FIDELITY ASIAN VALUES PLC
Annual Results for the year ended
31 July 2019
- Fidelity Asian Values PLC share price rose 12.3% over the
year to 31 July 2019
- Net Asset Value increased by 8.2%, versus the 3.9% benchmark
index
- An increased allocation to non-banking finance companies in
India supported strong
returns
- Out of favour small companies presented good buying
opportunities
Contacts
For further information, please
contact:
Natalia de Sousa
Company Secretary, FIL Investments International
01737 837846
CHAIRMAN’S STATEMENT
Fidelity Asian Values PLC provides shareholders with a
differentiated equity exposure to Asian markets. The Portfolio
Manager, Nitin Bajaj, achieves this
differentiation by favouring undervalued small and medium sized
companies as this allows him to find mispriced businesses, the
“winners of tomorrow”, before they become well known. Asia is the world’s fastest-growing economic
region and the Portfolio Manager looks to capitalise on this by
finding strong businesses, run by trustworthy people and buying
them at a sensible price.
INVESTMENT REVIEW
I am happy to report that both the Company’s NAV and its share
price strongly outperformed the MSCI All Countries Asia ex Japan
Index (“Comparative Index”) in the last 12 months, at a time when
small cap stocks significantly underperformed their larger cap
peers. This was a headwind given Nitin’s small cap bias.
Nonetheless, the Company’s NAV and the share price rose 8.2% and
12.3% respectively, in Sterling terms, compared with the 3.9% gain
for the Comparative Index mentioned above.
Nitin focuses on generating absolute returns, ignoring the
Comparative Index while he constructs the portfolio stock by stock
using fundamental bottom-up research. This is evident from the high
level of active money in the Company (98.5% as at 31 July 2019).
ECONOMIC AND MARKET REVIEW
Over the last 12 months, Asian equity markets as well as those of
the rest of the world became increasingly volatile as investors
reacted to mixed news flows around trade negotiations between the
US and China. The MSCI All
Countries Asia ex Japan Index remained volatile but finished in
positive territory, in Sterling terms, as at 31 July 2019.
Investors have become increasingly risk averse due to growing
concerns around a potential slowdown in global economic growth.
Towards the end of the review period, investors were also
disappointed after the US Federal Reserve indicated that its latest
interest rate cut was not the start of an aggressive monetary
policy easing cycle. In this context, Asian currencies depreciated
versus the US dollar over the 12-month period, while the price of
gold, which is seen as a safe-haven, rose sharply.
GEARING
Increased volatility and risk aversion in the market has created
stock-picking opportunities and Nitin has been able to add new
holdings and increase existing positions at more attractive
valuations. As a result, the Company’s net equity exposure has
increased from 89.6% at the end of July
2018 to 98.7% at the end of July
2019. To date, Nitin has not felt the need to use gearing
extensively during his tenure as the Company’s Portfolio Manager.
He continues to believe that the main driver of the Company’s
performance will be stock picking.
OUTLOOK
The long-term outlook for Asian equities is generally positive and,
in a low growth world, the region’s relatively higher growth
prospects should continue to attract investors. Also, at a time
when the world is becoming more protectionist, Asia’s robust
domestic demand from an expanding middle class supports the outlook
for the region. Nonetheless, the region remains vulnerable to a
global slowdown and the sudden tightening of global financial
conditions.
China is expected to slow
moderately this year as the US-China relationship is expected to
worsen in the medium-term. Trade-related disputes are only one
aspect, and there are many other contentious issues between the two
countries, including those relating to transfer of technology and
intellectual property, as well as social and geopolitical issues.
Key policy options for China to
deal with external uncertainties are either to boost domestic
demand or use currency flexibility to help exporters mitigate the
impact from the tariffs. Given this, the Chinese economy should
continue to rebalance towards domestic consumption. Meanwhile, the
increasing weight of Chinese A-shares in the MSCI Indices should
see an increase in foreign participation and accelerate the
development of China’s domestic capital market.
India remains a strong growth
story, given sustainable prospects for domestic consumption. Recent
economic and policy initiatives from the government suggest that it
intends to kick-start the economy by attracting more foreign
capital and boosting manufacturing and infrastructure development,
while remaining fiscally prudent. However, a lot will depend on
execution. In the short-term, earnings and growth are likely to
remain under pressure, but the recent correction has brought
valuations down to a more reasonable level giving rise to stock
specific investment opportunities.
In Australia, the country’s
low-cost resources, modest population growth, high dividend yields
and healthy dividend growth, as well as disciplined capital
management should continue to attract investor interest.
Overall, Asian equities continue to trade at attractive
valuations compared to long-term historical averages and developed
markets. The region has more than 18,000 listed companies, and the
opportunity to find hidden gems remains compellng. The Company will
continue to focus on finding attractive long-term investment
opportunities across the region based on strong fundamental
research. The depth and quality of research provided by Fidelity is
amongst the best in Asia and is
currently undertaken by 53 analysts and 33 portfolio managers.
Nitin draws extensively on this pool of talent in making his
investment decisions and we remain convinced that this is one of
the key points of distinction for your Company.
OTHER MATTERS
Comparative Index
The Board has, in conjunction with the Manager and the Company’s
Broker, been reviewing the Company’s Comparative Index. The Company
uses a Comparative Index against which the variable management fee
is calculated, and which is one of the indices against which
performance is illustrated in various reports published by the
Company. Currently, this is the MSCI All Countries Asia Ex Japan
Index (net) total return (in Sterling terms). This benchmark is
extensively used by the Company’s current peers and is effectively
a mid to mega cap index.
The Company is able to invest in companies of any size of
capitalisation and its objective is “to achieve long term capital
growth principally from the stockmarkets of the Asian Region
excluding Japan”. As previously mentioned, Nitin looks to find
strong businesses, run by trustworthy people and to buy them at a
sensible price. The universe of possible investment is not
constrained by size of company or by its weighting in any benchmark
index. However, smaller companies are favoured as they provide an
opportunity to find mispriced businesses, the “winners of
tomorrow”, before they become well known.
The Board has therefore been considering adopting a smaller
companies Comparative Index and has identified the MSCI All
Countries Asia ex Japan Small Cap (net) total return Index (in
Sterling terms) as a suitable benchmark.
The intention remains that smaller companies are only favoured
in order to achieve the Company’s objective of long-term capital
growth principally from the stockmarkets of the region. Other
reference points, such as achieving long-term capital growth and
outperforming all-cap markets in the region generally would
continue to be relevant measures for the Board and for
investors.
Association of Investment Companies (“AIC”) Sector
Classification
With effect from 28 May 2019, the AIC
Asia Pacific sector has been subdivided into Asia Pacific, Asia Pacific Smaller Companies
and Asia Pacific Income sub-sectors. The AIC automatically included
the Company in the Asia Pacific
sub-sector. However, in light of the considerations discussed
above, the Board feels that for simplicity and consistency it would
be more appropriate for the Company to be included in the Asia
Pacific Smaller Companies sub-sector.
Summary
There will be no change at all in the way the portfolio is managed.
A change is only proposed to the AIC sector classification and the
Comparative Index against which its performance can be measured.
The Board has consulted with its largest investors on this matter
and feedback from the consultation process was overwhelmingly in
favour of making these changes.
Shareholder consent
The Comparative Index is not part of the Investment Objective of
the Company, nor its stated Investment Policy. Nor does it drive
the Portfolio Manager’s choice of investments. A change of
Comparative Index therefore of itself does not represent a material
change of Investment Policy, which would require shareholder
consent. However, the regulatory direction of the FCA and European
regulators is clear that benchmarks, where used, should be clearly
stated. The Board therefore proposes to take the opportunity to
incorporate the new Comparative Index in the formal Investment
Policy of the Company. For this reason, and also for the sake of
good order in the light of the relationship between the variable
management fee and the Comparative Index, the Board wishes
voluntarily to seek shareholder approval for the change at the AGM
on 6 December 2019. Subject to the
vote being approved, the change of Comparative Index would take
effect from 1 February 2020 (the
start of the second half of the Company’s reporting year).
The detailed proposed Investment Policy is set out in the
Appendix to the Notice of Meeting.
BREXIT
Operationally, the Board believes that the Company should be
relatively unaffected by Brexit. However, as the Company holds
investments denominated in currencies other than Sterling,
investors should note that exchange rates may cause the value of
these investments, and the income from them, to rise or fall
commensurate to the volatility in the value of Sterling.
MANAGEMENT FEE
This is the first full year that the new variable fee arrangement
with FIL Investment Services (UK) Limited, the Company’s
Alternative Investment Fund Manager (the “Manager”) has been in
place. The base management fee is 0.70% of net assets per annum. In
addition, and effective from 1 November
2018, there is a +/- 0.20% variation fee based on the
Company’s NAV per share performance relative to the Company’s
Comparative Index. The maximum fee that the Company will now pay is
0.90% of net assets, but if the Company underperforms against the
Comparative Index, then the overall fee could fall as low as 0.50%
of net assets. The revised management fee arrangement has provided
an overall reduction this year from the previous tiered management
fee structure. The fee to 31 July
2019 was £2,262,000 (2018: £2,626,000). This represented
0.78% of net assets throughout the period (2018:0.93%).
Assuming that shareholders vote in favour of the resolution to
amend the Investment Policy and the MSCI All Countries Asia ex
Japan Small Cap Index (in Sterling terms) is adopted as the new
Comparative Index, there will be no impact to any fees accrued
until the date of the change; however over or under performance
will be measured against the new Comparative Index with effect from
1 February 2020 (the start of the
second half of the Company’s reporting year). The performance of
the portfolio is expected to correspond more closely to the
proposed new Comparative Index over time, which should lead to
reduced volatility in the amount of the variable management
fee.
BONUS ISSUE OF SUBSCRIPTION SHARES
The Company issued 1,213,003 ordinary shares of 25 pence on 30 November
2018 following the second exercise date of the conversion
rights attached to the subscription shares. The bonus issue of
subscription shares on the basis of one subscription share for
every five ordinary shares held by qualifying investors was
approved at the Company’s Annual General Meeting on 2 December 2016. As at the date of this Annual
Report, there are 11,103,030 subscription shares remaining.
The final date for exercising the subscription rights will be on
29 November 2019 but notice to
exercise may be given in the 25 busines days preceding 29 November 2019. The exercise price is
392.75 pence per share which is equal
to the published NAV of 366.88 pence
per ordinary share on 2 December 2016
plus a premium of 7%. Further details can be found on the Company’s
website.
SHARES ISSUED
I am pleased to say that in the reporting year the Company’s shares
have traded at a sustained level of premium since December 2018. Therefore, in order to issue
shares, the Board applied for a block listing authority for
6,866,940 ordinary shares which is the maximum allowed under the
Company’s current authority as approved by shareholders at the
Annual General Meeting on 13 December
2018. The block listing was effective on 8 February 2019. Since 11
February 2019 and as at the date of this report, 2,617,029
shares have been issued from this block listing. Issuing shares
increases the size of the Company, making it more liquid and allows
for costs to be spread out over a larger asset base.
SHARE REPURCHASES AND TREASURY SHARES
Repurchases of ordinary shares and subscription shares are made at
the discretion of the Board and within guidelines set by it from
time to time and in light of prevailing market conditions. Shares
will only be repurchased when it results in an enhancement to the
NAV of the ordinary shares for the remaining shareholders. In order
to assist in managing the discount, the Board has shareholder
approval to hold in Treasury any ordinary shares repurchased by the
Company, rather than cancelling them. Any shares held in Treasury
would only be re-issued at NAV per share or at a premium to NAV per
share. Any subscription shares repurchased would be cancelled.
No ordinary shares were repurchased for cancellation or for
holding in Treasury and no subscription shares were repurchased for
cancellation in the year under review. No shares have been
repurchased since the end of the reporting period and as at the
date of this report.
DIVIDEND
Subject to shareholders’ approval at the Annual General Meeting
(“AGM”) on 6 December 2019, the
Directors recommend a dividend of 8.80
pence per ordinary share which represents an increase of 60%
over the 5.50 pence paid in 2018.
This dividend will be payable on 11 December
2019 to shareholders on the register at close of business on
25 October 2019 (ex-dividend date
24 October 2019). The dividend has
increased significantly this year, however Shareholders should be
reminded that as the Company’s objective is long-term capital
growth; the level of dividend is a function of a particular year’s
income and it should not be assumed that dividends will continue to
be paid in the future.
BOARD OF DIRECTORS
I am pleased to welcome Clare Brady
as a new member of the Board with effect from 1 August 2019. Clare is a governance professional
with 30 years’ experience in banking and financial services. In the
private sector, she has headed audit and oversight functions at
Barclays Capital, HSBC and Republic National Bank of New York and was also a Managing Director at
Deutsche Bank in London and
Singapore. In the public sector,
Clare was the Head of Audit at the Bank of England representing the UK on the European
Systems of Central Banks (“ESCB”) and also at the G10 meetings of
Central Banks. She held the position of Auditor General at the
World Bank, based in Washington
D.C., where she was a Non-Executive Director of the
Institute of Internal Auditors (“IIA”). More recently, she has been
a Director of the International Monetary Fund (“IMF”), also based
in Washington D.C.
The Board will be refreshing its membership over the course of
the next two years. Following Clare’s appointment there are
currently six Directors on the Board. The objective of the Board
refreshment process is to bring new talent and skills to the Board
but not at the cost of losing market knowledge, fund management
expertise, as well as knowledge of the Company and its relationship
with the Manager. However, the Directors have concluded that over
time the Board should revert to a membership of five and it is
expected that Philip Smiley will
retire in the coming year.
All Directors, with the exception of Clare Brady, are subject to annual re-election
at the forthcoming AGM. Clare Brady
being newly appointed is subject to election at the AGM on
6 December 2019. The Directors’
biographies are included in the Annual Report, and between them,
they have a wide range of appropriate skills and experience to form
a balanced Board of the Company.
ANNUAL GENERAL MEETING
The AGM of the Company will be held at 11.00
am on 6 December 2019 at
Fidelity’s offices at 4 Cannon Street, London EC4M 5AB (nearest tube stations are
St Paul’s or Mansion House). Full details of the meeting are given
in the Annual Report.
This is our opportunity to meet as many shareholders as possible
and I hope, therefore, that you will be able to join us. In
addition to the formal business of the meeting, Nitin will be
making a presentation on the year’s results and the prospects for
the Company for the year to come.
KATE BOLSOVER
Chairman
14 October 2019
PORTFOLIO MANAGER’S REVIEW
QUESTION
What has the market environment been like in the year under
review?
ANSWER
Stock markets have been choppy globally over the last year as
investors try to balance prospects of declining interest rates and
fiscal stimulus with an ongoing slowdown in economic growth. This
has created volatility which is not uncommon late in the business
cycle.
In this environment, the Comparative Index returned 3.9%
(including dividends) relative to a long-term average return of
7-10%. Against this, the MSCI All Countries Asia ex Japan Small Cap
(net) total return Index declined by around 4.2% (including
dividends).
Within this, performance of larger companies and specially those
perceived as growth companies was better than smaller companies and
value stocks. This was also the case globally, with the MSCI World
Value Index performing materially worse than the MSCI World Growth
Index. The result is that several well known value managers have
had a tough time recently.
These trends between growth and value are part and parcel of
investing in the stock market and can capture the imagination of
both the media and investors from time-to-time before fading away.
It is not possible to forecast the duration or magnitude of these
swings but historically they always reverse. To use Howard Marks’
pendulum analogy: “the pendulum always swings one way and then the
other, rarely settling at an equilibrium”.
QUESTION
Can you comment on the Company’s performance over the last
year?
ANSWER
My comments regarding performance refer to the NAV of the Company
rather than the share price. Over the long-term, the share price
will approximate the underlying NAV, but in the short-term, the
share price can (and will) often diverge from the NAV.
Over my tenure, the NAV has grown by 14.1% p.a., outperforming
both the small and large cap indices in Asia over this period.
Similarly, the NAV appreciated by 8.2% versus 3.9% for the large
cap index and -4.2% for the small cap index over the year under
review.
PERFORMANCE – FUND NAV VERSUS INDICES
AND PEER GROUP
|
Fidelity
Asian
Values PLC
(undiluted)
NAV |
Large Cap
Index1 |
Small Cap
Index2 |
Average of
Asian
Investment
Trusts3 |
1 August 2015 – 31 July 2016 |
+33.8% |
+15.8% |
+13.4% |
+17.6% |
1 August 2016 – 31 July 2017 |
+19.3% |
+28.2% |
+15.9% |
+23.8% |
1 August 2017 – 31 July 2018 |
+2.2% |
+5.7% |
+5.0% |
+4.8% |
1 August 2018 – 31 July 2019 |
+8.2% |
+3.9% |
- 4.2% |
+1.9% |
Total Returns over Tenure |
+71.4% |
+52.6% |
+21.8% |
+53.5% |
Annualised Returns over Tenure |
+14.1% |
+10.9% |
+5.2% |
+10.8% |
|
========= |
========= |
========= |
========= |
Source: Fidelity International, 31 July
2019.
1 Large Cap Index is the MSCI All Countries
Asia ex Japan Index.
2 Small Cap Index is the MSCI All Countries
Asia ex Japan Small Cap (net) total return Index.
3 Morningstar Direct, Association of Investment
Companies (AIC) sector – Asia
Pacific ex Japan peer group
ex income funds.
Performance figures are net of fees in GBP
As our investment philosophy is based on owning undervalued
stocks, I have always had a significant share of funds invested in
value stocks, and more specifically small and mid cap value
stocks.
FUND AND INDEX SPLIT BY MARKET CAP AND
STYLE (AS AT 31 JULY 2019)
|
Fund weight
% |
Large
Cap Index1
Weight
% |
Small
Cap Index2
weight % |
Large Growth |
5.5 |
48.4 |
– |
Large Value |
14.2 |
38.5 |
– |
Mid Growth |
0.4 |
7.4 |
– |
Mid Value |
11.5 |
5.7 |
– |
Not Classified |
0.6 |
– |
0.1 |
Small Growth |
14.7 |
– |
54.8 |
Small Value |
51.7 |
– |
45.1 |
Cash |
1.4 |
– |
– |
|
--------------- |
--------------- |
--------------- |
Sources: Fidelity International, Factset, 31 July 2019.
1 Large Cap Index is the MSCI All Countries Asia ex
Japan Index.
2 Small Cap Index is the MSCI All Countries Asia ex
Japan Small Cap (net) total return Index.
Over the last 4 years, small companies have been out of favour.
Despite this we have been able to outperform broad indices over
this period. This is due to the hard work and diligence of
Fidelity’s small cap research team in Asia. The team is both motivated and excellent
at what it does. I would like to thank them for their support as
this performance would not have been possible without them.
If we analyse the performance in a bit more detail, the biggest
driver of performance has been our ability to avoid big losses in
situations where our investment thesis was incorrect.
As you can see from the table below, our losses from stocks
where we got it wrong and suffered a material loss (stock dropping
more than 30%) have been far lower than our profits from stocks
where we have got it right and made material gains. Avoiding a
big loss when we are wrong is key to our investment process. To
achieve this, we need to:
· own good
businesses;
· that are run by
competent and honest managers;
· with well-financed
balance sheets and ensure that;
· our buying price
leaves enough margin of safety for mistakes and bad luck.
STOCK LEVEL PERFORMANCE (AS ON
31 JULY 2019)
Profit/(Loss) as % of Fund NAV |
Cumulative
over
4 Years |
Last
Year |
Stocks which dropped > 30% |
(11.7%) |
(3.4%) |
Stocks which appreciated more than
30% |
54.3% |
10.4% |
Source: Fidelity International, 31 July
2019.
Finally, I would also like to highlight that a weak Sterling
helped both the NAV and Index returns by around 4% p.a. over the
last 4 years. This was primarily due to the prevailing economic and
political uncertainty currently in the UK. This may or may not
reverse in coming years.
QUESTION
How concerned should investors be about the impact of heightened
political risk on trade and growth?
ANSWER
The world has been becoming polarised and tense. Uncertainty
increased a notch with intensifying friction between China and the USA, tensions between Korea and Japan, confusion around possible Brexit
scenarios, Hong Kong protests and
increased pressures from serious issues like climate change, a
reducing water table and polarised electorates.
Political climate and economic policy impacts businesses in
different forms which are not often easy to understand. The first
order impacts are generally transparent – for example, a ban on
Huawei is bad for Huawei and its suppliers. This is obvious.
However, there will be knock on effects like increased Chinese
investments in technology which over time will change the industry
as well as the demand-supply equation in many other sectors. This
changes gradually over years and is much harder to analyse.
I made the same point last year. The world economy is a complex
system and we need to be careful about drawing knee jerk
conclusions.
That said, we as investors need to remain alert to the
implications of political crosswinds. My framework for considering
the potential impact of changing policy focuses on two
elements:
(1) Avoiding businesses where either the
risk of policy impact is high or where the stock market has failed
to understand the unintended consequences of policy change.
(2) Not allowing myself to become frozen
with fear, instead remaining vigilant for new opportunities.
Markets sometimes punish stocks in the eye of the storm of a policy
decision. I am especially interested in these scenarios as they can
throw up wonderful businesses going through challenging
circumstances which are likely to improve with time. These sorts of
companies can be excellent investments for the patient
investor.
QUESTION
Have there been any major changes to your strategy?
ANSWER
There has been no change in my investment philosophy. It has been
built over years of practice, observation and empirical evidence. I
do not feel the need to change it. And our returns over the coming
five years will largely be driven by the hard work of the team and
the consistency of application of our investment philosophy.
The investment philosophy is straight forward. What we are
trying to do is buy good businesses run by competent and
honest management teams and buy them at prices that
make sense. To accomplish this, my main areas of focus have
always been:
The business
Understanding the business is the first and the most critical step.
We are trying to understand key drivers of the business, its
industry structure, its management, its history, its competitive
advantage and its durability.
We start by analysing financial statements for the last 15-20
years to understand the returns on capital that the business is
able to generate through an economic cycle.
This is followed up with numerous meetings which range from the
management team of the business, to its vendors, customers,
ex-employees, competitors, industry experts and regulators. Whoever
can help us understand the business better.
Gauging the management team on skill and integrity is important
as we only want to invest in companies with honest and competent
management teams. An incompetent management will destroy your
capital and a dishonest one will steal it.
Getting a holistic picture of the business, its environment,
management and challenges allows us to understand opportunities and
risks associated with the business. Without doing this, we would be
flying blind.
Valuation
Buying a good business which is overvalued can undo many years of
hard work. The valuation point at which we enter a stock is
important for two reasons:
a. It determines the base price
for compounding capital.
b. It determines our margin of
safety. We will make mistakes. Starting with a margin of safety
allows us to limit our losses when we are wrong.
The exact valuation metric to use varies by industry and
situation. For example, I may look at the price-earnings (“P/E”)
ratio for a low capital intensity business with moats based on
intangible assets like brand or trademarks, or I may look at
Enterprise Value to replacement cost for a short cycle standardised
product business. The idea being that we want to use the most
logical metric for any given situation.
While the metric may vary, what is important is to have margin
of safety.
Downside protection
As I mentioned earlier, key to our process is avoiding big losses.
In my experience, material downside in a stock arises when one or
more of the following situations exist:
· Untested business
model.
· High financial
leverage.
· Over paying for a
good business.
· Paying a reasonable
price for a bad business.
· Getting the cycle
wrong - whether it is the broad economic cycle or an industry
specific down cycle.
We pay a lot of attention to avoid these situations. Our
philosophy is that return of capital is as important as
return on capital.
QUESTION
What have been the major changes to the portfolio over the
period?
ANSWER
There have been two changes from last year which I would like to
discuss.
First, I have deployed a lot more capital during the last year.
As investors have paid greater attention to larger growth
companies, I found several small companies which were being ignored
and hence available on attractive prices. As a result, we have
moved from a substantial cash position at the end of last year to a
small amount of leverage now.
Our deployment of capital in these attractively valued
businesses is represented through the aggregate P/E ratio of our
holdings which now stands between 8-9x (substantially lower
compared to the market average and our own past).
Such a P/E ratio is often associated with distressed or troubled
situations. However, on aggregate, our holdings demonstrate robust
balance sheets and high as well as stable returns on equity.
To put this in context, the MSCI All Countries Asia ex Japan
Index trades at around 14x P/E ratio, S&P 500 at around 17x and
FTSE at around 12-13x.
I understand that the businesses we are buying are out of
fashion with little investor interest. But I remain as convinced as
ever that owning good businesses, run by able management teams and
buying them at attractive prices has to be a sound way to
invest.
The other change has been, an increased allocation to
non-banking finance companies (“NBFC”) in India. Over the last 12-18 months there has
been a crisis building in this sector with some prominent names in
substantial financial difficulty.
This has led to extreme risk aversion and attractive valuations
for the whole sector. These businesses are an essential part of the
credit delivery mechanism in India
as large parts of the economy are either under banked or
‘unbankable’ by traditional banks. Hence, NBFCs that survive will
emerge stronger and will operate in an industry with substantially
less competition.
We have done a lot of work on this sector and backed the
companies we think have the best business models, management teams,
credit underwriting skills and funding availability. Our entry
price leaves enough margin of safety. We are confident and time
will tell if we are right.
QUESTION
What is your outlook over the next 12 months?
ANSWER
I will say exactly what I said last year, “forecasts tell you more
about the forecaster than the future.” I try to spend my time
understanding businesses that I invest in rather than forecasting
the direction of the economy or the stock market.
The world is uncertain, and I expect it to be a bumpy ride over
the next 3 years. However, I also feel that the stock market has
become very polarised and hence we have bought many excellent
businesses at attractive prices over the last 12 months. This
should serve us well in the coming three to five years.
The ride might be bumpy but given the quality of the businesses
the Company owns, I feel confident about the destination.
NITIN BAJAJ
Portfolio Manager
14 October 2019
STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provision C.2.1 of the 2016 UK Corporate Governance
Code, the Board has a robust ongoing process for identifying,
evaluating and managing the principal risks and uncertainties faced
by the Company. The Board, with the assistance of the Alternative
Investment Fund Manager (FIL Investment Services (UK) Limited/the
“Manager”), has developed a risk matrix which, as part of the risk
management and internal controls process, identifies the key risks
that the Company faces. The risks identified are placed on the
Company’s risk matrix and graded appropriately. Procedures are in
place to identify emerging risks which might impact the Company.
These include industry trends, economic/political risk, regulatory
developments, technological changes and threats to the Company’s
strategy and business model. These are reviewed and assessed in
terms of impact, likelihood and timescale of potential threats.
This process, together with the policies and procedures for the
mitigation of risks, is updated and reviewed regularly in the form
of comprehensive reports considered by the Audit Committee. The
Board determines the nature and extent of any risks it is willing
to take in order to achieve its strategic objectives.
The Manager also has responsibility for risk management for the
Company. It works with the Board to identify and manage the
principal risks and uncertainties and to ensure that the Board can
continue to meet its UK corporate governance obligations.
The Board considers the following as the principal risks and
uncertainties faced by the Company. The risks are unchanged from
those reported in the prior year apart from updating the “Market
risk” to include “Economic and Political risk” and the addition of
the “Key Person risk” and the classification of the “Cybercrime
risk” as a principal risk.
Principal Risks |
Description and Risk Mitigation |
Market, Economic and Political
risk |
The Company’s assets
consist mainly of listed securities and the principal risks are
therefore market related such as market downturn, interest rate
movements, and exchange rate movements. Political change or
protectionism can also impact the Company’s assets, such as a
US-led trade war, North Korean conflict, political tensions in the
Eurozone and Brexit risks. Further commentary on these risks is
contained in the Portfolio Manager’s Review and his success or
failure to protect and increase the Company’s assets against this
background is core to the Company’s continued success.
Risks to which the Company is exposed in the market risk category,
are included in Note 17 to the Financial Statements together with
summaries of the policies for managing these risks. |
Investment Performance
risk |
The achievement of the Company’s
performance objective relative to the market requires the taking of
risk, such as strategy, asset allocation and stock selection, and
may lead to underperformance of the Comparative Index. The Board
reviews the performance of the portfolio against the Comparative
Index and that of its competitors and the outlook for the markets
with the Portfolio Manager at each Board meeting. It considers the
asset allocation of the portfolio and a range of risk measures
within the parameters of the investment objective and strategy. The
Portfolio Manager is responsible for actively managing and
monitoring the portfolio selected in accordance with the asset
allocation parameters and seeks to ensure that individual stocks
meet an acceptable risk/reward profile. The emphasis is on
long-term performance as the Company risks volatility of
performance in the shorter-term. |
Key Person risk |
There is a risk that the Manager has
an inadequate succession plan for the Portfolio Manager given the
importance of his profile and differentiated style in relation to
the Company’s investment philosophy and strategy. The Manager
identifies key dependencies which are then addressed through
succession plans. Fidelity has succession plans in place for
portfolio managers which have been discussed with the Board. |
Discount Control risk |
The price of the Company’s shares
and its premium or discount to NAV are factors which are not within
the Company’s total control. Some short-term influence over the
discount may be exercised by the use of share repurchases at
acceptable prices within the parameters set by the Board. The
Company’s share price, NAV and discount volatility are monitored
daily by the Manager and considered by the Board regularly. |
Gearing risk |
The Company has the option to invest
up to the total of any loan facilities or to use CFDs to invest in
equities. The principal risk is that while in a rising market the
Company will benefit from gearing, in a falling market the impact
would be detrimental. Other risks are that the cost of gearing may
be too high or that the term of the gearing inappropriate in
relation to market conditions. The Company currently has no bank
loans and gears through the use of long CFDs which provide greater
flexibility and are cheaper than bank loans. The Board regularly
considers the level of gearing and gearing risk and sets limits
within which the Manager must operate. |
Derivatives risk |
Derivative instruments are used to
enable both the protection and enhancement of investment returns.
There is a risk that the use of derivatives may lead to a higher
volatility in the NAV and the share price than might otherwise be
the case. The Board has put in place policies and limits to control
the Company’s use of derivatives and exposures. These are monitored
on a daily basis by the Manager’s Compliance team and regular
reports are provided to the Board. Further details on derivative
instruments risk is included in Note 17 to the Financial
Statements. |
Currency risk |
The functional currency
and presentational currency of the Company in which it reports its
results is Sterling. Most of its assets and its income are
denominated in other currencies. Consequently, it is subject to
currency risk on exchange rate movements between Sterling and these
other currencies. It is the Company’s current policy not to hedge
currency risks against its own base currency.
Further details can be found in Note 17 to the Financial
Statements. |
Cybercrime risk |
The risk from cybercrime is
significant. Cybercrime threats evolve rapidly and consequently the
risk is regularly re-assessed and the Board receives regular
updates from the Manager in respect of the type and possible scale
of cyberattacks. The Manager’s technology team has developed a
number of initiatives and controls in order to provide enhanced
mitigating protection to this ever increasing threat and the Board
is updated on these as part of the reporting it receives from the
Manager. |
Other risks facing the Company include:
TAX AND REGULATORY RISKS
A breach of Section 1158 of the Corporation Tax Act 2010 could lead
to a loss of investment trust status resulting in the Company being
subject to tax on capital gains.
The Board monitors tax and regulatory changes at each Board
meeting and through active engagement with regulators and trade
bodies by the Manager.
OPERATIONAL RISKS
The Company relies on a number of third party service providers,
principally the Manager, Registrar, Custodian and Depositary. It is
dependent on the effective operation of the Manager’s control
systems and those of its service providers with regard to the
security of the Company’s assets, dealing procedures, accounting
records and the maintenance of regulatory and legal requirements.
The Registrar, Custodian and Depositary are all subject to a
risk-based programme of internal audits by the Manager. In
addition, service providers’ own internal control reports are
received by the Board on an annual basis and any concerns
investigated.
CONTINUATION VOTE
A continuation vote takes place every five years. There is a risk
that shareholders do not vote in favour of continuation during
periods when performance is poor. The next continuation vote will
be at the AGM in 2021.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 UK Corporate
Governance Code, the Directors have assessed the prospects of the
Company over a longer period than the twelve month period required
by the “Going Concern” basis. The Company is an investment trust
with the objective of achieving long-term capital growth. The Board
considers long-term to be at least five years, and accordingly, the
Directors believe that five years is an appropriate investment
horizon to assess the viability of the Company, although the life
of the Company is not intended to be limited to this or any other
period.
In making an assessment on the viability of the Company, the
Board has considered the following:
· The ongoing
relevance of the investment objective in prevailing market
conditions;
· The Company’s NAV
and share price performance;
· The principal risks
and uncertainties facing the Company, as set out above, and their
potential impact;
· The future demand
for the Company’s shares;
· The Company’s share
price relative to the NAV;
· The liquidity of the
Company’s portfolio;
· The level of income
generated by the Company; and
· Future income and
expenditure forecasts.
The Company’s performance has been strong over the five year
reporting period to 31 July 2019,
with a NAV total return of 83.6%, a share price total return of
114.7% and a Comparative Index return of 63.6%. The Board regularly
reviews the investment policy and considers it to be appropriate.
The Board has concluded that there is 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 years based on the
following considerations:
· The Manager’s
compliance with the Company’s investment objective, its investment
strategy and asset allocation;
· The fact that the
portfolio comprises sufficient readily realisable securities which
can be sold to meet funding requirements if necessary;
· The Board’s discount
management policy; and
· The ongoing
processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company’s total
assets.
In addition, the Directors’ assessment of the Company’s ability
to operate in the foreseeable future is included in the Going
Concern Statement in the Directors’ Report. The Company is also
subject to a continuation vote at the AGM in 2021 and the Board
expect that the vote, when due, will be approved.
GOING CONCERN STATEMENT
The Directors have considered the Company’s investment objective,
risk management policies, liquidity risk, credit risk, capital
management policies and procedures, the nature of its portfolio
(being mainly securities which are readily realisable) and its
expenditure and cash flow projections, and have concluded that the
Company has adequate resources to continue to adopt the going
concern basis for at least twelve months from the date of this
Annual Report. The prospects of the Company over a period longer
than twelve months can be found in the Viability Statement.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law they have
elected to prepare the Financial Statements in accordance with UK
Generally Accepted Accounting Practice, including FRS 102: The
Financial Reporting Standard applicable in the UK and Republic of Ireland. The Financial Statements
are required by law to give a true and fair view of the state of
affairs of the Company and of the profit or loss for the
period.
In preparing these Financial Statements the Directors are
required to:
· select suitable
accounting policies and then apply them consistently;
· make judgements and
estimates that are reasonable and prudent;
· state whether
applicable UK Accounting Standards have been followed, subject to
any material departures disclosed and explained in the Financial
Statements; and
· prepare the
Financial Statements on the going concern basis unless it is
inappropriate to assume that the Company will continue in
business.
The Directors are responsible for ensuring that adequate
accounting records are kept which disclose with reasonable accuracy
at any time the financial position of the Company and to enable
them to ensure that the Financial Statements 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.
Under applicable law and regulations the Directors are also
responsible for preparing a Strategic Report, a Directors’ Report,
a Corporate Governance Statement and a Directors’ Remuneration
Report that comply with that law and those regulations.
The Directors have delegated responsibility to the Manager for
the maintenance and integrity of the corporate and financial
information included on the Company’s pages of the Manager’s
website at www.fidelityinvestmenttrusts.com to the Manager.
Visitors to the website need to be aware that legislation in the UK
governing the preparation and dissemination of the Financial
Statements may differ from legislation in their jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial
Statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit of the Company; and
· The 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 it faces.
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 performance, business model and strategy.
Approved by the Board on 14 October
2019 and signed on its behalf by:
KATE
BOLSOVER
Chairman
Income Statement for the year ended 31
July 2019
|
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
Notes |
revenue
£’000 |
capital
£’000 |
total
£’000 |
revenue
£’000 |
capital
£’000 |
total
£’000 |
Gains on investments |
10 |
– |
16,606 |
16,606 |
– |
4,084 |
4,084 |
Losses on derivative
instruments |
11 |
– |
(573) |
(573) |
– |
(1,907) |
(1,907) |
Income |
3 |
11,481 |
– |
11,481 |
8,747 |
– |
8,747 |
Investment management fees |
4 |
(2,030) |
(232) |
(2,262) |
(2,626) |
– |
(2,626) |
Other expenses |
5 |
(772) |
(39) |
(811) |
(696) |
– |
(696) |
Foreign exchange gains |
|
– |
879 |
879 |
– |
568 |
568 |
|
|
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
Net return on ordinary activities
before finance costs and taxation |
|
8,679 |
16,641 |
25,320 |
5,425 |
2,745 |
8,170 |
Finance costs |
6 |
(678) |
– |
(678) |
(779) |
– |
(779) |
|
|
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
Net return on ordinary activities
before taxation |
|
8,001 |
16,641 |
24,642 |
4,646 |
2,745 |
7,391 |
Taxation on return on ordinary
activities |
7 |
(492) |
4 |
(488) |
(754) |
141 |
(613) |
|
|
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
Net return on ordinary activities
after taxation for the year |
|
7,509 |
16,645 |
24,154 |
3,892 |
2,886 |
6,778 |
|
|
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
Basic return per ordinary
share |
8 |
10.70p |
23.71p |
34.41p |
5.70p |
4.23p |
9.93p |
|
|
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
Diluted return per ordinary
share |
8 |
10.58p |
23.46p |
34.04p |
5.67p |
4.20p |
9.87p |
|
|
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
The Company does not have any other comprehensive income.
Accordingly, the net return on ordinary activities after taxation
for the year is also the total comprehensive income for the year
and no separate Statement of Comprehensive Income has been
presented.
The total column of this statement represents the Income
Statement of the Company. The revenue and capital columns are
supplementary and presented for information purposes as recommended
by the Statement of Recommended Practice issued by the AIC.
No operations were acquired or discontinued in the year and all
items in the above statement derive from continuing operations.
The Notes form an integral part of these Financial
Statements.
Statement of Changes in Equity for the year ended 31 July 2019
|
Notes |
share
capital
£’000 |
share
premium
account
£’000 |
capital
redemption
reserve
£’000 |
other
non-
distributable
reserve
£’000 |
other
reserve
£’000 |
capital
reserve
£’000 |
revenue
reserve
£’000 |
total
shareholders’
funds
£’000 |
Total shareholders’ funds at 31
July 2018 |
|
17,167 |
24,316 |
3,197 |
7,367 |
8,613 |
221,309 |
6,005 |
287,974 |
Net return on ordinary activities
after taxation for the year |
|
– |
– |
– |
– |
– |
16,645 |
7,509 |
24,154 |
Issue of ordinary shares on the
exercise of rights attached to subscription shares |
14 |
303 |
4,327 |
– |
– |
– |
– |
– |
4,630 |
Issue of new ordinary shares |
14 |
588 |
9,430 |
– |
– |
– |
– |
– |
10,018 |
Dividend paid to shareholders |
9 |
– |
– |
– |
– |
– |
– |
(3,777) |
(3,777) |
|
|
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
Total shareholders’ funds at 31
July 2019 |
|
18,058 |
38,073 |
3,197 |
7,367 |
8,613 |
237,954 |
9,737 |
322,999 |
|
|
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
Total shareholders’ funds at 31
July 2017 |
|
16,872 |
20,232 |
3,197 |
7,367 |
8,613 |
218,423 |
5,487 |
280,191 |
Net return on ordinary activities
after taxation for the year |
|
– |
– |
– |
– |
– |
2,886 |
3,892 |
6,778 |
Issue of ordinary shares on the
exercise of rights attached to subscription shares |
14 |
295 |
4,084 |
– |
– |
– |
– |
– |
4,379 |
Dividend paid to shareholders |
9 |
– |
– |
– |
– |
– |
– |
(3,374) |
(3,374) |
|
|
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
------------------- |
Total shareholders’ funds at 31
July 2018 |
|
17,167 |
24,316 |
3,197 |
7,367 |
8,613 |
221,309 |
6,005 |
287,974 |
|
|
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
=========== |
The Notes form an integral part of these Financial
Statements.
Balance Sheet as at 31 July
2019
Company number 3183919
|
Notes |
2019
£’000 |
2018
£’000 |
Fixed assets |
|
|
|
Investments |
10 |
312,681 |
273,714 |
Current assets |
|
|
|
Derivative instruments |
11 |
1,537 |
1,529 |
Debtors |
12 |
3,325 |
2,307 |
Amounts held at futures clearing
houses and brokers |
|
2,905 |
2,363 |
Cash at bank |
|
5,796 |
11,468 |
|
|
------------------- |
------------------- |
|
|
13,563 |
17,667 |
|
|
=========== |
=========== |
Creditors |
|
|
|
Derivative instruments |
11 |
(2,192) |
(960) |
Other creditors |
13 |
(1,053) |
(2,447) |
|
|
------------------- |
------------------- |
|
|
(3,245) |
(3,407) |
|
|
------------------- |
------------------- |
Net current assets |
|
10,318 |
14,260 |
|
|
------------------- |
------------------- |
Net assets |
|
322,999 |
287,974 |
|
|
=========== |
=========== |
Capital and reserves |
|
|
|
Share capital |
14 |
18,058 |
17,167 |
Share premium account |
15 |
38,073 |
24,316 |
Capital redemption reserve |
15 |
3,197 |
3,197 |
Other non-distributable reserve |
15 |
7,367 |
7,367 |
Other reserve |
15 |
8,613 |
8,613 |
Capital reserve |
15 |
237,954 |
221,309 |
Revenue reserve |
15 |
9,737 |
6,005 |
|
|
------------------- |
------------------- |
Total shareholders’
funds |
|
322,999 |
287,974 |
|
|
=========== |
=========== |
Net asset value per ordinary
share |
16 |
447.16p |
419.36p |
|
|
=========== |
=========== |
Diluted net asset value per
ordinary share |
16 |
439.91p |
413.64p |
|
|
=========== |
=========== |
The Financial Statements were approved by the Board of Directors
on 14 October 2019 and were signed on
its behalf by:
KATE
BOLSOVER
Chairman
The Notes form an integral part of these Financial
Statements.
Notes to the Financial Statements
1 PRINCIPAL ACTIVITY
Fidelity Asian Values PLC is an Investment Company incorporated in
England and Wales with a premium listing on the London
Stock Exchange. The Company’s registration number is 3183919, and
its registered office is Beech Gate, Millfield Lane, Lower Kingswood, Tadworth,
Surrey, KT20 6RP. The Company has been approved by HM Revenue
& Customs as an Investment Trust under Section 1158 of the
Corporation Tax Act 2010 and intends to conduct its affairs so as
to continue to be approved.
2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance
with UK Generally Accepted Accounting Practice (“UK GAAP”),
including FRS 102 “The Financial Reporting Standard applicable in
the UK and Republic of Ireland”, issued by the Financial Reporting
Council (“FRC”). The Financial Statements have also been prepared
in accordance with the Statement of Recommended Practice: Financial
Statements of Investment Trust Companies and Venture Capital Trusts
(“SORP”) issued by the Association of Investment Companies (“AIC”),
in November 2014 and updated in
February 2018 with consequential
amendments. The Company is exempt from presenting a Cash Flow
Statement as a Statement of Changes in Equity is presented and
substantially all of the Company’s investments are highly liquid
and are carried at market value.
a) Basis of accounting
The Financial Statements have been prepared on a going concern
basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative
instruments.
b) Significant accounting estimates and judgements
The Directors make judgements and estimates concerning the future.
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, such as expectations of
future events, and are believed to be reasonable under the
circumstances. Actual results may differ from these estimates. The
judgements required in order to determine the appropriate valuation
methodology of level 3 financial instruments have a risk of causing
an adjustment to the carrying amounts of assets. These judgements
include making assessments of the possible valuations in the event
of a listing or other marketability related risks.
c) Segmental reporting
The Company is engaged in a single segment business and, therefore,
no segmental reporting is provided.
d) Presentation of the Income Statement
In order to reflect better the activities of an investment company
and in accordance with guidance issued by the AIC, supplementary
information which analyses the Income Statement between items of a
revenue and capital nature has been prepared alongside the Income
Statement. The net revenue return after taxation for the year is
the measure the Directors believe appropriate in assessing the
Company’s compliance with certain requirements set out in Section
1159 of the Corporation Tax Act 2010.
e) Income
Income from equity investments is accounted for on the date on
which the right to receive the payment is established, normally the
ex-dividend date. Overseas dividends are accounted for gross of any
tax deducted at source. Amounts are credited to the revenue column
of the Income Statement. Where the Company has elected to receive
its dividends in the form of additional shares rather than cash,
the amount of the cash dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of
the shares received over the amount of the cash dividend is
recognised in the capital column of the Income Statement. Special
dividends are treated as a revenue receipt or a capital receipt
depending on the facts and circumstances of each particular
case.
Derivative instrument income received from dividends on long
contracts for difference (“CFDs”) are accounted for on the date on
which the right to receive the payment is established, normally the
ex-dividend date. The amount net of tax is credited to the revenue
column of the Income Statement.
Interest received on CFDs and bank deposits are accounted for on
an accruals basis and credited to the revenue column of the Income
Statement.
f) Investment management fees and other expenses
Investment management fees and other expenses are accounted for on
an accruals basis and are charged as follows:
· The base investment
management fee is allocated in full to revenue;
· The variable
investment management fee, effective 1
November 2018, is charged/credited to capital as it is based
on the performance of the net asset value per share relative to the
Comparative Index; and
· All other expenses
are allocated in full to revenue with the exception of those
directly attributable to share issues or other capital events.
g) Functional currency and foreign exchange
The Directors, having regard to the Company’s share capital, the
predominant currency in which its investors operate and the
currency in which expenses are paid, have determined its functional
currency to be UK Sterling. UK Sterling is also the currency in
which the Financial Statements are presented. Transactions
denominated in foreign currencies are reported in UK Sterling at
the rate of exchange ruling at the date of the transaction. Assets
and liabilities in foreign currencies are translated at the rates
of exchange ruling at the Balance Sheet date. Foreign exchange
gains and losses arising on translation are recognised in the
Income Statement as a revenue or a capital item depending on the
nature of the underlying item to which they relate.
h) Finance costs
Finance costs comprise interest on bank overdrafts and interest
paid on CFDs, which are accounted for on an accruals basis, and
dividends paid on short CFDs, which are accounted for on the date
on which the obligation to incur the cost is established, normally
the ex-dividend date. Finance costs are charged in full to the
revenue column of the Income Statement.
i) Taxation
The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas
income less amounts recoverable under taxation treaties. Taxation
is charged or credited to the revenue column of the Income
Statement, except where it relates to items of a capital nature, in
which case it is charged or credited to the capital column of the
Income Statement. Where expenses are allocated between revenue and
capital any tax relief in respect of the expenses is allocated
between revenue and capital returns on the marginal basis using the
Company’s effective rate of corporation tax for the accounting
period. The Company is an approved Investment Trust under Section
1158 of the Corporation Tax Act 2010 and is not liable for UK
taxation on capital gains.
Deferred taxation is the taxation expected to be payable or
recoverable on timing differences between the treatment of certain
items for accounting purposes and their treatment for the purposes
of computing taxable profits. Deferred taxation is based on tax
rates that have been enacted or substantively enacted when the
taxation is expected to be payable or recoverable. Deferred tax
assets are only recognised if it is considered more likely than not
that there will be sufficient future taxable profits to utilise
them.
j) Dividend paid
Dividends payable to equity shareholders are recognised when the
Company’s obligation to make payment is established.
k) Investments
The Company’s business is investing in financial instruments with a
view to profiting from their total return in the form of income and
capital growth. This portfolio of investments is managed and its
performance evaluated on a fair value basis, in accordance with a
documented investment strategy, and information about the portfolio
is provided on that basis to the Company’s Board of Directors.
Investments are measured at fair value with changes in fair value
recognised in profit or loss, in accordance with the provisions of
both Section 11 and Section 12 of FRS 102. The fair value of
investments is initially taken to be their cost and is subsequently
measured as follows:
· Listed investments are
valued at bid prices, or last market prices, depending on the
convention of the exchange on which they are listed; and
· Unlisted investments, are
investments which are not quoted, or are not frequently traded, and
are stated at the Directors best estimate of fair value. The
Manager’s Fair Value Committee, which is independent of the
Portfolio Manager’s team, provide a recommendation of fair values
to the Directors based on recognised valuation techniques that take
account of the cost of the investment, recent arm’s length
transactions in the same or similar investments and financial
performance of the investment since purchase.
In accordance with the AIC SORP, the Company includes
transaction costs, incidental to the purchase or sale of
investments, within gains on investments in the capital column of
the Income Statement and has disclosed these costs in Note 10
below.
l) Derivative instruments
When appropriate, permitted transactions in derivative instruments
are used. Derivative transactions into which the Company may enter
include long and short CFDs, forward currency contracts, futures,
options and warrants. Derivatives are classified as other financial
instruments and are initially accounted and measured at fair value
on the date the derivative contract is entered into and
subsequently measured at fair value as follows:
· Long and short CFDs – the
difference between the strike price and the value of the underlying
shares in the contract;
· Futures – the difference
between the contract price and the quoted trade price;
· Warrants – the quoted
trade price for the contract;
· Options – valued based on
similar instruments or the quoted trade price for the contract;
and
· Forward currency contracts
– valued at the appropriate quoted forward foreign exchange rate
ruling at the Balance Sheet date.
Where transactions are used to protect or enhance income, if the
circumstances support this, the income and expenses derived are
included in net income in the revenue column of the Income
Statement. Where such transactions are used to protect or enhance
capital, if the circumstances support this, the income and expenses
derived are included in gains on derivative instruments in the
capital column of the Income Statement. Any positions on such
transactions open at the year end are reflected on the Balance
Sheet at their fair value within current assets or creditors.
m) Debtors
Debtors include securities sold for future settlement, accrued
income and other debtors incurred in the ordinary course of
business. If collection is expected in one year or less (or in the
normal operating cycle of the business, if longer) they are
classified as current assets. If not, they are presented as
non-current assets. They are recognised initially at fair value
and, where applicable, subsequently measured at amortised cost
using the effective interest rate method.
n) Amounts held at futures clearing houses and
brokers
These are amounts held in segregated accounts as collateral on
behalf of brokers and are carried at amortised cost.
o) Other creditors
Other creditors include securities purchased for future settlement,
investment management fees, secretarial and administration fees and
other creditors and expenses accrued in the ordinary course of
business. If payment is due within one year or less (or in the
normal operating cycle of the business, if longer) they are
classified as current liabilities. If not, they are presented as
non-current liabilities. They are recognised initially at fair
value and, where applicable, subsequently measured at amortised
cost using the effective interest rate method.
p) Capital reserve
The following are accounted for in the capital reserve:
· Gains and losses on
the disposal of investments and derivative instruments;
· Changes in the fair value
of investments and derivative instruments held at the year end;
· Foreign exchange gains and
losses of a capital nature;
· Dividends receivable which
are capital in nature;
· Other expenses which are
capital in nature; and
· Taxation charged or
credited relating to items which are capital in nature.
As a result of technical guidance issued by the Institute of
Chartered Accountants in England
and Wales in TECH 02/10: Guidance
on the determination of realised profits and losses in the context
of distributions under the Companies Act 2006, changes in the fair
value of investments which are readily convertible to cash, without
accepting adverse terms at the Balance Sheet date, can be treated
as realised. Capital reserves realised and unrealised are shown in
aggregate as capital reserve in the Statement of Changes in Equity
and the Balance Sheet. At the Balance Sheet date, the portfolio of
the Company consisted of investments listed on a recognised stock
exchange and derivative instruments, contracted with counterparties
having an adequate credit rating, and the portfolio was considered
to be readily convertible to cash, with the exception of the level
3 investments which had unrealised investment holding gains of
£393,000 (2018: unrealised investment holding loss of £296).
3 INCOME
|
year
ended
31.07.19
£’000 |
year
ended
31.07.18
£’000 |
Investment income |
|
|
Overseas dividends |
10,694 |
8,242 |
Overseas scrip dividends |
370 |
299 |
|
------------------ |
------------------ |
|
11,064 |
8,541 |
|
========== |
========== |
Derivative income |
|
|
Dividends received on long CFDs |
126 |
51 |
Interest received on short CFDs |
201 |
90 |
|
------------------ |
------------------ |
|
327 |
141 |
|
========== |
========== |
|
|
|
Other income |
|
|
Deposit interest |
90 |
65 |
|
------------------ |
------------------ |
Total income |
11,481 |
8,747 |
|
========== |
========== |
No special dividends have been recognised in capital (2018:
£nil).
4 INVESTMENT MANAGEMENT FEES
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
revenue
£’000 |
capital
£’000 |
total
£’000 |
revenue
£’000 |
capital
£’000 |
total
£’000 |
Investment management fees |
2,030 |
232 |
2,262 |
2,626 |
– |
2,626 |
|
========== |
========== |
========== |
========== |
========== |
========== |
FIL Investment Services (UK) Limited is the Company’s
Alternative Investment Fund Manager and has delegated portfolio
management to FIL Investments International (“FII”). Both companies
are Fidelity group companies.
From 1 August, 2018, the Company
adopted a new fee arrangement which reduced the base management fee
from 0.90% on the first £200 million of gross assets and 0.85% on
gross assets over £200 million to 0.70% of net assets per annum. In
addition, with effect from 1 November 2018, there is a +/-
0.20% variation fee based on the NAV per share performance relative
to the Comparative Index. Fees are payable monthly in arrears and
are calculated on a daily basis.
5 OTHER EXPENSES
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
revenue
£’000 |
capital
£’000 |
revenue
£’000 |
capital
£’000 |
AIC fees |
21 |
– |
20 |
– |
Custody fees |
133 |
– |
117 |
– |
Depositary fees |
27 |
– |
27 |
– |
Directors’ expenses |
26 |
– |
26 |
– |
Directors’ fees* |
137 |
– |
131 |
– |
Legal and professional fees |
63 |
– |
63 |
– |
Marketing expenses |
146 |
– |
108 |
– |
Printing and publication
expenses |
68 |
– |
57 |
– |
Registrars’ fees |
35 |
– |
36 |
– |
Secretarial and administration fees
payable to the Manager |
75 |
– |
75 |
– |
Sundry other expenses |
13 |
– |
12 |
– |
Fees payable to the Company’s
Independent Auditor for the audit of the Financial Statements |
28 |
– |
24 |
– |
Cost of the issue of new ordinary
shares |
– |
39 |
– |
– |
|
------------------ |
------------------ |
------------------ |
------------------ |
|
772 |
39 |
696 |
– |
|
========== |
========== |
========== |
========== |
* Details of the breakdown of Directors’
fees are disclosed in the Directors’ Remuneration Report.
6 FINANCE COSTS
|
year ended
31.07.19
£’000 |
year ended
31.07.18
£’000 |
Interest on bank overdrafts |
4 |
– |
Interest paid on CFDs |
341 |
362 |
Dividends paid on short CFDs |
333 |
417 |
|
------------------ |
------------------ |
|
678 |
779 |
|
========== |
========== |
7 TAXATION ON RETURN ON ORDINARY
ACTIVITIES
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
revenue
£’000 |
capital
£’000 |
total
£’000 |
revenue
£’000 |
capital
£’000 |
total
£’000 |
a) Analysis of the taxation
charge for the year |
|
|
|
|
|
|
Overseas taxation |
492 |
– |
492 |
754 |
– |
754 |
Indian capital gains tax
received |
– |
(4) |
(4) |
– |
(141) |
(141) |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
Total taxation charge for the
year (see Note 7b) |
492 |
(4) |
488 |
754 |
(141) |
613 |
|
========== |
========== |
========== |
========== |
========== |
========== |
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of
UK corporation tax for an investment trust company of 19.00% (2018:
19.00%). A reconciliation of the standard rate of UK corporation
tax to the taxation charge for the year is shown below:
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
revenue
£’000 |
capital
£’000 |
total
£’000 |
revenue
£’000 |
capital
£’000 |
total
£’000 |
Net return on ordinary activities
before taxation |
8,001 |
16,641 |
24,642 |
4,646 |
2,745 |
7,391 |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
Net return on ordinary activities
before taxation multiplied by the standard rate of UK corporation
tax of 19.00% (2018: 19.00%) |
1,520 |
3,162 |
4,682 |
883 |
521 |
1,404 |
Effects of: |
|
|
|
|
|
|
Capital gains not taxable* |
– |
(3,213) |
(3,213) |
– |
(521) |
(521) |
Income not taxable |
(2,058) |
– |
(2,058) |
(1,587) |
– |
(1,587) |
Excess management expenses |
488 |
44 |
532 |
600 |
– |
600 |
Expenses not deductible |
– |
7 |
7 |
– |
– |
– |
Excess interest paid |
50 |
– |
50 |
109 |
– |
109 |
Overseas taxation expensed |
– |
– |
– |
(5) |
– |
(5) |
Overseas taxation |
492 |
– |
492 |
754 |
– |
754 |
Indian capital gains tax
received |
– |
(4) |
(4) |
– |
(141) |
(141) |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
Total taxation charge for the
year (see Note 7a) |
492 |
(4) |
488 |
754 |
(141) |
613 |
|
========== |
========== |
========== |
========== |
========== |
========== |
* The Company is exempt from UK taxation
on capital gains as it meets the HM Revenue & Customs criteria
for an investment company set out in Section 1159 of the
Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £4,425,000 (2018: £3,905,000), in respect
of excess management expenses of £22,304,000 (2018: £19,503,000)
and excess interest paid of £3,728,000 (2018: £3,466,000), has not
been recognised as it is unlikely that there will be sufficient
future taxable profits to utilise these expenses.
8 RETURN PER ORDINARY SHARE
|
year
ended 31 July 2019 |
year
ended 31 July 2018 |
|
revenue |
capital |
total |
revenue |
capital |
total |
Basic return per ordinary
share |
10.70p |
23.71p |
34.41p |
5.70p |
4.23p |
9.93p |
Diluted return per ordinary
share |
10.58p |
23.46p |
34.04p |
5.67p |
4.20p |
9.87p |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
The basic returns per ordinary share are based on the net
returns on ordinary activities after taxation for the year: revenue
return £7,509,000 (2018: £3,892,000), capital return £16,645,000
(2018: £2,886,000) and total return £24,154,000 (2018: £6,778,000).
These returns are divided by the weighted average number of
ordinary shares in issue during the year of 70,193,856 (2018:
68,277,830).
The diluted returns per ordinary share reflect the notional
dilutive effect that would have occurred if the rights attached to
subscription shares had been exercised and additional ordinary
shares had been issued. The returns on ordinary activities after
taxation for the year used in the diluted calculation are the same
as those for the basic returns above. These returns are divided by
the notional weighted average number of ordinary shares in issue
during the year of 70,964,574 (2018: 68,654,259). This number of
shares reflects the additional number of ordinary shares that could
have been purchased at the average ordinary share price for the
year with the proceeds from the excess of the subscription share
rights exercise price over the average ordinary share price.
9 DIVIDENDS PAID TO SHAREHOLDERS
|
year ended
31.07.19
£’000 |
year ended
31.07.18
£’000 |
Dividend paid |
|
|
Dividend paid of 5.50 pence per
ordinary share for the year ended 31 July 2018 |
3,777 |
– |
Dividend paid of 5.00 pence per
ordinary share for the year ended 31 July 2017 |
– |
3,374 |
|
------------------ |
------------------ |
|
3,777 |
3,374 |
|
========== |
========== |
Dividend proposed |
|
|
Dividend proposed of 8.80 pence per
ordinary share for the year ended 31 July 2019 |
6,380 |
– |
Dividend proposed of 5.50 pence per
ordinary share payable for the year ended 31 July 2018 |
– |
3,777 |
|
------------------ |
------------------ |
|
6,380 |
3,777 |
|
========== |
========== |
The Directors have proposed the payment of a dividend for the
year ended 31 July 2019 of
8.80 pence per ordinary share which
is subject to approval by shareholders at the Annual General
Meeting on 6 December 2019 and has
not been included as a liability in these Financial Statements. The
dividend will be paid on 11 December
2019 to shareholders on the register at the close of
business on 25 October 2019
(ex-dividend date 24 October
2019).
10 INVESTMENTS
|
2019
£’000 |
2018
£’000 |
Listed investments |
312,139 |
273,307 |
Unlisted investments |
542 |
407 |
|
------------------ |
------------------ |
Investments at fair
value |
312,681 |
273,714 |
|
========== |
========== |
Opening book cost |
260,237 |
222,070 |
Opening investment holding
gains |
13,477 |
42,006 |
|
------------------ |
------------------ |
Opening fair value |
273,714 |
264,076 |
|
========== |
========== |
Movements in the year |
|
|
Purchases at cost |
157,608 |
169,420 |
Sales - proceeds |
(135,247) |
(163,866) |
Sales - gains in the year |
6,569 |
32,613 |
Movement in investment holding
gains/(losses) in the year |
10,037 |
(28,529) |
|
------------------ |
------------------ |
Closing fair value |
312,681 |
273,714 |
|
========== |
========== |
Closing book cost |
289,167 |
260,237 |
Closing investment holding
gains |
23,514 |
13,477 |
|
------------------ |
------------------ |
Closing fair value |
312,681 |
273,714 |
|
========== |
========== |
|
year ended
31.07.19
£’000 |
year ended
31.07.18
£’000 |
Gains on investments for the
year |
|
|
Gains on sales of investments |
6,569 |
32,613 |
Investment holding
gains/(losses) |
10,037 |
(28,529) |
|
------------------ |
------------------ |
|
16,606 |
4,084 |
|
========== |
========== |
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of
investments, which are included in the gains on the investments
above, were as follows:
|
year
ended
31.07.19
£’000 |
year
ended
31.07.18
£’000 |
Purchases transaction costs |
207 |
342 |
Sales transaction costs |
292 |
404 |
|
------------------ |
------------------ |
|
499 |
746 |
|
========== |
========== |
The portfolio turnover rate of the year was 52.2% (2018:
62.7%).
11 DERIVATIVE INSTRUMENTS
|
|
|
year ended
31.07.19
£’000 |
year ended
31.07.18
£’000 |
Gains/(losses) on derivative
instruments |
|
|
|
|
Realised (losses)/gains on long CFD
positions closed |
|
|
(36) |
1,332 |
Realised gains/(losses) on short CFD
positions closed |
|
|
636 |
(2,426) |
Realised gains/(losses) on futures
contracts closed |
|
|
284 |
(123) |
Realised losses on options contracts
closed |
|
|
(2,506) |
(200) |
Realised (losses)/gains on forward
contracts |
|
|
(431) |
224 |
Movement in investment holding
losses on long CFDs |
|
|
(903) |
(1,364) |
Movement in investment holding gains
on short CFDs |
|
|
497 |
1,317 |
Movement in investment holding
(losses)/gains on futures |
|
|
(245) |
60 |
Movement in investment holding
gains/(losses) on options |
|
|
2,230 |
(757) |
Movement in investment holding
gains/(losses) on forward currency contracts |
|
|
26 |
(95) |
Movement in investment holding
(losses)/gains on warrants |
|
|
(125) |
125 |
|
|
|
------------------ |
------------------ |
|
|
|
(573) |
(1,907) |
|
|
|
========== |
========== |
|
|
|
|
|
|
|
|
2019
fair value
£’000 |
2018
fair value
£’000 |
Derivative instruments recognised
on the Balance Sheet |
|
|
|
|
Derivative instrument assets |
|
|
1,537 |
1,529 |
Derivative instrument
liabilities |
|
|
(2,192) |
(960) |
|
|
|
------------------ |
------------------ |
|
|
|
(655) |
569 |
|
|
========== |
========== |
|
|
|
|
|
2019 |
2018 |
|
fair value
£’000 |
gross
asset
exposure
£’000 |
fair value
£’000 |
gross
asset
exposure
£’000 |
At the year end the Company held
the following derivative instruments |
|
|
|
|
Long CFDs |
(1,070) |
5,654 |
(167) |
2,726 |
Long future |
(330) |
13,532 |
– |
– |
Short CFDs |
862 |
13,055 |
365 |
13,620 |
Short futures |
85 |
1,401 |
– |
– |
Warrants |
– |
– |
125 |
125 |
Written put option |
(133) |
1,101 |
– |
– |
Put options (hedging exposure) |
– |
– |
341 |
(4,918) |
Forward currency contracts (hedging
exposure) |
(69) |
(69) |
(95) |
(95) |
|
------------------ |
------------------ |
------------------ |
------------------ |
|
(655) |
34,674 |
569 |
11,458 |
|
========== |
========== |
========== |
========== |
12 DEBTORS
|
|
|
2019
£’000 |
2018
£’000 |
Securities sold for future
settlement |
|
|
1,559 |
1,381 |
Accrued income |
|
|
1,499 |
849 |
Other debtors |
|
|
267 |
77 |
|
|
|
------------------ |
------------------ |
|
|
|
3,325 |
2,307 |
|
|
|
========== |
========== |
13 OTHER CREDITORS |
|
|
|
|
|
|
|
|
|
|
|
|
2019
£’000 |
2018
£’000 |
Securities purchased for future
settlement |
|
|
644 |
1,952 |
Creditors and accruals |
|
|
409 |
495 |
|
|
|
------------------ |
------------------ |
|
|
|
1,053 |
2,447 |
|
|
|
========== |
========== |
14 SHARE CAPITAL |
|
|
|
|
|
|
|
|
|
|
2019 |
2018 |
|
number
of
shares |
£’000 |
number
of
shares |
£’000 |
Issued, allotted and fully
paid |
|
|
|
|
Ordinary shares of 25 pence each
held outside Treasury |
|
|
|
|
Beginning of the year |
68,669,402 |
17,167 |
67,488,213 |
16,872 |
Ordinary shares issued on the
exercise of rights |
1,213,003 |
303 |
1,181,189 |
295 |
New ordinary shares issued |
2,351,048 |
588 |
– |
– |
|
------------------ |
------------------ |
------------------ |
------------------ |
End of the year |
72,233,453 |
18,058 |
68,669,402 |
17,167 |
|
========== |
========== |
========== |
========== |
Issued, allotted and fully
paid |
|
|
|
|
Subscription shares of 0.001
pence |
|
|
|
|
Beginning of the year |
12,316,033 |
– |
13,497,222 |
– |
Cancellation of subscription shares
on the exercise of rights |
(1,213,003) |
– |
(1,181,189) |
– |
|
------------------ |
------------------ |
------------------ |
------------------ |
End of the year |
11,103,030 |
– |
12,316,033 |
– |
|
========== |
========== |
========== |
========== |
Total share capital |
|
18,058 |
|
17,167 |
|
|
------------------ |
|
------------------ |
A bonus issue of subscription shares to ordinary shareholders on
the basis of one subscription share for every five ordinary shares
held took place on 5 December 2016.
Each subscription share gives the holder the right, but not the
obligation, to subscribe for one ordinary share upon payment of the
subscription price. The subscription price is based on the
published unaudited NAV per ordinary share at 2 December 2016, plus a premium depending upon
the year in which the right is exercised. The subscription share
rights can be exercised annually in the 25 business days prior to
the relevant subscription date (on which the exercises would take
effect). The subscription dates, subscription prices and premiums
are as follows:
|
Exercise date |
Exercise price |
Premium |
First exercise date |
30 November 2017 |
370.75p |
1% |
Second exercise date |
30 November 2018 |
381.75p |
4% |
Final exercise date |
29 November 2019 |
392.75p |
7% |
After the final exercise date of 29
November 2019, the Company will appoint a trustee who will
exercise any rights remaining that have not been exercised by
shareholders, providing that by doing so a profit can be realised.
To realise a profit, the sale proceeds from selling the resulting
ordinary shares in the market would need to be in excess of the
392.75 pence per share price of
exercising the rights, plus any related expenses and fees. Any
resulting profit will be paid to the holders of those outstanding
subscription shares, unless the amount payable to an individual
holder is less than £5, in which case such sum shall be retained
for the benefit of the Company.
Subscription shares carry no rights to vote, to receive a
dividend or to participate in the winding up of the Company.
During the year, the Company issued 1,213,003 ordinary shares
(2018: 1,181,189 ordinary shares) on the exercise of rights
attached to subscription shares. The subscription share price of
381.75 pence per ordinary share
issued represented a premium of 356.75
pence per share over the 25
pence nominal value of each share. The total premium
received in the year on the issue of ordinary shares of £4,327,000
(year ended 31 July 2018: £4,084,000)
was credited to the share premium account.
The Company issued 2,351,048 new ordinary shares during the year
(2018: nil). The total premium received in the year on the issue of
new ordinary shares of £9,430,000 (2018: £nil) was credited to the
share premium account.
15 RESERVES
The “share premium account” represents the amount by which the
proceeds, from the issue of new ordinary shares or the issue of
ordinary shares on the exercise of rights attached to subscription
shares, exceeded the nominal value of those ordinary shares. It is
not distributable by way of dividend. It cannot be used to fund
share repurchases.
The “capital redemption reserve” maintains the equity share
capital of the Company and represents the nominal value of shares
repurchased and cancelled. It is not distributable by way of
dividend. It cannot be used to fund share repurchases.
The “other non-distributable reserve” represents amounts
transferred from the warrant reserve in prior years with High Court
approval. It is not distributable by way of dividend. It cannot be
used to fund share repurchases.
The “other reserve” represents amounts transferred from the
share premium account and the capital redemption reserve in prior
years with High Court approval. It is not distributable by way of
dividend. It can be used to fund share repurchases.
The “capital reserve” reflects realised gains or losses on
investments and derivative instruments sold, unrealised increases
and decreases in the fair value of investments and derivative
instruments held and other income and costs recognised in the
capital column of the Income Statement. Refer to Notes 10 and 11
for information on investment holding gains/(losses) included in
this reserve. It can be used to fund share repurchases and it is
distributable by way of dividend. The Board has stated that it has
no current intention to pay dividends out of capital.
The “revenue reserve” represents retained revenue surpluses
recognised through the revenue column of the Income Statement. It
is distributable by way of dividend.
16 NET ASSET VALUE PER ORDINARY SHARE
The basic net asset value per ordinary share is based on net assets
of £322,999,000 (2018: £287,974,000) and on 72,233,453 (2018:
68,669,402) ordinary shares, being the number of ordinary shares of
25 pence each held outside of
Treasury at the year end.
The diluted net asset value per ordinary share reflects the
potential dilution in the net asset value per ordinary share if the
rights of the 11,103,030 subscription shares in issue had been
exercised on 31 July 2019 at the next
exercise date price of 392.75 pence
per share. The basis of the calculation is in accordance with the
guidelines laid down by the AIC.
The net asset value per ordinary share and the diluted net asset
value per ordinary share are published by the London Stock Exchange
on a daily basis.
17 FINANCIAL INSTRUMENTS
Management of risk
The Company’s investing activities in pursuit of its investment
objective involve certain inherent risks. The Board confirms that
there is an ongoing process for identifying, evaluating and
managing the risks faced by the Company. The Board with the
assistance of the Manager, has developed a risk matrix which, as
part of the internal control process, identifies the risks that the
Company faces. Principal risks identified are market, performance,
key person, economic, political, geopolitical, discount control,
gearing, derivatives, currency and cybercrime risks. Other risks
identified are tax and regulatory and operational risks, including
those relating to third party service providers covering investment
management, marketing and business development, company
secretarial, fund administration and operations and support
functions. Risks are identified and graded in this process,
together with steps taken in mitigation, and are updated and
reviewed on an ongoing basis. These risks and how they are
identified, evaluated and managed are shown in the Strategic
Report.
This note refers to the identification, measurement and
management of risks potentially affecting the value of financial
instruments. The Company’s financial instruments may comprise:
· Equity shares and equity
linked notes held in accordance with the Company’s investment
objective and policies;
· Derivative instruments
which comprise CFDs, forward currency contracts, warrants, futures
and options on listed stocks and equity indices; and
· Cash, liquid resources and
short-term debtors and creditors that arise from its
operations.
The risks identified arising from the Company’s financial
instruments are market price risk (which comprises interest rate
risk, foreign currency risk and other price risk), liquidity risk,
counterparty risk, credit risk and derivative instrument risk. The
Board reviews and agrees policies for managing each of these risks,
which are summarised below. These policies are consistent with
those followed last year.
Market price risk
Interest rate risk
The Company finances its operations through its share capital and
reserves. In addition, the Company has gearing through the use of
derivative instruments. The level of gearing is reviewed by the
Board and the Portfolio Manager. The Company is exposed to a
financial risk arising as a result of any increases in interest
rates associated with the funding of the derivative
instruments.
Interest rate risk exposure
The values of the Company’s financial instruments that are exposed
to movements in interest rates are shown below:
|
2019
£’000 |
2018
£’000 |
Exposure to financial instruments
that earn interest |
|
|
Cash at bank |
5,796 |
11,468 |
Short CFDs – exposure plus fair
value |
13,917 |
13,985 |
Amounts held at futures clearing
houses and brokers |
2,905 |
2,363 |
|
------------------ |
------------------ |
|
22,618 |
27,816 |
|
========== |
========== |
Exposure to financial instruments
that bear interest |
|
|
Long CFDs – exposure less fair
value |
6,724 |
2,893 |
|
------------------ |
------------------ |
Net exposure to financial
instruments that earn interest |
15,894 |
24,923 |
|
========== |
========== |
Foreign currency risk
The Company’s net return on ordinary activities after taxation for
the year and its net assets can be affected by foreign exchange
rate movements because the Company has income, assets and
liabilities which are denominated in currencies other than the
Company’s functional currency which is UK Sterling. The Portfolio
Manager may seek to manage exposure to currency movements by using
forward and spot foreign exchange contracts. The Company can also
be subject to short-term exposure from exchange rate movements, for
example, between the date when an investment is purchased or sold
and the date when settlement of the transaction occurs.
Three principal areas have been identified where foreign
currency risk could impact the Company:
· Movements in
currency exchange rates affecting the value of investments and
derivative instruments;
· Movements in
currency exchange rates affecting short term timing differences;
and
· Movements in currency
exchange rates affecting income received.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is
shown below:
Currency |
investments
at fair value
£’000 |
long
exposure to
derivative
instruments1
£’000 |
debtors2
£’000 |
cash at
bank
£’000 |
2019
total
£’000 |
Hong Kong dollar |
74,204 |
5,654 |
776 |
– |
80,634 |
Indian rupee |
69,495 |
– |
1,016 |
446 |
70,957 |
Indonesian rupiah |
33,872 |
– |
5 |
– |
33,877 |
South Korean won |
29,967 |
– |
– |
7 |
29,974 |
Taiwan dollar |
28,157 |
– |
1,475 |
282 |
29,914 |
Philippine peso |
17,359 |
(69) |
27 |
– |
17,317 |
Singapore dollar |
13,419 |
– |
25 |
– |
13,444 |
Australian dollar |
11,777 |
– |
20 |
– |
11,797 |
Thai baht |
10,562 |
– |
– |
– |
10,562 |
US dollar |
6,504 |
14,633 |
2,255 |
3,035 |
26,427 |
Sri Lankan rupee |
6,429 |
– |
– |
– |
6,429 |
Other overseas currencies |
10,936 |
– |
365 |
1,867 |
13,168 |
UK Sterling |
– |
– |
266 |
159 |
425 |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
|
312,681 |
20,218 |
6,230 |
5,796 |
344,925 |
|
========== |
========== |
========== |
========== |
========== |
1 The exposure to the market of long
CFDs, long futures and options after the netting of hedging
exposures.
2 Debtors include amounts held at
futures clearing houses and brokers.
Currency |
investments
held at
fair value
£’000 |
long
exposure to
derivative
instruments1
£’000 |
debtors2
£’000 |
cash
at bank
£’000 |
2018
total
£’000 |
Hong Kong dollar |
69,051 |
750 |
246 |
– |
70,047 |
Indian rupee |
47,488 |
(72) |
1,858 |
244 |
49,518 |
South Korean won |
29,436 |
(2,870) |
4 |
47 |
26,617 |
Indonesian rupiah |
24,627 |
– |
161 |
– |
24,788 |
Taiwan dollar |
22,623 |
– |
424 |
187 |
23,234 |
Australian dollar |
18,546 |
– |
208 |
– |
18,754 |
Philippine peso |
17,932 |
– |
– |
– |
17,932 |
US dollar |
6,313 |
(95) |
1,656 |
8,430 |
16,304 |
Singapore dollar |
12,371 |
– |
– |
– |
12,371 |
Thai baht |
10,958 |
125 |
34 |
– |
11,117 |
Sri Lanka rupee |
7,320 |
– |
– |
– |
7,320 |
Other overseas currencies |
6,050 |
– |
– |
2,495 |
8,545 |
UK Sterling |
999 |
– |
79 |
65 |
1,143 |
|
------------------ |
------------------ |
------------------ |
------------------ |
------------------ |
|
273,714 |
(2,162) |
4,670 |
11,468 |
287,690 |
|
========== |
========== |
========== |
========== |
========== |
1 The exposure to the market of long
CFDs and warrants after the netting of hedging exposures.
2 Debtors include amounts held at
futures clearing houses and brokers.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary
share capital and reserves. The Company’s financial liabilities
comprise short positions on derivative instruments and other
creditors. The currency profile of these financial liabilities is
shown below:
Currency |
short
exposure to
derivative
instruments1
£’000 |
other
creditors
£’000 |
2019
total
£’000 |
US dollar |
6,680 |
90 |
6,770 |
Australian dollar |
3,341 |
– |
3,341 |
Hong Kong dollar |
3,034 |
54 |
3,088 |
Indian rupee |
1,401 |
366 |
1,767 |
Other overseas currencies |
– |
134 |
134 |
UK Sterling |
– |
409 |
409 |
|
------------------ |
------------------ |
------------------ |
|
14,456 |
1,053 |
15,509 |
|
========== |
========== |
========== |
1 The exposure to the market of short
CFDs and short futures.
Currency |
short
exposure to
derivative
instruments1
£’000 |
other
creditors
£’000 |
2018
total
£’000 |
Hong Kong dollar |
5,681 |
1,442 |
7,123 |
US dollar |
5,277 |
54 |
5,331 |
Australian dollar |
2,662 |
– |
2,662 |
Other overseas currencies |
– |
601 |
601 |
UK Sterling |
– |
350 |
350 |
|
------------------ |
------------------ |
------------------ |
|
13,620 |
2,447 |
16,067 |
|
========== |
========== |
========== |
1 The exposure to the market of short
CFDs.
Other price risk
Other price risk arises mainly from uncertainty about future prices
of financial instruments used in the Company’s business. It
represents the potential loss the Company might suffer through
holding market positions in the face of price movements.
The Board meets quarterly to consider the asset allocation of
the portfolio and the risk associated with particular industry
sectors within the parameters of the investment objective.
The Portfolio Manager is responsible for actively monitoring the
existing portfolio selected in accordance with the overall asset
allocation parameters described above and seeks to ensure that
individual stocks also meet an acceptable risk/reward profile.
Other price risks arising from derivative positions, mainly due to
the underlying exposures, are estimated using Value at Risk and
Stress Tests as set out in the Company’s internal Derivative Risk
Measurement and Management Document.
Liquidity risk
Liquidity risk is the risk that the Company will encounter
difficulties in meeting obligations associated with financial
liabilities. The Company’s assets mainly comprise readily
realisable securities and derivative instruments which can be sold
easily to meet funding commitments if necessary. Short term
flexibility is achieved by the use of a bank overdraft, if
required.
Liquidity risk exposure
At 31 July 2019, the undiscounted
gross cash outflows of the financial liabilities were all repayable
within one year and consisted of derivative instrument liabilities
of £2,192,000 (2018: £960,000) and creditors of £1,053,000 (2018:
£2,447,000).
Counterparty risk
Certain derivative instruments in which the Company may invest are
not traded on an exchange but instead will be traded between
counterparties based on contractual relationships, under the terms
outlined in the International Swaps and Derivatives Association’s
(“ISDA”) market standard derivative legal documentation. As a
result, the Company is subject to the risk that a counterparty may
not perform its obligations under the related contract. In
accordance with the risk management process which the Manager
employs, the Manager will seek to minimise such risk by only
entering into transactions with counterparties which are believed
to have an adequate credit rating at the time the transaction is
entered into, by ensuring that formal legal agreements covering the
terms of the contract are entered into in advance, and through
adopting a counterparty risk framework which measures, monitors and
manages counterparty risk by the use of internal and external
credit agency ratings and by evaluating derivative instrument
credit risk exposure.
For Over The Counter (“OTC”) derivative transactions, collateral
is used to reduce the risk of both parties to the contract.
Collateral is managed on a daily basis for all relevant
transactions. At 31 July 2019, £nil
(2018: UBS AG £457,000) was held by the brokers in cash in a
segregated collateral account on behalf of the Company, to reduce
the credit risk exposure of the Company. £2,905,000 (2018:
£2,363,000), shown as amounts held at futures clearing houses and
brokers on the Balance Sheet, was held by the Company in a
segregated collateral account, on behalf of the brokers, to reduce
the credit risk exposure of the brokers. This collateral is
comprised of: HSBC Bank Plc £295,000 (2018: £213,000) in cash, UBS
AG £2,610,000 (2018: £2,112,000) in cash and Morgan Stanley &
Co International PLC £nil (2018: £38,000).
Credit risk
Financial instruments may be adversely affected if any of the
institutions with which money is deposited suffer insolvency or
other financial difficulties. All transactions are carried out with
brokers that have been approved by the Manager and are settled on a
delivery versus payment basis. Limits are set on the amount that
may be due from any one broker and are kept under review by the
Manager. Exposure to credit risk arises on unsettled security
transactions and derivative instrument contracts and cash at
bank.
Derivative instruments risk
The risks and risk management processes which result from the use
of derivative instruments, are set out in a documented Derivative
Risk Measurement and Management Document. Derivative instruments
are used by the Manager for the following purposes:
· to gain unfunded
long exposure to equity markets, sectors or single stocks. Unfunded
exposure is exposure gained without an initial flow of capital;
· to hedge equity
market risk using derivatives with the intention of at least
partially mitigating losses in the exposures of the Company’s
portfolio as a result of falls in the equity market;
· to position short
exposures in the Company’s portfolio. These uncovered exposures
benefit from falls in the prices of shares which the Portfolio
Manager believes to be over valued. These positions, therefore,
distinguish themselves from other short exposures held for hedging
purposes since they are expected to add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at
31 July 2019, an increase of 0.25% in
interest rates throughout the year, with all other variables held
constant, would have increased the return on ordinary activities
after taxation for the year and increased the net assets of the
Company by £40,000 (2018: £62,000). A decrease of 0.25% in interest
rates throughout the year would have had an equal but opposite
effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates
at 31 July 2019, a 10% strengthening
or weakening of the UK Sterling exchange rate against other
currencies would have (decreased)/increased the Company’s net
return on ordinary activities after taxation for the year and the
Company’s net assets by the following amounts:
If the UK Sterling exchange rate had strengthened by 10% the
impact would have been:
Currency |
2019
£’000 |
2018
£’000 |
Hong Kong dollar |
(7,611) |
(5,720) |
Indian rupee |
(6,611) |
(4,482) |
Indonesian rupiah |
(3,080) |
(2,226) |
US dollar |
(3,018) |
(998) |
South Korean won |
(2,729) |
(2,420) |
Taiwan dollar |
(2,721) |
(2,107) |
Australian dollar |
(1,376) |
(1,463) |
|
------------------ |
------------------ |
|
(27,146) |
(19,416) |
|
========== |
========== |
If the UK Sterling exchange rate had weakened by 10% the impact
would have been:
Currency |
2019
£’000 |
2018
£’000 |
Hong Kong dollar |
9,302 |
6,992 |
Indian rupee |
8,080 |
5,478 |
Indonesian rupiah |
3,764 |
2,721 |
US dollar |
3,689 |
1,219 |
South Korean won |
3,335 |
2,957 |
Taiwan dollar |
3,325 |
2,575 |
Australian dollar |
1,682 |
1,788 |
|
------------------ |
------------------ |
|
33,177 |
23,730 |
|
========== |
========== |
Other price risk – exposure to investments sensitivity
analysis
Based on the investments held and share prices at 31 July 2019, an increase of 10% in share prices,
with all other variables held constant, would have increased the
Company’s net return on ordinary activities after taxation for the
year and increased the net assets of the Company by £31,268,000
(2018: £27,371,000). A decrease of 10% in share prices would have
had an equal and opposite effect.
Other price risk – net exposure to derivative instruments
sensitivity analysis
Based on the derivative instruments held and share prices at
31 July 2019, an increase of 10% in
the share prices underlying the derivative instruments, with all
other variables held constant, would have increased the Company’s
net return on ordinary activities after taxation for the year and
increased the net assets of the Company by £583,000 (2018:
decreased the net return and net assets by £1,578,000). A decrease
of 10% in share prices would have had an equal and opposite
effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at
values which are not materially different to their fair values. As
explained in Note 2 (k) and (l) above, investments and derivative
instruments are shown at fair value. In the case of cash at bank,
book value approximates to fair value due to the short maturity of
the instruments.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that
classifies its 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. The valuation techniques
used by the Company are explained in Note 2 (k) and (l) above. The
table below sets out the Company’s fair value hierarchy:
Financial assets at fair value through profit or loss |
level 1
£’000 |
level 2
£’000 |
level 3
£’000 |
2019
total
£’000 |
Investments |
311,753 |
386 |
542 |
312,681 |
Derivative instrument assets |
85 |
1,194 |
258 |
1,537 |
|
------------------ |
------------------ |
------------------ |
------------------ |
|
311,838 |
1,580 |
800 |
314,218 |
|
------------------ |
------------------ |
------------------ |
------------------ |
Financial liabilities at fair value
through profit or loss |
|
|
|
|
Derivative instrument
liabilities |
(463) |
(1,729) |
– |
(2,192) |
|
========== |
========== |
========== |
========== |
Financial assets at fair value through profit or loss |
level 1
£’000 |
level 2
£’000 |
level 3
£’000 |
2018
total
£’000 |
Investments |
273,248 |
59 |
407 |
273,714 |
Derivative instrument assets |
466 |
1,063 |
– |
1,529 |
|
------------------ |
------------------ |
------------------ |
------------------ |
|
273,714 |
1,122 |
407 |
275,243 |
|
------------------ |
------------------ |
------------------ |
------------------ |
Financial liabilities at fair value
through profit or loss |
|
|
|
|
Derivative instrument
liabilities |
– |
(960) |
– |
(960) |
|
========== |
========== |
========== |
========== |
The table below sets out the movements in level 3 financial
instruments during the year:
|
year
ended
31.07.19
£’000 |
year
ended
31.07.18
£’000 |
Beginning of the year |
407 |
– |
Unrealised gains recognised in the
Income Statement |
135 |
– |
Transfer into level 3 – China Ding
Yi Feng Holdings (Short CFD)* |
258 |
407 |
|
------------------ |
------------------ |
End of the year |
800 |
407 |
|
========== |
========== |
* Financial instruments are transferred
into level 3 on the date they are suspended, delisted or when they
have not traded for thirty days.
JHL Biotech Inc
JHL Biotech Inc develops biosimilars and is also engaged in
providing process development and contract manufacturing solutions
to the biopharmaceutical industry. On 26
February 2018, JHL Biotech voluntarily delisted from the
Taipei Exchange. The valuation at 31 July
2019 is based on the price of the shares when US$750m of funding was raised in October 2018.
China Ding Yi Feng Holdings (Short CFD)
China Ding Yi Feng Holdings Limited operates as an investment
holding company in Hong Kong and
is currently suspended from trading. The valuation at 31 July 2019 is based on the unaudited
consolidated NAV of the Company.
18 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital
requirements. The financial resources of the Company comprise its
share capital and reserves, as disclosed in the Balance Sheet, and
any gearing, which is managed by the use of derivative instruments.
Financial resources are managed in accordance with the Company’s
investment policy and in pursuit of its investment objective, both
of which are detailed in the Strategic Report. The principal risks
and their management are disclosed in the Strategic Report and in
Note 17 above.
The Company’s gearing/(net cash position) at the year end is set
out below:
|
2019
gross asset
exposure
£’000 |
2018
gross asset
exposure
£’000 |
Long exposures to shares and equity
linked notes |
312,681 |
273,714 |
Warrants |
– |
125 |
Long CFDs |
5,654 |
2,726 |
Long future |
13,532 |
– |
Written put option |
1,101 |
– |
|
------------------ |
------------------ |
Total long exposures |
332,968 |
276,565 |
|
========== |
========== |
Less: hedging exposure to forward
currency contracts |
(69) |
(95) |
Less: hedging exposure to Index
linked put options |
– |
(4,918) |
|
------------------ |
------------------ |
Total long exposures after the
netting of hedges |
332,899 |
271,552 |
|
========== |
========== |
Short CFDs |
13,055 |
13,620 |
Short futures |
1,401 |
– |
|
------------------ |
------------------ |
Gross Asset Exposure |
347,355 |
285,172 |
|
========== |
========== |
Total Shareholders’
Funds |
322,999 |
287,974 |
|
========== |
========== |
Gearing/(net cash
position)* |
7.5% |
(1.0%) |
|
========== |
========== |
* Gross Asset Exposure less Total
Shareholders’ Funds expressed as a percentage of Total
Shareholders’ Funds.
19 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company’s Alternative
Investment Fund Manager and has delegated portfolio management and
the role of company secretary to FIL Investments International
(“FII”). Both companies are Fidelity group companies.
Details of the current fee arrangements are given in the
Directors’ Report. During the year, management fees of £2,262,000
(2018: £2,626,000) and secretarial and administration fees of
£75,000 (2018: £75,000) were payable to FII. At the Balance Sheet
date, management fees of £217,000 (2018: £222,000) and secretarial
and administration fees of £6,000 (2018: £6,000) were accrued and
included in other creditors. FII also provides the Company with
marketing services. The total amount payable for these services
during the year was £146,000 (2018: £108,000). At the Balance Sheet
date, marketing services of £20,000 (2018: £11,000) were accrued
and included in other creditors.
Disclosures of the Directors’ interests in the ordinary shares
of the Company and Directors’ fees and taxable expenses relating to
reasonable travel expenses payable to the Directors are given in
the Directors’ Remuneration Report. In addition to the fees and
taxable expenses disclosed in the Directors’ Remuneration Report,
£13,000 (2018: £12,000) of Employers’ National Insurance
Contributions was also paid by the Company.
20 ALTERNATIVE PERFORMANCE MEASURES
Total return is considered to be an alternative performance measure
(as defined in the Glossary of Terms). NAV and diluted NAV total
return includes reinvestment of the dividend in the NAV/diluted NAV
of the Company on the ex-dividend date. Share price total return
includes the reinvestment of the net dividend in the month that the
share price goes ex-dividend.
The tables below provide information relating to the NAVs and
share prices of the Company, the impact of the dividend
reinvestments and the total returns for the years ended
31 July 2019 and 31 July 2018.
2019 |
Net
asset
value per
ordinary
share –
undiluted |
Net
asset
value per
ordinary
share –
diluted |
Share
price |
31 July 2018 |
419.36p |
413.64p |
412.00p |
31 July 2019 |
447.16p |
439.91p |
455.50p |
Change in year |
+6.6% |
+6.4% |
+10.6% |
Impact of dividend reinvestment |
+1.6% |
+1.5% |
+1.7% |
|
------------------ |
------------------ |
------------------ |
Total return for the
year |
+8.2% |
+7.9% |
+12.3% |
|
========== |
========== |
========== |
2018 |
Net
asset
value per
ordinary
share –
undiluted |
Net
asset
value per
ordinary
share –
diluted |
Share
price |
31 July 2017 |
415.17p |
407.77p |
386.00p |
31 July 2018 |
419.36p |
413.64p |
412.00p |
Change in year |
+1.0% |
+1.4% |
+6.7% |
Impact of dividend reinvestment |
+1.2% |
+1.3% |
+1.5% |
|
------------------ |
------------------ |
------------------ |
Total return for the year |
+2.2% |
+2.7% |
+8.2% |
|
========== |
========== |
========== |
The Annual Financial Report Announcement is not the Company's
statutory accounts. The above results for the year ended
31 July 2019 are an abridged version
of the Company's full Annual Report and Financial Statements, which
have been approved and audited with an unqualified report. The 2018
and 2019 statutory accounts received unqualified reports from the
Company's Auditor and did not include any reference to matters to
which the Auditor drew attention by way of emphasis without
qualifying the reports, and did not contain a statement under s.498
of the Companies Act 2006. The financial information for 2018 is
derived from the statutory accounts for 2018 which have been
delivered to the Registrar of Companies. The 2019 Financial
Statements will be filed with the Registrar of Companies in due
course.
A copy of the Annual Report will shortly be submitted to the
National Storage Mechanism and will be available for inspection at
www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders in due course
and additional copies will be available from the registered office
of the Company and on the Company's website:
www.fidelityinvestmenttrusts.com where up to date information on
the Company, including daily NAV and share prices, factsheets and
other information can also be found.
The Annual General Meeting will be
held at 11.00 on 6 December at 4 Cannon Street, London EC4M 5AB.
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) is incorporated into, or forms part of, this
announcement.
ENDS