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LOWLAND INVESTMENT COMPANY PLC

ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2022

This announcement contains regulated information.

INVESTMENT OBJECTIVE

The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term, by investing in a broad spread of predominantly UK Companies. The Company measures its performance against the FTSE All-Share Index Total Return.

INVESTMENT POLICY

Asset Allocation

The Company will invest in a combination of large, medium and smaller companies listed in the UK.  We are not constrained by the weightings of any index; we focus instead on controlling absolute risk by diversifying on the basis of underlying company characteristics such as size, industry, economic sensitivity, clients and management.  In normal circumstances up to half the portfolio will be invested in FTSE 100 companies; the remainder will be divided between small and medium-sized companies.  On occasions the Manager will buy shares listed overseas. The Manager may also invest a maximum of 15% in other listed trusts.

Dividend

The Company aims to provide shareholders with better-than-average dividend growth.

Gearing

The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, and therefore the Company will usually be geared.  At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.

Key Data as at 30 September 2022

·      Net Asset Value ('NAV') Total Return¹ of -14.8%

·      Benchmark Total Return² of -4.0%

·      Dividend growth of 1.2%

·      Dividend for the Year³ of 6.10p

Comparative numbers for 2021 have been restated to reflect the ten for one share split which took place on 7 February 2022.

¹   NAV per share total return (including dividends reinvested) with debt at fair value

²   FTSE All-Share Index (including dividends reinvested)

³   Includes the final dividend of 1.525p per ordinary share for the year ended 30 September 2022 that will be put to shareholders for approval at the Annual General Meeting on Wednesday 25 January 2023

⁴   NAV per share for both figures is before deduction of the third interim dividend paid in October of each year

⁵   Mid-market closing price

⁶   Based on dividends paid and payable in respect of the financial year and the share price at the year end

⁷   Calculated using year end fair value NAVs including current year revenue

Sources: Morningstar Direct, Janus Henderson, Refinitiv Datastream

Historical Performance

¹ Comparative numbers for 2012 to 2021 have been restated to reflect the ten for one share split which took place on 7 February 2022.

² Includes the final dividend of 1.525p per ordinary share for the year ended 30 September 2022 that will be put to shareholders for approval at the Annual General Meeting on Wednesday 25 January 2023

CHAIRMAN'S STATEMENT

Performance

Progress on Lowland's twin objectives of capital and income growth contrasted markedly in the year ended 30 September. The highlight of Lowland's financial performance is unquestionably the recovery in earnings and with it the return to payment of a fully covered dividend. Your Company has maintained a progressive dividend policy since its inception more than 50 years ago. Since 2013 the policy has been progressive on a quarterly basis, meaning that each quarterly dividend has been equal to, or greater than, the dividend declared for the previous corresponding quarter.

Earnings per share increased by 43% to 6.10p, and, assuming shareholder approval of the final dividend, dividends paid will increase very modestly from 6.025p to 6.10p. Dividend yield amounts to a historically very high 5.8%. There is satisfaction to be had that the dividend policy survived Brexit, COVID and, so far at least, war in the Ukraine. We feel that the income side of the Company's objective has been satisfactorily served.

The other half of our objective, capital growth, has been contrastingly disappointing. While capital growth over the very long term has been good, in the last ten years, our Net Asset Value ('NAV') has underperformed the benchmark, being the FTSE All-Share Index. In the year just ended our NAV declined by 14.8%, compared with a decline of 4.0% in the benchmark.

Your Board is of the view that it is generally paramount to stick to an investment approach and it is almost inevitable, in the prevailing markets, that a determinedly multi-cap trust should under-perform an index with a pronounced large cap bias. Nevertheless, when faced with a prolonged period of disappointing performance, our approach has been firstly to examine whether changes in the world have rendered our investment philosophy obsolete. The second examination is to question why this approach has resulted in underperformance, and the final step is to look at whether execution of the policy has been poor and has exacerbated the fact that policy has faced major headwinds.

The Fund Managers explain why, over the long term, they believe opportunities at the lower end of the market cap spectrum are superior, and these are well rehearsed by commentators in the investment community. The Fund Managers and your Board are of the view that there is unrecognised value in the mid- and small-cap areas of the UK market. We therefore conclude that investing on a multi-cap, mildly contrarian basis, with a UK bias, is not an obsolete approach.

Lowland's investment policy stipulates that in normal circumstances, up to half the portfolio will be invested in FTSE 100 companies. Generally, exposure to large companies has been materially below 50%, with about a third being invested in this area five years ago. In anticipation of the rough waters smaller companies were likely to face, exposure to the larger end of the market has been increased over the last few years and this increase has lessened the underperformance. Nevertheless, the multi-cap approach is the predominant reason for our underperformance against the FTSE All-Share benchmark.

At the end of the year under review Lowland had 47.8% of NAV invested in FTSE 100 constituent companies, compared with 83.3% in the index. Investment in the next layer down, FTSE 250 companies, was approximately in line with the index at 15.9%. Inasmuch as Lowland is underweight the higher end of the market, so it is overweight the lower end, with FTSE SmallCap and AIM companies comprising 28.9% compared with an immaterial 2.7% in the index. This is the territory which has historically given Lowland significant outperformance.

There are a host of factors which have combined to render this part of the UK market out of favour. That it is out of favour is clearly demonstrated by the historic PE of 8.7 times on the aggregate portfolio, compared with a historic average of 12.7 times. Reasons for this include:

-     The revenue of companies of this size is far more weighted to the UK than in the case of larger companies, as demonstrated by the 51% domestic sales exposure for the Lowland portfolio against 23% for the FTSE All-Share.

-     The UK market as a whole is trading at a significant discount to other developed equity markets (for example, UK equities were trading at a near 40% discount to the MSCI World Index). The UK's near pariah status has pertained since before Brexit, and has been confirmed by a succession of 'events', the most recent being what can fairly be characterised as political chaos.

-     The best performers on the UK market have been broadly among the twenty largest companies, often in commodities businesses which have benefitted from the consequences of Putin's war.

-     In times of nervousness smaller companies are often perceived to be inherently risky and sold off indiscriminately.

The Board monitors Lowland's performance against that of a composite index, being 50% FTSE All-Share/50% Numis Smaller Companies ex Investment Trusts, which is more representative of the universe in which we invest. This index declined by 16.2% during the period, Lowland outperforming it by 1.4%, representing the effect of our overweight position in AIM constituent companies.

Share split

Following approval at the AGM, our shares underwent a ten for one share split. We hope that investors will find this more convenient, particularly those who invest relatively small amounts on a regular basis.

Dividends

A final dividend of 1.525p is proposed. Assuming this is approved, total dividends for the year will amount to 6.10p compared with last year's 6.025p, all numbers adjusted for the share split.

Gearing

The ability to gear the portfolio is a key advantage of an investment trust. The Board is cautious in moving levels of gearing, being of the view that timing major movements is difficult to get right. Lowland has a mixture of medium-term facilities - up to £40m - and long-term notes, amounting to £30m at a rate of 3.15% maturing in 2037. We believe this balance will serve us well over the long term.

At the year end net gearing amounted to £38.9m (12.5%) compared with £54.9m (13.8%) at the start of the year. Gearing levels were fairly steady during the year.

Ongoing charge

Ongoing Charges amounted to 0.6% which is in line with last year and which we feel to be competitive.

Discount

The Company's shares have traded at a discount of between 7.4% and 13%, ending the year at 11.5%. The policy with regard to discount is set out on page 33 of the annual report.

The Board

As previously notified to you, Karl Sternberg resigned on 8 December 2021. There were no other changes to the Board during the year.  We intend to begin the process of recruiting a new member in the next year.  Our policy on board tenure and diversity is set out in the annual report.

Contact

I am always keen to hear from shareholders. Please contact me with comments or questions on ITSecretariat@janushenderson.com.

Annual General Meeting ('AGM')

The AGM will be held at the Janus Henderson office on 25 January 2023. Full details of the business to be conducted at the meeting are set out in the Notice accompanying this report. Laura Foll will be on maternity leave, so James Henderson will be making the usual presentation on his own. The Board and Fund Managers welcome the opportunity to hear from shareholders each year and we encourage as many as possible to attend.

Outlook

Three years ago, on the eve of Covid, we drew shareholders' attention to the fact that our shares had only offered a dividend yield of 4.6% once before, and that had been followed by a significant capital uplift. COVID clearly had its say. Absent something comparable, or another unpredictable catastrophe, the same logic holds at least as true, with our shares on a 5.8% yield.

Despite the UK and other developed economies being blighted by recession and high inflation, we see value in the areas in which we are invested. Investee companies do not generally see downturns in their prospects which would justify their low valuations. While some companies will be hit by unpleasant surprises, by and large we believe that earnings and dividend prospects are not properly priced into the market. It is therefore reasonable, in our view, to look to a recovery in UK valuations and a return to dividend growth. As to dividends, we have successfully maintained the quarterly progressive dividend policy. The challenge now will be to generate dividend growth that mitigates, at least to some extent, the corrosive effect of high inflation.

We are pleased to report that since financial year end, the Company's NAV and share price have recovered somewhat, rising 10.5% and 12.4% respectively. Over the same time period the FTSE All-Share Index rose 9.0%. Medium-sized companies have led this recovery, with the FTSE 250 gaining 10.3% compared to a rise in the FTSE 100 of 8.9%. This modest outperformance of medium-sized companies is yet to filter down to smaller companies, with the FTSE AIM All-Share index up 3.9% and FTSE SmallCap up 5.6%. Smaller company share prices often react with a lag. We are encouraged to see signs of improving sentiment in the mid-cap area, and hopeful that this will permeate down to small-caps. 

Robert Robertson

Chairman

12 December 2022

FUND MANAGER'S REPORT

Background

It has been a very difficult year for Lowland with the Company underperforming the benchmark and falling in absolute terms, as shown in the table below.

This is the result of the Company's strategic long-term position, namely a bias to higher yielding shares and smaller companies. This bias gives the Company a preference for UK based businesses and it is these that have seen their value fall more than companies operating overseas. The reason for this must be that investors believe that many UK based companies will perform relatively poorly in the coming years. The selling of UK companies by investors has been pronounced during the year, as can be seen in the chart below. This follows several years of outflows since Brexit, leaving investor weightings in the area low versus where they have been historically.

Link for chart - http://www.rns-pdf.londonstockexchange.com/rns/4429J_1-2022-12-12.pdf

The reasons for the concerns about the earnings outlook for UK companies include the issues over Brexit, the supply disruptions surrounding COVID and the fallout from the war in Ukraine. These general concerns became mixed in with a cost-of-living crisis and political turmoil which called into question the government's economic competence. However, through all this, many of the companies held in the portfolio were doing what they do and doing it well. This is to supply goods and services of a high standard for which they are rewarded through obtaining reasonable operating margins. This can be evidenced by strong cash flows and dividends. The result of this is that Lowland's earnings have recovered and now cover the modestly growing dividend.

Performance Attribution

Against a backdrop of slowing economic growth and rising commodity prices, the best performing sectors in the FTSE All-Share were those with earnings positively exposed to higher commodity prices (energy and basic materials) or sectors less exposed to the broader economic cycle (such as healthcare, utilities and consumer staples). In contrast the worst performing sectors included consumer discretionary, where stocks such as retailers fell materially as a result of pressure on household real disposable income. The industrials sector was also a poor performer as a result of concerns that input costs were rising at a time when the order backdrop may weaken (although on the latter concern there is currently little evidence). For Lowland, there was a clear trend of cyclical sectors detracting from relative performance. The largest detractor at the sector level from relative performance was industrials, followed by financials and consumer discretionary.

This sector backdrop had a marked impact on what size of company performed well. The FTSE 100 has a significantly higher weight in natural resources and defensive sectors than the FTSE 250 and below. This meant that the FTSE 100 generated a modest positive total return during the year while small and medium-sized company share prices fell substantially (see the final column of the table below).

Lowland at the financial year end held a near 50% weight in the FTSE 100. While this is higher than its historic average weighting of approximately 1/3, this remained significantly below the benchmark weight in the FTSE 100 of over 80% (see the first and third columns of the table below for weight comparisons). The Company's higher weighting in small and medium-sized companies was of severe detriment to the Company's relative performance during the year. On our estimates the size allocation of the portfolio drove the majority of the Company's underperformance relative to the benchmark, and within this it was specifically the underweight position in the FTSE 100 and overweight on AIM that were the among main drivers of relative underperformance.

From the table below it is worth noting that while the Company's holdings in FTSE 100 companies performed roughly in line with that index (comparing the second and fourth columns of the table below), and encouragingly the Company's holdings within the AIM index outperformed, within the FTSE 250 and SmallCap indices the Company's holdings underperformed. Examining in more detail why this is the case, a number of the Company's most cyclical holdings fall within the 250 and SmallCap indices. Industrial holdings such as Morgan Advanced Materials, Hill & Smith and IMI, for example, sit within the 250 index and were underperformers during the year. Similarly, a number of the Company's financial and consumer discretionary holdings also sit within these indices (for example IP Group and Reach). We go into more details of the stock-specific drivers of performance below.

Weights for Lowland and FTSE All-Share shown as at financial year end. Note the weights for Lowland do not add up to 100 as there is a small % of the portfolio held overseas and in the FTSE Fledgling Index.

Lowland has always been deliberately multi-cap in its approach, investing across all sizes of UK companies and as per its investment objective in 'normal circumstances' up to half the portfolio will be invested in FTSE 100 companies. The reason for this breadth in its investment universe is twofold. Firstly it brings exposure to faster growing smaller companies at an earlier stage of their lifecycle, and therefore with the potential for a longer pathway of earnings growth ahead of them. Secondly it diversifies the Company's source of income beyond the large FTSE 100 dividend payers. This approach has worked well for the Company over the very long term, however we must acknowledge that over the last five years the Company's performance has (on average) been disappointing. For the purposes of clarity we have kept the discussion in this section on the Company's one year performance - we go into the drivers of longer-term performance in the next section below.

At the stock level the impact of the concentration within the benchmark can be clearly seen, with a number of the largest detractors from relative performance being underweights in areas such as natural resources. Shell, for example, which was the Company's largest holding at year end and the largest contributor to absolute performance, was (despite this) the second largest detractor from relative performance (see second table below) as on average over the year it made up 5.6% of the benchmark compared to only 2.9% for Lowland. This demonstrates the difficulties in managing a multi-cap portfolio relative to a concentrated benchmark. If the circumstances are such (as they were this financial year) that the largest benchmark constituents perform very well, it is challenging for a broader, multi-cap fund to hold weights level with the index. This can act as a material detractor from relative returns.

While the different size allocation of the portfolio in comparison to the benchmark was the key determinant of relative performance this year, we have included below a brief summary of the main contributors and detractors from performance at the stock level.

The top ten contributors to relative returns were:

In examining these best performers there are a number of themes that can be drawn out:

·      Rising energy prices - the rise in the price of natural gas and subsequent rise in UK power prices drove earnings upgrades in Serica Energy and Centrica.

·      Rising interest rates - global bank Standard Chartered performed well on the expectation that a rising interest rate environment will be positive for future lending margins.

·      Returns to shareholders - Insurers FBD and Aviva performed well following material distributions to shareholders. In FBD's case they returned to paying ordinary dividends following a resolution to their COVID-19 business interruption claims, while Aviva returned one-off proceeds from business sales.

·      Takeover activity - Euromoney Institutional Investor received a takeover approach from private equity. This has been a recurring theme in recent years given the valuation discount on the UK equity market relative to overseas.

The largest ten detractors from relative return were:

Examining each of these largest detractors:

·      Studio Retail was written down to zero in very disappointing circumstances. We discussed the reasons within the half year report, however to summarise, the company incurred supply chain disruption, which led to a working capital outflow and the company reaching the limits of its lending facilities.

·      Shell and Glencore saw substantial earnings upgrades as a result of higher commodity prices.

·      British American Tobacco and AstraZeneca rose due to their defensive qualities at a time of market uncertainty.

·      Reach (formerly Trinity Mirror) fell materially from its highs due to rising costs of print as well as pressure on digital advertising yields following the Russia/Ukraine war.

·      Ilika fell following lower than expected demand from industrial customers for its next generation battery technology. There was also a broader de-rating in the market of early stage, loss making businesses, which led to the share price fall in IP Group (which saw the share price of its key portfolio holding, Oxford Nanopore, fall substantially).

·      Headlam Group (a flooring distributor) fell due to concerns that pressure on household real disposable income would impact people's willingness and ability to spend on new flooring.

·      Morgan Advanced Materials (a specialist materials company serving end markets such as industrial, healthcare and semiconductors) fell due to concerns surrounding a slowdown in the global economy.

Addressing longer-term performance

Lowland has always had a multi-cap approach to seeking out capital and income opportunities in the UK, and over the very long term this approach has worked well for our shareholders - the 25 year NAV CAGR is 7.9% relative to a FTSE All-Share CAGR of 5.2%. This structural overweight in small and medium-sized companies brings with it an overweight to UK sales and earnings, as small and medium- sized companies are, on average, more exposed to their home market. This can be seen in the revenue breakdown of Lowland where, as at the year end, approximately 51% of portfolio sales were derived in the UK compared to only 23% for the benchmark. 

This overweight position of Lowland in the UK has been challenging for relative performance at a time when domestic businesses have materially de-rated relative to international earners. As seen from the chart below, in the approximately 15 years leading up to Brexit, domestic and international earners performed roughly in line. In the six years since Brexit, however, the difference in relative performance has been over 50%, with international earners (seen in green below) materially outperforming.

Link for chart - http://www.rns-pdf.londonstockexchange.com/rns/4429J_1-2022-12-12.pdf

This de-rating of domestic earners has led to many market leading, well managed businesses with conservative balance sheets trading on material valuation discounts to their history. This is visible at the portfolio level, where the table below shows that the portfolio is trading on an approximately 30% valuation discount to its long-term average.

Source: Factset.  Weighted harmonic average.

Portfolio Activity

Returning our discussion to the current financial year, new purchases and additions focused predominantly on domestically exposed smaller companies.

A new position, for example, was established in UK pork and poultry producer Cranswick. Cranswick already has a dominant position in the UK pork market and has, in recent years, successfully moved into chicken with a state-of-the-art facility in Eye in Suffolk. The group has significant ambitions for further expansion in chicken and this provides the potential for a long pathway of future sales and earnings growth. In our view this is not reflected in its valuation (see table below). Other new positions established during the year included building materials company Marshalls, which was first purchased in August after the shares had approximately halved this calendar year. Marshalls supply predominantly paving stones and roof tiles into the repair and maintenance market, new housing and infrastructure projects. The shares have fallen on the view that repair and maintenance spend will decline due to broader pressures on consumer spending. There is already some evidence of this with the company having to move earnings forecasts lower for the current financial year. It is our view, however, that infrastructure spending will prove more resilient and that the current share price already reflects significant weakness in consumer spending.

We also continued to add to existing positions including textile rental company Johnson Service Group, baked goods producer Finsbury Food and retailer Kingfisher. In order to demonstrate the scale of valuation opportunity we are seeing, the below table illustrates where valuations currently stand relative to history for these purchases.

Source: Refinitiv Datastream, as at 30 September 2022.

These additions were funded through full sales of positions including housebuilder Bellway (sold in January on concerns that interest rate rises may pressure already stretched house valuations relative to average earnings), energy supplier Centrica (sold in September following good relative performance), Euromoney Institutional Investor (sold following the private equity takeover approach) and information services and analytics provider Relx (sold in May on valuation grounds following good relative performance).

Dividends

2022 saw a significant recovery in investment income, with the Company generating 6.10p in revenue earnings per share compared to 4.27p the previous year. It is encouraging to note that the Company has therefore returned to covering its dividend (which totalled 6.10p for the financial year) following two years of using historic reserves.

Among the key drivers of dividend growth in 2022 was the financial sector and in particular the domestic banks, all of which more than doubled their final dividends year on year. There was also a sizable special dividend received from Natwest, which returned a portion of their excess capital to shareholders.

A further driver of the dividend recovery was the return of some companies to the dividend list following the pandemic. We mentioned in last year's annual report that 17% of the portfolio did not pay a dividend in the 2021 financial year. The equivalent number for the current financial year was only 5% of the portfolio, with many previous zero dividend payers (such as BT, FBD, Irish Continental and Finsbury Food) returning to payments.

As we look ahead to the next financial year, while the earnings outlook has a higher than usual degree of uncertainty there are a number of factors that make us more optimistic when forecasting the path for investment income. For example the dividend payout ratio of the portfolio is currently 40%, which allows scope for companies to flex payout ratios upwards were earnings to decline. The average indebtedness of companies in the portfolio is also modest (the average ND/EBITDA was 1.8x at year end), meaning in our view the need for companies to reduce debt is not likely to force many companies to reduce or suspend dividends. Both of these factors (a low payout ratio and modest net debt) have come about because the current economic downturn has come shortly after COVID-19, when many companies reduced dividends to zero and raised equity. This meant balance sheets had in many cases been de-risked and dividend payout ratios had not yet recovered to their long-run average.

ESG

Our approach to environmental, social and governance (ESG) matters is laid out in more detail in the annual report. We hold the view that seeking better to understand how companies are managing material ESG factors and engaging with them is a route more conducive to long-term progress than sector exclusions. It continues to be our view that companies with good processes for managing ESG risk factors outperform. We have seen stock-specific evidence of this in the current year with the largest stock detractor, Studio Retail. Studio would not have flagged on quantitative metrics for governance issues (it was broadly run in-line with good governance practices). In hindsight, however, there had been recent senior management change and the Board did not have the sufficient depth of experience or relationship with institutional shareholders to arrange an emergency rights issue within the necessarily short time horizon. The lesson for us has been the importance of Board composition, most importantly the breadth of experience and a mixture of short and long tenures (so as to maintain both independence and in-depth knowledge of the company).

Outlook

Valuations of companies are guided by the cash flows they are expected to achieve over time. When expectations change, share prices will alter. The movement in the share price can then feed on itself - when a stock price falls, sentiment towards the company can deteriorate leading to a downward spiral of pessimism. This may be happening in the UK with the macroeconomic concerns drowning out an appraisal of individual companies' prospects, leading investors to question the strengths of even the best. The companies held in Lowland's portfolio are not a proxy for the UK economy but individual businesses that have management teams that will respond to the circumstances they are in. Downturns will create opportunities for the better ones to position themselves to prosper in the next upturn.

During this phase of despondency about the UK it is important to remember it is a place to find innovation, world leading companies and strong management teams. The portfolio holdings tap into these strengths. It is the many sound companies that operate in the UK that are the fundamental block from which the economy is built. It is their strengths that will be behind a recovery in the fortunes of the overall economy.

The companies with real strengths can be found across many different sectors, therefore the Company holds a relatively long and broadly based list of stocks. The diversification this brings in uncertain times is important for long term capital preservation and growth. Companies are dealing with changes in consumer behaviour and advances in technology. Some will not keep pace but the belief is many will prosper and grow. We believe there will be substantial share price appreciation when these strengths come to be more recognised.

James Henderson and Laura Foll

Fund Managers

12 December 2022

Twenty Largest Holdings as at 30 September 2022

The stocks in the portfolio are a diverse mix of businesses operating in a wide range of end markets.

At 30 September 2022 these investments totalled £143,937,000 or 40.9% of portfolio.

* Not in the top twenty largest investments last year

MANAGING RISKS  

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks and uncertainties, including emerging risks, facing the Company including those that would threaten its business model, future performance, solvency, liquidity and reputation. The Board regularly considers the principal risks facing the Company and has drawn up a matrix of risks. The Board has put in place a schedule of investment limits and restrictions, appropriate to the Company's investment objective and policy, in order to mitigate these risks as far as practicable. The principal risks which have been identified and the steps taken by the Board to mitigate these are set out in the table below. The principal financial risks are detailed in note 14 to the financial statements.

At the half year stage, the Board completed a thorough review of the principal risks and uncertainties facing the Company. As a result of this, they were updated to include geopolitical risks, due to the Russian invasion of Ukraine which has increased the volatility in European markets.

Emerging risks

In addition to the principal risks facing the Company, the Board also regularly considers potential emerging risks, which are defined as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of the probability of them happening and the possible effects on the Company. Should an emerging risk become sufficiently clear, it may be moved to a principal risk.

VIABILITY STATEMENT

RELATED PARTY TRANSACTIONS

The Company is a long-term investor; the Board believes it is appropriate to assess the Company's viability over a five-year period in recognition of our long-term horizon and what we believe to be investors' horizons, taking account of the Company's current position and the potential impact of the principal and emerging risks and uncertainties as documented above in this Strategic Report.

The assessment has considered the impact of the likelihood of the principal and emerging risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board has taken into account the liquidity of the portfolio and the gearing in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan facilities and how a breach of the loan facility covenants could impact on the Company's liquidity, net asset value and share price.

The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

In coming to this conclusion, the Directors have considered the ongoing impact of the war in Ukraine and the COVID-19 pandemic, in particular the impact on income and the Company's ability to meet its investment objective. The Board does not believe that they will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding the short-term uncertainty they have caused in the markets.

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

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

• the Company's financial statements, which have been prepared in accordance with UK Accounting Standards and applicable law give a true and fair view of the assets, liabilities, financial position and return of the Company; and

• the Strategic Report, Report of the Directors and financial statements 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 it faces.

For and on behalf of the Board

Robert Robertson

Chairman

12 December 2022

INCOME STATEMENT

¹ Comparative figures for the year ended 30 September 2021 have been restated due to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no other comprehensive income other than those disclosed in the Income Statement. The net return is both the profit for the year and the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

¹ Comparative figures have been restated due to the sub-division of each ordinary share of 25p each into ten ordinary shares of 2.5p on 7 February 2022

¹ Comparative figures have been restated due to the sub-division of each ordinary share of 25p each into ten ordinary shares of 2.5p on 7 February 2022

STATEMENT OF FINANCIAL POSITION

¹ Prior year comparatives have been restated as explained further in note 1a)

² Comparative figures for the year ended 30 September 2021 have been restated to the sub-division of each ordinary share of 25p into ten ordinary shares of 2.5p each on 7 February 2022.

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS)

¹ The residual will be transferred to the revenue reserve (2021: transfer from revenue reserve £3,198,000 and from the capital reserve £1,513,000)

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) are incorporated into, or form part of, this announcement.