfolio manager responsible for the day to day management of the portfolio is Ciaran Mallon.

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 Capita Asset Services to act as registrar and BNY Mellon Trust & Depositary (UK) Limited as depositary. The depositary has delegated safekeeping of the Company’s investments to The Bank of New York Mellon (London Branch).

Investment Policy

The Company’s investment objective, principal investment aims, investment policy and risk and investment limits combine to form the ‘Investment Policy’ of the Company.

Investment Objective

The Company’s investment objective is to produce income and capital growth superior to that of the UK stock market and dividends paid quarterly that, over time, grow above the rate of inflation.

Principal Investment Aims

The Company aims to:

–          have a portfolio yielding more than the FTSE All-Share Index in order to generate sufficient income;

–          provide shareholders with dividend growth in excess of inflation over the longer term;

–          achieve capital growth in excess of the FTSE All-Share Index over the longer term;

–          reduce risk by diversifying investments across a wide range of companies and sectors; and

–          enhance returns by utilising borrowings, when appropriate.

Investment Policy and Risk

The Company invests principally in quoted UK equities and equity-related securities of UK companies selected from any market sector. At certain times some exposure to fixed interest securities may be considered desirable by the Manager whereby the main criteria for inclusion will be income, liquidity and credit quality.

The Company utilises borrowings when appropriate in order to seek to enhance its returns but the associated risks will be mitigated by limiting the maximum amount of borrowings that can be utilised and by investing predominantly in liquid investments so that any gearing can be managed in a timely way.

One of the Company’s principal characteristics is that it diversifies its investments across a wide range of companies and sectors, so minimising the risks associated with having too much invested in one stock or sector. The Manager’s aim is to have a broad cross-section of the best-performing stocks that he can find consistent with this characteristic.

Investment Limits

The Board has prescribed limits on the Investment Policy, among which are the following:

–          no more than 10% of gross assets will be held in a single investment;

–          no more than 15% of gross assets will be held in other listed investment companies;

–          no more than 5% of gross assets will be held in unquoted investments; and

–          borrowings may be used to raise market exposure up to a maximum of 25% of net assets.

Except for borrowings, all of the preceding limits are measured at the time of investment.

The Company does not currently use derivative instruments, but could potentially do so for efficient portfolio management purposes, subject to specific sanction of the Board.

Performance

Key Performance Indicators

The Board and Manager work closely together to achieve the Company’s investment objective. To help shareholders understand how this is achieved and monitored, the following key performance indicators are used:

–          the income available to be paid as dividends compared to Retail Price Inflation (RPI);

–          the net asset value performance;

–          the Company’s total return performance compared to inflation, its benchmark and its peer group;

–          the premium or discount to net asset value at which the Company’s shares trade; and

–          ongoing charges (the total cost to shareholders incurred by the Company).

Dividends and Dividend Payment Policy

The Board aims to pay a sustainable level of base dividend that grows above the rate of inflation and so provides shareholders with real long-term growth in dividends. Additional dividend payments above the sustainable level may be paid on a case by case basis as special dividends.

The Board’s Dividend Payment Policy is for the Directors to declare four dividends in respect of each accounting year, with one payment in respect of each calendar quarter. Currently, payments are made in October, December, March and July. Additional special dividends may be declared, at the discretion of the Directors.

For the year ended 31 March 2017, three interim dividends have been paid and the Directors have declared a fourth interim dividend, in lieu of a final dividend, of 4.0p (2016: final of 3.80p) per share. The first two interim dividends were of 2.20p (2016: 2.15p) each per share and were paid on 31 October 2016 and 30 December 2016. The third interim dividend was 2.25p (2016: 2.20p) and was paid on 15 March 2017. The fourth interim dividend will be paid to shareholders on 28 July 2017. In total, the Directors have declared dividends of 10.65p, an increase of 3.4% over the previous year. Further details on the dividend payment history can be found on page 5.

The Board keeps under review the income generated by the portfolio. The average yield of the portfolio during the year was approximately 3.9%, a premium of 0.3% over the average yield of the FTSE All-Share Index over the same period, which was 3.6%. Whilst the portfolio’s yield has been, and is anticipated to continue to be, at a premium to the index the premium has narrowed in recent years. This is mostly because of the strong capital return from the portfolio, leading to a concomitant fall in dividend yield. Many of the large, higher yielding companies in the benchmark index have dividends which are not well covered by earnings. Inclusion in the portfolio takes account not only of current dividend yield, but also dividend safety and growth prospects.

Asset Performance

On 31 March 2017, the share price and the net asset value (NAV) per share were 291.0p and 328.3p respectively. The comparable figures for 31 March 2016 were 260.0p and 293.9p.

The Board monitors the Company’s NAV and compares its performance with relevant indices, principally the FTSE All-Share Index, which is the Company’s benchmark. The NAV total return of the Company for the year was 15.5% compared with a total return of 22.0% for the FTSE All-Share Index, 17.5% for the FTSE All-Share 5% Capped Index, 18.6% for the FTSE 100 Share Index and 17.5% for the FTSE 350 High Yield Index.

Peer Group Performance

The Board monitors the performance of the Company in relation to both the AIC UK Equity Income sector as a whole and, as this sector is quite diverse in its objectives and structures, to those companies within it which the Board considers to be the peer group that most closely matches it.

As at 31 March 2017, out of the 22 investment trusts ranked within the AIC UK Equity Income sector, the Company was ranked 14th over one year, 11th over three years and 11th over five years by NAV performance (source: AIC).

Discount

The Board monitors the discount at which the Company’s shares trade in relation to the value of the underlying assets and how this compares to other investment trusts in the AIC UK Equity Income sector. During the year the Company’s shares traded at a discount between 7.2% and 12.9%. At the year end the discount was 11.4% (2016: 11.5%) and the average discount of the sector was 4.8% (2016: 4.5%) (source: JPMorgan Cazenove).

The Board and Manager closely monitor movements in the Company’s share price and dealings in the Company’s shares. In order to avoid significant overhang or shortage of shares in the market, the Board asks shareholders to approve resolutions every year authorising the repurchase of shares (for cancellation or to be held as treasury shares) and also their issuance. This may assist in the management of the discount. These authorities were not utilised in the year.

The Company does not currently hold shares in treasury. However, should the Board consider it to be in shareholders’ interests to do so, then it is the Board’s policy to sell shares held as treasury shares on terms that are in the best interests of shareholders.

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 average net asset value during the year, expressed as a percentage.

Ongoing charges for the year totalled £1,439,000 (2016: £1,437,000) and the ongoing charges figure was 0.80% (2016: 0.81%).

Financial Position

At 31 March 2017, the Company’s net assets were valued at £192 million (2016: £172 million). The portfolio comprises mainly equity investments with some fixed rate securities and cash.

The Company has an overdraft facility, which is limited to the lesser of 25% of net asset value and £25 million. At the balance sheet date, drawings were £6.8 million (2016: £14.9 million). Note 11 to the financial statements gives details of the facility.

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 purchase and sales of investments and the income from investments, against which must be set the costs of borrowing and management expenses. The Company’s use of financial instruments is disclosed in note 1C and note 15 to the financial statements.

Future Trends

Details of the main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Manager’s Report section of this Strategic Report on pages 10 and 11. Further details as to the risks affecting the Company are set out below under ‘Principal Risks and Uncertainties’.

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 page 26).

The following are considered to be the most significant risks to shareholders in relation to their investment 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 15 to the financial statements.

Investment Objective

There can be no guarantee that the Company will meet its investment objective.

The Board monitors the performance of the Company and has established guidelines to ensure that the investment policy is followed.

Market Risk

All of the investments held in the year traded on the London Stock Exchange. The prices of securities and the income derived from them are influenced by many factors such as general economic conditions, interest rates, inflation, political events and government policies, as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company, although the risk to the Company’s performance can be mitigated to an extent by adjusting the level of borrowing or holding cash balances.

Investment Risk

There is a risk that the performance of stocks selected for the portfolio might disappoint. Any poor performance of individual investments is mitigated by the diversification of the portfolio and the continual analysis of all holdings by the portfolio manager. The portfolio of investments held at 31 March 2017 is set out on pages 17 and 18.

Shares

Shareholders are exposed to certain risks in addition to risks applying to the Company itself. The market value of the shares in the Company may not reflect their underlying net asset value (NAV) and they may trade at a discount to it. The Board and the Manager monitor the market rating of the Company’s shares and both share repurchase and issuance powers are in place that can be used to help in its management and are intended to be renewed at the AGM.

The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested. Past performance of the Company is not necessarily indicative of future performance.

While it is the intention of the Directors to pay dividends to shareholders quarterly from revenue earned, the ability to do so will depend upon the level of income received from securities and the timing of receipt of such income by the Company. Accordingly, the amount of quarterly dividends paid to shareholders may fluctuate.

Gearing Arising from Borrowings

Whilst the use of borrowings by the Company will enhance the total return on the shares where the return on the Company’s underlying securities is positive and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is negative. The Board and the Manager keep the level of borrowing under review.

Regulatory

The Company is subject to various laws and regulations by virtue of its status as a public limited company registered under section 833 of the Companies Act 2006, its status as an investment trust, and its listing on the Official List of the UK Listing Authority.

Loss of investment trust status could lead to the Company being subject to tax on the realised capital profits on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the Official List, 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 compliance with tax and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all perceived risks and the measures in place to control them. 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.

Reliance on Third Party Service Providers

The Company has no employees and the Directors are all appointed on a non-executive basis. The Company is reliant upon the performance of third party service providers for its executive functions. In particular, the Manager performs services which are integral to the operation of the Company. 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 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.

The Board regularly reviews the quality of services provided. The Company’s main service providers are listed on page 66.

Viability Statement

The Company is an investment company operating as an investment trust, as defined by sections 1158 and 1159 of the Corporation Tax Act 2010. As such, the Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Directors take a long term view in their stewardship of the Company, as does the portfolio manager in his management of the portfolio. Long term for this purpose is considered to be at least five years and so the Directors have assessed the Company’s viability over that 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 14 and 15, together with mitigating factors. The risks of failure to meet the Company’s investment objective, and contributory market and investment risks 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 it commenced operations in 1996.

In terms of financial risks to viability, the investments comprising the portfolio are currently all listed on the London Stock Exchange and readily realisable. The Company has no long term liabilities and the portfolio’s total value is many times the value of its short term liabilities and annual operating costs. Consequently, there appears little to no prospect of the Company being unable to meet its financial obligations as they fall due in the next five years.

Based on the above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period of their assessment.

Board Diversity

The Company’s policy on diversity is set out on page 30. The Board currently comprises five non-executive directors of whom one is a woman, thereby constituting 20% female representation. Summary biographical details of the Directors are set out on page 22. 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 decide to, or not to, make an investment on environmental and social grounds alone. The Company does not have a human rights policy, although the Manager applies the United Nations Principles for Responsible Investment.

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 required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

This Strategic Report was approved by the Board on 28 June 2017

Invesco Asset Management Limited
Company Secretary

Investments in Order of Valuation

At 31 March 2017

UK listed ordinary shares unless otherwise stated


Holdings

Company

Activity By Sector
Value
£'000 
% of
Portfolio
208,341 British American Tobacco Tobacco 11,042  5.6
232,817 Imperial Brands Tobacco 9,003  4.5
459,261 GlaxoSmithKline Pharmaceuticals & Biotechnology 7,621  3.8
142,533 Wolseley Support Services 7,148  3.6
733,999 Pennon Gas, Water & Multiutilities 6,470  3.3
407,568 RELX Media 6,370  3.2
956,462 HSBC Banks 6,226  3.1
626,800 Young & Co's Brewery - Non voting Travel & Leisure 6,143  3.1
316,651 Nichols Beverages 5,906  3.0
580,302 National Grid Gas, Water & Multiutilities 5,881  3.0
Top ten holdings 71,810 36.2
357,190 Experian Support Services 5,812  3.0
2,343,494 Legal & General Life Insurance 5,796  2.9
161,263 Croda International Chemicals 5,747  2.9
1,079,334 Aviva Life Insurance 5,742  2.9
501,695 CVS General Retailers 5,694  2.9
851,151 Informa Media 5,550  2.8
358,693 Compass Travel & Leisure 5,398  2.7
232,000 Bunzl Support Services 5,382  2.7
1,744,362 G4S Support Services 5,308  2.7
1,114,328 Jupiter Fund Management Financial Services 4,747  2.4
Top twenty holdings 126,986 64.1
193,276 Severn Trent Gas, Water & Multiutilities 4,604  2.3
113,993 Whitbread Travel & Leisure 4,512  2.3
963,243 BP Oil & Gas Producers 4,407  2.2
297,350 SSE Electricity 4,389  2.2
419,073 United Utilities Gas, Water & Multiutilities 4,163  2.1
106,240 InterContinental Hotels Travel & Leisure 4,152  2.1
388,891 Euromoney Institutional Investor Media 4,111  2.1
185,141 Royal Dutch Shell – B Shares Oil & Gas Producers 4,044  2.0
1,247,993 BT Fixed Line Telecommunications 3,971  2.0
316,645 Smith & Nephew Health Care Equipment & Services 3,847  2.0
Top thirty holdings 169,186 85.4
UK listed ordinary shares unless otherwise stated
Value % of
Holdings Company Activity By Sector £'000 Portfolio
1,720,163 Centrica Gas, Water & Multiutilities 3,733  1.9
81,950 Next General Retailers 3,540  1.8
549,773 Essentra Support Services 2,886  1.5
1,176,336 N Brown General Retailers 2,467  1.2
614,493 Softcat Software & Computer Services 2,421  1.2
49,121 AstraZeneca Pharmaceuticals & Biotechnology 2,413  1.2
91,959 Micro Focus International Software & Computer Services 2,095  1.1
199,839 Ricardo Support Services 1,728  0.9
1,075,539 Xafinity Financial Services 1,713  0.9
297,480 Capita Support Services 1,679  0.8
Top forty holdings 193,861 97.9
409,260 Drax Electricity 1,332  0.7
282,885 Treatt Chemicals 1,052  0.5
76,060 Chesnara Life Insurance 271  0.1
Total ordinary shares (43) 196,516 99.2
1,300,000 Barclays Bank 14% Perpetual (BB)* Banks 1,589  0.8 
Total fixed income investments (1) 1,589 0.8
Total value of investments (44) 198,105 100.0

*          Standard & Poors long term credit rating; investment grade range is from BBB to AAA, non-investment (speculative) grade is BB and below.

Directors’ Responsibilities  Statement

in respect of the preparation of the Annual Financial Report

The Directors are responsible for ensuring that the annual financial report is prepared in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that 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 accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the net return 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, Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration Report that comply with that law and those regulations.

In so far as each of the Directors is aware:

–   there is no relevant audit information of which the Company’s auditor is unaware; and

–   the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the 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 and profit and loss 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

Hugh Twiss MBE

Chairman

28 June 2017

Financial

For the year ended 31 March

Income Statement

2017 2016

Notes
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Gains/(losses) on investments 9 19,790 19,790 (9,188) (9,188)
Income 2 7,475 558 8,033 7,778 85 7,863
Investment management fee 3 (522) (522) (1,044) (526) (526) (1,052)
Other expenses 4 (395) (395) (385) (385)
Net return before finance costs
and taxation 6,558 19,826 26,384 6,867 (9,629) (2,762)
Finance costs 5 (50) (50) (100) (104) (104) (208)
Return on ordinary activities
before and after taxation 6,508 19,776 26,284 6,763 (9,733) (2,970)
Return per ordinary share:
Basic 7 11.1p 33.8p 44.9p 11.5p (16.6)p (5.1)p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with the accounting policies detailed in note 1 to the financial statements. The return on ordinary activities after taxation is the total comprehensive income and therefore no 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. No operations were acquired or discontinued in the year.

Reconciliation of Movements in Shareholders’ Funds




Notes
Share
Capital
£’000
Share
Premium
£’000
Capital
Redemption
Reserve
£’000
Capital
Reserve
£’000
Revenue
Reserve
£’000
Total
£’000
At 31 March 2015 14,638 40,021 2,310 118,742 5,322 181,033
Net return on ordinary activities (9,733) 6,763 (2,970)
Net dividends paid 8 (6,002) (6,002)
At 31 March 2016 14,638 40,021 2,310 109,009 6,083 172,061
Net return on ordinary activities 19,776 6,508 26,284
Net dividends paid 8 (6,118) (6,118)
At 31 March 2017 14,638 40,021 2,310 128,785 6,473 192,227

The accompanying notes are an integral part of these financial statements.

Balance Sheet


Notes
2017
£’000
 2016
£’000
Fixed assets
Investments at fair value 9 198,105 185,851
Current assets
Debtors 10 1,162 1,269
Creditors: amounts falling due within one year 11 (7,040) (15,059)
Net current liabilities (5,878) (13,790)
Net assets 192,227 172,061
Capital and reserves
Share capital 12 14,638 14,638
Share premium 13 40,021 40,021
Capital redemption reserve 13 2,310 2,310
Capital reserve 13 128,785 109,009
Revenue reserve 13 6,473 6,083
Shareholders’ funds 192,227 172,061
Net asset value per ordinary share
Basic 14 328.3p 293.9p

These financial statements were approved and authorised for issue by the Board of Directors on 28 June 2017.

Hugh Twiss MBE

Chairman

Signed on behalf of the Board of Directors

The accompanying notes are an integral part of these financial statements.

Notes to the Financial Statements

1. Principal 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 adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.

A.         Basis of Preparation

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) and with the Statement of Recommended Practice ‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’, issued by the Association of Investment Companies in November 2014, as amended in January 2017. The financial statements are issued on a going concern basis.

As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds) is provided.

B.         Foreign Currency

(i)    Functional and presentational currency

       The financial statements are presented in sterling, which is the Company’s functional and presentation currency and the currency in which the Company’s share capital and expenses, as well as the majority of its assets and liabilities, are denominated.

(ii)   Transactions and balances

       Transactions in foreign currencies, 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.

C.         Financial Instruments

The Company has chosen to apply the provisions of Section 11 and 12 of FRS 102 in full in respect of the financial instruments.

(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 have expired.

(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 are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy, and this is also the basis on which investment information is provided internally to the Board.

     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 as part of gains and losses on investments in the income statement, and are subsequently valued at fair value.

     Fair value for investments 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.

–   Financial liabilities

     Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

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.

E.    Income

Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent to the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserve.

Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.

Interest income arising from fixed income securities is recognised in the income statement using the effective interest method.

Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

F.    Expenses and Finance Costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.

Investment management fees and finance costs are recognised on an accruals basis and are charged 50% to capital and 50% to revenue. This is in accordance with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company.

All other expenses, except for custodian transaction charges, are allocated to revenue in the income statement.

G.    Taxation

The liability to corporation tax is based on net revenue for the year excluding UK dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.

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 and losses on loan relationships, as the Company is unlikely to have sufficient future taxable revenue to offset against these.

H.    Dividends

Dividends are not recognised in the financial statements unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.

2. Income

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

2017
£’000
2016
£’000
Income from investments
UK dividends 6,889 7,237
UK special dividends 394 312
UK unfranked investment income 172 229
7,455 7,778
Other income
Underwriting commission 20
Total income 7,475 7,778

Special dividends of £558,000 (2016: £85,000) have been recognised in capital.

3. Investment Management Fee

This note shows the fees paid to the Manager, which were calculated monthly.

2017 2016
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Investment management fee 522 522 1,044 526 526 1,052

Details of the management agreement are disclosed in the Directors’ Report. At 31 March 2017, £90,000 (2016: £83,000) was owed in respect of management fees.

4. Other Expenses

The other expenses of the Company are presented below; those paid to the Directors and the auditor are separately identified.

2017 2016
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Directors’ remuneration 139 139 129 129
Auditor’s remuneration
- for audit of the annual financial statements 23 23 23 23
Other expenses 233 233 233 233
395 395 385 385

Further information on Directors’ remuneration can be found in the Director’s Remuneration Report.

Auditor’s remuneration amounts exclude VAT. The VAT is included in other expenses.

Included within other expenses is £12,000 (2016: £12,000) of employer’s National Insurance payable on Directors’ remuneration. As at 31 March 2017, the amounts outstanding on Directors’ remuneration and employer’s National Insurance was £19,000 (2016: £13,000).

5. Finance costs

Finance costs arise on any borrowing facilities the Company has used in the year.

2017 2016
Revenue
£’000
Capital
£’000
Total
£’000
Revenue
£’000
Capital
£’000
Total
£’000
Interest on overdraft 50 50 100 104 104 208

6. Tax on Ordinary Activities

As an investment trust the Company pays no tax on capital gains. The Company also pays no tax on income as most of its income is non-taxable UK dividend income and any taxable income was offset by expenses. This note also shows the basis of the Company having no deferred tax assets or liability.

The tax charge for the year is nil (2016: nil) as allowable expenses exceed taxable income.

2017
£’000
2016
£’000
Total return on ordinary activities before taxation 26,284 (2,970)
Theoretical tax at the current UK Corporation Tax rate of 20% (2016: 20%) 5,257 (594)
Effects of:
– non-taxable (gains)/losses on investments (3,958) 1,838
– non-taxable UK dividends (1,378) (1,448)
– non-taxable special dividends (190) (79)
– expenses in excess of taxable income 269 283
Actual tax amount

Factors that may affect future tax charges

The Company has cumulative surplus management expenses and losses on loan relationships of £24,266,000 (2016: £22,919,000) that are available to offset future taxable revenue. A deferred tax asset of £4,125,000 (2016: £4,125,000) measured at the prospective corporation tax rate of 17% (2016: 18%) has not been recognised in respect of the 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. Return per Ordinary Share

Return per share is the return for the financial year divided by the weighted average number of ordinary shares in issue.

The basic revenue, capital and total returns per ordinary share are based on each return on ordinary shares after tax and on 58,551,530 (2016: 58,551,530) ordinary shares, being the weighted average number of shares in issue during the year.

8. Dividends on Ordinary Shares

Dividends represent the return of income less expenses to shareholders. The Company pays four dividends a year.

2017 2016
Dividends paid and recognised in the year: pence £’000 pence £’000
Final paid in respect of previous year 3.80 2,225 3.75 2,196
First interim paid 2.20 1,288 2.15 1,259
Second interim paid 2.20 1,288 2.15 1,259
Third interim paid 2.25 1,317 2.20 1,288
10.45 6,118 10.25 6,002
2017 2016
Dividends payable in respect of the year: pence £’000 pence £’000
First interim paid 2.20 1,288 2.15 1,259
Second interim paid 2.20 1,288 2.15 1,259
Third interim paid 2.25 1,317 2.20 1,288
Fourth interim (in lieu of final) (2016: proposed final) 4.00 2,343 3.80 2,225
10.65 6,236 10.30 6,031

The fourth interim dividend for 2017 will be paid on 28 July 2017 to shareholders on the register as at 30 June 2017. Shares will be quoted ex-dividend on 29 June 2017.

9.         Investments

The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange. 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.  

2017
£’000
2016
£’000
Investments listed on a recognised Stock Exchange 198,105 185,851
Opening valuation 185,851 194,683
Movements in year:
Purchases at cost 10,923 20,388
Sales – proceeds (18,459) (20,032)
– net realised gains 1,709 2,248
Movement in investment holding gains 18,081 (11,436)
Closing valuation 198,105 185,851
Closing book cost (116,776) (122,603)
Closing investment holding gains 81,329 63,248
Net realised gains in year 1,709 2,248
Movement in investment holding gains 18,081 (11,436)
Total gains/(losses) in year 19,790 (9,188)

The transaction costs included in total gains/(losses) in year amount to £54,000 (2016: £115,000) on purchases and £37,000 (2016: £37,000) for sales.

Significant Interests

The Company owns 3.3% of the issued non-voting ordinary 12.5p share capital of Young & Co. Brewery.

10. Debtors

Debtors are amounts due to the Company, such as income which has been earned (accrued) but not yet received and any monies due from brokers for investments sold.

2017
£’000
2016
£’000
Prepayments and accrued income 1,162 1,269
1,162 1,269

11. Creditors: amounts falling due within one year

Creditors are amounts the Company owes, and includes any overdraft and any amounts due to brokers for the purchase of investments or amounts owed to suppliers, such as the Manager and auditor.

2017
£’000
2016
£’000
Amounts due to brokers 80
Bank overdraft 6,764 14,877
Accruals 196 182
7,040 15,059

The Company has a one-year uncommitted overdraft facility with The Bank of New York Mellon of up to the lesser of £25 million and 25% of the adjusted net asset value of the Company. The facility is due for renewal on 16 September 2017 (2016: 17 September 2016). The rate of interest applicable to drawings is 0.85% per annum over the Bank of England’s Base Rate.

12. Share Capital

Share capital represents the total number of shares in issue, on which dividends are paid.

2017 2016
number £’000 number £’000
Allotted, called-up and fully paid:
Ordinary shares of 25p each 58,551,530 14,638 58,551,530 14,638

No shares were bought back and cancelled in the year and no shares were held in treasury at the year end.

The Directors’ Report on page 34 sets out the rights and restrictions attaching to the shares.

13. 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 arose on the issue of new shares. The capital redemption reserve maintains the share capital of the Company and arose from the nominal value of shares bought back and cancelled. The share premium and capital redemption reserve are non-distributable.

The revenue and capital reserves are distributable by way of dividend. The revenue reserve shows the net revenue retained after payment of dividends. Reducing the balance sheet revenue reserve by the fourth interim (in lieu of final) dividend of £2,343,000 (see note 8) results in a revenue reserve available for future distributions of £4,130,000.

The capital reserve includes investment holding gains, being the difference between cost and market value, which are shown in note 9.

14. Net Asset Value per Ordinary Share

The Company’s net assets (total assets less total liabilities) are often termed shareholders’ funds and are converted into net asset value per ordinary share by dividing by the number of shares in issue.

The net asset value per ordinary share and the net asset values attributable to shareholders at the year end were as follows:

2017 2016
Net asset value
per share
pence
Net assets
attributable
£’000
Net asset value
per share
pence
Net assets
attributable
£’000
Ordinary shares
– Basic 328.3 192,227 293.9 172,061

Net asset value per ordinary share is based on net assets at the year end and on 58,551,530 (2016: 58,551,530) ordinary shares, being the number of ordinary shares in issue at the year end. Only the basic NAV is shown. There is no dilution in this or the previous year.

15. Financial Instruments

Financial instruments comprise the Company’s investment portfolio as well as its cash, borrowings, debtors and creditors. This note sets out the risks arising from the Company’s financial instruments in terms of the Company’s exposure and sensitivity, and any mitigation that the Manager or Board can take.

The Company’s principal risks and uncertainties are outlined in the Strategic Report on pages 14 and 15. This note expands on risk areas in relation to the Company’s financial instruments. The Company’s portfolio is managed in accordance with its investment policy, which is set out on page 12. The internal control and risk management process is described on page 26. The overall disposition of the Company’s assets is reviewed by the Board on a regular basis.

The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

Risks that an investment company faces in its portfolio management activities include:

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.

Liquidity risk – arising from any difficulty in meeting obligations associated with financial liabilities.

Credit 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

The Directors have delegated to the Manager the responsibility for day-to-day investment activities and the management of borrowings of the Company as more fully described in the Directors’ Report.

As an investment trust the Company invests in equities and other investments for the long-term according to its investment policy so as to fulfil its investment objective. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either 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 policies the Company used to manage these risks follow.

15.1   Market Risk

          The Manager assesses the Company‘s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed in the Board Responsibilities on page 27. No derivative or hedging instruments are utilised to manage market risk. Gearing is used to enhance returns, but this also increases the Company‘s exposure to market risk and volatility.

15.1.1     Currency risk is not significant for the two years under review as the Company invests in UK equities traded on the London Stock Exchange. During the year, the Company received non-sterling dividends, which represented 10.8% of total investment income in the year (2016: 14.0%).

15.1.2     Interest rate risk

               Interest rate movements may affect the level of interest payable on variable rate borrowings and the income receivable on cash deposits. 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. The Company has an overdraft facility limited to a maximum of £25 million. Note 11 gives full details. The Company uses the facility when required at levels approved and monitored by the Board.

               At the year end drawings on the Company’s overdraft were £6,764,000 (2016: £14,877,000). At the maximum of £25 million, the effect of a movement of +/– 1% in the interest rate would result in a decrease/increase to the Company’s income statement of £250,000 (2016: £250,000).

               The Company can invest in fixed income securities and at the year end the level of exposure was £1.6 million (2016: £1.6 million). The Directors estimate that a 1% change in interest rates applied to this balance would have no impact on reported revenue profit before tax but would increase or decrease reported capital profit before tax by £30,000 (2016: £39,000). The Company had no cash flow exposure to floating interest rate assets.

15.1.3     Other price risk

               Other price risk (i.e. changes in market prices other than those arising directly from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the Manager to manage the portfolio to achieve the best return possible.

               The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager’s compliance with the Company’s stated Investment Policy and to review investment performance.

               The Company’s portfolio is the result of the Manager’s investment process and as a result is not wholly correlated with the Company’s benchmark or the market in which the Company invests. Therefore, the value of the portfolio will not move in line with the market but in accordance with the performance of the particular company’s shares held within the portfolio.

               If the value of the portfolio rose or fell by 10% at the balance sheet date, the profit after tax for the year would increase or decrease by £19.8 million (2016: £18.6 million) respectively.

15.2   Liquidity risk is minimised as the majority of the Company‘s investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, an overdraft provides short-term funding flexibility. The Board monitors the portfolio’s liquidity.

Liquidity risk exposure: the financial liabilities are detailed in note 11. The contractual maturities of these are all three months or less, based on the earliest date on which payment can be required.

15.3   Credit risk comprises the potential failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered; it includes, but is not limited to: lost principal and interest, disruption to cash flows or the failure to pay interest.

Credit risk is minimised by using: (a) only approved counterparties, covering both brokers and deposit takers; and (b) a custodian that operates under BASEL II guidelines. The Board reviews the custodian’s annual independent controls assurance report and the Manager’s management of the relationship with the custodian. Following the appointment of a depositary, assets and cash held at the custodian are covered by the depositary’s restitution obligation, accordingly the risk of loss is remote.

In addition, cash balances are limited to a maximum of £5 million with any one deposit taker. This limit is at the discretion of the Board and is reviewed on a regular basis. No cash was held at the year end (2016: £nil).

There are no financial assets that are past due or impaired during the year (2016: none).

16. Fair Value

Fair Values of Financial Assets and Financial Liabilities

The fair values of the financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals, cash at bank and overdraft).

Fair Value – Hierarchy Disclosures

Nearly all of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow:

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. All of the equity investments are deemed to be Level 1. Due to less visibility on prices for the fixed income investments, these are reported as Level 2; these represented 0.8% (2016: 0.9%) of the portfolio at the balance sheet date. There were no transfers between any levels during the year and no investments were held in Level 3.

17. Capital Management

The Company’s total capital employed at 31 March 2017 was £198,991,000 (2016: £186,938,000) comprising borrowings of £6,764,000 (2016: £14,877,000) and equity share capital and other reserves of £192,227,000 (2016: £172,061,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective as set out on page 12, including that borrowings may be used to provide gearing of the equity portfolio up to a maximum of £25 million or 25% of net asset value. Borrowings comprise of a bank overdraft. Details are given in note 11 and net gearing was 3.5% (2016: 8.6%) at the balance sheet date. The Company’s policies and processes for managing capital were unchanged throughout the year and the preceding year.

The main risks to the Company’s investments are shown in the Strategic Report under the ‘Principal Risks and Uncertainties’ section on pages 14 and 15. These also explain that the Company is able to gear and that gearing 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 under the Corporation Tax Act 2010 and under 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 the Company has complied with, the externally imposed capital requirements. This is unchanged from the prior year.

18. 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 are no contingencies, guarantees or financial commitments of the Company at the year end.

19. 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 38 and 39 with additional disclosure 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 32, and in note 3.

20. Post Balance Sheet Events

Any significant events that occurred after the balance sheet date but before the signing of the balance sheet will be shown here.

There were no significant balance sheet events requiring disclosure.

Notice of Annual General Meeting

NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Income Growth Trust plc will be held at 1st Floor, 43-45 Portman Square, London W1H 6LY, on 15 September 2017 at 2.00 pm for the following purposes:

Ordinary Business

To consider and, if thought fit, to pass the following resolutions all of which will be proposed as ordinary resolutions:

1.       To receive the Annual Financial Report for the year ended 31 March 2017.

2.       To approve the Directors’ Remuneration Policy.

3.       To approve the Annual Statement and Report on Remuneration.

4.       To approve the Company’s Dividend Payment Policy to declare four dividends in respect of each accounting year, with one payment in respect of each calendar quarter.

5.       To re-elect Davina Curling a Director of the Company.

6.       To re-elect Jonathan Silver a Director of the Company.

7.       To re-elect Hugh Twiss a Director of the Company.

8.       To re-elect Roger Walsom a Director of the Company.

9.       To re-appoint Ernst & Young LLP as the Company’s auditor and to authorise the Audit Committee to determine the auditor’s remuneration.

Biographies of Directors seeking re-election are shown on page 22 of the annual financial report.

Special Business

To consider and, if thought fit, to pass the following resolutions of which resolution 10 will be proposed as an ordinary resolution and resolutions 11, 12 and 13 will be proposed as special resolutions:

10.     That:

the Directors be generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (‘the Act’) to exercise all powers of the Company to allot relevant securities (as defined in that section) up to an aggregate nominal amount (within the meaning of sections 551(3) and (6) of the Act) of £4,879,294, such authority to 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 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 as if the authority conferred by this resolution had not expired.

11.     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 (‘the Act’) to allot equity securities for cash, either pursuant to the authority given by the preceding resolution 10 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 Act did not apply to any such allotment, provided that this power shall be limited:

(a)     to the allotment of equity securities in connection with a rights issue in favour of all holders of a class of equity securities where the equity securities attributable respectively to the interests of all holders of securities of such class are either proportionate (as nearly as may be) to the respective numbers of relevant equity securities held by them or are otherwise allotted in accordance with the rights attaching to such equity securities (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, regulatory or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise); and

(b)     to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £1,463,788

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, unless the authority is renewed or revoked at any other general meeting prior to such time, 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 Act shall bear the same meanings in this resolution.

12.     That:

the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 (the ‘Act’) to make market purchases (within the meaning of section 693(4) of the Act) of its issued ordinary shares of 25p each in the capital of the Company (‘Shares’).

Provided always that:

(i)      the maximum number of Shares hereby authorised to be purchased shall be 8,776,874 shares;

(ii)      the minimum price which may be paid for a Share shall be 25p;

(iii)     the maximum price which may be paid for a Share must not be more than the higher of: (i) 5%. above the average of the mid-market values of the Shares for the five business days before the purchase is made; or (ii) that stipulated by the regulatory technical standards adopted by the EU pursuant to the Market Abuse Regulation from time to time;

(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;

(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; and

(vii)    any shares so purchased shall be cancelled or, if the Directors so determine and subject to the provisions of Sections 724 to 731 of the Act and any applicable regulations of the United Kingdom Listing Authority, be held (or otherwise dealt with in accordance with Section 727 or 729 of the Act) as treasury shares.

13.     That:

the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 clear days.

The resolutions are explained further in the Directors’ Report on pages 35 and 36.

By order of the Board

Invesco Asset Management Limited

Company Secretary

Dated this 28 June 2017

This annual financial report announcement is not the Company's statutory accounts. The statutory accounts for the year ended 31 March 2016 have been delivered to the Registrar of Companies. The statutory accounts for the financial year ended 31 March 2017 have been approved and audited but have not yet been delivered to the Registrar of Companies. The statutory accounts both for the year ended 31 March 2016 and for the year ended 31 March 2017 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. 

The audited Annual Financial Report will be available to shareholders shortly. Copies may be obtained during normal business hours from the Company’s correspondence address, 6th Floor, 125 London Wall, London EC2Y 5AS or the Company’s website at http://www.invescoperpetual.co.uk/incomegrowth .

By order of the Board
Invesco Asset Management Limited
28 June 2017

Contacts:

Nick Black          Tel – 020 3753 1000
Shilla Pindoria   Tel – 020 3753 1000