TIDMARR
RNS Number : 6528L
Aurora Investment Trust PLC
20 April 2018
AURORA INVESTMENT TRUST plc
ANNUAL FINANCIAL REPORT
Year ended 31 December 2017
STRATEGIC REPORT
OBJECTIVE
To provide shareholders with long term returns through capital
and income growth.
POLICY
Phoenix Asset Management Partners Limited (Phoenix) was
appointed Investment Manager on 28 January 2016. Phoenix currently
seeks to achieve the Objective by investing in a portfolio of UK
listed equities.
The portfolio will remain relatively concentrated. The exact
number of individual holdings will vary over time but typically the
portfolio will consist of 15 to 20 holdings.
The Board is seeking shareholder approval at the AGM to increase
the flexibility of the Company to invest outside the UK and in
unlisted securities.
BENCHMARK
Performance is benchmarked against the FTSE All-Share Index
(total return) representing the overall London market.
PERFORMANCE
Year to Period 1 March
2016 to
31 December 2017 31 December 2016
Aurora Performance
(total return) +18.5% +7.3%
Benchmark
(total return) +13.1% +19.1%
DIVID
The Directors recommend a final dividend of 2.75p per share, to
be paid on 19 June 2018 to shareholders on the register as at 27
April 2018.
No final dividend was paid in 2017, but an interim dividend of
2.0p per share in respect of the financial period ended on 31
December 2016 was paid on 10 April 2017.
ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at the
offices of Grant Thornton, 30 Finsbury Square, London EC2P 2YU on 6
June 2018 at 12.00 noon.
CHAIRMAN'S STATEMENT
Performance Review
- The performance for the year to end December 2017 was +18.5%,
out-performing the benchmark FTSE All Share Index by 5.4%.
- One of the key features of the Investment Management Agreement
with Phoenix is that they earn no management fees other than an
annual performance fee, equal to one third of NAV per share total
returns in excess of the total return of the FTSE All-Share Index.
This fee is subject to claw back and a high water mark and is
capped at 4% of NAV p.a. in the case of an absolute increase in NAV
per share; and 2% in the case of a decrease but with outperformance
compared with the FTSE All-Share.
- Despite Aurora's strong outperformance of the Index in 2017,
no performance fee was earned by Phoenix. The NAV had lagged the
Index in 2016 and, as the performance fee is calculated on a
cumulative basis, it can only be earned once the lag has been
caught-up. At the year-end, the "lag" had reduced to just under 5%,
after which a performance fee will be earned for subsequent
outperformance.
- The share price of Aurora traded at a premium to NAV for
substantially all of the period in question. The average premium
for the year was 1.5%, which was helpful in attracting new
investors and to increase the size of the Company through the
issuance of new shares. Accordingly our aim is for the shares to
continue to trade at a small premium to NAV and to grow the Company
further, as discussed below.
Two Years of Phoenix Management
- 2017 was the second full year of Phoenix management, which
began with their being appointed Investment Manager in January
2016. Aurora is managed under the same investment strategy as
Phoenix's long standing, open-ended fund, the Phoenix UK Fund.
Since its inception in 1998 that fund has delivered, net of fees,
annualised returns of 10% compared with 5.5% for the FTSE All-Share
Index.
- I thought it might be useful to add some observations on our
experience over the last few years of the investment management
process and practices of Phoenix. Three key words stand out in my
experience: patience, discipline and focus. There's a lot of talk
about patient capital but it seems to me that the root of long term
outperformance is the willingness to accept some periods of
underperformance followed by (hopefully more significant) periods
of outperformance based on core investment principles. The key
though are those investment principles that guide the stock
selection. Get them right, wait to find the right business at the
right price - as evidenced by the recent purchase of Dignity after
many years of patient research and monitoring - and hopefully
you'll reap a long-term reward.
Discipline I think goes with patience. It's about waiting to buy
the right stock but also it's about using thorough processes,
checklists and research gathering processes to find the right
stock. Phoenix build up the required knowledge by studying the
relevant industries and companies in detail - a learning process
which can take several years. When it comes to price, Phoenix are
disciplined in only paying up to half of what they believe the
business is worth.
The last word I mentioned was focus. In the case of Phoenix this
involves knowing some sectors really very well. That requires that
patience and discipline but it also requires a willingness to shut
out other ideas and stay focused on what you know - your circle of
competence. That means for instance some focus on consumer stocks
such as Sports Direct, where Phoenix have been patient and
successful - in terms of investment returns. Alternatively, it
could mean a focus on housebuilding companies or, indeed,
specialist hobby brands - a niche within the consumer space
arguably - which involves outfits such as Hornby or latterly
Stanley Gibbons.
There is though one side effect of what we think as the three
virtues of patience, discipline and focus - sometimes there aren't
many new portfolio additions. This means turnover can and has been
low.
The rarity of suitable investment candidates, combined with the
time-consuming nature of the investment process, inevitably results
in a concentrated portfolio, typically of a maximum of between 15
and 20 investments.
I would add a final parting observation. Patience, discipline
and focus can also be applied not only to the investment process
but also the way the Company is developed over time and marketed to
a wider audience. Phoenix are committed to growing the size of the
Company and have over the last few years attracted what we would
like to believe are high quality, patient investors from wealth
managers, family offices and university endowments. Within the
retail space this is echoed by the determination of the Company to
reach a wider private investor audience, a development we hope will
be accelerated with the appointment by Phoenix of Frostrow, as
covered later, to assist in marketing Aurora to a national
audience. Again, these all demonstrate a commitment to the long
term, to building the Company and creating real value for our
shareholders.
Investment Policy
- At this year's AGM, shareholders will be asked to vote on a
resolution to amend Aurora's Investment Policy. The Existing
Investment Policy limits the scope of investment to UK listed
equities and cash. The changes, which have been proposed by Phoenix
and carefully considered by the Aurora Board, will broaden the
scope to enable investment in companies listed outside the UK
(limited to 20% of assets at cost price) and unlisted securities
(limited to 10% of gross assets at cost price). From the Board's
discussions with Phoenix, it is clear that the proposed amendments
do not represent a shift in Phoenix's investment strategy and
objectives. Rather, they will enable Phoenix to implement more
effectively their well-established investment philosophy. The
ability to hold 10% of gross assets at cost price, in unlimited
securities is also necessary to participate in the Stanley Gibbons
investment, which Phoenix have recently undertaken. Phoenix have
assured the Board that they will be cautious in making use of the
expanded remit and the Board recommends that shareholders approve
the proposed changes.
Growth of the Company
Growing the Company remains a key objective of the Board. A new
prospectus was published during the year to enable the continued
issuance of new shares, both via small "tap-issues" and larger,
more structured "Placings". A total of 12,679,198 new shares were
issued in 2017, bringing the total number of shares issued during
the era of Phoenix management to 28,080,114. Consequently, the
market capitalisation of the Company, which had been GBP51.69m in
January 2017, finished the year at GBP88.34m.
After the year-end, in January 2018, Phoenix announced the
appointment of Frostrow Capital to assist achieving an increase in
the size of the Company by raising the profile of Aurora, with
potential investors across the UK. This appointment will be paid
for, at their suggestion, by Phoenix and therefore minimise the
cost to shareholders. Frostrow has an excellent reputation built on
the provision of similar services to a select number of other
investment trusts.
In last year's statement I mentioned our objective was to
increase the size of Aurora to GBP100m. At the time of writing, the
market cap has reached GBP92.63m and it seems appropriate to update
the objective. Having spoken with Phoenix, who have considered the
investment opportunities available to them, our new objective is
now to increase the size of Aurora to GBP200m over the next two to
three years. As well as finding sufficient opportunities to invest
new money, it is essential that the Company attracts new
shareholders with a long-term focus who understand and respect the
Phoenix investment strategy.
Dividend
The Board recommends a final dividend of 2.75 per share, which
if approved by shareholders at the AGM will be paid on 19 June
2018.
The Company has no fixed dividend policy, but it expects to
continue to pay an annual dividend, which will comprise
substantially all of the net revenues for the year.
AGM
A warm welcome is extended to shareholders to the AGM to be held
at 12 noon on 6 June 2018 at the offices of Grant Thornton, 30
Finsbury Square, London EC2P 2YU.
Lord Flight
Chairman
20 April 2018
INVESTMENT POLICY AND RESULTS
The Company adopted the Existing Investment Policy on 28 January
2016, with the appointment of Phoenix Asset Management Partners
("Phoenix") as the Company's new Investment Manager.
The Board has recently undertaken a review of its Existing
Investment Policy and in particular the lack of flexibility that
the Company has to make investments out with the UK and into
unlisted securities. Accordingly the Board is seeking shareholder
approval at the AGM to adopt the wording set out below under the
heading Revised Investment Policy as the Company's investment
objective and policy following the AGM.
EXISTING INVESTMENT POLICY
The Company's existing objective is to provide shareholders with
long-term returns through capital and income growth by investing in
a concentrated portfolio of UK listed equities.
The Company seeks to achieve its investment objective by
investing in a portfolio of UK listed equities. The portfolio will
be relatively concentrated. The exact number of individual holdings
will very over time but typically the portfolio will consist of 15
to 20 holdings. The Company may use derivatives and similar
instruments for the purpose of capital preservation. There are no
pre-defined maximum or minimum exposure levels for each individual
holding or sector, but these exposures re reported to, and
monitored by, the Board in order to ensure that adequate
diversification is achieved. The Company's policy is not to invest
more than 15% of its gross assets in any one investment.
While there is a comparable index for the purposes of measuring
performance over material periods, no attention is paid to the
composition of this index when constructing the portfolio and the
composition of the portfolio is likely to vary substantially from
that of the index. The Company may from time to time invest in
other UK listed investment companies, but the Company will not
invest more than 10% in aggregate of the total assets of the
Company in other listed closed-ended funds other than closed-ended
investment funds which themselves have published investment
policies to invest no more than 15 per cent of their total assets
in other listed closed-ended funds. The Company will not invest in
any other fund managed by the Company's investment manager.
The Company does not currently intend to use gearing. However,
if the Board did decide to utilise gearing the aggregate borrowings
of the Company would be restricted to 30 per cent of the aggregate
of the paid up nominal capital plus the capital and revenue
reserves.
Any material change to the investment policy of the Company will
only be made with the approval of the shareholders.
REVISED INVESTMENT POLICY
The Company's objective is to provide Shareholders with
long-term returns through capital and income growth.
The Company seeks to achieve its investment objective by
investing predominantly in a portfolio of UK listed companies. The
Company may from time to time also invest in companies listed
outside the UK and unlisted securities. The investment policy is
subject to the following restrictions, all of which are at the time
of investment:
-- The maximum permitted investment in companies listed outside
the UK at cost price is 20 per cent. of the Company's gross
assets.
-- The maximum permitted investment in unlisted securities at
cost price is 10 per cent. of the Company's gross assets.
-- There are no pre-defined maximum or minimum sector exposure
levels but these sector exposures are reported to and monitored by,
the Board in order to ensure that adequate diversification is
achieved.
-- The Company's policy is not to invest more than 15 per cent.
of its gross assets in any one underlying issuer.
-- The Company may from time to time invest in other UK listed
investment companies, but the Company will not invest more than ten
per cent. in aggregate of the gross assets of the Company in other
listed closed-ended investment funds.
-- The Company will not invest in any other fund managed by the Investment Manager.
While there is a comparable index for the purposes of measuring
performance over material periods, no attention is paid to the
composition of this index when constructing the portfolio and the
composition of the portfolio is likely to vary substantially from
that of the index. The portfolio will be relatively concentrated.
The exact number of individual holdings will vary over time but
typically the portfolio will consist of holdings in 15 to 20
companies. The Company may use derivatives and similar instruments
for the purpose of capital preservation.
The Company does not currently intend to use gearing. However,
if the Board did decide to utilise gearing the aggregate borrowings
of the Company would be restricted to 30 per cent. of the aggregate
of the paid up nominal capital plus the capital and revenue
reserves.
Any material change to the investment policy of the Company will
only be made with the approval of Shareholders at a general
meeting. In the event of a breach of the Company's investment
policy, the Directors will announce through a Regulatory
Information Service the actions which will be taken to rectify the
breach.
DIVID POLICY
The investment policy does not include any fixed dividend
policy. However, the Board will distribute substantially all of the
net revenue arising from the investment portfolio. Accordingly, the
Company is expected to continue to pay an annual dividend, but this
could be lower than the level of recent dividends and may vary each
year.
OBJECTIVES AND KEY PERFORMANCE INDICATORS (KPIs)
The Company's principal investment objective is to achieve
capital growth. The Company's success in attaining its objectives
is measured by reference to KPIs as follows:
a) To make an absolute total return for shareholders on a long-term basis.
b) The Company's Benchmark is the FTSE All-Share Index (total
return), against which the Net Asset Value (NAV) return is
compared. After achieving the goal of making absolute returns for
shareholders, the next aim is to provide a better return from the
portfolio than from the market as measured by the Benchmark.
c) The Company seeks to ensure that the operating expenses of
running the Company as a proportion of NAV (the Ongoing Charges
Ratio) are kept to the minimum possible.
PERFORMANCE
The Investment Manager is Phoenix Asset Management Partners
Limited, which is regulated by the FCA. The Chief Investment
Officer of Phoenix is Gary Channon. Phoenix reports in detail upon
the Company's activities in the IMR.
Under the Investment Management Agreement no regular management
fees are payable. A performance fee is payable to the Investment
Manager only if the benchmark is beaten.
Upon the change of Investment Manager, the benchmark became the
FTSE All-Share Index Total Return.
Performance is shown below. For the previous period performance
is shown from from 28 January 2016, when Phoenix became Investment
Manager, to 31 December 2016.
Year to Period from 28
January 2016 to
31 December 31 December 2016
2017
Aurora Performance
(total return) +18.5% +10.2%
Benchmark
(total return) +13.1% +20.5%
The Ongoing Charges ratio was as follows:
Year to 31 Period from 1 March
December 2017 2016 to 31 December
2016 (annualised)
Ongoing Charges
Ratio 0.54% 1.04%
ALTERNATIVE PERFORMANCE MEASURES ("APMs")
The disclosures of Performance above are considered to represent
the Company's APMs (which are measurements not defined in
Accounting Standards). Definitions of these APMs together with how
these measures have been calculated can be found in the
Glossary.
REVENUE RESULT AND DIVID
The Company's revenue profit after tax for the year amounted to
GBP1,306,307 (Period 1 March 2016 to 31 December 2016:
GBP636,037).
The directors recommend a final dividend of 2.75p per Ordinary
Share. If approved by the AGM this dividend will be paid on 19 June
2018 to shareholders on the register at 27 April 2018; the ordinary
shares will be marked ex-dividend on 26 April 2018. In accordance
with International Financial Reporting Standards this dividend is
not reflected in the financial statements for the period ended 31
December 2017.
In 2017 an interim dividend of 2.00p per ordinary share was
paid, absorbing GBP614,526.
FIVE YEAR SUMMARY
The following data are all expressed as pence per share. NAV
figures are all calculated at bid prices.
Year NAV Dividend Share price
in respect (mid market)
of year
p p p
Year ended 28
February 2014 191.78 3.80 166.00
Year ended 28
February 2015 171.37 3.85 147.50
Year ended 29
February 2016 162.30 1.00 158.00
Period to 31
December 2016 172.66 2.00 173.50
Year ended 31
December 2017 205.72 2.75 208.00
TOP HOLDINGS
AT 31 DECEMBER 2017
Date Weight By valuation Avg. Share Market Net Cash/
of first Cost Price Cap (Debt)
purchase per
share*
% GBP GBP GBP GBP GBP
Lloyds Banking
Group Dec-15 10.8 9,412,706 0.67 0.6781 48.8bn (9.5bn)
Tesco Dec-15 10.1 8,838,929 1.77 2.07 17.0bn (3.3bn)
Bellway Dec-15 10.0 8,705,834 25.12 24.76 4.4bn 16mil
Sports Direct Dec-15 8.6 7,527,936 3.51 3.77 2.0bn (472mil)
Glaxosmithkline Dec-15 8.2 7,106,656 14.03 13.18 65.2bn (14.8bn)
Randall
& Quilter Feb-16 7.1 6,226,636 1.22 7.16 167mil 60.4mil
Redrow Oct-16 6.6 5,729,663 5.07 6.545 2.4bn 73mil
(321
Vesuvius Dec-15 6.0 5,222,327 3.95 5.84 1.6bn mil)
Hornby July-16 5.5 4,786,556 0.29 0.27 35mil 4mil
Morrison
Supermarkets Dec-15 4.8 4,157,429 1.97 2.199 5.1bn (930mil)
JD Weatherspoon Jan-16 4.0 3,465,876 7.46 12.57 1.3bn (700mil)
Easyjet Feb-16 3.3 2,852,850 10.49 14.63 5.9bn 357mil
------ ------------
85.0 74,033,398
------ ------------
Other (<3%) 9.8 8,553,903
------ ------------
Total 94.8 82,587,301
------ ------------
Cash 5.2 4,506,798
------ ------------
Overall
Total 100.0 87,094,099
------ ------------
*Net cost including sales
The Company held over 3% of the issued share capital of the
following:
Randall & Quilter 3.81%
Hornby PLC 14.15%
PORTFOLIO ANALYSIS
AT 31 DECEMBER 2017
Percentage
of Portfolio
Retail 23.5
Construction 18.8
Financial 13.5
Industrials 11.9
Pharmaceuticals 8.2
Food & Beverage 6.3
Insurance 7.1
Leisure 5.5
Cash 5.2
100.0
--------------
ANALYSIS BY TYPE, MARKET AND CURRENCY
All investments are of Ordinary Shares, denominated in sterling.
All holdings carried at a value are in listed companies with the
exception of Hornby and Randall & Quilter, which are quoted on
AIM. The Company also has a registered holding in China Chaintek,
but this has been written down to a valuation of GBPNil.
STATEMENT FROM THE CIO OF THE INVESTMENT MANAGER
If 2016 was a year for sowing, as we did in a substantial way
after the Brexit vote, then 2017 was a year of reaping. The alchemy
that produced the strong performance for the year was an
attractively priced portfolio of businesses delivering strong
fundamental returns in their underlying businesses. Each of our 3
housebuilders was up around 50%, as was our new addition in 2016,
easyJet. Most of the portfolio performed strongly.
Rising prices and good news make it harder to find bargains and
so the year ended without us having made any new investments. The
cash position increased to 5.5% at year-end.
Phoenix acting through all its accounts acquired a controlling
position in Hornby plc during the year, that triggered a mandatory
bid and we followed that up with a capital raise. At the end of
those steps Phoenix, through all the accounts and funds it manages
has an aggregate interest in 75% of the company. The Aurora
Investment Trust for its part owns 14%.
We took this unusual move to enable the Company to adopt a
strategy that we think will lead to a successful revival of the
core business. What we have given up in terms of liquidity will be
gained in the value we believe comes from having some say in the
levers of value creation within a company. Some of these are
protective; we can prevent things that in the past have subtracted
value, like overpriced acquisitions, poor capital allocation and a
lack of frugality. On the positive side, it allows us to choose who
should manage the business and we did that. Lyndon Davies joined
Hornby in October 2017 as CEO, with an agreement to buy the
business he founded and built, Oxford Diecast. Lyndon has a great
track record as a successful entrepreneur who competed with Hornby.
He has a keen awareness of the Hornby's strengths, weaknesses and
potential; we couldn't be happier to have him on board.
Hornby is an example of us using all the means at our disposal
to make attractive investments for our clients whilst protecting
the downside risk. In the past this has taken many forms, not just
purchasing equity, and we expect to continue to approach
investments that way in the future. Post the year-end and ahead of
the publication of this report, Phoenix announced a deal to make an
investment in Stanley Gibbons, which, if it completes, we will tell
you about in next year's report. In structuring that transaction we
have sacrificed convention and appearances for downside risk
protection and ultimate returns.
As the UK heads towards Brexit we may see more turbulence in
markets and from our perspective, we welcome that because it is in
those conditions that short-term valuations on the stock market are
most likely to get out of kilter with long term intrinsic values
(i.e. what they are likely to be really worth to a long-term
investor). However, even in strong markets, individual businesses
come unstuck and have big share price falls. Occasionally one of
those will be in our candidate universe and we will get an
opportunity to act. This has happened in early 2018 with Dignity
plc.
A long-term focus on the future, an almost obsessional focus on
the competitive dynamics of business, observed first hand in the
field and a willingness to be patient for long periods of time,
(acting only occasionally, when values merit it) will, we believe,
continue to deliver attractive long-term returns for our investors.
Over 20 years we have developed a disciplined approach to
investment using a system and process that continues to learn from
its shortcomings. This reduces our error rate, limits losses when
errors are spotted and ultimately builds a portfolio that we
understand the value of, with a good measure of confidence. Today's
portfolio is priced at almost half of the intrinsic value we
estimate it contains and although that is not a guide over the
short-term, (which we characterise as less than 3 years), it has,
historically, been the best guide for our long-term
expectations.
Proposed change of investment policy
At this year's AGM we will be asking shareholders to vote on
proposed amendments to Aurora's Existing Investment Policy. The
major changes are mentioned in the Chairman's Statement and
outlined in more detail elsewhere.
A few years ago, shortly before his death, I had the very good
fortune to meet with Peter Cundill, a highly successful Canadian
investor once named by Warren Buffett as a potential successor.
Amongst many other things Peter told me that given the level of
knowledge and expertise we had about our companies we were
unnecessarily restricting ourselves by only investing in the listed
equity. His view, which I have come to share, was that having
gained a good understanding of a companies value we should look for
the best risk adjusted way of making our investment, anywhere in
the capital structure. We have been approaching things in that way
since.
We would have sought to alter the Existing Investment Policy at
some point, the catalyst for doing so now is the recent investment
by other Phoenix Funds in Stanley Gibbons, the world's leading
stamp and coin dealing business. The two substantial changes are to
allow investment in unlisted companies and in companies listed in
countries other than the UK (limited to 10% and 20% at cost prices,
respectively).
Our investment in Stanley Gibbons takes an unusual form,
structured to protect our downside risk and making it a far
superior investment to buying only the listed equity. Our overall
investment in Stanley Gibbons comprised the purchase of four
assets: 58% of the equity (listed shares), the bank loan, a
portfolio of stamps and a receivable from the administration of a
Guernsey entity. We hope to be able to allocate Aurora its share of
the Stanley Gibbons investment and we need to change the Existing
Investment Policy to do so.
We have invested in Stanley Gibbons and Hornby because they fit
our profile of having great long term potential to make attractive
returns for shareholders whilst being currently available at
attractive prices.
These changes do not herald any change in our investment
philosophy or principles which have served us well at Phoenix for
the past 20 years.
Gary Channon
CIO Phoenix Asset Management Partners
20 April 2018
INVESTMENT MANAGER'S REVIEW AND OUTLOOK
In early March, a week or so before putting pen to paper for
this review, the FT published a story entitled "Global investors
shun UK Stock market" (FT: Chris Flood: March 5(th) 2018) that
suggested UK equities are currently the most unpopular asset class
in the world among large institutional investors; not the most
auspicious of backdrops for an investment trust with significant
exposure to UK domestic businesses. Moreover, one of the questions
we have been most frequently asked during recent meetings with
potential investors is "how do you feel the portfolio is
positioned, given Brexit?". The question is perfectly reasonable
and the answer has two parts; firstly, we make the general
observation that the Brexit negotiation process, like the making of
a sausage, is not attractive to behold. It is also a subject to
which we bring no unique insight; whether we end-up with the
political equivalent of a short-dated Iceland frozen banger or a
mouth-watering, hand-made finocchiona, remains to be seen. The most
important point on this topic, for shareholders of Aurora, is that
the Phoenix investment approach does not involve so-called
"top-down" investing. For readers not familiar with the jargon,
"top down" investing is when a fund manager begins with a belief
that world events will unfold in a certain way (for example,
concluding ahead of the event that Britain's leaving the EU will
mean such-and-such). Then, each stock in the portfolio is selected
with this opinion in mind; if that opinion turns out to be accurate
then the investment performance of the portfolio may be good; if
the view turns out to be wrong, the investment performance is more
likely to be poor. On the other hand, the Phoenix approach to
building a portfolio of stocks is known as "bottom-up". Less ribald
than it sounds, this simply means we don't pick stocks on the basis
that they will benefit from specific macro-economic events but
because we think each investment is a compelling proposition in its
own right. And that brings us to the second part of the answer we
give to potential investors who ask us about Brexit or our UK
focus; that despite the prevailing downer on UK business, our
portfolio comprises a number of high-quality companies that are
generally prospering and that we think will continue to do well
over the medium to long-term, whatever Brexit has in store.
Turning last year's precedent into a tradition, we will begin
the activity review with the year's laggard, GSK, whose share price
fell 11%. GSK has a new, highly regarded CEO, Emma Walmsley, whose
actions we have been watching closely and of which we so far
approve. However, fears remain that the company doesn't have
sufficient new patented drugs to replace older products whose
patents face expiry. Known as the "patent cliff", this has been one
of the "bear" arguments against GSK for a while. However, our
counter is that this view doesn't consider the long history of
creative destruction in large pharma' companies; a patented drug's
commercial life is almost never more than 15 years; drugs
come-and-go all the time and yet today's largest drug companies
have been major forces in the pharmaceutical industry for
generations. Why should the companies endure when the products they
sell do not? We think the answer lies in the vast scale and
expertise possessed by companies like GSK in areas such as R&D
and distribution; their size and depth of talent means that
significant discovery (and subsequent commercialisation) is likely,
even when predicting the advent of specific new products is
impossible. Another "bear" argument is that global pharma' firms
are unwieldy and staid; sitting-ducks to smaller, more nimble
competitors. And yet, despite the profusion of start-up "bio-tech"
businesses to have emerged over recent decades, almost none of them
have threatened the dominance of "big pharma'". Even when these
smaller businesses (or university departments) discover something
of potential commercial value, they often form alliances with, or
are acquired by, much larger pharma' groups. Why? Because the
bigger firms, with their benefits of scale, are more likely to
succeed in commercialising innovation. With the shares priced under
GBP13 we increased our shareholding in GSK during the year.
We are ambivalent about short-term share price movements (and
don't think they can be predicted) although we did note that last
year's wooden spoon went to Sports Direct amidst a perfect storm of
bad PR and a minor profits warning. However, we said at the time
that we rated the business and its management very highly and we
were enthused about the investment. This year, the shares did
better (up 35%) and, much more importantly, the underlying business
continued to perform well. One of the many fascinating elements of
the business is Mike Ashley's approach to investing in freehold
property. He built the business over several decades with a
leasehold strategy, only deciding to acquire freeholds when there
was a need to do so and when suitable locations could be acquired
on very attractive terms. Now this is the case, Mike and his team
are buying prime sites and developing them into flagship stores
with a more up-market feel and product range, thus satisfying the
consumer's demand for more premium products. Owning rather than
leasing stores means that Mike and his team have full control over
the property and get to retain the benefits of expensive
refurbishments. This isn't the case in a leased store, where the
landlord retains the benefits of a tenant's improvements to the
property. Initial reports suggest that these new, freehold flagship
stores are doing very well, generating a high return on the capital
invested in them. This is one example among many of how this nimble
business continues to succeed.
Tesco and Morrisons (whose share price moves for the year were
2% and -3% respectively) continued along the path of "self-help"
and we are generally pleased with what we are finding when we visit
stores; pricing strategies are clearer and more competitive and
they are not afraid to copy competitor's good ideas; a useful
attribute in a good retailer. For example, Lidl sells some of its
meat under the "Birchwood Farm" brand; an invented name intended to
graft a feel-good provenance onto an otherwise commodity product.
Although ideas like this can be easily discounted as cynical
marketing tricks, they do seem to appeal to customers and so we
were pleased to see Tesco follow suit with some of its own "farm"
brands. We are less enamoured with Tesco's proposed acquisition of
Booker. It has been a frequent topic of discussion in the Phoenix
office and the current view is that although it is likely that the
price to be paid for Booker is too high, the size of the deal means
it doesn't have sufficient negative impact to undermine our
investment case for Tesco.
We reduced the weight in our housebuilding investments ahead of
the UK general election because the Conservative manifesto wasn't
quite as tub-thumping for housebuilders as it might have been. In
particular, there was no mention of the "help-to-buy" scheme, which
has been tailwind for housebuilders in recent years. Subsequently,
these fears abated when Theresa May and other Conservatives
restated their desire to see more housebuilding, upon which we
partly reversed the reduction and increased our investment in
Redrow and Bellway (shares up 49% and 58% respectively) which had
tremendous years, with higher sales and profits and ongoing high
returns on capital. We have previously written quite extensively
about the positive trading conditions currently being experienced
by house-builders in the UK and we won't repeat everything here.
Suffice to say that the housing market remains under-supplied with
new-build houses, and that since the credit crunch ten years ago,
the Government has been pulling policy levers to increase the
number of houses built in this country. Against the positive
general market backdrop, Bellway and Redrow are both benefitting
from opening new subsidiaries in parts of the country where they
didn't previously operate, a strategy that is enabling them to
increase their sales faster than the overall market.
Our investment in Hornby (shares down 4%) may appear unusual as
we own 75% of the business and a Phoenix Partner, James Wilson,
sits on their Board. However, it is in other ways typical of our
approach. The business owns a series of great brands including
Hornby, Corgi, Airfix and Scalextrics. These nostalgic brands
occupy a special place in the hearts and minds of Hornby's
customers, who are often long-standing and devoted hobbyists.
However, the brands have not fulfilled their potential because of
various operational set-backs. We increased our shareholding of
Hornby during the year, believing that these set-backs will be
overcome with better management. One of several promising examples
of this already in action is the new approach to offering discounts
to wholesale customers. In the past, Hornby used these discounts to
tempt orders from these customers. However, the tactic was
over-used, causing those customers to become too reliant on
discounts. The new management of Hornby have announced that
discounting will stop immediately, a decision that will most likely
cost Hornby some sales in the short-term but be of long-term
benefit to the value and perception of the brands.
EasyJet (shares up 54%) is an investment of quite recent
vintage, having first been purchased during autumn 2016, in the
wake of the Brexit "leave" vote. Unfortunately, since then, the
highly regarded CEO, Carolyn McCall has left the business. Her
emphasis on return-on-capital meant that the business pursued a
very disciplined growth strategy, creating much value for
shareholders. We will watch carefully to see that the new CEO
continues to operate the business along similar lines. Apart from
the loss of McCall, the news for easyJet has been largely positive
this year as some weaker European airlines such as Monarch and Air
Berlin have gone bust and easyJet's strategy of providing a
convenient, low-cost alternative to more expensive national
airlines continues to work. We are pleased with the progress the
business is making and are excited about the investment. (An aside
on Easyjet: if you are ever at a dinner party dull enough to be
enlivened by an injection of airline trivia, try this: Ryanair and
easyJet combined, fly approximately 2,600 routes. On what
percentage of those routes do they compete with each other, within
a two-hour time slot? Is the answer A: 40%, B: 10% or C: less than
0.5%? The answer is C, less than 0.5%.
A combination of easy funding and hubris has left parts of the
"casual dining" market with too much capacity, resulting in
financial difficulties and site closures at businesses including
Byron, Jamie's Italian and Prezzo. Yet, despite this slew of bad
news coming from the overall market, JD Wetherspoon (shares up 43%)
where food makes up 40% of turnover, grew both sales and profits in
2017. The focused, low-cost business model, combined with
excellent, consistent customer service continues to endure in a
market not currently awash with success stories.
Another company bearing the fingerprints of its founders is
niche insurer, Randall & Quilter, (R&Q) (shares up 9%)
whose principals, Ken Randall and Alan Quilter, started the
business in 1991. For the last couple of years, R&Q has been
selling non-core assets and re-focusing on their "run-off" and
"fronting" specialisms. During the year, they issued GBP49m worth
of new shares by way of an "open offer" and plan to use the money
to expand the core business. We are excited about the prospects and
added to our investment in the open offer.
The new CEO of Vesuvius (shares up 52%) has recently been
reporting improvements in the company's major markets (steel
foundry and steel flow) as global steel production has been
increasing. Sales and profits increased over the year and an
internal restructuring programme is continuing to lower costs. Debt
also fell and the 20% return-on-capital remains very impressive for
any business, let alone one in an industry that is generally
capital intensive. Vesuvius specialises in so-called "flat steel",
which is used in consumer products including cars and fridges,
rather than construction. Medium and long-range forecasts suggest
that flat steel production will increase significantly as consumer
goods markets continue to grow in China, India and other parts of
the developing world.
During the period, Lloyds (shares up 14%) was returned to full
public ownership, increased its dividend, increased underlying
profit, strengthened its balance sheet, increased the "net interest
margin" (the difference between interest income earned by Lloyds
and the amount Lloyds pays its' own lenders; a higher net interest
margin is a good thing) and drew nearer to the end of the PPI or
"conduct claims" saga. Core operating costs fell year-on-year, with
the company reporting a market-leading "cost-income ratio" (a
measure of efficiency). The company reiterated the long-term
targets set out by CEO Antonio Horta Osario and said that the
recent acquisition of the MBNA credit card business is running
ahead of schedule. Last year we said of the Lloyds investment that
"the business fundamentals have been on the turn (i.e. improving)
for some time and yet the shares remain cheap. It is a good example
of why it pays not to stick ones neck out and talk about when and
why a share price might start to rise" which is even more valid
today! We added to the Lloyds holding during the year.
Outlook
A "top-down" investor might point to Brexit or any other "news"
and try and pin-point how the portfolio outlook will be impacted by
certain macro-economic outcomes. Our "bottom-up" approach means
that our portfolio outlook is formed by focusing on business
fundamentals instead. Although a huge amount of work goes into
making and monitoring each of our investments, the case for owning
each one boils down to a pretty simple investment thesis (in fact,
an inability to articulate an investment case in simple terms is a
good warning sign). We spend most of our time questioning and
testing the theses using our primary research. Every piece of
research used at Phoenix is produced in-house; in twenty years we
have never made an investment using broker research. What is the
relevance of this? It means that our investment outlook is a moving
feast, informed by what we observe by putting boots on the ground
and watching our investee businesses in action.
A significant part of this involves mystery shopping; we
regularly "buy" a sample basket of sports items to test whether
Sports Direct remains the lowest cost producer. We spend time
inspecting the toilets in Weatherspoons' because they are a good
litmus test of pub management and are important when customers form
impressions. Each month, we use housebuilder's web sites to track
the sales of new-build houses at over 100 locations around the UK
(tip: housing developments often have their own individual websites
that show exactly the housing plots available for sale. Identified
by a unique number, these plots are removed from the websites once
sold; by building a regular data series it is relatively easy,
albeit time consuming, to figure out how many houses are being sold
each month.) We visit numerous branches of Tesco and Morrisons and
in each one we ask shop assistants "where is the soy sauce?" We
grade them for the quality of their response, record the data and
use the trend as one of many indicators of customer service
standards.
We think that the most relevant outlook statement we can make is
that currently, the research that we do gives us confidence that
the companies in our portfolio are performing well, in line with
our investment theses. And, very importantly, the shares are cheap.
These two elements augur well for future investment returns.
Tristan Chapple
Investment Manager
Phoenix Asset Management Partners
20 April 2018
OTHER STRATEGIC REPORT INFORMATION
RISK ANALYSIS
The Board considers that the principal risks faced by the
shareholders of the Company fall into two categories:
External Risks
Poor performance in the UK and/or world economies; poor
corporate profits and dividends.
Poor stock market performance caused by market-specific factors,
such as rising interest rates, the unwinding of "bubbles" or
disinvestment by institutions, superimposed on general economic
factors, or caused by shocks, wars, disease etc. The Board does not
consider, however, that short-term volatility represents a risk for
the long-term shareholder, since it regards long-term performance
to be of primary importance.
Internal Risks
Poor asset management, which may include poor stock selection,
excessive concentration of the portfolio, mistakes regarding
currency movements, speculation in shares of companies without
sound or established businesses and speculation in derivatives.
Poor governance, compliance or administration, including
particularly the risk of loss of investment trust status.
All these and other risks can result in shareholders not making
acceptable returns from their investment in the Company.
RISK CONTROLS
External risks
As described in the Investment Policy section above, external
risks are mitigated by diversification of the portfolio and by not
utilising gearing.
Risk diversification
An element of risk is inherent in investment undertaken on a
selective basis. The Company seeks to mitigate the degree of risk
by investing in securities in substantial organisations, normally
listed and traded on the London Stock Exchange, and by spreading
its investments across a range of such securities. At 31 December
2017 the Company held 16 stocks, spread across 8 main sectors.
Gearing
The Company has discontinued the use of gearing as an element of
its Exiting Investment Policy and will continue to do so under the
Revised investment Policy. Under the articles, borrowings are
permitted up to a maximum of 30% of NAV. The Company's agreement
with BNP also permits borrowing of up to 30% of NAV, but there is
currently no intention to make use of this allowance.
The Board will keep under review whether any provision should be
made for the use of short-term borrowing for the sole purpose of
meeting working capital requirements from time to time.
Further details concerning currency risks, liquidity risks and
interest rate risks are given in note 17.
Internal risks
The control of risks related to governance, compliance and
administration is dealt with in the report on Corporate
Governance.
VIABILITY STATEMENT
The Company is subject to continuation votes every three years.
As a consequence of the appointment of Phoenix, the Directors
proposed the replacement of the pre-existing continuation vote
schedule by a new three-year schedule, with the next vote falling
due in 2019. This was approved by the AGM held in July 2016.
Although there will be a continuation vote in 2019, the
Directors consider that a longer time frame is appropriate for the
purpose of assessing the Company's viability. At the present time,
the Board's expectation is that it will recommend continuation of
the Company beyond 2019. Accordingly, they have concluded that they
should continue to utilise a five year period for this purpose.
After making inquiries, the Directors have a reasonable
expectation that the Company has adequate resources to continue in
operational existence and meet its liabilities as they fall due for
at least five years from the date of approval of this document.
In reaching this conclusion, the directors have considered each
of the principal risks and uncertainties set out above. They have
considered the liquidity and solvency of the Company, the level of
discount at which its shares trade, its income and expenditure
profile including the absence of monthly management fees and the
discontinuation of the use of gearing as an instrument of normal
investment policy. The Company's investments comprise readily
realisable securities which could, if necessary, be sold to meet
the Company's funding requirements. The Company's plan to expand by
the issue of new share capital and the sale of shares from treasury
is kept under close, ongoing review by the Board. Portfolio changes
and market developments are also discussed at quarterly Board
meetings. The internal control framework of the Company is subject
to formal review on at least an annual basis.
The directors do not expect there to be any material increase in
the annual ongoing charges of the Company over the period of their
assessment. The Company's income from investments and cash
realisable from the sale of investments provide substantial cover
to the Company's operating expenses and any other costs likely to
be faced by the Company during the period under review.
SOCIAL, ETHICAL, HUMAN RIGHTS AND ENVIRONMENTAL MATTERS
Being an investment company, with no staff, premises,
manufacturing or other operations of its own, the Company does not
have any direct influence on social, ethical, human rights and
environmental matters. The Company has no greenhouse gas emissions
to report from its operations, nor any responsibility for emission
producing sources.
BOARDROOM DIVERSITY
The Company has no employees. At 31 December 2017 the Company
had five directors, all of whom were male. The Company's policy is
that the Board should have a broad range of skills; while keeping
this in mind, consideration is given to the recommendations of the
AIC Code and other guidance on boardroom diversity.
OUTLOOK
The outlook for Aurora is discussed in the Chairman's Statement
and the Manager's Review and Outlook.
This Strategic Report was approved by the Board on 20 April
2018.
For and on behalf of the Board
Lord Flight
Chairman
20 April 2018
GOVERNANCE
STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE ANNUAL
REPORT
The directors are responsible for preparing the Strategic
Report, the Directors' Report, the Remuneration Reports and the
financial statements in accordance with applicable law and
regulations.
Company law in the United Kingdom requires the directors to
prepare financial statements for each financial year. Under that
law the directors have elected to prepare the Company financial
statements in accordance with International Financial Reporting
Standards (IFRSs) as adopted by the European Union. Under company
law the directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of
affairs and profit or loss of the Company for that period. In
preparing these financial statements, the directors are required
to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates which are reasonable and prudent;
-- state whether applicable IFRSs have been followed, subject to
any material departures disclosed and explained in the financial
statements;
-- prepare the financial statements on the going concern basis,
unless it is inappropriate to presume that the Company will
continue in business.
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements and the Remuneration Report comply with
the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the website
used by the Company.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Statement under the Disclosure and Transparency Rules 4.1.12
The directors confirm that to the best of their knowledge and
belief;
(a) The financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the issuer; and
(b) this annual report includes a fair review of the development
and performance of the business and the position of the Company,
together with a description of the principal risks and
uncertainties that it faces
Having taken advice from the Audit Committee, the Directors
consider that the annual report and financial statements taken as a
whole are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Company's
position and performance, business model and strategy.
For and on behalf of the Board
Lord Flight
Chairman
20 April 2017
FINANCE
STATEMENT OFCOMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2017
Year ended 31 Period ended
December 31 December 2016
2017
Revenue Capital Total Revenue Capital Total
Note GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Profits on investments
designated at
fair value through
profit or loss - 10,621 10,621 - 2,144 2,144
---------- ---------- -------- ---------- ---------- --------
2 Investment income 1,683 - 1,683 944 - 944
Total income 1,683 10,621 12,304 944 2,144 3,088
Investment management
3 fees - - - - 125 125
3 Other expenses (376) - (376) (308) - (308)
Profit before
tax 1,307 10,621 11,928 636 2,269 2,905
6 Tax - - - - - -
---------- ---------- -------- ---------- ---------- --------
Profit and total
comprehensive
income for the
period 1,307 10,621 11,928 636 2,269 2,905
8 Earnings per share 3.67p 29.85p 33.52p 3.00p 10.72p 13.72p
The revenue and capital columns, including the revenue and
capital earnings per share data, are supplementary information
prepared under guidance published by the AIC.
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
during the period. All revenue is attributable to the equity
holders of the Company.
The comparative period is not directly comparable to the period
ended 31 December 2017, being of ten months as compared to twelve
months.
The Board has recommended a final dividend of 2.75p per share
(see note 7).
BALANCE SHEET
AT 31 DECEMBER 2017
2017 2016
Notes GBP'000 GBP'000
NON-CURRENT ASSETS
Investments designated
at fair value through
9 profit or loss 82,587 49,849
--------
82,587 49,849
-------- --------
CURRENT ASSETS
Other receivables 351 251
Cash and cash equivalents 4,507 1,403
-------- --------
4,858 1,654
-------- --------
TOTAL ASSETS 87,445 51,503
-------- --------
CURRENT LIABILITIES:
Other payables 72 65
--------
72 65
-------- --------
TOTAL ASSETS LESS CURRENT
LIABILITIES 87,373 51,438
-------- --------
EQUITY
10 Called up share capital 10,618 7,448
Capital redemption reserve 179 179
Share premium account 54,009 32,557
12 Investment holding gains 10,887 2,111
12 Other capital reserves 10,053 8,208
Revenue reserve 1,627 935
TOTAL EQUITY 87,373 51,438
-------- --------
Net assets per ordinary
13 share 205.72p 172.66p
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2017
Year to 31 December
2017 Notes
Share Capital Share Investment Other Revenue Total
capital redemption premium holding capital reserve
reserve account losses reserves
GBP,000 GBP'000 GBP,000 GBP,000 GBP,000 GBP,000 GBP,000
Opening
equity 7,448 179 32,557 2,111 8,208 935 51,438
Total comprehensive
income/(loss)
for the
year - - - 8,776 1,845 1,307 11,928
Issue of
new shares 3,170 - 21,737 - - - 24,907
Share issue
costs - - (285) - - - (285)
Dividends
paid 7 - - - - - (615) (615)
Closing
equity 10,618 179 54,009 10,887 10,053 1,627 87,373
--------- ------------ --------- ----------- ---------- --------- --------
Period to 31 December
2016 Notes
Share Capital Share Investment Other Revenue Total
capital redemption premium holding capital reserve
reserve account losses reserves
GBP,000 GBP'000 GBP,000 GBP,000 GBP,000 GBP,000 GBP,000
Opening equity 3,598 179 10,997 (4,371) 7,551 486 18,440
Total
comprehensive
income/(loss)
for the year - - - 6,482 (4,213) 636 2,905
Sale of shares
from treasury - - - - 4,870 - 4,870
Issue of
new shares 3,850 - 21,861 - - - 25,711
Share issue
costs - - (301) - - - (301)
Dividends
paid 7 - - - - - 187 (187)
Closing equity 7,448 179 32,557 2,111 8,208 935 51,438
--------- ------------ --------- ----------- ---------- --------- --------
CASH FLOW STATEMENT
FOR THE YEARED 31 DECEMBER 2017
Year to Period
31 December to 31
December
2017 2016
GBP'000 GBP'000
NET CASH OUTFLOW FROM OPERATING
ACTIVITIES
Cash inflow from investment
income and interest 1,631 747
Cash outflow from management
expenses (417) (322)
Payments to acquire non-current
asset investments (44,895) (36,198)
Receipts on disposal of
non-current asset investments 22,778 2,938
NET CASH OUTFLOW FROM OPERATING
ACTIVITIES (20,903) (32,835)
------------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from issues
of new shares 24,622 25,410
Sale of treasury shares - 4,870
Dividends paid (615) (187)
NET CASH FLOW FROM FINANCING
ACTIVITIES 24,007 30,093
------------- ----------
INCREASE/(DECREASE) IN
CASH 3,104 (2,742)
------------- ----------
Cash and cash equivalents
at beginning of year 1,403 4,145
Increase/(decrease) in
cash 3,104 (2,742)
Cash and cash equivalents
at end of year 4,507 1,403
------------- ----------
The comparative period is not directly comparable to the period
ended 31 December 2017, being of ten months as compared to twelve
months.
NOTES TO THE FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards (IFRS),
which comprise standards and interpretations approved by the IASB
and International Accounting Standards and Standing Interpretations
Committee interpretations approved by the IASC that remain in
effect, and to the extent that they have been adopted by the
European Union.
Under IFRS, the AIC Statement of Recommended Practice "Financial
Statements of Investment Trust Companies and Venture Capital
Trusts" issued in January 2017 has no formal status, but the
Company adheres to the guidance of the SORP.
The accounting policies are unchanged from those used in the
last annual financial statements except where otherwise stated. The
particular accounting policies adopted are described below:
(a) Accounting Convention
The accounts are prepared under the historical cost basis,
except for the measurement of fair value of investments.
(b) Investments
As the Company's business is investing in financial assets with
a view to profiting from their total return in the form of
increases in fair value, investments are designated as fair value
through profit or loss on initial recognition in accordance with
IAS 39. At this time, fair value is the consideration given,
excluding material transaction or other dealing costs associated
with the investment.
After initial recognition such investments are valued at fair
value. For quoted investments this is established by reference to
bid, or last, market prices depending on the convention of the
exchange on which the investment is quoted. Gains or losses are
recognised in the capital column of the Statement of Comprehensive
Income. All purchases and sales of investments are accounted for on
a trade date basis.
(c) Income from Investments
Investment income from ordinary shares is accounted for on the
basis of ex-dividend dates. Income from fixed interest shares and
securities is accounted for on an accruals basis using the
effective interest method. Special Dividends are assessed on their
individual merits and are credited to the capital column of the
Statement of Comprehensive Income if the substance of the payment
is a return of capital; with this exception all investment income
is taken to the revenue column of the Statement of Comprehensive
Income. Income from gilts and bank interest receivable is accounted
for on an accruals basis using the effective yield.
(d) Capital Reserves
The Company is not precluded by its Articles from making any
distribution of capital profits by way of dividend, but the
Directors have no current plans to do so. Profits and losses on
disposals of investments are taken to the other capital (gains on
disposal) reserve. Revaluation movements are taken to the
investment holding reserve via the capital column of the Statement
of Comprehensive Income.
(e) Investment Management Fees, Finance Costs and Other Costs
Performance-related fees are charged to other capital reserves
(gains on disposal) via the capital column of the Statement of
Comprehensive Income. Other costs are normally charged to revenue,
unless there is a compelling reason to charge to capital. Tax
relief in respect of costs allocated to capital is credited to
capital via the capital column of the Statement of Comprehensive
Income on the marginal basis.
(f) Taxation
Current income tax assets and/or liabilities comprise those
obligations to, or claims from, fiscal authorities relating to the
current or prior reporting period, that are unpaid at the balance
sheet date.
Deferred income taxes are calculated using the liability method
on temporary differences. Deferred tax is generally provided on the
difference between the carrying amounts of assets and liabilities
and their tax bases. In addition, tax losses available to be
carried forward as well as other income tax credits are assessed
for recognition as deferred tax assets.
Deferred tax assets and liabilities are calculated, without
discounting, at tax rates that are expected to apply at their
respective period of realisation, provided they are enacted or
substantively enacted at the balance sheet date. Deferred tax
liabilities are always provided for in full. Deferred tax assets
are recognised to the extent that it is probable that they will be
able to be offset against future taxable income.
Changes in deferred tax assets or liabilities are recognised as
a component of tax expense in the income statement, except where
they relate to items that are charged or credited directly to
equity.
(g) Foreign currency
The currency of the primary economic environment in which the
Company operates (the functional currency) is pounds sterling
("Sterling"), which is also the presentational currency of the
Company. Transactions involving currencies other than Sterling are
recorded at the exchange rate ruling on the transaction date. At
each balance sheet date, monetary items and non-monetary assets and
liabilities, which are fair valued and which are denominated in
foreign currencies, are retranslated at the closing rates of
exchange. Such exchange differences are included in the Statement
of Comprehensive Income and allocated to capital if of a capital
nature or to revenue if of a revenue nature. Exchange differences
allocated to capital are taken to gains on disposal or investment
holding losses, as appropriate.
(h) Cash and cash equivalents
Cash and Cash Equivalents in the Cash Flow Statement comprise
cash held at bank.
(i) Dividends payable to equity shareholders
Dividends payable to equity shareholders are recognised in the
Statement of Changes in Equity when they are paid, or have been
approved by shareholders in the case of a final dividend.
(j) Judgements and estimations
The directors have reviewed matters requiring estimation and/or
judgement. The preparation of the financial statements requires
management to make judgements, estimations and assumptions that
affect the amounts reported for assets and liabilities as at the
balance sheet date and the amounts reported for revenue and
expenses during the year. However, the nature of the estimation
means that actual outcomes could differ from those estimates. There
are no judgments or estimates that have had a significant effect on
amounts recognised in the financial statements.
2. INCOME Year to Period
31 December from 1
March
to 31
December
2017 2016
Income from investments: GBP'000 GBP'000
Franked dividends from
listed or quoted investments 1,683 795
Unfranked income from
overseas dividends - 149
1,683 944
------------- ----------
3. INVESTMENT MANAGEMENT 2017 2016
FEES AND OTHER
EXPENSES
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management
fees - - - - - -
- monthly -performance - - - - (125) -
-------- -------- -------- -------- -------- --------
Administration
fees 111 - 111 79 - 79
Depository/custodian
fees 60 - 60 60 - 60
Registrar's fees 24 - 24 22 - 22
Directors' fees 88 - 88 71 - 71
Auditor's fees 31 - 31 29 - 29
Printing 14 - 14 14 - 14
Miscellaneous
expenses 48 - 48 33 - 33
-------- -------- -------- -------- -------- --------
Total other expenses 376 376 308 - 308
-------- -------- -------- -------- -------- --------
All expenses include any relevant irrecoverable VAT. The amounts
excluding VAT paid or accrued for the audit of the Company are
GBP25,250 (2016: GBP24,500).
4. DIRECTORS' FEES
The fees paid or accrued were GBP81,250 (10 month period to 31
December 2016: GBP67,708). There were no other emoluments. The
gross figures shown for directors' fees in note 3 above include
employers' National Insurance charges or VAT, as appropriate. Full
details of the fees of each director are given in the Directors'
Remuneration Report.
5. TRANSACTION CHARGES
Period
from 1
Year to March
31 to 31
December December
G 2017 2016
GBP'000 GBP'000
Transaction costs on purchases
of investments 132 196
Transaction costs on sales
of investments 11 4
--------- ---------
Total transaction costs
included in gains or losses
on investments at fair
value through profit or
loss 143 200
--------- ---------
6. TAXATION
Year to 31 December Period from 1 March
to 31 December
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Corporation - - - - - -
tax
Overseas tax - - - - - -
-------- -------- -------- -------- -------- --------
Tax charge - - - - - -
in respect
of the current
year
-------- -------- -------- -------- -------- --------
Current taxation
The taxation charge for the year is different from the standard
rate of corporation tax in the
UK (19.25%). The differences are explained below:
Year ended Period
to
31 December 31 December
2017 2016
GBP'000 GBP'000
Total profit before tax 11,928 2,905
Theoretical tax at UK corporation
tax rate of 19.25% (20.0%) 2,296 581
Effects of:
Capital profits that are
not taxable (2,045) (479)
UK dividends which are not
taxable (324) (159)
Overseas dividends that are
not taxable - (30)
Increase in excess tax losses 73 62
Expenses charged to capital
account for which a deduction
is claimed - 25
Actual current tax - -
Due to the Company's status as an investment trust and its
intention to continue meeting the conditions required to maintain
its status 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.
Factors that may affect future tax charges
The Company has tax losses of GBP9,182,061 (2016: GBP8,805,985)
in respect of management expenses, equivalent to a potential tax
saving of GBP1,560,950 at the prospective tax rate of 17% (2016:
GBP1,673,137 at the then prospective rate of 19%) and tax losses of
GBP1,490,706 (2016: GBP1,490,706) in respect of loan interest,
equivalent to a potential tax saving of GBP253,420 at the
prospective tax rate of 17% (2016: GBP283,234 at the then
prospective tax rate of 19%) .
These amounts are available to offset future taxable revenue. A
deferred tax asset has not been recognised in respect of those
expenses and will be recoverable only to the extent that the
Company has sufficient future taxable revenue.
7. ORDINARY DIVIDS
Period
Year to to
31 December 31 December
2017 2016
GBP'000 GBP'000
Dividends reflected
in the financial statements:
Interim dividend for the
period to 31 December 2016
at 2.00p per share 615 -
Final dividend for the year
ended 28 February 2016 at
1.00p per share (2015: 3.85p) - 187
----------- -----------
Dividends not reflected in
the financial statements:
Final dividend for the year
2017 of 2.75p per share 1,280 -
Interim dividend for the
period to 31 December 2016
at 2.00p per share - 615
----------- -----------
8. EARNINGS PER SHARE
Earnings per share are based on the profit of GBP11,927,202
(2016:GBP2,905,495) attributable to the weighted average of
35,585,776 (21,166,160) ordinary shares of 25p in issue during the
year.
Supplementary information is provided as follows: revenue
earnings per share are based on the revenue profit of GBP1,306,307
(2016: GBP636,037); capital earnings per share are based on the net
capital profit of GBP10,620,895 (2016: GBP2,269,458), attributable
to the weighted average of 35,585,776 (2016:21,166,160) ordinary
voting shares of 25p.
9. INVESTMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS
2017 2016
GBP'000 GBP'000
UK listed securities 82,587 49,849
Total non-current investments
designated at fair value through
profit or loss 82,587 49,849
--------- --------
Movements during the year:
Opening balance of investments,
at cost 47,738 18,816
Additions, at cost 44,895 36,198
Disposals - proceeds received
or receivable (22,778) (2,938)
- add realised losses/ less
realised profits 1,845 (4,338)
--------- --------
- at cost (20,933) (7,276)
Cost of investments designated
at fair value through profit
or loss at 31 December 71,700 47,738
--------- --------
Revaluation of investments
to market value:
Opening balance 2,111 (4,371)
Increase/(decrease) in unrealised
appreciation debited to investment
holding reserve 8,776 6,482
Balance at 29 February 10,887 2,111
--------- --------
Market value of non-current
investments designated at
fair value through profit
or loss at 31 December 82,587 49,849
--------- --------
10. SHARE CAPITAL
2017 2016
Allotted, called
up and fully paid
Ordinary shares
of 25p Number 42,471,503 29,792,305
GBP'000 10,618 7,448
------------------------------ ----------- -----------
The Company did not purchase any of its own shares during the
year ended 31 December 2017 or the period ended 31 December 2016.
No shares were cancelled during either year or period.
No shares were held in Treasury or sold from Treasury during the
year ended 31 December 2017 (period ended 31 December 2016
3,029,520 shares sold from Treasury for a gross amount of
GBP4,882,617).
Placings
A placing was carried out on 15 March 2017 under the terms of
the placing programme that had been established by a prospectus
dated 22 March 2016. This raised GBP4,338,178, net of commission
but before professional and other fees, for the issue of 2,352,913
new shares. Under the 2016 prospectus up to 55 million shares could
be issued from time to time during the period from 30 March 2016 to
21 March 2017. The price at which shares could be issued under that
programme was the NAV per share at the time of issue plus a premium
to cover the expenses of the issue as determined by the Board at
the time of each issue.
On 5 September 2017 the Company issued a new prospectus. This
provided for an initial placing and offer for subscription and for
a new placing programme. Authority to issue shares pursuant to
these proposals was granted by a General Meeting on 28 September
2017. The price at which shares can be issued under this prospectus
is the NAV per share at the time of issue plus a premium pf 1.25%.
The initial placing and offer for subscription was carried out on 6
October 2017, raising GBP9,125,586, net of commission but before
professional and other fees, for the issue of 4,565,650 new
shares.
Block listings
The Company had also put in place during 2016 a block listing
facility for up to 5,043,177 new shares, to meet market demand
arising from time to time. Under this facility a total of 4,092,635
new shares were issued in the period January-August 2017, raising
GBP7,858,271, net of commission.
On 16 October 2017 the Company established a new block listing
facility for up to 8,160,700 new shares, also to meet market demand
arising from time to time. Under this facility a total of 1,668,000
new shares were issued during the period October-December 2017,
raising GBP3,441,881, net of commission.
At 31 December 2017, the Company had 42,471,503 (2016:
29,792,305) shares in issue. The number of voting shares at 31
December was 42,471,503 (2016: 29,792,305).
11. TOTAL EQUITY
Total Equity includes, in addition to Share Capital, the
following reserves:
Capital Redemption Reserve. When any shares are redeemed or
cancelled, a transfer of realised profit must be made to this
reserve in order to maintain the level of capital that is not
distributable.
Share Premium Account. When shares are issued at a premium to
their nominal value, the "capital profit" arising on their
allotment must be held in a Share Premium Account, which is not
distributable in the ordinary course and may be utilised only in
certain limited circumstances.
Capital profits arising from the Company's investment
transactions are held as Capital Reserves, subdivided between Gains
on Disposal for profits arising upon sales of investments and
Investment Holding gains/losses for portfolio revaluations. The
movements on this account are analysed in note 14 below.
The Company's Revenue Reserves are the net profits that have
arisen from the Company's revenue income in the form of dividends
and interest, less operating expenses and dividends paid out to the
Company's shareholders.
12. CAPITAL RESERVES
31 December 31 December
2017 2016
GBP'000 GBP'000
Investment holding gains/(losses)
Opening balance 2,111 (4,371)
Revaluation of investments
- listed 8,776 6,482
Balance of investment
holding gains at 31
December 10,887 2,111
------------ ------------
Other capital reserves
Opening balance 8,208 7,551
Net gains and losses
on realisation of investments 1,615 (4,370)
Capital distributions
received 230 32
Expenses of capital
management: management
fees - 125
Total of realised gains
and losses reflected
in the Statement of
Comprehensive Income 1,845 (4,213)
------------ ------------
Sale of treasury shares - 4,870
------------ ------------
Total gains and losses
of other capital reserves 1,845 657
Balance of other capital
reserves at 31 December 10,053 8,208
------------ ------------
Total capital reserve
at 31 December 20,940 10,319
------------ ------------
13. NET ASSETS PER ORDINARY SHARE
The figure for net assets per ordinary share is based on
GBP87,372,561 (2016: GBP51,438,261) divided by 42,471,503 (2016:
29,792,305) voting ordinary shares in issue at 31 December
2017.
14. RECONCILIATION OF PROFT BEFORE FINANCE COSTS AND TAX TO
NET INFLOW FROM OPERATING ACTIVITES
Year to Period to
31 December 31 December
2017 2016
GBP'000 GBP'000
Profit before finance
costs and tax 11,928 2,905
(Increase) in non-current
investments (32,738) (35,404)
(Increase) in other
receivables (100) (200)
Increase/(decrease)
in other payables 7 (136)
Net cash inflow from
operating activities (20,903) (32,835)
------------ ------------
15. RELATED PARTY TRANSACTIONS
Details of the management, administration and secretarial
contracts can be found in the Directors' Report. Mr Chapple is a
director of the company and an employee of Phoenix. Fees payable to
Phoenix are shown in note 3.
Other payables include accruals of administration fees of
GBP9,825 (2016 GBP8,056 for two months).
No provision has been made for a performance fee at 31 December
2017 (2016: GBPNil). Any performance fee would be payable in shares
after the end of the performance fee period, but the amount that
would have be payable is provided in the accounts as an equivalent
value of money. All figures include any appropriate VAT.
16. FINANCIAL ASSETS/LIABILITIES
Investments are carried in the balance sheet at fair value. For
other financial assets and financial liabilities, the balance sheet
value is considered to be a reasonable approximation of fair
value.
Financial assets
The Company's financial assets may include equity investments,
fixed interest securities, short-term receivables and cash
balances. The currency and cash-flow profile of those financial
assets was:
2017 2016
Interest Non- Total Interest Non- interest Total
bearing interest bearing bearing
bearing
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Non-current
investments
at fair value
through profit
or loss:
GBP sterling
equities - 82,587 82,587 - 49,849 49,849
- 82,587 82,587 - 49,849 49,849
---------------------------- ---------- -------- --------- -------------- --------
Cash at bank:
Floating rate
- GBP sterling - 4,507 4,507 - 1,403 1,403
- 4,507 4,507 - 1,403 1,403
---------------------------- ---------- -------- --------- -------------- --------
Cash at bank includes GBP4,506,798 (2016: GBP1,393,316) held by
the Company's Depository, BNP Paribas.
Financial liabilities
The Company finances its investment activities through its
ordinary share capital and reserves. It has discontinued the use of
borrowing for such purposes. The Company's financial liabilities
comprise short-term trade payables. Foreign currency balances are
stated in the accounts in sterling at the exchange rate as at the
Balance Sheet date.
The Company no longer uses borrowing for investment management
purposes. There were no short-term trade payables (other than
accrued expenses).
17. FINANCIAL INSTRUMENTS - RISK ANALYSIS
The general risk analysis undertaken by the Board and its
overall policy approach to risk management are set out in the
Strategic Report. Issues associated with portfolio distribution and
concentration risk are discussed in the Investment Policy section
of the Strategic Report. This note, which is incorporated in
accordance with accounting standard IFRS7, examines in greater
detail the identification, measurement and management of risks
potentially affecting the value of financial instruments and how
those risks potentially affect the performance and financial
position of the Company.
The risks concerned are categorised as follows:
A) Potential Market Risks, which are principally (i) Currency
Risk (ii) Interest Rate Risk and (iii) Other Price Risk.
B) Liquidity Risk
C) Credit Risk
Each is considered in turn below:
A (i) Currency Risk
The portfolio as at 31 December 2017 was invested entirely in
sterling securities and there was no currency risk arising from the
possibility of a fall in the value of sterling impacting upon the
value of investments or income.
The Company had no foreign currency borrowings at 31 December
2017 or 31 December 2016 and no sensitivity analysis is presented
for this risk.
A (ii) Interest Rate Risk
The Company did not hold fixed interest securities at 31
December 2017 or 31 December 2016.
With the exception of cash, no interest rate risks arise in
respect of any current asset. All cash held as a current asset is
sterling denominated, earning interest at the bank's or custodian's
variable interest rates.
The Company had no borrowings at 31 December 2017 or 31 December
2016.
A (iii) Other Price Risk
The principal price risk for the Company is the price volatility
of shares that are owned by the Company. As described in the
Investment Manager's Review, the Company spreads its investments
across different sectors and geographies, but, as shown by the
Portfolio Analysis in the Business Review, the Company may maintain
relatively strong concentrations in particular sectors selected by
the Investment Manager.
B Liquidity Risk
Liquidity Risk is considered to be small, because the portfolio
is invested in readily realisable securities. As a consequence,
cash flow risks are also considered to be small. The Manager
estimates that, under normal market conditions and without causing
excessive disturbance to the prices of the securities concerned,
the majority of the portfolio could be realised within 7 days.
C Credit Risk
The Company invests in quoted equities and fixed interest
securities. The Company's investments are held by BNP ("the
Depository"), which is a large international bank with a high
reputation. The Company's normal practice is to remain fully
invested at most times and not to hold very large quantities of
cash. At 31 December 2017, cash at bank comprised GBP4,506,798
(2016: GBP1,393,316) held by the Depository. At 31 December 2017 no
cash was held at Coutts & Co (2016: GBP10,078) the account with
Coutts & Co having been closed.
Credit Risk arising on transactions with brokers relates to
transactions awaiting settlement. This risk is considered to be
very low because transactions are almost always undertaken on a
delivery versus payment basis with member firms of the London Stock
Exchange.
D Capital management policies and procedures
The Company' s capital management objectives are:
-- to ensure the Company's ability to continue as a going concern; and
-- to provide an adequate return to shareholders
by pursuing investment policies commensurately with the level of
risk.
The Company monitors capital on the basis of the carrying amount
of equity, less cash and cash equivalents as presented on the face
of the statement of financial position.
The Company sets the amount of capital in proportion to its
overall financing structure, i.e. equity and financial liabilities.
The Company manages the capital structure and makes adjustments to
it in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or
adjust the capital structure, the Company may adjust the amount of
dividends paid to shareholders (within the statutory limits
applying to investment trusts), return capital to shareholders,
issue new shares, or sell assets.
18. FAIR VALUE HIERARCHY
Under IFRS13 investment companies are required to disclose the
fair value hierarchy that classifies financial instruments measured
at fair value at one of three levels according to the relative
reliability of the inputs used to estimate the fair values.
Classification Input
Level 1 Valued using quoted prices in
active markets for identical
assets
Level 2 Valued by reference to valuation
techniques using observable
inputs other than quoted prices
included within Level 1
Level 3 Valued by reference to valuation
techniques using inputs that
are not based on observable
market data
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant asset.
Assessment of Hierarchy
The Company's subsidiary was held at cost less impairment and
therefore its valuation as an investment in the Company's balance
sheet did not fall within the fair value hierarchy. The investment
was written off in 2016.
2017 2016
Level 1 82,587 49,849
Level 2 - -
Level 3 - -
19. STANDARDS, AMMENTS AND INTERPRETATIONS TO EXISTING STANDARDS
THAT ARE NOT YET EFFECTIVE AND HAVE NOT BEEN ADOPTED EARLY BY THE
COMPANY
At the date of authorisation of these financial statements,
certain new standards, amendments and interpretations to existing
standards have been published but are not yet effective, and have
not been adopted early by the Company.
Information on new standards, amendments and interpretations
that are expected to be relevant to the Company's financial
statements is provided below. Certain other new standards and
interpretations have been issued but are not expected to have a
material impact on the Company's financial statements.
The Company intends to adopt these standards (where applicable)
when they become effective.
-- IFRS 9 Financial Instruments - classification and measurement
of financial assets and financial liabilities as defined in IAS39
(IASB effective date 1 January 2018).
-- IFRS 15 Revenue from Contracts with customers(effective date 1 January 2018).
-- IFRS 16 Leases (effective date 1 January 2019).
It is not expected that the adoption of IFRS 9, IFRS 15 or IFRS
16 will have any significant impact on the Company.
20. POST BALANCE SHEET DATE EVENTS
Since 31 December 2017 the Company has made further issues from
its block listing facility of 4,074,474 new shares.
As at 20 April 2018 the Company has 46,545,977 shares in issue
and the number of voting shares is 46,545,977.
21. FINANCIAL INFORMATION
This announcement does not constitute the Company's statutory
accounts. The financial information for the period to 31 December
2017 is derived from the statutory accounts for that period, which
will be delivered to the registrar of companies following the
Company's Annual General Meeting. The statutory accounts for the
period to 31 December 2016 have been delivered to the registrar of
companies. The auditors reported on the accounts for the period to
31 December 2016; their report was unqualified and did not include
a statement under Section 498(2) or (3) of the Companies Act
2006.
The annual report for the year ended 31 December 2017 will be
posted to shareholders and will be made available on the Investment
Manager's website.
This announcement contains regulated information under the
Disclosure Rules and Transparency Rules of the FCA.
The annual report will be submitted to the National Storage
Mechanism and will shortly be available for inspection at
http://www.morningstar.co.uk/NSM
24. ANNUAL GENERAL MEETING
The Annual General Meeting will be held on 6 June 2018 at 12.00
noon at the offices of Grant Thornton (UK) LLP, 30 Finsbury Square,
London EC1V 4RU.
20 April 2018
Secretary and registered office
PraxisIFM Fund Services Limited
Mermaid House
2 Puddle Dock
London EC4V 3DB
This information is provided by RNS
The company news service from the London Stock Exchange
END
ACSIMMBTMBTTBLP
(END) Dow Jones Newswires
April 20, 2018 07:32 ET (11:32 GMT)
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