SHIRES INCOME PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 MARCH 2022
Legal Entity Identifier (LEI): 549300HVCIHNQNZAYA89
The Company
Shires Income PLC (the "Company") is an investment trust. Its Ordinary shares are listed on the premium segment of the London Stock Exchange.
Investment Objective
The Company's investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and other fixed income securities.
Benchmark
The Company's benchmark is the FTSE All-Share Index (total return).
Website
Up to date information can be found on the Company's website: www.shiresincome.co.uk
COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS
| Net asset value per Ordinary share total returnA | Share price total returnA | |||
| +11.4% | +18.4% | |||
| 2021 | +34.0% | 2021 | +31.2% | |
| Benchmark index total return | Earnings per share (revenue) | |||
| +13.0% | 14.21p | |||
| 2021 | +26.7% | 2021 | 12.33p | |
| Dividends per Ordinary share | Dividend yieldA | |||
| 13.80p | 4.9% | |||
| 2021 | 13.20p | 2021 | 5.3% | |
| A Alternative Performance Measure. | ||||
For further information, please contact:
Luke Mason (0207 463 5971)
Stephanie Hocking (0207 463 6403)
Aberdeen Standard Fund Managers Limited
Financial Calendar and Highlights
Financial Calendar
| Online Shareholder Presentation | 22 June 2022 |
| Annual General Meeting | 6 July 2022 |
| Expected payment dates of quarterly dividends | 29 July 2022 |
| Half year end | 30 September 2022 |
| Expected announcement of results for the six months ending 30 September 2022 | November 2022 |
| Financial year end | 31 March 2023 |
| Expected announcement of results for year ending | May 2023 |
Highlights
| 31 March 2022 | 31 March 2021 | % change | |
| Total assets | £104,819,000 | £99,856,000 | +5.0 |
| Shareholders' funds | £85,819,000 | £80,857,000 | +6.1 |
| Market capitalisationA | £85,987,000 | £76,371,000 | +12.6 |
| Net asset value per Ordinary shareB | 278.29p | 262.41p | +6.1 |
| Share price | 279.00p | 248.00p | +12.5 |
| Premium/(discount) to NAV (cum-income)C | 0.3% | (5.5%) | |
| Net gearingC | 20.4% | 16.5% | |
| Dividend and earnings | |||
| Revenue return per shareD | 14.21p | 12.33p | +15.3 |
| Dividend per shareE | 13.80p | 13.20p | +4.5 |
| Dividend coverC | 1.03 | 0.93 | |
| Revenue reservesF | £6,705,000 | £6,517,000 | |
| Dividend yieldC | 4.9% | 5.3% | |
| Operating costs | |||
| Ongoing charges ratio (excluding look-through costs)C | 0.98% | 1.00% | |
| Ongoing charges ratio (including look-through costs)C | 1.14% | 1.21% | |
| A Represents the number of Ordinary shares in issue in the Company multiplied by the Company's share price. | |||
| B Net asset value per Ordinary share is calculated after the repayment of the capital paid up on Cumulative Preference shares (see note 16). | |||
| C Considered to be an Alternative Performance Measure. | |||
| D Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income). | |||
| E The figures for dividend per share reflect the years in which they were earned (see note 9). | |||
| F The revenue reserve figure does not take account of payment of the third interim or final dividend amounting to £2,281,000 (2021 - £2,217,000) combined. | |||
Chairman's Statement
The year to 31 March 2022 was a volatile one for investors in many ways. The worst of the Covid-19 pandemic which has dominated many aspects of our lives for the past two years lessened, despite the emergence of new variants. Economic activity has picked up helped by an extremely supportive monetary policy stance and asset valuations have risen, supporting strong returns from equity markets over the period. However, the year ended with a rising number of challenges: the return of much higher levels of inflation than witnessed for decades; rising costs of living to consumers as both energy and food prices have become more elevated; and the tragic invasion of Ukraine by Russian forces calling into question many aspects of geo-political security and relations that many thought were settled. Navigating these forces has been challenging for all investors, yet the Company has managed to deliver good growth in net asset value ("NAV") and to protect and grow income for shareholders. Overall, while the outlook that we all face is uncertain, your company has retained its defensive characteristics and continues to deliver strong long-term performance coupled with a secure yield.
Performance
For the year ended 31 March 2022, the Company produced a NAV total return of 11.4%. Although strong in absolute terms, this lagged the return of 13.0% from the benchmark FTSE All-Share Index. However, the Company's share price performed more strongly, out-performing the benchmark, with a total return of 18.4% as the discount to NAV narrowed.
Over longer periods, performance remains strong, with NAV total returns over three and five years of 22.3% and 31.4%, versus benchmark returns of 16.8% and 25.8% respectively.
Despite positive relative performance from the equity portfolio, which returned 13.8%, the preference shares only returned 2.8% which, given rising bond yields, was not surprising. We do, however, continue to see a high level of income from these holdings justifying their continued inclusion in the portfolio.
Full details of performance for the year and portfolio activity are contained in the Investment Manager's Review.
Earnings
The Company's revenue return for the year was 14.21p per share, compared to 12.33p per share for the previous year, an increase of 15.3%, as we saw companies return to paying dividends previously cut during the pandemic. As mentioned above, the Company's preference share portfolio also continues to provide a good source of stable income to the portfolio. The combination of income from the equities and preference shares meant that the revenue return recorded for the year was higher than its pre-pandemic level.
Dividend
The Company has paid three interim dividends of 3.20p per Ordinary share (2021: 3.00p). The Board is proposing a final dividend of 4.20p per Ordinary share (2021: 4.20p), which will be paid on 29 July 2022 to shareholders on the register on 8 July 2022. This final dividend brings total Ordinary share dividends for the year to 13.80p per share, an increase of 4.5% from the previous year (2021: 13.20p). Based on the year end share price of 279.0p, this equates to a dividend yield of 4.9%.
It was pleasing to see that this year, helped by the strong bounce back in equity dividends, the Company returned to a fully covered dividend. During the previous year the Company had used some of its revenue reserves in order to maintain the dividend in the midst of the pandemic induced uncertainty. Following the payment of the final dividend, revenue reserves will stand at 1.04 times the current annual Ordinary share dividend cost. This gives the Board great security for funding future dividend payments, particularly in light of the uncertainties clouding the macroeconomic outlook. In addition, the Company also has the flexibility to pay dividends from its realised capital reserves, although the Board has no current intention of making use of this flexibility. Subject to unforeseen circumstances, it is proposed to continue during this financial year to pay three quarterly interim dividends of 3.20p each per Ordinary share and, as in previous years, the Board will decide on next year's final dividend having reviewed the full year results, taking into account the general outlook for the portfolio's investment income at that time.
Premium/(Discount)
At the end of the year, the Company's Ordinary shares were trading at a small premium of 0.3% to the NAV per share (including income) compared to a discount of 5.5% at the end of the previous year. We also saw the shares trading at a premium during the course of the year, which allowed us, in response to investor demand, to issue 25,000 new Ordinary shares on a non-dilutive basis.
The Board and Manager monitor the premium/discount of the Company's shares on an ongoing basis and the Board will seek to renew the appropriate share issuance and share buyback authorities at the Annual General Meeting.
Gearing
The Company's gearing level (net of cash) was 20.4% as at 31 March 2022 compared to 16.5% at the end of the previous year, with the difference due mainly to a lower amount of cash being held at the year end compared to last year.
Throughout the year, the Company's borrowing arrangements comprised its £20 million loan facility with Scotia Bank Europe PLC, due to mature in September 2022. The facility included a £10 million fixed rate loan and a £10 million revolving credit facility. For the whole of the year, £9 million of the revolving credit facility was drawn down resulting in total borrowings of £19 million.
Since the year end, the Board made the decision, in light of recent and potential future interest rate rises, together with some concern about access to credit within the wider economy, to renew the loan facility ahead of its expiry date in September 2022 and consequently entered into a new £20 million loan facility with The Royal Bank of Scotland International Limited, London Branch, on 3 May 2022. In addition, the Board took the view that securing a five-year agreement, so removing much uncertainty over future funding given its importance to the strategy of the Company, was the prudent thing to do.
£10 million of the new loan facility was drawn down and fixed at an all-in interest rate of 3.903%. £9 million of the facility was drawn down on a short-term basis and can be repaid without incurring any financial penalties. The proceeds of the new loan were used to repay and cancel in full the Company's previous loan facilities. The Company's total borrowings are therefore unchanged following the re-financing.
As in previous years, the Board takes the view that the borrowings are notionally invested in the less volatile fixed income part of the portfolio which generates a high level of income giving the Investment Manager greater ability to invest in a range of equity stocks with various yields. This combination means that the Company can achieve a high level of dividend but also deliver some capital appreciation to shareholders.
Ongoing Charges
I am pleased to report that the Company's ongoing charges (excluding look-through costs) decreased to 0.98% during the year (2021: 1.00%).
Board Composition
Following a thorough search process, Helen Sinclair was appointed to the Board as an independent non-executive Director on 1 February 2022 to replace Marian Glen who, having served on the Board for nine years, will be retiring from the Board at the AGM in July. I would like to take this opportunity on behalf of the whole Board to thank Marian for her outstanding contribution to the Company.
Following this change, the ongoing Board will have four members, two women and two men, all with considerable and relevant experience to exercise oversight to the benefit of shareholders. In accordance with the AIC Code of Corporate Governance, all Directors, with the exception of Marian and Helen, are standing for re-appointment at this year's AGM. Helen will be standing for appointment.
Environmental, Social and Governance ("ESG")
You will see that the Investment Manager has provided a wealth of information on its approach to ESG matters in this Annual Report and how this is taken into account in the investment decision-making process.
The Board remains very comfortable with the Investment Manager's approach to ESG, with its strong emphasis upon engagement with companies hoping to bring about positive corporate change and improved investor outcomes. Recent geo-political events have highlighted that blanket exclusions may not be entirely wise when considering shareholder returns and that a more nuanced approach is more appropriate when considering issues such as energy security or even national security which are extremely important to society as a whole.
Annual General Meeting ("AGM") and Online Shareholder Presentation
The Company's AGM will take place at 12 noon on Wednesday 6 July 2022 at the offices of abrdn plc, Bow Bells House, 1 Bread Street, London, EC4M 9HH and will be followed by lunch.We are delighted to be able to finally meet with shareholders in person this year and hope to see many of you there.
We encourage all shareholders to complete and return the Proxy Form enclosed with the Annual Report so as to ensure that your votes are represented at the meeting. If you hold your shares in the Company via a share plan or a platform and would like to attend and / or vote at the AGM, then you will need to make arrangements with the administrator of your share plan or platform. For this purpose, investors who hold their shares in the Company via the abrdn Investment Plan for Children, Share Plan or ISA will find a Letter of Direction enclosed. Shareholders are encouraged to complete and return their Proxy Forms / Letters of Direction in accordance with the instructions.
As you may recall, in the absence of a physical AGM last year, we held an Online Shareholder Presentation, at which a presentation was given by the Investment Manager, the Chairman and the Audit Committee Chairman, and attendees had the opportunity to ask questions of the Manager and the Board.
As this event proved very popular, we have decided to hold another Online Shareholder Presentation this year, in addition to the AGM, which will be held on Wednesday 22 June 2022 at 10:00 a.m.
Full details on how to register for the event can be found at: www.workcast.com/register?cpak=4861163585974988
Details are also contained on the Company's website. Should you be unable to attend the online event, the Investment Manager's presentation will be made available on the Company's website shortly after the presentation.
You will be able to ask questions during the presentation, but you are also able to submit questions in advance at the following email address: shires.income@abrdn.com. We hope that for those unable to attend the AGM, this will be a useful way of communicating with the Manager and the Board.
Outlook
The war in Ukraine is starting to crystallise in many commentators' minds that there is a retreat from globalisation, and many of the benefits which had flowed from this, that had existed for the past few decades. Not only does this mean that geo-political risks to economies and financial markets have risen directly, but it is also leading businesses to re-evaluate their supply chains with a greater focus upon security rather than purely upon efficiency. Overall, the costs to business in conducting their operations are rising with as yet uncertain effects upon profitability. In addition, it now appears clear that inflation, at much higher levels than has been prevalent for decades, could well become embedded in economies for some time. The ability of companies to navigate rising cost inflation and pass this onto customers will be increasingly important to delivered profitability.
These changes, along with a shift in central bank policy towards a much tighter monetary stance, will likely lead to both greater head-winds to equity market advances and a change in market leadership: the pure 'growth' investment style that has worked best for the last ten years which relied partly on ultra-low interest rates, will not necessarily be as successful in the next cycle. Our expectation is that a more balanced approach encompassing growth and value names should be more successful. Your company's Investment Manager focuses on a bottom-up approach to investing, looking for undervalued companies with quality attributes and the ability to generate income. The commitment to detailed analysis and knowledge of the UK stock market supports the aim of the Company to deliver long-term capital growth and resilient income for our shareholders. Overall, while there are a number of uncertainties clouding the investment outlook the Board believes that the Investment Manager's approach should provide shareholders with confidence in the future of the Company.
Robert Talbut
Chairman
25 May 2022
Overview of Strategy
Business Model
The business of the Company is that of an investment company which qualifies as an investment trust for tax purposes. The Directors do not envisage any change in this activity in the foreseeable future.
Investment Objective
The Company's investment objective is to provide shareholders with a high level of income, together with the potential for growth of both income and capital, from a diversified portfolio substantially invested in UK equities but also in preference shares, convertibles and other fixed income securities.
Investment Policy
In pursuit of its objective, the Company's policy is to invest principally in the ordinary shares of UK quoted companies, and in preference shares, convertibles and other fixed income securities with above average yields.
The Company generates income primarily from ordinary shares, preference shares, convertibles and other fixed income securities. It also generates income by writing call and put options on shares owned, or shares the Company would like to own. By doing so, the Company generates premium income.
Risk Diversification
In order to ensure adequate diversification, the Board sets absolute limits on maximum holdings and exposures in the portfolio from time to time. These limits do not form part of the investment policy and can be changed or overridden with Board approval. The current limits are disclosed under the heading "Board Investment Limits" below.
Gearing
The Directors are responsible for determining the gearing strategy of the Company. Gearing is used with the intention of enhancing long-term returns. Gearing is subject to a maximum equity gearing level of 35% of net assets at the time of drawdown. Any borrowing, except for short-term liquidity purposes, is used for investment purposes.
Delivering the Investment Policy
The Directors are responsible for determining the investment objective and investment policy of the Company, although any significant changes are required to be approved by shareholders at a general meeting. Day-to-day management of the Company's assets has been delegated, via the Alternative Investment Fund Manager (the "AIFM"), to the Investment Manager.
Board Investment Limits
In order to ensure adequate diversification, the Board has set absolute limits on maximum holdings and exposures in the portfolio at the time of acquisition. These can only be overridden with Board approval. The current limits include the following:
- Maximum 10% of total assets invested in the equity securities of overseas companies;
- Maximum 7.5% of total assets invested in the securities of one company (excluding abrdn Smaller Companies Income Trust plc);
- Maximum 5% of quoted investee company's ordinary shares (excluding abrdn Smaller Companies Income Trust plc); and
- Maximum 10% of total assets invested directly in AIM holdings.
The Board assesses on a regular basis with the Manager the applicability of these investment limits, the use of gearing and risk diversification, whilst aiming to meet the overall investment objectives of the Company.
Preference Shares
The Company also invests in preference shares, primarily to enhance the income generation of the Company. The majority of these investments are in large financial institutions. Issue sizes are normally relatively small and the underlying securities are relatively illiquid by comparison with the equity component of the portfolio. A maximum of 7.5% of total assets may be invested in the preference shares of any one company. In addition, the Company cannot hold more than 10% of any investee company's preference shares.
Traded Options Contracts
The Company enters into traded option contracts, primarily to enhance the income generation of the Company. The risks associated with these option contracts are managed through the principal guidelines below, which operated in the year under review:
- Call options written to be covered by stock;
- Put options written to be covered by net current assets/borrowing facilities;
- Call options not to be written on more than 10% of the equity portfolio; and
- Put options not to be written on more than 10% of the equity portfolio.
Benchmark
In assessing its performance, the Company compares its returns with the returns of the FTSE All-Share Index (total return).
Promoting the Success of the Company
The Board's statement below describes how the Directors have discharged their duties and responsibilities over the course of the financial year under section 172 (1) of the Companies Act 2006 and how they have promoted the success of the Company.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company, which are considered at each Board meeting, are shown in the table below:
| KPI | Description |
| Performance of NAV | The Board considers the Company's NAV total return figures to be the best indicator of performance over time and this is therefore the main indicator of performance used by the Board. The figures for each of the past ten years are set out below. |
| Revenue return per Ordinary share | The Board monitors the Company's net revenue return (earnings per share). The revenue returns per Ordinary share for each of the past ten years are set out below. |
| Dividend per share | The Board monitors the Company's annual dividends per Ordinary share and the extent to which dividends are covered by current net revenue and revenue reserves. The dividends per share for each of the past ten years are set out below. |
| Performance against benchmark index | The Board measures performance over the medium to long-term, on a total return basis against the benchmark index - the FTSE All-Share Index (total return). Cumulative performance figures for the past ten years are set out below. The figures for this year and the past three and five years are set out below. |
| Share price performance | The Board monitors the performance of the Company's share price on a total return basis. Cumulative performance figures for the past ten years are set out below. The returns for this year and for the past three and five years are set out below. |
| Premium/discount to NAV | The premium/discount relative to the NAV per share represented by the share price is closely monitored by the Board. The Board also monitors trading activity in the Company's shares on a regular basis. |
| Ongoing charges | The Board monitors the Company's operating costs carefully. Ongoing charges for the year and the previous year are disclosed above. Some of the operating costs are fixed whilst the most significant cost, being the investment management fee, is variable depending on the net asset value of the Company. |
Principal and Emerging Risks and Uncertainties
The Board carries out a regular review of the risk environment in which the Company operates, changes to that environment and to individual risks. The Board also identifies emerging risks which might impact on the Company. During the year, the most significant risks were inflation and the resultant volatility that it created in global stock markets. In addition, recent events in Ukraine have created geo-political uncertainty which has further increased market risk premia and volatility.
There are a number of other risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has carried out a robust assessment of the Company's principal and emerging risks, which include those that would threaten its business model, future performance, solvency, liquidity or reputation and has endeavoured to find means of mitigating those risks, wherever practical.
The principal risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix. The assessment of risks and their mitigation continues to be an area of significant focus for the Audit Committee.
The Board also regularly identifies and evaluates newly emerging risks, for example the impact of climate change, and monitors these closely, as appropriate for the Company. The impact of climate change is not considered to be material to the financial statements as the entire investment portfolio consists of listed equities and preference shares and the quoted market (being bid) price is expected to reflect market participants' view of climate change risk.
The principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below.
The principal risks associated with an investment in the Company's shares are published monthly in the Company's factsheet and they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are available on the Company's website.
| Description | Mitigating Actions |
| Strategic objectives and investment policy - a lack of demand for the Company's shares due to its objectives becoming unattractive to investors, or a negative perception of investment trusts, could result in a widening of the discount of the share price to its underlying NAV and a fall in the value of its shares. | The Board formally reviews the Company's objectives and strategies for achieving them on an annual basis, or more regularly if appropriate. The Board is cognisant of the importance of regular communication with shareholders and knowledge of what encourages investment in the Company. Directors attend meetings with shareholders where practical, host the Annual General Meeting as a forum for shareholder contact and regularly discuss shareholder investment behaviour with the Manager, including trends on investment platforms and shareholder themes. The Board reviews shareholder feedback through reports provided by the Manager's Investor Relations team and also receives feedback from the Company's Stockbroker. The Board and Manager keep the level of discount under constant review, as well as changes to the Company's shareholder register. |
| Investment performance - performance of the portfolio when measured against the benchmark. | The Board meets the Manager on a regular basis and keeps investment performance under close review. This includes performance attribution by sector and stock, and liquidity analysis, as well as the degree of diversification in the portfolio and income sustainability through examination of forward income projections. Representatives of the Investment Manager attend all Board meetings and a detailed formal appraisal of the abrdn Group is carried out annually by the Management Engagement Committee. The Board sets, and monitors, the investment restrictions and guidelines, and receives regular reports which include performance reporting on the implementation of the investment policy, the investment process, risk management and application of the guidelines. Investment risk within the portfolio is managed in four ways: Adherence by the Investment Manager to the investment process in order to minimise investments in poor quality companies and/or overpaying for investments. Diversification of investment - seeking to invest in a wide variety of companies with strong balance sheets and the earnings power to pay increasing dividends. In addition, investments are diversified by sector in order to reduce the risk of a single large exposure. The Company invests mainly in equities and preference shares. Adherence by the Investment Manager to the investment limits set by the Board. Examination of changes to the portfolio and emerging investment themes, including relative to benchmark constituents. Investment in UK smaller companies In order to gain exposure to a higher growth sector, rather than holding a number of smaller companies' shares, the Company invests indirectly into this part of the equity market through one holding in abrdn Smaller Companies Income Trust plc, which is also managed by the Manager. Given its size (representing 8.8% of the Company's portfolio as at 31 March 2022) the Directors regularly review this holding, including its liquidity. All of the directors of abrdn Smaller Companies Income Trust PLC are independent of Shires Income plc. The Manager does not charge any management fee in respect of the amount of the Company's assets attributable to this holding. Investment in preference shares The Company has longstanding holdings in a number of preference shares with no fixed redemption dates (representing 24.1% of the Company's portfolio as at 31 March 2022). The Directors regularly review these investments, which are held primarily to enhance the income generation of the Company. By their nature, their price movements will be subject to a number of factors and, in normal market conditions, will tend to respond less to pricing movements in equity markets. Issue sizes of these preference shares are normally relatively small and with associated low secondary market liquidity by comparison with the equity component of the portfolio. The Board also considers the long-term nature of these investments and the impact of any potential changes on duration on the portfolio and its returns, as well as the sustainability of the dividends paid. |
| Failure to maintain, and grow the dividend over the longer term - the level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio. | The Directors review detailed income forecasts at each Board meeting and discuss the Investment Manager's outlook for dividends. The Company has revenue reserves which it can draw upon should there be a shortfall in revenue returns in a year, and also has the ability to pay dividends from realised capital reserves. The Board regularly reviews forward net revenue projections and takes into account revenue reserves in setting quarterly dividend levels. |
| Widening of discount - a number of factors including the setting of an unattractive strategic investment proposition, changing investor sentiment and investment underperformance may lead to a decrease in demand for the Company's shares and a widening of the difference between the share price and the NAV per share. | The Board monitors the Company's Ordinary share price relative to the NAV per share and keeps the level of premium or discount at which the Company's shares trade under review. The Board also keeps the investment objective and policy under review and holds an annual strategy meeting where it reviews investor relations reports and updates from the Manager and the Company's Stockbroker. The Directors are updated at each Board meeting on the composition of, and any movements in, the shareholder register, which is retail investor dominated. The Board annually agrees a marketing programme and budget with the Manager, and receives updates regularly on both marketing and investor relations. The Board has a close focus on investor platform activity which has been the dominant change over recent years in how retail investors choose to acquire and hold their shares. This includes contact with the platform operators through the Manager. |
| Gearing - a fall in the value of the Company's investment portfolio could be exacerbated by the impact of gearing. It could also result in a breach of loan covenants and the forced sale of investments. | The Board sets the gearing limits within which the Investment Manager can operate. Gearing levels and compliance with loan covenants are monitored on an ongoing basis by the Manager and at regular Board meetings, or between scheduled Board meetings if required. In the event of a possible impending covenant breach, appropriate action would be taken to reduce borrowing levels. The financial covenants attached to the Company's borrowings currently provide for significant headroom. The maximum equity gearing level is 35% of net assets at the time of drawdown, which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio. The use of gearing has been an important facilitator of the income returns from the portfolio, particularly in financing the high yield preference share proportion of the portfolio which has historically provided significant dividend income for the Company. The Company's gearing includes a revolving credit facility which can be reduced without any significant financial penalties for early repayment and at relatively short notice. |
| Regulatory obligations - failure to comply with relevant laws and regulations could result in fines, loss of reputation and potentially loss of an advantageous tax regime. | The Board and Manager monitor changes in government policy and legislation which may have an impact on the Company, and the Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager. The Board is kept aware of proposed changes to laws and regulations, considers the changes and applies them as appropriate, if they are not already being met. From time to time the Board employs external advisers to advise on specific regulatory and governance matters. |
| Operational - the Company is dependent on third parties for the provision of all systems and services (in particular, those of the abrdn Group) and any control failures and gaps in their systems and services, including in relation to cyber security, could result in a loss or damage to the Company. | The Board receives reports from the Manager on its internal controls and risk management processes and receives assurances from the Manager and all its other significant service providers on at least an annual basis, including on matters relating to operational resilience and cyber security. Written agreements are in place with all third party service providers. The Manager monitors closely the control environments and quality of services provided by third parties, including those of the Depositary and Custodian, through service level agreements, regular meetings and key performance indicators. The operational requirements of the Company, including its service providers, were subject to rigorous testing during the Covid-19 pandemic, including increased use of online communication and out of office working and reporting. The Board reviews management accounts and forecast revenue and expense statements at each Board meeting and the Audit Committee is closely involved in the financial reporting of the Company. Financial records are subject to an annual audit and the Audit Committee receives reports from the Manager on internal controls and is advised of any control breaches or reporting errors. |
| Exogenous risks such as health, social, financial, economic and geo-political - the financial impact of such risks, associated with the portfolio or the Company itself, could result in losses to the Company. | At any given time, the Company has sufficient cash resources to meet its operating requirements. In common with most commercial operations, exogenous risks over which the Company has no control are always a risk. This includes the Covid-19 pandemic, current events in Ukraine and the impact of higher inflation. The Company does what it can to address these risks where possible and to try and meet the Company's investment objectives. In relation to the recent events in Ukraine, the Board has liaised closely with the Manager to establish the impact on the Company, including the performance of individual holdings within the portfolio. The Board is supportive of the Investment Manager's approach to environmental, social and governance ("ESG") risks and welcomes its active engagement with company management. Through this activity, the Investment Manager aims to identify and manage the exposure to such risks over time. The financial and economic risks associated with the Company include market risk, liquidity risk and credit risk, all of which the Investment Manager seeks to mitigate. Further details of the steps taken to mitigate the financial risks associated with the portfolio are set out in note 18 to the financial statements. |
External Agencies
In addition to the services provided to the Company by the abrdn Group, the Board has contractually delegated certain services to external service suppliers, including: depositary services (which include the safekeeping of the Company's assets) (BNP Paribas Securities Services, London Branch) and share registration services (Equiniti Limited). Each of these services was entered into after full and proper consideration by the Board of the quality and cost of services offered. In addition, day-to-day accounting and administration services are provided, through delegation by the Manager, by BNP Paribas Securities Services.
Promotional Activities
The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the rating of the Company's shares. The Board believes one effective way to achieve this is through subscription to, and participation in, the promotional programme run by the abrdn Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the abrdn Group. The Company also supports the Manager's investor relations programme which involves regional roadshows to existing and potential shareholders, promotional and public relations campaigns. During the Covid-19 pandemic, a number of events that were usually held physically were substituted with virtual events. The Manager's promotional and investor relations teams report to the Board on a quarterly basis giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.
The purpose of the promotional and investor relations programmes is both to communicate effectively with existing shareholders and to gain new shareholders, with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key. The promotional programme includes commissioning independent paid for research on the Company, most recently from Kepler Trust Intelligence. A copy of the latest research note is available from the Company's website.
Board Diversity
The Board recognises the importance of having a range of skilled, experienced individuals with the right knowledge represented on the Board in order to allow it to fulfil its obligations. The Board also recognises the benefits of, and is supportive of, the principle of diversity in its recruitment of new Board members. The Board will not display any bias for age, gender, race, sexual orientation, religion, ethnic or national origins, or disability in considering the appointment of its Directors. In view of its size, the Board will continue to ensure that all appointments are made on the basis of merit against the specification prepared for each appointment, with the aim of retaining a small, cohesive board with the requisite skills and experience to acquit the Board's responsibilities well. At 31 March 2022, there were two male Directors and three female Directors.
Environmental, Social and Human Rights Issues
The Company has no employees as the Board has delegated the day-to-day management and administrative functions to the Manager. There are therefore no disclosures to be made in respect of employees or environmental matters.
Modern Slavery Act
Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
Environmental, Social and Governance ("ESG") Matters
The Board is supportive of the Investment Manager's approach to ESG issues, including climate change, and welcomes its active engagement with company management.
The UK Stewardship Code and Proxy Voting
The Company supports the UK Stewardship Code, and seeks to play its role in supporting good stewardship of the companies in which it invests. Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the Manager which has sub-delegated that authority to the Investment Manager. abrdn plc is a tier 1 signatory of the UK Stewardship Code which aims to enhance the quality of engagement by investors with investee companies in order to improve their socially responsible performance and the long-term investment return to shareholders. While delivery of stewardship activities has been delegated to the Manager, the Board acknowledges its role in setting the tone for the effective delivery of stewardship on the Company's behalf.
The Board has also given discretionary powers to the Manager to exercise voting rights on resolutions proposed by the investee companies within the Company's portfolio. The Manager reports on a quarterly basis on stewardship (including voting) issues.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.
Viability Statement
The Board considers the Company, with no fixed life, to be a long-term investment vehicle but, for the purposes of this viability statement, has decided that three years is an appropriate period over which to report, irrespective of any exogenous risks that the Company may face. The Board considers that this period reflects a balance between a longer-term investment horizon, the inherent uncertainties within equity markets and the specifics of a closed-end investment company where its central purpose is different from other listed commercial and industrial companies.
In assessing the viability of the Company over the review period, the Directors have focused upon the following factors:
- The principal risks and uncertainties detailed above and the steps taken to mitigate these risks.
- The ongoing relevance of the Company's investment objective.
- The liquidity of the Company's portfolio. The majority of the portfolio is invested in readily realisable listed securities.
- The level of ongoing expenses. The Company's annual expenses, excluding the cost of the dividend, are expected to continue to be covered by annual investment income.
- The level of gearing. This is closely monitored and stress testing is carried out by the Manager. The financial covenants attached to the Company's borrowings provide for significant headroom. Since the year end, the Company's £20 million loan facility has been repaid and a new five year £20 million loan facility has been entered into.
- Regulatory or market changes.
- The robustness of the operations of the Company's third party service providers.
In making its assessment, the Board has considered that there are other matters that could have an impact on the Company's prospects or viability in the future, including the current events in Ukraine, economic shocks, significant stock market volatility, the emerging risk of climate change, and changes in regulation or investor sentiment, including on income propensities.
Taking into account the Company's current position and the potential impact of its principal risks and uncertainties and emerging risks, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of approval of this Report.
Outlook
The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included in its statement.
On behalf of the Board
Robert Talbut
Chairman
25 May 2022
Promoting the Success of the Company
How the Board Meets its Obligations Under Section 172 of the Companies Act
The Board is required to describe to the Company's shareholders how the Directors have discharged their duties and responsibilities over the course of the financial year under section 172 (1) of the Companies Act 2006 (the "Section 172 Statement"). The Board provides below an explanation of how the Directors have promoted the success of the Company for the benefit of its members as a whole, taking into account, amongst other things, the likely long-term consequences of decisions, the need to foster business relationships with all stakeholders and the impact of the Company's operations on the environment.
The Purpose of the Company and Role of the Board
The purpose of the Company is to act as an investment vehicle to provide, over time, financial returns (both income and capital) to its shareholders. Investment trusts, such as the Company, are long-term investment vehicles and are typically externally managed, have no employees, and are overseen by an independent non-executive board of directors.
The Board, which, at the year end, comprised five independent non-executive Directors with a broad range of skills and experience across all major functions that affect the Company, retains responsibility for taking all decisions relating to the Company's investment objective and policy, gearing, corporate governance and strategy, and for monitoring the performance of the Company's service providers.
The Board's philosophy is that the Company should operate in a transparent culture where all parties are treated with respect and provided with the opportunity to offer practical challenge and participate in positive debate which is focused on the aim of achieving the expectations of shareholders and other stakeholders alike. The Board reviews the culture and manner in which the Manager and Investment Manager operate at its regular meetings and receives regular reporting and feedback from the other key service providers. The Board is very conscious of the ways it promotes the Company's culture and ensures as part of its regular oversight that the integrity of the Company's affairs is foremost in mind in the way that the activities are managed and promoted. The Board works very closely with the Manager and Investment Manager in reviewing how stakeholder issues are handled, ensuring good governance and responsibility in managing the Company's affairs, as well as visibility and openness in how the affairs are conducted.
The Company's main stakeholders have been identified as its shareholders, the Manager/Investment Manager, service providers, investee companies, its debt provider and, more broadly, the community at large and the environment.
How the Board Engages with Stakeholders
The Board considers its stakeholders at Board meetings and receives feedback on the Manager's interactions with them.
During the Covid-19 pandemic, direct interaction with stakeholders was more challenging, and a number of shareholder events that were usually held physically were substituted with virtual events. However, the Board, through the Manager and its other agents, endeavoured to maintain close contact and to analyse feedback, particularly from shareholders, given the potential changes in their aspirations in those challenging times.
The Board and Manager also continue to consider how best to engage with private investors who invest through platforms, not least to increase voting participation at general meetings of the Company.
| Stakeholder | How We Engage |
| Shareholders | Shareholders are key stakeholders and the Board places great importance on communication with them. The Board welcomes all shareholders' views and aims to act fairly between all shareholders. The Company's shareholder register is retail dominated and the Manager and Company's Stockbroker regularly meet with current and prospective shareholders to discuss performance. Shareholder feedback is discussed by the Directors at each Board meeting. The Company subscribes to the Manager's investor relations programme in order to maintain communication channels with shareholders. Regular updates are provided to shareholders through the Annual Report, Half-Yearly Report, monthly factsheets, Company announcements, including daily NAV announcements, and through the Company's website. The Company's Annual General Meeting provides a forum, both formal and informal, for shareholders to meet and discuss issues with the Directors and Manager. The Board encourages as many shareholders as possible to attend the Company's Annual General Meeting and to provide feedback on the Company. In addition to the Annual General Meeting, there will be an Online Shareholder Presentation again this year following a favourable response last year (see comments in the Chairman's Statement regarding arrangements for the Annual General Meeting this year and the Online Shareholder Presentation). The Board welcomes contact with shareholders and has put in place ways of receiving shareholder questions and responding to them. During the year, the Investment Manager held meetings with a number of the Company's larger shareholders to update them on the Company and to receive any feedback or concerns. The Board is keen to have increased shareholder voting at general meetings of the Company and reviews ways in which there can be greater communication with the largely private investor shareholder base. |
| Manager/Investment Manager | The Investment Manager's Review details the key investment decisions taken during the year. The Investment Manager has continued to manage the Company's assets in accordance with the mandate agreed with shareholders, with the oversight of the Board. The Board regularly reviews the Company's performance against its investment objective and undertakes an annual strategy review meeting to ensure that the Company is positioned well for the future delivery of its objective for its shareholders. The Board receives presentations from the Investment Manager at every Board meeting to help it to exercise effective oversight of the Investment Manager and the Company's strategy. The Board, through the Management Engagement Committee, formally reviews the performance of the Manager and Investment Manager at least annually. |
| Service Providers | The Board seeks to maintain constructive relationships with the Company's suppliers either directly or through the Manager with regular communications and meetings. The Management Engagement Committee conducts an annual review of the performance, terms and conditions of the Company's main service providers to ensure they are performing in line with Board expectations, undertaking their responsibilities and providing value for money. |
| Investee Companies | Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the Manager which has sub-delegated that authority to the Investment Manager. The Board has also given discretionary powers to the Manager to exercise voting rights on resolutions proposed by the investee companies within the Company's portfolio. The Manager reports on a quarterly basis on stewardship (including voting) issues. Through engagement and exercising voting rights, the Investment Manager actively works with companies to improve corporate standards, transparency and accountability. The Board monitors investments made and divested and questions the rationale for investment and voting decisions made. |
| Debt Provider | On behalf of the Board, the Manager maintains a positive working relationship with the provider of the Company's loan facility, and provides regular updates to the Board on business activity and compliance with its loan covenants. Gearing is an important component of the Company's capital structure. |
| Environment and Community | The Board and Manager are committed to investing in a responsible manner and the Investment Manager embeds Environmental, Social and Governance ("ESG") considerations into its research and analysis as part of the investment decision-making process. |
Specific Examples of Stakeholder Consideration During the Year
The Board is fully engaged in both oversight and the general strategic direction of the Company. During the year, the Board's main strategic discussions focussed around income management, with a portfolio consisting of various parts, including equities, fixed interest securities, options and exposure to UK smaller companies through abrdn Smaller Companies Income Trust plc, a closed-end investment company.
While the importance of giving due consideration to the Company's stakeholders is not a new requirement, and is considered during every Board decision, the Directors were particularly mindful of stakeholder considerations during the following decisions undertaken during the year ended 31 March 2022.
Management of the Portfolio
The Investment Manager's Review details the key investment decisions taken during the year. The overall shape and structure of the investment portfolio is an important factor in delivering the Company's stated investment objective.
The Board held its annual strategy meeting during the year at which it considered a number of factors, including the overall shape and composition of the portfolio, feedback from shareholders and the Company's Stockbroker, and medium term revenue forecasts.
During the year, the Management Engagement Committee decided that the continuing appointment of the Manager was in the best interests of shareholders.
Dividend
Following the payment of the final dividend for the year, of 4.20p per Ordinary share, total dividends for the year will amount to 13.80p per Ordinary share, representing a dividend yield of 4.9% based on the share price of 279.0p at the end of the financial year. This is in accordance with the Company's objective to provide shareholders with a high level of income.
In deciding on the level of dividend for the year, the Board took into account the revenue earnings per Ordinary share for the year, forecast revenues for subsequent years and the level of revenue reserves.
Through meetings with shareholders and feedback from the Manager and the Company's Stockbroker, the Board remains conscious of the importance that shareholders place on the level of dividends paid by the Company.
Online Shareholder Presentation
As explained in the Chairman's Statement, to encourage and promote interaction and engagement with the Company's shareholders, the Board has again decided to hold an interactive Online Shareholder Presentation which will be held at 10.00am on Wednesday 22 June 2022. At the presentation, shareholders will receive updates from the Chairman and Investment Manager and there will be an interactive question and answer session. The online presentation is being held ahead of the AGM in order to allow shareholders to submit their proxy votes prior to the meeting.
On behalf of the Board
Robert Talbut
Chairman
25 May 2022
Performance
Performance (Total Return)
| 1 year | 3 year | 5 year | |
| % return | % return | % return | |
| Net asset valueA | +11.4 | +22.3 | +31.4 |
| Share priceA (based on mid-market) | +18.4 | +22.4 | +48.4 |
| FTSE All-Share Index | +13.0 | +16.8 | +25.8 |
| A Considered to be an Alternative Performance Measure. | |||
| All figures are for total return and assume re-investment of net dividends excluding transaction costs. | |||
| Source: abrdn plc, Morningstar & Factset | |||
Analysis of Total Return Performance
| % | |
| Gross assets total return | 10.3 |
| Total NAV return per share | 11.4 |
| Total return on FTSE All-Share Index | 13.0 |
| Relative performance of NAV compared to FTSE All-Share Index | -1.6 |
Dividends
| Rate per share | XD date | Record date | Payment date | |
| First interim dividend | 3.20p | 7 October 2021 | 8 October 2021 | 29 October 2021 |
| Second interim dividend | 3.20p | 6 January 2022 | 7 January 2022 | 28 January 2022 |
| Third interim dividend | 3.20p | 7 April 2022 | 8 April 2022 | 29 April 2022 |
| Proposed final dividend | 4.20p | 7 July 2022 | 8 July 2022 | 29 July 2022 |
| 2021/22 | 13.80p | |||
| First interim dividend | 3.00p | 1 October 2020 | 2 October 2020 | 23 October 2020 |
| Second interim dividend | 3.00p | 7 January 2021 | 8 January 2021 | 29 January 2021 |
| Third interim dividend | 3.00p | 8 April 2021 | 9 April 2021 | 30 April 2021 |
| Proposed final dividend | 4.20p | 8 July 2021 | 9 July 2021 | 30 July 2021 |
| 2020/21 | 13.20p |
Ten Year Financial Record
| Year to 31 March | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020* | 2021* | 2022* |
| Revenue available for ordinary dividends (£'000) | 3,556 | 3,789 | 3,877 | 3,617 | 3,925 | 4,106 | 3,920 | 3,961 | 3,796 | 4,379 |
| Per share (p) | ||||||||||
| Net revenue earnings | 11.9 | 12.6 | 12.9 | 12.1 | 13.1 | 13.7 | 13.1 | 13.0 | 12.3 | 14.2 |
| Net dividends paid/proposed | 12.00 | 12.00 | 12.25 | 12.25 | 12.75 | 13.00 | 13.20 | 13.20 | 13.20 | 13.80 |
| Net total earnings | 53.5 | 26.0 | 23.1 | (17.8) | 54.5 | 9.4 | 10.3 | (45.4) | 68.2 | 29.5 |
| Net asset value | 234.4 | 248.4 | 259.5 | 229.4 | 271.6 | 268.2 | 265.5 | 207.4 | 262.4 | 278.3 |
| Share price (mid-market) | 233.0 | 252.3 | 252.0 | 202.0 | 243.3 | 260.0 | 267.0 | 200.5 | 248.0 | 279.0 |
| Shareholders' funds (£m) | 70.3 | 78.7 | 77.8 | 68.8 | 81.5 | 80.5 | 80.1 | 63.9 | 80.9 | 85.8 |
| * Net asset value per share is calculated after the repayment of the capital paid up on Cumulative Preference shares (see note 16). | ||||||||||
Cumulative Performance
Rebased to 100 at 31 March 2012
| As at 31 March | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| Net asset value | 100.0 | 121.5 | 128.8 | 134.5 | 118.9 | 140.8 | 139.1 | 137.6 | 107.5 | 136.0 | 144.3 |
| Net asset value total returnA | 100.0 | 129.1 | 144.0 | 157.9 | 146.9 | 182.8 | 188.9 | 196.4 | 161.0 | 215.7 | 240.2 |
| Share price performance | 100.0 | 119.8 | 129.7 | 129.6 | 103.9 | 125.1 | 133.7 | 137.3 | 103.1 | 127.5 | 143.4 |
| Share price total returnA | 100.0 | 127.2 | 145.0 | 152.1 | 128.6 | 163.9 | 184.0 | 198.6 | 156.5 | 205.4 | 243.2 |
| Benchmark performance | 100.0 | 112.6 | 118.4 | 122.0 | 113.1 | 132.9 | 129.7 | 132.5 | 103.5 | 127.6 | 139.5 |
| Benchmark total returnA | 100.0 | 116.8 | 127.1 | 135.4 | 130.1 | 158.7 | 160.6 | 170.9 | 139.3 | 176.5 | 199.5 |
| A Total return figures are based on reinvestment of net income. | |||||||||||
Investment Manager's Review
Highlights
- NAV total return of 11.4% compared to the benchmark total return of 13.0%
- The equity portfolio again outperformed the benchmark (total return of 13.8%), offset by the more defensive preference share portfolio
- Revenue return per share increased by 15.3% to 14.21p
- Three and five year NAV performance remains ahead of the benchmark
Portfolio Strategy
We take a long-term approach to investing, believing that whilst there might be volatility in the short and even medium term, share prices will ultimately reflect the fundamental value of a company. Consequently, there has been no change to our approach to the construction of the portfolio during the year under review. The Company's investment portfolio is invested in equities and preference shares. At the year end 75.9% of the portfolio was invested in equities and 24.1% was invested in preference shares.
Equity Market Review
Equity markets were volatile over the year under review. On a positive note, after two years of disruption, markets continued to recover as the impact of the Covid-19 pandemic on the global economy lessened. Despite the sharp, but mercifully short, shock from the Omicron variant at the end of 2021, the severity of the pandemic has declined, allowing for restrictions to be lifted in the UK and for companies to return to more normal operations. Risks do still remain, however, and in some regions, such as Asia, where vaccination and acquired immunity is lower, restrictions remain in place.
As we exit the pandemic, the main driving forces of markets have been more traditional macro-economic debates. Inflation, something we have not had to contend with for a decade, has returned - at least partially driven by the pandemic, which resulted in tighter supply chains which are less able to cope with rebounding demand for energy and capital and consumer goods. Rising inflation expectations have led to more hawkish monetary policy, with central banks now required to pull back from quantitative easing programs and to raise interest rates. This is a marked change in policy since the financial crisis of 2008/09. At the start of 2022, these changes led to a rotation in markets, with value stocks outperforming growth by a wide margin for the first time in many years. Finally, the twelve month period ended with a rise in geopolitical risk following the Russian invasion of Ukraine. Along with the tragic human consequences of this event, it has also increased inflationary pressures on world economies, driving further rises in energy and food prices.
Despite the volatile economic and political backdrop, equity markets rose over the period. The MSCI World Index increased in value by 9%, although this reflects 15% appreciation in 2021 followed by a pullback in the year to date. The UK market (measured by the FTSE All-share Index) delivered a total return of 13.0%, outperforming the global equity benchmark for the first time in many years. The UK market is a natural beneficiary of the rotation we have seen in 2022, given its greater weighting to value sectors and a lower proportion of highly rated growth companies. Exposure to energy and materials have been particularly beneficial since the turn of the calendar year, and it is notable that, although the UK has outperformed, positive earnings revisions, particularly from these sectors, means that it remains on a record discount to European markets.
By sector, the recent market rotation has dominated, meaning that the best performing companies over the year had a distinct value and commodity skew. Energy delivered a 49% return, followed by the large mining companies which delivered a +42% return. Defensive sectors such as utilities (+37%), healthcare (+35%) and tobacco (+23%) and those that act as an inflation hedge, such as real estate (+21%), also did well. Conversely, highly rated sectors underperformed, with technology returning -4%. The greatest pain was felt in consumer facing sectors, however, as the combination of supply chain tightness, rising input costs and a more difficult outlook for the consumer led to underperformance. Retail was down 11%, travel & leisure down 23% and household goods down 23%. Overall market strength has therefore come despite significant weakness in some areas and hides a marked change in direction compared to the preceding five to ten years.
Investment Performance
Over the year, the Company's net asset value ("NAV") delivered a total return of 11.4%, including dividends reinvested. That compares to the benchmark, the FTSE All-Share Index, which returned 13.0%, representing a 1.6% underperformance. The share price total return for the year was 18.4%, comfortably ahead of the benchmark. The Company has delivered superior performance over the longer term, with NAV total returns 5.5% ahead of the benchmark over three years and 5.6% ahead over five years.
Over the period the equity portfolio produced a total return of 13.8%, 0.8% ahead of the benchmark. The preference shares, as we would expect in a rising bond yield environment, were more stable but still delivered a positive total return of 2.8%. The positions that delivered the most positive relative returns for the portfolio were weighted towards more commodity sectors. The largest single contributor to outperformance was the holding in BHP, which benefited from rising metals prices. The shares increased in value by 46%. Energy exposure was also a distinct positive for the portfolio, with Energean (+40%), Diversified Energy (+20%) and Total (+22%) performing well as oil and gas prices rallied.
Along with energy, utilities exposure was also beneficial, with UK utilities seeing rising income as gas prices rose. SSE increased in value by 27% as it continued to make progress with its renewables pipeline and benefited from weaker businesses exiting the higher gas prices in the UK. Telecom Plus also benefited from rising energy costs. Its offering, prioritising stable, competitive pricing, is now more attractive to consumers, allowing for better growth in customer numbers and leading to a share price rise of 26% in the year.
The best performance terms of share price appreciation in the portfolio was Novo-Nordisk, which rose by 75%. The company has delivered consistent growth and demonstrated the strength of its market position and pricing power - valuable attributes in today's market.
The greatest detractors from relative performance for the Company were not holding a number of large company commodity exposed stocks that performed strongly: Glencore, Anglo American and Shell all delivered positive returns. Of the companies held, the greatest detractor was Ashmore. The company is an emerging markets debt fund manager and the asset class has been out of favour this year, leading to under performance, with its shares down 37%. Countryside Properties was also weak, with the company downgrading guidance after missing build targets in early 2022 - its shares fell 47%.
Gearing and Preference Share Portfolio
Gearing (net of cash) increased during the year from 16.5% to 20.4%. The gearing is notionally invested in the preference share portfolio. At the year end these securities had a value of £24.7 million, materially in excess of net indebtedness (borrowings less cash) which stood at £17.5 million. This part of the portfolio provides a core level of high income and would, in normal conditions, be expected to be more resilient than equities in the event of a fall in the market.
The preference share portfolio lagged the equity market during the year, returning 2.8%. The preference shares will naturally correlate with bond yields, with rising yields resulting in lower valuations for bonds compared to equity. The preference shares are also naturally defensive, so would be expected to lag a rising market. Importantly, though these positions have continued to deliver a high level of reliable income for the Company and remain valuable to delivering our goal of resilient income to shareholders.
Revenue Account
Revenue earnings per share increased by 15.3% over the year to 14.21p (2021: 12.33p).
The increase in revenue reflected a recovery in ordinary dividend payments from the equity portfolio, which was combined with changes to the portfolio to enhance income. Of existing positions, there were notable increases in dividends from the miners, with both Rio Tinto and BHP increasing dividends to reflect high commodity prices. Utility companies also increased their dividends and financials delivered meaningful growth as the risk of balance sheet damage from the Covid-19 pandemic declined. Of the new positions added to the portfolio during the year, Nordea, Bawag and Drax were examples of higher yielding holdings that enhanced income. The income from the preference shares was fixed, and we saw a decline in the income from traded option premiums. This reflected our decision to write fewer options due to relatively unattractive pricing during a period of high market volatility.
The following table details the Company's main sources of income over the last five years.
| | 2022 | 2021 | 2020 | 2019 | 2018 |
| | % | % | % | % | % |
| Ordinary dividends | 66.5 | 57.2 | 60.0 | 58.5 | 59.1 |
| Preference dividends | 26.9 | 33.2 | 31.0 | 34.4 | 33.0 |
| abrdn Smaller Companies Income Trust | 5.2 | 5.7 | 5.4 | 4.9 | 4.4 |
| Fixed interest and bank interest | - | - | 0.3 | 0.2 | 0.1 |
| Traded option premiums | 1.4 | 3.9 | 3.3 | 2.0 | 3.4 |
| Total | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 |
| Total income (£'000s) | 5,239 | 4,529 | 4,807 | 4,712 | 4,916 |
Portfolio Activity
Compared to recent years, portfolio activity was more limited. After elevated turnover to protect income through the Covid-19 pandemic in the preceding financial year, the need to trade heavily was reduced. Much of the portfolio activity focused on topping up conviction ideas on weakness and trimming those stocks where valuation multiples began to look more full or where the dividend yield had compressed. The following paragraphs highlight the new positions and exits from the portfolio during the year.
In September we started a new position in Bawag, an Austrian bank. The main appeal of the holding is a very strong capital position which allows for meaningful dividends in the near term. The bank has come out of the last two years with a resilient balance sheet and this supports a special dividend. In the medium term, we see potential for continued growth and exposure to the central and Eastern European markets which is attractive for returns and loan growth. The bank is also a high return business, delivering 15% return on tangible equity.
Adding to the European banks exposure, we also took a position in Nordea in September. Similar to Bawag, the bank built up a very strong capital position during the pandemic period and is now set to return cash to shareholders over the next 12 months. The purchase helps to enhance income and gives the portfolio more exposure to banks, natural beneficiaries of a rising interest rate environment.
The third new holding that month was Drax. In the short-term, the UK power generator is positively exposed to rising gas prices and recent energy market tightness has highlighted its importance to the UK economy. Longer term, its biomass generation plan, named BECCS, has the potential to deliver relatively environmentally friendly power on a large scale. While this will take five to six years to deliver, it can be a source of meaningful value creation with a longer-term view. A dividend yield of over 4% at purchase is also attractive.
After a pause in trading during a period of high volatility in February, we took two new positions in the equity portfolio in March. Firstly, we started a new position in NatWest. The shares had fallen due to investor concerns around growth. This presented an opportunity for us to invest into a company with a high level of exposure to rising interest rates and a very attractive capital return program for the next three years as excess capital comes back to the market. We also see the risk to NatWest as limited - it is primarily a UK mortgage bank, with low levels of default and with a large provisioning buffer built up during the pandemic to cover losses in its corporate book. It is also much better run after a restructuring in recent years, with low return parts of the bank reduced.
Secondly, we started a new position in Oxford Instruments. The company provides high technology materials analysis products to the science and engineering communities and has clear quality characteristics, with high margins and a very strong market position that has resulted in steady growth over time. A recent bid to acquire the company by Spectris was withdrawn, causing the shares to fall, and this created an opportunity to invest in a high quality business with long-term growth prospects. Although there is limited yield from the holding, it diversifies risk and provides capital growth potential. One of the strengths of the Shires structure is that high yielding preference shares allow us to hold some growth equities and maintain a balanced portfolio.
Early in the period we exited John Laing. The company had been bid for by private equity at an attractive premium and we took profits on the position. We also exited the position in Avast during the year following a takeover of the company. UK companies remain attractive to overseas acquirers given their valuation discount. We also exited a small position in Experian where the valuation premium looked stretched.
We exited Dechra Pharmaceuticals in April 2021. Since our purchase of the position in June 2020 the shares had performed very well and the yield on the position had compressed. The valuation re-rated significantly and we felt it more fairly reflected the value of the company so chose to move on to invest in other ideas which provide more income.
Stewardship and ESG
We believe that, as long-term owners of the businesses in which we are invested, it is not sufficient merely to seek out assets that we believe to be undervalued. It is also incumbent upon us to take a proactive approach to our stewardship of these companies. Therefore, we engage extensively with investee companies. We have attended a range of meetings with chairmen, non-executive directors and other stakeholders. Other than performance and prospects, topics covered have included the composition of the board, environmental and social issues, and remuneration. Risk is a very broad subject that is interpreted in varying manners by different companies. However, by engaging on this subject we secure a deeper understanding of how the boards of investee companies perceive and seek to manage these issues. Such interactions also enable us to push for improved disclosure and better management practices and, on occasion, different decisions where appropriate. We have had conversations regarding companies' financing choices. We find that it is always worthwhile communicating our preference for conservatively structured balance sheets that place a company's long-term fortunes ahead of possible short-term share price gains. Such activity is by its nature time consuming but we regard it as an integral aspect of our role as long-term investors.
Consideration of Environmental, Social and Governance ("ESG") factors also forms an important part of our process. Whilst the management of the Company's investments is not undertaken with any specific instructions to exclude certain asset types or classes, we embed ESG into the company and sector specific research on all holdings as part of the investment process. ESG investment is about active engagement with the goal of improving the performance of assets held by the Company. We aim to make the best possible investment decissions for the Company by understanding the whole picture - before, during and after an investment is made. That includes understanding the ESG risks and opportunities they present, and how these could affect longer-term performance and valuations. With more than 1,000 investment professionals within the abrdn Group and more than 50 ESG specialists, we are able to take account of ESG factors in our company research, stock selection and portfolio construction. ESG considerations underpin all investment activities.
Outlook
The start of 2022 has been unusually volatile for equity markets, with macro and geopolitical events driving market direction. At the start of the year, rising bond yields and inflation expectations led to a de-rating of highly rated growth stocks and a rotation into value. While this rotation was quicker and more pronounced than we expected, we continue to see growth at a historically high premium to value and expect the recent trend will have some way to run. In February and March, the main event moving markets was the tragic invasion of Ukraine by Russia. Beyond the humanitarian impact, this will have a lasting impact on some important sectors of the UK market. Steps by the US and other Western countries to restrict access for Russia to international markets, goods and services will likely continue for some time, even if the conflict is hopefully resolved more quickly. Commodity markets in particular are therefore likely to remain tight as it is a very difficult task to replace Russian oil and gas supplies, particularly in continental Europe. Addressing this challenge will likely require some re-investment in alternative sources of supply, but also an acceleration of energy transition and a re-start of nuclear capacity additions. These decisions will have consequences for the energy sector but also for construction and industrial stocks to which the Company is exposed. Consumers and companies will also likely have to get accustomed to higher energy prices and input costs for some time to come. The conflict also reinforces current inflation expectations and adds more pressure to central banks to raise interest rates and normalise monetary policy after a period of easing.
Assessing these factors and their impact on the companies we invest in is not simple. However, we should be relatively optimistic and there are reasons to be positive. Both consumers and companies have very healthy financial positions to allow them to weather a period of higher costs. Economic activity will also continue to be well supported as consumers get back to normal life and companies invest after a three year hiatus in capital expenditure. The equity portfolio is overweight in energy and financials, two beneficiaries of the dynamic described above, while we are more cautious on sectors like consumer staples where we see pressure from rising input costs and slowing consumer demand. The focus on quality companies also works in our favour, as those with strong margins and market positions are better placed to absorb higher costs and to pass them onto their customers. It is also worth noting, that despite the outperformance of the UK market since the beginning of 2022, it is at its greatest ever discount to Europe (a price/earnings discount of 14% as at 31 March 2022) and has a much higher dividend yield (3.6% from the FTSE All-Share Index as at 31 March 2022, compared to a dividend yield of 3.3% from the MSCI Europe Index). We continue to believe that the Company is well placed to meet its performance objectives.
Iain Pyle and Charles Luke
Aberdeen Asset Managers Limited
25 May 2022
Investment Portfolio - Equities
| As at 31 March 2022 | ||||
| Valuation | Total | Valuation | ||
| 2022 | portfolio | 2021 | ||
| Company | FTSE All-Share Index Sector | £'000 | % | £'000 |
| abrdn Smaller Companies Income Trust | Equity Investment Instruments | 9,041 | 8.8 | 9,611 |
| AstraZeneca | Pharmaceuticals & Biotechnology | 4,264 | 4.1 | 2,711 |
| Shell | Oil, Gas and Coal | 2,997 | 2.9 | 1,375 |
| Diageo | Beverages | 2,744 | 2.7 | 1,393 |
| Diversified Energy | Oil, Gas and Coal | 2,665 | 2.6 | 1,642 |
| Standard Chartered | Banks | 2,643 | 2.6 | 1,098 |
| SSE | Electricity | 2,537 | 2.5 | 2,033 |
| British American Tobacco | Tobacco | 2,424 | 2.4 | 2,105 |
| BP | Oil, Gas and Coal | 2,339 | 2.3 | 1,836 |
| Rio Tinto | Industrial, Metals & Mining | 2,152 | 2.1 | 1,964 |
| Ten largest investments | 33,806 | 33.0 | ||
| TotalEnergies | Oil, Gas and Coal | 2,068 | 2.0 | 1,801 |
| National Grid | Gas Water & Multiutilities | 1,846 | 1.8 | 1,635 |
| BHP | Industrial, Metals & Mining | 1,751 | 1.7 | 2,521 |
| Energean | Oil, Gas and Coal | 1,733 | 1.7 | 1,236 |
| Chesnara | Life Insurance | 1,674 | 1.6 | 1,577 |
| Vodafone | Telecommunications Service Providers | 1,658 | 1.6 | 1,751 |
| Telecom Plus | Telecommunications Service Providers | 1,608 | 1.6 | 1,336 |
| Entain | Travel & Leisure | 1,528 | 1.5 | 1,608 |
| Sirius Real Estate | Real Estate Investment Services | 1,519 | 1.5 | 1,406 |
| M&G | Asset Management | 1,428 | 1.4 | 1,205 |
| Twenty largest investments | 50,619 | 49.4 | ||
| Prudential | Life Insurance | 1,427 | 1.4 | 2,755 |
| Morgan Sindall | Construction and Materials | 1,262 | 1.2 | 405 |
| GlaxoSmithKline | Pharmaceuticals & Biotechnology | 1,203 | 1.2 | 1,981 |
| Imperial Brands | Tobacco | 1,167 | 1.2 | 1,081 |
| Howden Joinery | Retailers | 1,166 | 1.1 | 740 |
| Direct Line Insurance | Non-life Insurance | 1,146 | 1.1 | 1,306 |
| Unilever | Personal Care, Drug & Grocery Stores | 1,136 | 1.1 | 1,334 |
| Close Brothers | Banks | 1,071 | 1.1 | 1,395 |
| Inchcape | Industrial Support Services | 1,060 | 1.0 | 1,192 |
| OSB | Finance and Credit Services | 933 | 0.9 | - |
| Thirty largest investments | 62,190 | 60.7 | ||
| Mondi | General Industrials | 919 | 0.9 | 891 |
| Novo-Nordisk | Pharmaceuticals & Biotechnology | 894 | 0.9 | 769 |
| RS Group | Industrial Support Services | 848 | 0.8 | - |
| AXA | Non-life Insurance | 821 | 0.8 | 714 |
| Telenor | Telecommunications Service Providers | 767 | 0.7 | 1,078 |
| Drax | Electricity | 747 | 0.7 | - |
| Bawag | Banks | 714 | 0.7 | - |
| Bodycote | Industrial, Metals & Mining | 688 | 0.7 | 898 |
| Ashmore | Investment Banking & Brokerage Services | 676 | 0.7 | 687 |
| Balfour Beatty | Construction & Materials | 668 | 0.7 | - |
| Forty largest investments | 69,932 | 68.3 | ||
| Marshalls | Construction & Materials | 654 | 0.6 | 346 |
| NatWest | Banks | 625 | 0.6 | - |
| Coca-Cola Hellenic Bottling Company | Beverages | 621 | 0.6 | 499 |
| Urban Logistics | Real Estate Investment Trusts | 598 | 0.6 | - |
| Euromoney Institutional Investor | Industrial Support Services | 593 | 0.6 | 701 |
| Assura | Real Estate Investment Trusts | 576 | 0.6 | 877 |
| United Utilities | Gas Water & Multiutilities | 536 | 0.5 | 527 |
| Wood Group | Oil, Gas and Coal | 524 | 0.5 | 431 |
| Fortum | Electricity | 502 | 0.5 | 782 |
| Nordea | Banks | 480 | 0.5 | - |
| Fifty largest investments | 75,641 | 73.9 | ||
| Countryside Properties | Household Goods & Home Construction | 477 | 0.5 | 954 |
| Schroders | Investment Banking & Brokerage Services | 426 | 0.4 | 557 |
| Softcat | Software & Computer Services | 402 | 0.4 | 428 |
| Bridge Point | Asset Management | 367 | 0.4 | - |
| Redrow | Household Goods & Home Construction | 351 | 0.3 | - |
| Oxford Instruments | Electronic & Electrical Equipment | 45 | - | - |
| Total equity investments | 77,709 | 75.9 | ||
| Purchases and/or sales of portfolio holdings effected during the year result in 2022 and 2021 values not being directly comparable. | ||||
Investment Portfolio - Other Investments
| As at 31 March 2022 | |||
| Valuation | Total | Valuation | |
| 2022 | portfolio | 2021 | |
| Company | £'000 | % | £'000 |
| Preference sharesA | |||
| Ecclesiastical Insurance Office 8 5/8% | 5,936 | 5.8 | 6,487 |
| Royal & Sun Alliance 7 3/8% | 5,220 | 5.1 | 5,394 |
| Santander 10.375% | 4,491 | 4.4 | 4,402 |
| General Accident 7.875% | 4,364 | 4.3 | 4,754 |
| Standard Chartered 8.25% | 3,737 | 3.6 | 3,746 |
| R.E.A. Holdings 9% | 968 | 0.9 | 704 |
| Total Preference shares | 24,716 | 24.1 | |
| Total Investments | 102,425 | 100.0 | |
| A None of the preference shares listed above have a fixed redemption date. | |||
| Purchases and/or sales of portfolio holdings effected during the year result in 2022 and 2021 values not being directly comparable. | |||
Distribution of Assets and Liabilities
| Movement during the year | |||||||
| Valuation at | Gains/ | Valuation at | |||||
| 31 March 2021 | Purchases | Sales | (losses) | 31 March 2022 | |||
| £'000 | % | £'000 | £'000 | £'000 | £'000 | % | |
| Listed investments | |||||||
| Equities | 68,058 | 84.2 | 13,554 | (9,722) | 5,819 | 77,709 | 90.5 |
| Preference shares | 25,487 | 31.5 | - | - | (771) | 24,716 | 28.8 |
| Total investments | 93,545 | 115.7 | 13,554 | (9,722) | 5,048 | 102,425 | 119.4 |
| Current assets | 6,642 | 8.2 | 2,656 | 3.1 | |||
| Current liabilities | (9,331) | (11.5) | (19,262) | (22.4) | |||
| Non current liabilities | (9,999) | (12.4) | - | - | |||
| Net assets | 80,857 | 100.0 | 85,819 | 100.0 | |||
| Net asset value per Ordinary share | 262.4p | 278.3p | |||||
Directors' Report (extract)
The Directors present their report and audited financial statements for the year ended 31 March 2022.
Results and Dividends
The financial statements for the year ended 31 March 2022 are contained below. Dividends paid and proposed for the year amounted to 13.80p per Ordinary share.
First, second and third interim dividends for the year, each of 3.2p per Ordinary share, were paid on 29 October 2021, 28 January 2022 and 29 April 2022 respectively. The Directors recommend a final dividend of 4.20p per Ordinary share, payable on 29 July 2022 to shareholders on the register on 8 July 2022. The ex-dividend date is 7 July 2022. Under UK-adopted international accounting standards the third interim and final dividends will be accounted for in the financial year ended 31 March 2023. A resolution in respect of the final dividend will be proposed at the forthcoming Annual General Meeting.
Investment Trust Status
The Company is registered as a public limited company (registered in England and Wales No. 00386561) and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company has been approved by HM Revenue & Customs as an investment trust subject to it continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 April 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 March 2022 so as to enable it to comply with the ongoing requirements for investment trust status.
Individual Savings Accounts
The Company satisfies the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.
Capital Structure
During the year the Company issued 25,000 Ordinary shares of 50p each under its non pre-emptive allotment authority, raising £70,000 in aggregate on a non-dilutive basis. The issued Ordinary share capital at 31 March 2022 consisted of 30,819,580 Ordinary shares of 50p each and 50,000 3.5% Cumulative Preference Shares of £1 each.
Voting Rights
Each Ordinary and Cumulative Preference share carries one vote at general meetings of the Company. The Cumulative Preference shares carry a right to receive a fixed rate of dividend and, on a winding up of the Company, to the payment of such fixed cumulative preferential dividends to the date of such winding up and to the repayment of the capital paid up on such shares in priority to any payment to the holders of the Ordinary shares.
The Ordinary shares, excluding any treasury shares, carry a right to receive dividends and, on a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.
There are no restrictions on the transfer of Ordinary or Cumulative Preference shares in the Company other than certain restrictions which may from time to time be imposed by law.
Management Agreement
The Company has appointed Aberdeen Standard Fund Managers Limited ("ASFML"), a wholly owned subsidiary of abrdn plc, as its alternative investment fund manager. ASFML has been appointed to provide investment management, risk management, administration, company secretarial services and promotional activities to the Company. The Company's portfolio is managed by Aberdeen Asset Managers Limited ("AAML") by way of a group delegation agreement in place between ASFML and AAML. In addition, ASFML has sub-delegated administrative and company secretarial services to Aberdeen Asset Management PLC and promotional activities to AAML. Details of the management fee and fees payable for promotional activities are shown in notes 4 and 5 to the financial statements.
The management agreement is terminable on not less than six months' notice. In the event of termination by the Company on less than the agreed notice period, compensation is payable to the Manager in lieu of the unexpired notice period.
Substantial Interests
As at 31 March 2022, the following interests in the issued Ordinary share capital of the Company had been disclosed in accordance with the requirements of the FCA's Disclosure Guidance and Transparency Rules:
| Shareholder | Number of Ordinary shares held | % of Ordinary shares held |
| abrdn Retail PlansA | 6,026,849 | 19.6 |
| A Non-beneficial interest | | |
There have been no changes notified to the Company between the year end and the date of approval of this Report.
Directors
Helen Sinclair was appointed as an independent non-executive Director on 1 February 2022. For the appointment of Ms Sinclair as a Director, the Board used the services of an external search consultant, Fletcher Jones Limited. Fletcher Jones Limited does not have any other connections with the Company or individual Directors.
At the end of the year the Board comprised five non-executive Directors, each of whom is considered by the Board to be independent of the Company and the Manager.
The Directors attended scheduled Board and Committee meetings during the year ended 31 March 2022 as follows (relevant meetings in brackets):
| Director | Board | Audit Committee | Management Engagement Committee | Remuneration Committee |
| Robert Talbut | 5 (5) | 2 (2) | 1 (1) | 1 (1) |
| Robin Archibald | 5 (5) | 2 (2) | 1 (1) | 1 (1) |
| Marian Glen | 5 (5) | 2 (2) | 1 (1) | 1 (1) |
| Jane Pearce | 5 (5) | 2 (2) | 1 (1) | 1 (1) |
| Helen SinclairA | 1 (1) | - (-) | 1 (1) | 1 (1) |
A Appointed on 1 February 2022
The Board meets more frequently when business needs require and has regular dialogue between formal Board meetings, including with the Manager.
Under the terms of the Company's Articles of Association, Directors must retire and be subject to appointment at the first Annual General Meeting after their appointment by the Board, and be subject to re-appointment every three years thereafter. Directors with more than nine years' service are subject to annual re-appointment. However, the Board has decided that all Directors will seek annual re-appointment after initial appointment to the Board.
Helen Sinclair will stand for appointment at the Annual General Meeting. Robin Archibald, Robert Talbut and Jane Pearce will seek re-appointment at the Annual General Meeting. As explained in the Chairman's Statement, Marian Glen will retire at the Annual General Meeting, having served on the Board for nine years, and will not seek re-appointment.
The Board believes that all the Directors seeking appointment/re-appointment remain independent of the Manager and free from any relationship which could materially interfere with the exercise of their judgement on issues of strategy, performance, resources and standards of conduct. The Board believes that each Director has the requisite high level and range of business, investment and financial experience which enables the Board to provide clear and effective leadership, oversight and proper governance of the Company.
Following formal performance evaluations, the performance of each of the Directors seeking re-appointment continues to be effective. Each Director has demonstrated commitment to the role and the Board is satisfied that their individual performances contribute to the long-term sustainable success of the Company. All of the Directors have demonstrated that they have sufficient time and commitment to fulfil their directorial roles with the Company. The Board therefore recommends the appointment/re-appointment of each of the Directors (other than Marian Glen who is retiring) at the Annual General Meeting.
Board's Policy on Tenure
In normal circumstances, it is the Board's expectation that Directors will not serve beyond the Annual General Meeting following the ninth anniversary of their appointment. However, the Board takes the view that independence of individual Directors is not necessarily compromised by length of tenure on the Board and that continuity and experience can add significantly to the Board's strength. The Board believes that recommendation for re-election should be on an individual basis following a rigorous review which assesses the contribution made by the Director concerned, but also taking into account the need for regular refreshment and diversity.
It is the Board's policy that the Chairman of the Board will not normally serve as a Director beyond the Annual General Meeting following the ninth anniversary of his appointment to the Board. However, this may be extended in certain circumstances including the facilitation of effective succession planning and the development of a diverse Board. In such a situation the reasons for the extension will be fully explained to shareholders and a timetable for the departure of the Chairman clearly set out.
The Role of the Chairman and Senior Independent Director
The Chairman is responsible for providing effective leadership to the Board, by setting the tone of the Company, demonstrating objective judgement and promoting a culture of openness and debate. The Chairman facilitates the effective contribution and encourages active engagement by each Director. In conjunction with the Company Secretary, the Chairman ensures that Directors receive accurate, timely and clear information to assist them with effective decision-making. The Chairman acts upon the results of the Board evaluation process by recognising strengths and addressing any weaknesses and also ensures that the Board engages with major shareholders and that all Directors understand shareholder views.
The Senior Independent Director acts as a sounding board for the Chairman and acts as an intermediary for other Directors, when necessary. Working closely with the other Directors, the Senior Independent Director takes responsibility for an orderly succession process for the Chairman, and leads the annual appraisal of the Chairman's performance. The Senior Independent Director is also available to shareholders to discuss any concerns they may have.
Directors' and Officers' Liability Insurance
The Company maintains insurance in respect of Directors' and Officers' liabilities in relation to their acts on behalf of the Company. In addition, the Company has entered into a separate deed of indemnity with each of the Directors reflecting the scope of the indemnity in the Articles of Association. Under the Articles of Association, each Director is entitled to be indemnified out of the assets of the Company to the extent permitted by law against any loss or liability incurred by him or her in the proper execution of his or her duties in relation to the affairs of the Company.
Management of Conflicts of Interest
The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, each Director prepares a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his or her connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.
No Director has a service contract with the Company although all Directors are issued with letters of appointment, which may be amended from time to time to reflect regulatory and other changes. Other than the deeds of indemnity referred to above and the Directors' letters of appointment, there were no contracts during, or at the end of the year, in which any Director was interested.
The Company has a policy of conducting its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and has procedures in place that are proportionate to the Company's circumstances to prevent them. The Manager also adopts a group-wide zero-tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption. Copies of the Manager's anti-bribery and corruption policies are available on its website.
In relation to the corporate offence of failing to prevent tax evasion, it is the Company's policy to conduct all business in an honest and ethical manner. The Company takes a zero-tolerance approach to facilitation of tax evasion whether under UK law or under the law of any foreign country and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships.
Corporate Governance
The Company is committed to high standards of corporate governance and the Board is accountable to the Company's shareholders for good governance. The Board has considered the principles and provisions of the AIC Code of Corporate Governance as published in February 2019 (the "AIC Code"). The AIC Code addresses the principles and provisions set out in the UK Corporate Governance Code as published by the FRC in July 2018 (the "UK Code"), as well as setting out additional provisions on issues that are of specific relevance to investment trusts.
The Board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed by the FRC, provides more relevant information to shareholders than if it had adopted the UK Code. The AIC Code is available on the AIC's website: theaic.co.uk. It includes an explanation of how the AIC Code adapts the principles and provisions set out in the UK Code to make them relevant for investment trusts.
The Board confirms that, during the year, the Company complied with the principles and provisions of the AIC Code.
Further details of the Company's compliance with the AIC Code can be found on its website.
The Board and its Committees
Mr Talbut is the Chairman of the Board and Ms Glen is the Senior Independent Director.
The Board has appointed committees with specific responsibilities as set out below. Copies of the terms of reference of each committee are available on the Company's website, or upon request from the Company.
Given the size of the Board and because all of the Directors are non-executive, the Board does not consider it appropriate for the Company to have a nominations committee. The business of nominations and succession planning, and Board evaluations, is covered by the full Board.
Audit Committee
The Audit Committee comprises all Directors and is chaired by Mr Archibald.
Management Engagement Committee
The Management Engagement Committee comprises all Directors and is chaired by Mr Talbut. The purpose of the Committee is to review the terms of the agreement with the Manager including, but not limited to, the management fee, and also to review the performance of the Manager in relation to the achievement of the Company's objectives. These reviews were conducted during the year and the outcomes are noted below. In addition, the Committee conducts an annual review of the performance, terms and conditions of the Company's other main service providers.
The key terms of the management agreement and fees payable to the Manager are set out above and in notes 4 and 5 to the financial statements. The Board believes the fee arrangements are competitive with reference to other investment trusts with a similar investment mandate and are priced appropriately given the level of service provided by the abrdn Group. As stated above, the Committee reviews the performance of the Manager annually. The Board is satisfied with the Company's performance since the appointment of the abrdn Group as Manager in 2008 and believes that the Investment Manager has positioned the portfolio well in order to seek to achieve good medium and long-term performance in line with the Company's investment objective. The Board is also satisfied with the standard of company secretarial, administration and promotional support provided by the Manager. It therefore considers the continuing appointment of the Manager on the terms agreed to be in the best interests of shareholders.
Remuneration Committee
The Remuneration Committee comprises all Directors and is chaired by Ms Glen who has relevant experience and understanding of the Company. The Committee's duties include reviewing the Company's remuneration policy and determining Directors' remuneration, including for the Chairman. The Committee also considers the need to appoint an external remuneration consultant.
Going Concern
The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange. The Board has performed stress testing and liquidity analysis on the portfolio and considers that, in most foreseeable circumstances, the majority of the Company's investments are realisable within a relatively short timescale.
The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants, including the headroom available. During the year, the Company had a £20 million loan facility which was due to mature in September 2022. Since the year end, the entire facility has been repaid and a new five year £20 million loan facility has been entered into. Further details are contained in note 13 to the financial statements.
Having taken these factors into account, the Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for the period to 30 June 2023, which is at least twelve months from the date of approval of this Report. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements.
Accountability and Audit
Each Director confirms that, so far as he or she is aware, there is no relevant audit information of which the Company's Auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.
Independent Auditor
The Company's Auditor, Ernst & Young LLP, has indicated its willingness to remain in office. The Board will place resolutions before the Annual General Meeting to re-appoint Ernst & Young LLP as Auditor for the ensuing year and to authorise the Directors to determine its remuneration.
Relations with Shareholders
The Directors place a great deal of importance on communications with shareholders. Shareholders and investors may obtain up to date information on the Company through its website and the Manager's information service.
The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (including the Company Secretary or the Manager) in situations where direct communication is required, and representatives from the Board and Manager meet with major shareholders on at least an annual basis in order to gauge their views. In addition, the Company Secretary only acts on behalf of the Board, not the Manager, and there is no filtering of communication. At each Board meeting the Board receives full details of any communication from shareholders to which the Chairman responds personally as appropriate.
Directors make themselves available to attend meetings with the Company's largest shareholders and meet other shareholders at the Annual General Meeting and, as explained in the Chairman's Statement, the Company will hold an Online Shareholder Presentation in advance of the Annual General Meeting this year including the opportunity for an interactive question and answer session.
The notice of the Annual General Meeting is, where practicable, sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions to the Board and Manager at the meeting. Further details regarding the arrangements for this year's Annual General Meeting and separate Online Shareholder Presentation are set out in the Chairman's Statement.
Annual General Meeting
The Annual General Meeting will be held at the offices of abrdn plc, Bow Bells House, 1 Bread Street, London EC4M 9HH on Wednesday 6 July 2022 at 12 noon.
Should circumstances change significantly before the time of the Annual General Meeting, the Company will notify shareholders of any changes to the arrangements by updating the Company's website and through a stock exchange announcement, where appropriate, as early as is possible before the date of the meeting. Shareholders should note that if law or Government guidance so requires at the time of the meeting, the Chairman of the meeting will limit, in his or her sole discretion, the number of individuals in attendance at the meeting and may be required to impose entry restrictions on certain persons wishing to attend the meeting in order to ensure the safety of those attending.
By order of the Board
Aberdeen Asset Management PLC
Company Secretary
1 George Street
Edinburgh EH2 2LL
25 May 2022
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements, in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year, and under that law they have chosen to prepare the financial statements in accordance with UK-adopted international accounting standards.
The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies in accordance with IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' and then apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
- provide additional disclosures when compliance with the specific requirements in UK-adopted international accounting standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance;
- state whether the financial statements have been prepared in accordance with UK-adopted international accounting standards subject to any material departures disclosed and explained in the notes to 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 proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and 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, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, but not for the content of any information included on the website that has been prepared or issued by third parties. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Board confirms that to the best of its knowledge:
- the financial statements have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
- in the opinion of the Directors, the Annual Report taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy; and
- the Strategic Report and Directors' Report include 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 the Company faces.
On behalf of the Board
Robert Talbut
Chairman
25 May 2022
Statement of Comprehensive Income
| Year ended | Year ended | ||||||
| 31 March 2022 | 31 March 2021 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| Notes | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Gains on investments at fair value | 11 | - | 5,048 | 5,048 | - | 17,514 | 17,514 |
| Currency gains/(losses) | - | 3 | 3 | - | (5) | (5) | |
| Income | 3 | ||||||
| Dividend income | 4,974 | - | 4,974 | 4,278 | - | 4,278 | |
| Stock dividends | 194 | - | 194 | 75 | - | 75 | |
| Traded option premiums | 71 | - | 71 | 176 | - | 176 | |
| 5,239 | 5,051 | 10,290 | 4,529 | 17,509 | 22,038 | ||
| Expenses | |||||||
| Management fee | 4 | (212) | (212) | (424) | (189) | (190) | (379) |
| Administrative expenses | 5 | (440) | - | (440) | (358) | - | (358) |
| Finance costs | 7 | (135) | (135) | (270) | (132) | (132) | (264) |
| (787) | (347) | (1,134) | (679) | (322) | (1,001) | ||
| Profit before taxation | 4,452 | 4,704 | 9,156 | 3,850 | 17,187 | 21,037 | |
| Taxation | 8 | (73) | - | (73) | (54) | - | (54) |
| Profit attributable to equity holders of the Company | 4,379 | 4,704 | 9,083 | 3,796 | 17,187 | 20,983 | |
| Earnings per Ordinary share (pence) | 10 | 14.21 | 15.27 | 29.48 | 12.33 | 55.82 | 68.15 |
| The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit for the year" is also the "Total comprehensive income for the year", as defined in IAS 1 (revised). | |||||||
| The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with UK adopted International Accounting Standards. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. | |||||||
| All items in the above statement derive from continuing operations. | |||||||
| The accompanying notes are an integral part of these financial statements. | |||||||
Balance Sheet
| As at | As at | ||
| 31 March 2022 | 31 March 2021 | ||
| Notes | £'000 | £'000 | |
| Non-current assets | |||
| Ordinary shares | 77,709 | 68,058 | |
| Preference shares | 24,716 | 25,487 | |
| Securities at fair value | 11 | 102,425 | 93,545 |
| Current assets | |||
| Other receivables | 12 | 1,173 | 988 |
| Cash at bank | 1,483 | 5,654 | |
| 2,656 | 6,642 | ||
| Creditors: amounts falling due within one year | |||
| Other payables | (262) | (331) | |
| Short-term borrowings | (19,000) | (9,000) | |
| 13 | (19,262) | (9,331) | |
| Net current liabilities | (16,606) | (2,689) | |
| Total assets less current liabilities | 85,819 | 90,856 | |
| Non-current liabilities | |||
| Long-term borrowings | 13 | - | (9,999) |
| Net assets | 85,819 | 80,857 | |
| Share capital and reserves | |||
| Called-up share capital | 14 | 15,460 | 15,447 |
| Share premium account | 21,109 | 21,052 | |
| Capital reserve | 15 | 42,545 | 37,841 |
| Revenue reserve | 6,705 | 6,517 | |
| Equity shareholders' funds | 85,819 | 80,857 | |
| Net asset value per Ordinary share (pence) | 16 | 278.29 | 262.41 |
| The financial statements were approved by the Board of Directors and authorised for issue on 25 May 2022 and were signed on its behalf by: | |||
| Robert Talbut | |||
| Chairman | |||
| The accompanying notes are an integral part of these financial statements. | |||
Statement of Changes in Equity
| Year ended 31 March 2022 | |||||
| Share | |||||
| Share | premium | Capital | Revenue | ||
| capital | account | reserve | reserve | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 31 March 2021 | 15,447 | 21,052 | 37,841 | 6,517 | 80,857 |
| Issue of Ordinary shares | 13 | 57 | - | - | 70 |
| Profit for the year | - | - | 4,704 | 4,379 | 9,083 |
| Equity dividends (see note 9) | - | - | - | (4,191) | (4,191) |
| As at 31 March 2022 | 15,460 | 21,109 | 42,545 | 6,705 | 85,819 |
| Year ended 31 March 2021 | |||||
| Share | |||||
| Share | premium | Capital | Revenue | ||
| capital | account | reserve | reserve | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | |
| As at 31 March 2020 | 15,435 | 21,005 | 20,654 | 6,770 | 63,864 |
| Issue of Ordinary shares | 12 | 47 | - | - | 59 |
| Profit for the year | - | - | 17,187 | 3,796 | 20,983 |
| Equity dividends (see note 9) | - | - | - | (4,049) | (4,049) |
| As at 31 March 2021 | 15,447 | 21,052 | 37,841 | 6,517 | 80,857 |
| The Company has aggregate realised and distributable reserves of £33,931,000 as at 31 March 2022 (2021 - £31,193,000), comprising capital reserve - realised of £27,226,000 (2021 - £24,676,000) and a revenue reserve of £6,705,000 (2021 - £6,517,000). | |||||
| The accompanying notes are an integral part of these financial statements. | |||||
Cash Flow Statement
| Year ended | Year ended | |
| 31 March 2022 | 31 March 2021 | |
| £'000 | £'000 | |
| Net cash inflow from operating activities | ||
| Dividend income receivedA | 4,809 | 4,105 |
| Options premium received | 71 | 172 |
| Management fee paid | (512) | (281) |
| Other cash expenses | (417) | (353) |
| Cash generated from operations | 3,951 | 3,643 |
| Interest paid | (280) | (252) |
| Overseas tax paid | (91) | (58) |
| Net cash inflows from operating activities | 3,580 | 3,333 |
| Cash flows from investing activities | ||
| Purchases of investmentsA | (13,372) | (10,252) |
| Sales of investments | 9,739 | 12,777 |
| Net cash (outflow)/inflow from investing activities | (3,633) | 2,525 |
| Cash flows from financing activities | ||
| Equity dividends paid | (4,191) | (4,049) |
| Issue of Ordinary shares | 70 | 59 |
| Net cash outflow from financing activities | (4,121) | (3,990) |
| (Decrease)/increase in cash and cash equivalents | (4,174) | 1,868 |
| Reconciliation of net cash flow to movements in cash and cash equivalents | ||
| (Decrease)/increase in cash and cash equivalents as above | (4,174) | 1,868 |
| Net cash and cash equivalents at start of year | 5,654 | 3,791 |
| Effect of foreign exchange rate changes | 3 | (5) |
| Net cash and cash equivalents at end of year | 1,483 | 5,654 |
| A Non-cash dividends during the year comprised stock dividends of £194,000 (2021 - £75,000). | ||
Notes to the Financial Statements
| 1. | Principal activity. |
| The Company is a closed-end investment company, registered in England and Wales No. 00386561, with its Ordinary shares listed on the London Stock Exchange. |
| 2. | Accounting policies | |
| (a) | Basis of accounting. The financial statements of the Company have been prepared in accordance with UK adopted International Accounting Standards ("IAS"). | |
| The Company's assets consist mainly of equity shares in companies listed on the London Stock Exchange. The Board has performed stress testing and liquidity analysis on the portfolio and considers that, in most foreseeable circumstances, the majority of the Company's investments are realisable within a relatively short timescale. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants, including the headroom available. During the year, the Company had a £20 million loan facility which was due to mature in September 2022. Since the year end, the entire facility has been repaid and a new five year £20 million loan facility has been entered into. Further details are contained in note 13 to the financial statements. Having taken these factors into account, the Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for the period to 30 June 2023, which is at least twelve months from the date of approval of this Report. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements. | ||
| In preparing these financial statements the Directors have considered the impact of climate change risk as an emerging risk, and have concluded that it does not have a material impact on the Company's investments. In line with IFRS investments are valued at fair value, which for the Company are quoted bid prices for investments in active markets at the Balance Sheet date and therefore reflect market participants view of climate change risk. | ||
| The Company's financial statements are presented in sterling, which is also the functional currency as it is the currency in which shares are issued and expenses are generally paid. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated. | ||
| Where presentational guidance set out in the Statement of Recommended Practice ("SORP"): 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies ("AIC"), is consistent with the requirements of IAS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP issued in April 2021. | ||
| Significant accounting judgements, estimates and assumptions. The preparation of financial statements requires the use of certain significant accounting judgements, estimates and assumptions which requires management to exercise its judgement in the process of applying the accounting policies and are continually evaluated. The area requiring most significant judgement and assumption in the financial statements is the determination of the fair value hierarchy classification of traded options which have been assessed as being Level 2 due to them not being considered to trade in active markets. The Directors do not consider there to be any significant judgement and estimates within the financial statements for the year ended 31 March 2022. Special dividends are assessed and credited to capital or revenue according to their circumstances. | ||
| New and amended accounting standards and interpretations. At the date of authorisation of these financial statements, the following amendments to Standards and Interpretations were assessed to be relevant and are all effective for annual periods beginning on or after 1 January 2021: | ||
| - IAS 39, IFRS 4, 7, 9 and 16 Amendments (Interest Benchmark Reform Phase 2) | ||
| Future amendments to standards and interpretations. At the date of authorisation of these financial statements, the following amendments to Standards and Interpretations were assessed to be relevant and are all effective for annual periods beginning on or after 1 January 2022; | ||
| - IAS 1 Amendments Classification of Liabilities as current or non-current (effective from 1 January 2023) | ||
| - IAS 1 Amendments Disclosure of Accounting Policies (effective from 1 January 2023) | ||
| - IAS 8 Amendments Definition of Accounting Estimates (effective from 1 January 2023) | ||
| - IAS 12 Amendments (Deferred Tax related to Assets and Liabilities arising from a Single Transaction) (effective from 1 January 2023) | ||
| The Company intends to adopt the Standards and Interpretations in the reporting period when they become effective and the Board does not anticipate that the adoption of these Standards and Interpretations in future periods will materially impact the Company's financial results in the period of initial application although there may be revised presentations to the Financial Statements and additional disclosures. | ||
| (b) | Investments. All investments are evaluated and managed on a fair value basis and are therefore classified as FVTPL ("Fair Value Through Profit or Loss"). | |
| Investments are recognised and de-recognised at the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are measured at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange. | ||
| Gains and losses arising from the changes in fair value are included in net profit or loss for the period as a capital item. Transaction costs are treated as a capital cost. | ||
| (c) | Income. Dividend income from equity investments, including preference shares, which have a discretionary dividend, is recognised when the shareholders' rights to receive payment have been established, normally the ex-dividend date. Special dividends are allocated to revenue or capital based on their individual merits. | |
| If a scrip dividend is taken in lieu of a cash dividend, the net amount of the cash dividend declared is credited to the revenue account. Any excess in the value of the shares received over the amount of the cash dividend foregone is recognised as capital. | ||
| Interest from deposits, interest from debt securities, and income from preference shares which do not have a discretionary dividend are accounted for on an accruals basis. | ||
| (d) | Expenses. All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly, the management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors' expected long-term view of the nature of the future investment returns of the Company. | |
| (e) | Borrowings. Short-term borrowings, which comprise interest bearing bank loans are initially recognised at cost, being the fair value of the consideration received, net of any issue expenses. The finance costs, being the difference between the net proceeds of borrowings and the total amount of payments that require to be made in respect of those borrowings, are amortised over the life of the borrowings. | |
| Long-term borrowings are measured initially at the fair value of the consideration received, net of any issue expenses, and subsequently at amortised cost using the effective interest method. |
| (f) | Taxation. The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company has no liability for current tax. | |
| Deferred tax is recognised in respect of all temporary differences at the Balance Sheet date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the Balance Sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise, using tax rates that are expected to apply at the date the deferred tax position is unwound. | ||
| Owing to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. | ||
| (g) | Foreign currencies. Monetary assets and liabilities, comprising current assets, current liabilities and non-current liabilities and non-monetary assets comprising non-current assets held at fair value which are denominated in foreign currencies are converted into sterling at the rate of exchange ruling at the reporting date. Transactions during the year in foreign currencies are converted at the rate of exchange ruling at the transaction date. Gains or losses on monetary assets and liabilities arising from a change in exchange rates subsequent to the date of a transaction are included as a currency gain or loss in revenue or capital column of the Statement of Comprehensive Income, depending on whether the gain or loss is of a revenue or capital nature. Gains or losses on non-monetary assets arising from a change in exchange rates subsequent to the date of a transaction are included as a gain or loss on investments in the capital column of the Statement of Comprehensive Income. | |
| (h) | Derivatives. The Company may enter into certain derivatives (e.g. traded options). Traded option contracts are restricted to writing out-of-the-money options with a view to generating income. Premiums received on traded option contracts are recognised as income evenly over the period from the date they are written to the date when they expire or are exercised or assigned. Losses on any movement in the fair value of open contracts at the year end and on the exercise of the contracts are recorded in the capital column of the Statement of Comprehensive Income as they arise. | |
| (i) | Cash and cash equivalents. Cash and cash equivalents comprise cash in hand and at banks and short-term deposits. | |
| (j) | Other receivables. Financial assets classified as loans and receivables are held to collect contractual cash flows and give rise to cash flows representing solely payments of principal and interest. As such they are measured at amortised cost. Other receivables do not carry any interest, they have been assessed for any expected credit losses over their lifetime due to their short-term nature. |
| (k) | Other payables. Payables are non-interest bearing and are stated at their undiscounted cash flows. | |
| (l) | Dividends payable. Final dividends are recognised from the date on which they are approved by shareholders. Interim dividends are recognised when paid. | |
| (m) | Nature and purpose of reserves | |
| Share premium account. The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity share capital comprising Ordinary shares of 50p per share. This reserve is not distributable. | ||
| Capital reserve. This reserve reflects any realised gains or losses in the period together with any unrealised increases and decreases that have been recognised in the Statement of Comprehensive Income. These include gains and losses from foreign currency exchange differences. Additionally, expenses, including finance costs, are charged to this reserve in accordance with (d) above. | ||
| The capital reserve, to the extent that the gains are deemed realised, is distributable, including by way of dividend. | ||
| Revenue reserve. This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The revenue reserve is distributable, including by way of dividend. | ||
| (n) | Segmental reporting. The Directors are of the opinion that the Company is engaged in a single segment of business activity, being investment business. Consequently, no business segmental analysis is provided. |
| 3. | Income | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Income from listed investments | |||
| UK dividend income | 4,198 | 3,884 | |
| Overseas dividend income | 776 | 394 | |
| Stock dividends | 194 | 75 | |
| 5,168 | 4,353 | ||
| Other income from investment activity | |||
| Traded option premiums | 71 | 176 | |
| Total income | 5,239 | 4,529 |
| 4. | Management fees | ||||||
| 2022 | 2021 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| Management fees | 212 | 212 | 424 | 189 | 190 | 379 | |
| The management fee is based on 0.45% per annum up to £100 million and 0.40% over £100 million, by reference to the net assets of the Company and including any borrowings up to a maximum of £30 million, and excluding commonly managed funds, calculated monthly and paid quarterly. The fee is allocated 50% to revenue and 50% to capital. The management agreement is terminable on not less than six months' notice. The total of the fees paid and payable during the year to 31 March 2022 was £424,000 (2021 - £379,000) and the balance due to Aberdeen Standard Fund Managers Limited ("ASFML") at the year end was £107,000 (2021 - £195,000). The Company held an interest in a commonly managed investment trust, abrdn Smaller Companies Income Trust plc, in the portfolio during the year to 31 March 2022 (2021 - same). The value attributable to this holding is excluded from the calculation of the management fee payable by the Company. | |||||||
| 5. | Administrative expenses | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Directors' remuneration | 126 | 122 | |
| Auditor's remuneration: fees payable to the Company's Auditor for the audit of the Company's annual accounts | 45 | 37 | |
| Promotional activities | 65 | 49 | |
| Professional fees | 40 | - | |
| Directors' & Officers' liability insurance | 7 | 6 | |
| Trade subscriptions | 26 | 20 | |
| Share plan costs | 22 | 20 | |
| Registrar's fees | 43 | 41 | |
| Printing, postage and stationery | 26 | 27 | |
| Other administrative expenses | 40 | 36 | |
| 440 | 358 | ||
| The management agreement with ASFML also provides for the provision of promotional activities, which ASFML has delegated to Aberdeen Asset Managers Limited. The total fees paid and payable under the management agreement in relation to promotional activities were £65,000 (2021 - £49,000) inclusive of VAT. The Company's management agreement with ASFML also provides for the provision of company secretarial and administration services to the Company; no separate fee is charged to the Company in respect of these services, which have been delegated to Aberdeen Asset Management PLC. | |||
| With the exception of Directors' remuneration and Auditor's remuneration for the statutory audit, all of the expenses above include irrecoverable VAT where applicable. | |||
| 6. | Directors' remuneration. |
| The Company had no employees during the year (2021 - none). No pension contributions were paid for Directors (2021 - £nil). Further details on Directors' Remuneration can be found in the Directors' Remuneration Report. |
| 7. | Finance costs | ||||||
| 2022 | 2021 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | ||
| On bank loans | 135 | 135 | 270 | 132 | 132 | 264 | |
| 8. | Taxation | |||||||
| 2022 | 2021 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||
| (a) | Analysis of the charge for the year | |||||||
| Overseas tax | 73 | - | 73 | 54 | - | 54 | ||
| Total tax charge | 73 | - | 73 | 54 | - | 54 | ||
| (b) | Factors affecting the tax charge for the year. The tax assessed for the year is lower than the effective rate of corporation tax in the UK. The differences are explained in the reconciliation below: | |||||||
| 2022 | 2021 | |||||||
| Revenue | Capital | Total | Revenue | Capital | Total | |||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |||
| Profit before taxation | 4,452 | 4,704 | 9,156 | 3,850 | 17,187 | 21,037 | ||
| Corporation tax at an effective rate of 19% (2021 - 19%) | 846 | 894 | 1,740 | 732 | 3,266 | 3,998 | ||
| Effects of: | ||||||||
| Non-taxable UK dividend income | (830) | - | (830) | (730) | - | (730) | ||
| Excess management expenses not utilised | 131 | 66 | 197 | 87 | 61 | 148 | ||
| Overseas withholding tax | 73 | - | 73 | 54 | - | 54 | ||
| Non-taxable overseas dividends | (147) | - | (147) | (89) | - | (89) | ||
| Gains on investments not taxable | - | (959) | (959) | - | (3,328) | (3,328) | ||
| (Gains)/losses on currency movements | - | (1) | (1) | - | 1 | 1 | ||
| Total tax charge | 73 | - | 73 | 54 | - | 54 | ||
| At 31 March 2022 the Company had surplus management expenses and loan relationship debits with a tax value of £7,217,000 based on a corporation tax rate of 25% (2021 - £5,288,000 based on a corporation tax rate of 19%) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses. | ||||||||
| 9. | Dividends | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Amounts recognised as distributions to equity holders in the period: | |||
| Third interim dividend for 2021 of 3.00p (2020 - 3.00p) per share | 924 | 923 | |
| Final dividend for 2021 of 4.20p (2020 - 4.20p) per share | 1,293 | 1,292 | |
| First two interim dividends for 2022 totalling 6.40p (2021 - 6.00p) per share | 1,972 | 1,848 | |
| Refund of unclaimed dividends from previous periods | - | (16) | |
| 4,189 | 4,047 | ||
| 3.5% Cumulative Preference shares | 2 | 2 | |
| Total | 4,191 | 4,049 | |
| The third interim dividend of 3.20p for the year to 31 March 2022, which was paid on 29 April 2022, and the proposed final dividend of 4.20p for the year to 31 March 2022, payable on 29 July 2022, have not been included as liabilities in these financial statements. | |||
| Set out below are the total ordinary dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered: | |||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Three interim dividends for 2022 totalling 9.60p (2021 - 9.00p) per share | 2,959 | 2,772 | |
| Proposed final dividend for 2022 of 4.20p (2021 - 4.20p) per share | 1,294 | 1,293 | |
| 4,253 | 4,065 | ||
| The amount reflected above for the cost of the proposed final dividend for 2022 is based on 30,819,580 Ordinary shares, being the number of Ordinary shares in issue at the date of this Report. | |||
| 10. | Earnings per Ordinary share | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Earnings per Ordinary share are based on the following figures: | |||
| Revenue return | 4,379 | 3,796 | |
| Capital return | 4,704 | 17,187 | |
| Total return | 9,083 | 20,983 | |
| Weighted average number of Ordinary shares | 30,812,251 | 30,788,210 | |
| During the year there were no (2021 - same) potentially dilutive shares in issue. |
| 11. | Non-current assets - Securities at fair value | ||||||||
| 2022 | 2021 | ||||||||
| Listed | Listed | ||||||||
| investments | investments | ||||||||
| £'000 | £'000 | ||||||||
| Opening book cost | 80,380 | 84,782 | |||||||
| Opening investment holdings gains/(losses) | 13,165 | (6,381) | |||||||
| Opening valuation | 93,545 | 78,401 | |||||||
| Purchases | 13,554 | 10,272 | |||||||
| Sales - proceeds | (9,722) | (12,641) | |||||||
| Gains on investments | 5,048 | 17,513 | |||||||
| Total investments held at fair value through profit or loss | 102,425 | 93,545 | |||||||
| 2022 | 2021 | ||||||||
| Listed | Listed | ||||||||
| investments | investments | ||||||||
| £'000 | £'000 | ||||||||
| Closing book cost | 87,106 | 80,380 | |||||||
| Closing investment holdings gains | 15,319 | 13,165 | |||||||
| Total investments held at fair value through profit or loss | 102,425 | 93,545 | |||||||
| 2022 | 2021 | ||||||||
| Gains/(losses) on investments | £'000 | £'000 | |||||||
| Net realised gains/(losses) on sales of investmentsA | 2,984 | (1,830) | |||||||
| Cost of call options exercised | (90) | (203) | |||||||
| Net realised gains/(losses) on sales | 2,894 | (2,033) | |||||||
| Movement in fair value of investments | 2,171 | 19,555 | |||||||
| Cost of put options assigned | (17) | (9) | |||||||
| Movement in appreciation of traded options held | - | 1 | |||||||
| 5,048 | 17,514 | ||||||||
| A Includes losses realised on the exercise of traded options of £107,000 (2021 - £212,000) which are reflected in the capital column of the Statement of Comprehensive Income. | |||||||||
| The cost of the exercising of call options and the assigning of put options is the difference between the market price of the underlying shares and the strike price of the options. The premiums earned on options expired, exercised or assigned of £71,000 (2021 - £176,000) have been dealt with in the revenue account. | |||||||||
| The movement in the fair value of traded option contracts has been calculated in accordance with the accounting policy stated in note 2(h) and has been charged to the capital reserve. | |||||||||
| The Company received £9,722,000 (2021 - £12,641,000) from investments sold in the period. The book cost of these investments when they were purchased was £6,828,000 (2021 - £14,674,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments. | |||||||||
| During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within losses on investments in the Statement of Comprehensive Income. The total costs on purchases of investments in the year was £59,000 (2021 - £42,000). The total costs on sales of investments in the year was £6,000 (2021 - £5,000). The above transaction costs are calculated in line with the AIC SORP. The transaction costs in the Company's Key Information Document are calculated on a different basis and in line with the PRIIPs regulations. | |||||||||
| At 31 March 2022 the Company held the following investments comprising more than 3% of the class of share capital held: | |||||||||
| Class | |||||||||
| Country of | Number of | Class of | held | ||||||
| Company | Incorporation | shares held | shares held | % | |||||
| abrdn Smaller Companies Income Trust plc | Scotland | 3,013,726 | Ordinary | 13.6 | |||||
| Ecclesiastical Insurance Office | England | 4,240,000 | 8 5/8% Cum Pref | 4.0 | |||||
| Royal & Sun Alliance | England | 4,350,000 | 7 3/8% Cum Pref | 3.5 | |||||
| General Accident | Scotland | 3,548,000 | 7.875% Cum Pref | 3.2 | |||||
| 12. | Other receivables | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Accrued income and prepayments | 1,173 | 988 | |
| 1,173 | 988 | ||
| None of the above amounts are overdue. |
| 13. | Current liabilities | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Short-term bank loans | 19,000 | 9,000 | |
| Amount due to brokers | 5 | - | |
| Other creditors | 257 | 331 | |
| 19,262 | 9,331 | ||
| Included above are the following amounts owed to ASFML for management and saving scheme services and for the promotion of the Company. | |||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| Other creditors | 159 | 225 | |
| 2022 | 2021 | ||
| Non-current liabilities | £'000 | £'000 | |
| Long-term bank loan | - | 10,000 | |
| Loan arrangement fees | - | (1) | |
| - | 9,999 | ||
| Throughout the year, the Company had an agreement with Scotiabank Europe PLC to provide a loan facility until 20 September 2022 for up to £20,000,000. A £10,000,000 fixed rate loan was drawn down on 20 September 2019 at a rate of 1.706%. This rate was fixed until maturity on 20 September 2022 and this loan moved from being long-term to short-term during the year. In addition, at the year end £9,000,000 had been drawn down at an all-in interest rate of 1.378%, maturing on 14 April 2022. At the date of signing this Report the amount drawn down was unchanged at £9,000,000 with an all-in interest rate of 2.3407%, maturing on 1 June 2022. | |||
| The terms of the Scotiabank Europe PLC facility contained covenants that gross borrowings may not exceed one-third of adjusted portfolio value and that adjusted portfolio value may not be less than £37 million. The Company met these covenants during the year and following the year end. | |||
| The arrangement expenses incurred on the drawdown of the loan were amortised over the term of the loan. | |||
| Since the year end, the Company has renewed the loan facility ahead of its expiry date on 20 September 2022 and entered into a new £20 million loan facility with The Royal Bank of Scotland International Limited, London Branch, on 3 May 2022. £10 million of the new loan facility has been drawn down and fixed at an all-in interest rate of 3.903%. £9 million of the facility has been drawn down on a short-term basis and can be repaid without incurring any financial penalties. The proceeds of the new loan were used to repay and cancel in full the Company's previous loan facilities. The Company's total borrowings are therefore unchanged following the re-financing. The new loan facility matures on 30 April 2027.
| |||
| 14. | Called up share capital | ||||
| 2022 | 2021 | ||||
| Number | £'000 | Number | £'000 | ||
| Authorised | |||||
| Ordinary shares of 50 pence each | 39,800,000 | 19,900 | 39,800,000 | 19,900 | |
| 3.5% Cumulative Preference shares of £1 each | 100,000 | 100 | 100,000 | 100 | |
| 20,000 | 20,000 | ||||
| Allotted, called up and fully paid Ordinary shares of 50 pence each: | |||||
| Balance brought forward | 30,794,580 | 15,397 | 30,769,580 | 15,385 | |
| Ordinary shares issued | 25,000 | 13 | 25,000 | 12 | |
| Balance carried forward | 30,819,580 | 15,410 | 30,794,580 | 15,397 | |
| Allotted, called up and fully paid 3.5% Cumulative Preference shares of £1 each: | |||||
| Balance brought forward and carried forward | 50,000 | 50 | 50,000 | 50 | |
| 15,460 | 15,447 | ||||
| During the year the Company issued 25,000 (2021 - 25,000) Ordinary shares of 50p each for proceeds of £70,000 (2021 - £59,000). | |||||
| Each Ordinary and Cumulative Preference share carries one vote at general meetings of the Company. The Cumulative Preference shares are considered to be equity. They have no fixed redemption date, carry a right to receive a fixed rate of dividend and, on a winding up of the Company, to the payment of such fixed cumulative preferential dividends to the date of such winding up and to the repayment of the capital paid up on such shares in priority to any payment to the holders of the Ordinary shares. | |||||
| The Ordinary shares, excluding any treasury shares, carry a right to receive dividends and, on a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings. | |||||
| There are no restrictions on the transfer of Ordinary or Cumulative Preference shares in the Company other than certain restrictions which may from time to time be imposed by law. | |||||
| 15. | Capital reserve | ||
| 2022 | 2021 | ||
| £'000 | £'000 | ||
| At 31 March 2021 | 37,841 | 20,654 | |
| Net gains/(losses) on sales of investments during year | 2,894 | (2,033) | |
| Movement in fair value increases of investments | 2,154 | 19,546 | |
| Management fees | (212) | (190) | |
| Interest on bank loans | (135) | (132) | |
| Currency gains/(losses) | 3 | (5) | |
| Capital gains on traded options | - | 1 | |
| At 31 March 2022 | 42,545 | 37,841 | |
| The capital reserve includes gains of £15,319,000 (31 March 2021 - gains of £13,165,000), which relate to the revaluation of investments held at the reporting date. | |||
| 16. | Net asset value per Ordinary share | ||
| The net asset value per share and the net assets attributable to the Ordinary shareholders at the year end were as follows: | |||
| 2022 | 2021 | ||
| Net assets per Balance Sheet | £85,819,000 | £80,857,000 | |
| 3.5% Cumulative Preference shares of £1 each | £50,000 | £50,000 | |
| Attributable net assets | £85,769,000 | £80,807,000 | |
| Number of Ordinary shares in issue | 30,819,580 | 30,794,580 | |
| Net asset value per share | 278.29p | 262.41p | |
| 17. | Analysis of changes in financial liabilities during the year | |||||
| At | At | |||||
| 31 March | Currency | Cash | Other | 31 March | ||
| 2021 | differences | flows | movementsA | 2022 | ||
| Financing activities | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Debt due within one year | (9,000) | - | - | (10,000) | (19,000) | |
| Debt due after more than one year | (9,999) | - | - | 9,999 | - | |
| (18,999) | - | - | (1) | (19,000) | ||
| At | At | |||||
| 31 March | Currency | Cash | Other | 31 March | ||
| 2020 | differences | flows | movementsA | 2021 | ||
| Financing activities | £'000 | £'000 | £'000 | £'000 | £'000 | |
| Debt due within one year | (9,000) | - | - | - | (9,000) | |
| Debt due after more than one year | (9,998) | - | - | (1) | (9,999) | |
| (18,998) | - | - | (1) | (18,999) | ||
| a) | b) | c) | d) | e) | f) | g) |
| A The other movements column represents the fixed rate bank loan moving from long-term to short-term during the year and the amortisation of the loan arrangement fees. | ||||||
| 18. | Financial instruments | |||||
| Risk management. The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. | ||||||
| The Company may also, subject to Board approval, enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 3, the premium received and fair value changes in respect of options written in the year were £71,000 (2021 - £176,000). Positions closed during the year realised a loss of £107,000 (2021 - £212,000). The largest position in derivative contracts held during the year at any given time was £26,000 (2021 - £70,000). The Company had no open positions in derivative contracts at 31 March 2022 (2021 - nil). | ||||||
| The Board has delegated the risk management function in relation to financial instruments to Aberdeen Standard Fund Managers Limited ("ASFML") under the terms of its management agreement with ASFML (further details of which are included under note 4). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the Manager's approach to the management of each type of risk, are summarised below. Such approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors given their relatively low value. | ||||||
| Risk management framework. The directors of ASFML collectively assume responsibility for ASFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year. | ||||||
| ASFML is a fully integrated member of the abrdn Group (the "Group"), which provides a variety of services and support to ASFML in the conduct of its business activities, including in the oversight of the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to Aberdeen Asset Managers Limited, which is responsible for ensuring that the Company is managed within the terms of its investment guidelines and the limits set out in its pre-investment disclosures to investors (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the Company. | ||||||
| The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group's CEO and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment. | ||||||
| The Manager conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Group's CEO. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SHIELD"). | ||||||
| The Group's corporate governance structure is supported by several committees to assist the board of directors of abrdn, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference. | ||||||
| Risk management. The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and price risk), (ii) liquidity risk and (iii) credit risk. | ||||||
| (i) | Market risk. The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. | |||||
| Interest rate risk. Interest rate movements may affect: | ||||||
| - the fair value of the investments in convertibles and preference shares; | ||||||
| - the level of income receivable on cash deposits; and | ||||||
| - interest payable on the Company's variable rate borrowings. | ||||||
| Management of the risk. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. | ||||||
| The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving, and uncommitted facilities. The fixed rate facilities are used to finance opportunities at low rates and, the revolving and uncommitted facilities to provide flexibility in the short-term. Current bank covenants state that the gross borrowings will not exceed one-third of adjusted portfolio value. | ||||||
| The Board reviews the value of investments in preference shares on a regular basis. | ||||||
| Interest rate profile. The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares) at the Balance Sheet date was as follows: | ||||||
| Weighted | ||||||
| average | ||||||
| period | Weighted | |||||
| for which | average | |||||
| rate is | interest | Fixed | Floating | |||
| fixed | rate | rate | rate | |||
| As at 31 March 2022 | Years | % | £'000 | £'000 | ||
| Assets | ||||||
| UK preference shares | - | 8.50 | 24,716 | - | ||
| Cash and cash equivalents | - | 0.01 | - | 1,483 | ||
| Total assets | 24,716 | 1,483 | ||||
| Liabilities | ||||||
| Short-term bank loans | 0.27 | 1.55 | (19,000) | - | ||
| Long-term bank loans | - | - | - | - | ||
| Total liabilities | (19,000) | - | ||||
| Weighted | ||||||
| average | ||||||
| period | Weighted | |||||
| for which | average | |||||
| rate is | interest | Fixed | Floating | |||
| fixed | rate | rate | rate | |||
| As at 31 March 2021 | Years | % | £'000 | £'000 | ||
| Assets | ||||||
| UK preference shares | - | 8.48 | 25,487 | - | ||
| Cash and cash equivalents | - | 0.01 | - | 5,654 | ||
| Total assets | 25,487 | 5,654 | ||||
| Liabilities | ||||||
| Short-term bank loans | 0.05 | 0.93 | (9,000) | - | ||
| Long-term bank loans | 1.47 | 1.71 | (9,999) | - | ||
| Total liabilities | (18,999) | - | ||||
| The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. | ||||||
| The cash assets consist of cash deposits on call earning interest at prevailing market rates. | ||||||
| The UK preference shares assets have no maturity date. | ||||||
| Short-term debtors and creditors (with the exception of bank loans) have been excluded from the above tables. | ||||||
| Interest rate sensitivity. The sensitivity analyses below have been determined based on the exposure to interest rates for non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. | ||
| If interest rates had been 200 basis points higher or lower and all other variables were held constant, the Company's: | ||
| - profit before tax for the year ended 31 March 2022 would increase/decrease by £30,000 (2021 - £113,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end. | ||
| - the capital return would decrease/increase by £6,810,000 (2021 - increase/decrease by £3,288,000) using VaR ("Value at Risk") analysis based on 100 observations of monthly VaR computations of fixed interest portfolio positions at each year end. | ||
| Currency risk. A small proportion of the Company's investment portfolio is invested in overseas securities whose values are subject to fluctuation due to changes in exchange rates. | ||
| Management of the risk. The revenue account is subject to currency fluctuations arising on dividends received in foreign currencies and, indirectly, due to the impact of foreign exchange rates upon the profits of investee companies. The Company does not hedge this currency risk. The Company does not have any exposure to foreign currency liabilities. No currency sensitivity analysis has been prepared as the Company considers any impact to be immaterial to the financial statements. | ||
| Price risk. Price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. | ||
| Management of the risk. It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on recognised stock exchanges. | ||
| Price sensitivity. If market prices at the Balance Sheet date had been 20% higher or lower while all other variables remained constant, the profit before tax attributable to Ordinary shareholders for the year ended 31 March 2022 would have increased/decreased by £15,542,000 (2021 - increase/decrease of £13,612,000). This is based on the Company's portfolio of Ordinary shares held at each year end. |
| (ii) | Liquidity risk. This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. | ||||||
| Management of the risk. Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. | |||||||
| Short-term flexibility is achieved through the use of loan facilities, details of which can be found in note 13. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis. | |||||||
| The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise a revolving loan facility and a fixed term loan facility. The Board has imposed a maximum equity gearing of 35% which constrains the amount of gearing that can be invested in equities which, in normal market conditions, are more volatile than the preference shares within the portfolio. Details of borrowings at 31 March 2022 are shown in note 13. | |||||||
| Maturity profile. The maturity profile of the Company's financial liabilities at the Balance Sheet date was as follows: | |||||||
| Within | Within | More than | |||||
| 1 year | 1-5 years | 5 years | |||||
| At 31 March 2022 | £'000 | £'000 | £'000 | ||||
| Trade and other payables | (262) | - | - | ||||
| Short-term bank loans | (19,086) | - | - | ||||
| Long-term bank loans | - | - | - | ||||
| (19,348) | - | - | |||||
| Within | Within | More than | |||||
| 1 year | 1-5 years | 5 years | |||||
| At 31 March 2021 | £'000 | £'000 | £'000 | ||||
| Trade and other payables | (327) | - | - | ||||
| Short-term bank loans | (9,021) | - | - | ||||
| Long-term bank loans | (174) | (10,086) | - | ||||
| (9,522) | (10,086) | - | |||||
| (iii) | Credit risk. This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. | |||||
| Management of the risk. The risk is managed as follows: | ||||||
| - where the Investment Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; | ||||||
| - transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default; | ||||||
| - investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker; | ||||||
| - the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the Custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Group's Compliance carries out periodic reviews of the Custodian's operations and reports its findings to the abrdn Group's Risk Management Committee and to the Board of the Company. This review will also include checks on the maintenance and security of investments held; | ||||||
| - transactions involving derivatives and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Investment Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and | ||||||
| - cash is held only with reputable banks with high quality external credit enhancements. | ||||||
| It is the Investment Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties. | ||||||
| None of the Company's financial assets is secured by collateral or other credit enhancements. | ||||||
| Credit risk exposure. In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 March 2022 and 31 March 2021 was as follows: | ||||||
| 2022 | 2021 | |||||
| Balance | Maximum | Balance | Maximum | |||
| Sheet | exposure | Sheet | exposure | |||
| £'000 | £'000 | £'000 | £'000 | |||
| Non-current assets | ||||||
| Quoted preference shares at fair value through profit or loss | 24,716 | 24,716 | 25,487 | 25,487 | ||
| Current assets | ||||||
| Accrued income | 1,158 | 1,158 | 975 | 975 | ||
| Cash and cash equivalents | 1,483 | 1,483 | 5,654 | 5,654 | ||
| 27,357 | 27,357 | 32,116 | 32,116 | |||
| None of the Company's financial assets is past its due date. | ||||||
| Fair value of financial assets and liabilities. There were no long-term loans at the year end (2021 - fair value of £10,001,000 compared to an accounts value in the financial statements of £9,999,000) (note 13). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. The loan is considered to be classed as a Level 2 liability under IFRS 13. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. Traded options contracts are valued at fair value which have been determined with reference to quoted market values of the contracts. The contracts are tradeable on a recognised exchange. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity. | ||||||
| 19. | Fair value hierarchy | |||||||
| IFRS 13 'Financial Value Measurement' requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: | ||||||||
| Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; | ||||||||
| Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and | ||||||||
| Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). | ||||||||
| The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 March 2022 as follows: | ||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||
| Note | £'000 | £'000 | £'000 | £'000 | ||||
| Financial assets at fair value through profit or loss | ||||||||
| Quoted investments | a) | 102,425 | - | - | 102,425 | |||
| Net fair value | 102,425 | - | - | 102,425 | ||||
| Level 1 | Level 2 | Level 3 | Total | |||||
| As at 31 March 2021 | Note | £'000 | £'000 | £'000 | £'000 | |||
| Financial assets at fair value through profit or loss | ||||||||
| Quoted investments | a) | 93,545 | - | - | 93,545 | |||
| Net fair value | 93,545 | - | - | 93,545 | ||||
| a) | Quoted investments. The fair value of the Company's quoted investments has been determined by reference to their quoted bid prices at the reporting date. Quoted investments included in Fair Value Level 1 are actively traded on recognised stock exchanges. | |||||||
| 20. | Capital management policies and procedures |
| The Company's capital management objectives are: | |
| - to ensure that the Company will be able to continue as a going concern; and | |
| - to maximise the return to its equity shareholders through an appropriate balance of equity capital and debt. | |
| The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings. | |
| The Board monitors and reviews the broad structure of the Company's capital. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements. |
| 21. | Related party transactions |
| Directors' fees and interests. Fees payable during the year to the Directors and their interests in shares of the Company are disclosed within the Directors' Remuneration Report. | |
| Transactions with the Manager. The Company has an agreement with the abrdn Group for the provision of management, secretarial, accounting and administration services and for the carrying out of promotional activities in relation to the Company. Details of transactions during the year and balances outstanding at the year end are disclosed in notes 4 and 5. |
Alternative Performance Measures
| Alternative performance measures are numerical measures of the Company's current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company's applicable financial framework includes IAS and the AIC SORP. The Directors assess the Company's performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies. | |||
| Premium/(discount) to net asset value per Ordinary share | |||
| The difference between the share price and the net asset value per Ordinary share expressed as a percentage of the net asset value per Ordinary share. | |||
| 2022 | 2021 | ||
| Share price (p) | a | 279.00 | 248.00 |
| NAV per Ordinary share (p) | b | 278.29 | 262.41 |
| Premium/(discount) | (a-b)/a | 0.3% | (5.5%) |
| Dividend Cover | |||
| Dividend cover measures the revenue return per share divided by total dividends per share, expressed as a ratio. | |||
| 2022 | 2021 | ||
| Revenue return per share | a | 14.21p | 12.33p |
| Dividends per share | b | 13.80p | 13.20p |
| Dividend cover | a/b | 1.03x | 0.93x |
| Dividend Yield | |||
| The annual dividend divided by the share price, expressed as a percentage. | |||
| 2022 | 2021 | ||
| Annual dividend per Ordinary share (p) | a | 13.80p | 13.20p |
| Share price (p) | b | 279.00p | 248.00p |
| Dividend yield | a/b | 4.9% | 5.3% |
| Net Gearing | |||
| Net gearing measures total borrowings less cash and cash equivalents divided by shareholders' funds, expressed as a percentage. Under AIC reporting guidance, cash and cash equivalents includes net amounts due to and from brokers at the period end as well as cash and short-term deposits. | |||
| 2022 | 2021 | ||
| Borrowings (£'000) | a | 19,000 | 18,999 |
| Cash (£'000) | b | 1,483 | 5,654 |
| Amounts due to brokers (£'000) | c | 5 | - |
| Amounts due from brokers (£'000) | d | - | - |
| Shareholders' funds (£'000) | e | 85,819 | 80,857 |
| Net gearing | (a-b+c-d)/e | 20.4% | 16.5% |
| Ongoing Charges Ratio | |||
| The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses and expressed as a percentage of the average net asset values throughout the year. | |||
| 2022 | 2021 | ||
| Investment management fees (£'000) | 424 | 379 | |
| Administrative expenses (£'000) | 440 | 358 | |
| Less: non-recurring chargesA (£'000) | (17) | - | |
| Ongoing charges (£'000) | 847 | 737 | |
| Average net assets (£'000) | 86,114 | 73,999 | |
| Ongoing charges ratio (excluding look-through costs) | 0.98% | 1.00% | |
| Look-through costsB | 0.16% | 0.21% | |
| Ongoing charges ratio (including look-through costs) | 1.14% | 1.21% | |
| A Comprises promotional acitivity fees not expected to recur. | |||
| B Calculated in accordance with AIC guidance issued in October 2020 to include the Company's share of costs of holdings in investment companies on a look-through basis. | |||
| The ongoing charges ratio provided in the Company's Key Information Document is calculated in line with the PRIIPs regulations which amongst other things, includes the cost of borrowings and transaction costs. | |||
| Total Return | |||
| NAV and share price total returns show how the NAV and share price has performed over a period of time in percentage terms, taking into account both capital returns and dividends paid to shareholders. Share price and NAV total returns are monitored against open-ended and closed-ended competitors, and the Reference Index, respectively. | |||
| Share | |||
| Year ended 31 March 2022 | NAV | Price | |
| Opening at 1 April 2021 | a | 262.41p | 248.00p |
| Closing at 31 March 2022 | b | 278.29p | 279.00p |
| Price movements | c=(b/a)-1 | 6.1% | 12.5% |
| Dividend reinvestmentA | d | 5.3% | 5.9% |
| Total return | c+d | +11.4% | +18.4% |
| Share | |||
| Year ended 31 March 2021 | NAV | Price | |
| Opening at 1 April 2020 | a | 207.39p | 200.50p |
| Closing at 31 March 2021 | b | 262.41p | 248.00p |
| Price movements | c=(b/a)-1 | 26.5% | 23.7% |
| Dividend reinvestmentA | d | 7.5% | 7.5% |
| Total return | c+d | +34.0% | +31.2% |
| A NAV total return involves investing the net dividend in the NAV of the Company with debt at fair value on the date on which that dividend goes ex-dividend. Share price total return involves reinvesting the net dividend in the share price of the Company on the date on which that dividend goes ex-dividend. | |||
Additional Notes to Annual Financial Report
The Annual General Meeting will be held at the offices of abrdn plc, Bow Bells House, 1 Bread Street, London EC4M 9HH on Wednesday 6 July 2022 at 12 noon.
The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 March 2022 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2021 and 2022 statutory accounts received unqualified reports from the Company's auditor and did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the reports, and did not contain a statement under S.498 of the Companies Act 2006. The financial information for 2021 is derived from the statutory accounts for 220 which have been delivered to the Registrar of Companies. The 2022 accounts will be filed with the Registrar of Companies in due course.
The Annual Report and Accounts will be posted to shareholders and copies will be available from the registered office of the Manager and on the Company's website, www.shiresincome.co.uk.*
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
By order of the Board
Aberdeen Asset Management PLC
Company Secretary
25 May2022
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