TIDMFEV
FIDELITY EUROPEAN VALUES PLC
Final Results for the year ended 31 December 2019
Financial Highlights:
* The Board of Fidelity European Values PLC (the "Company") recommends a
final dividend of 3.88 pence per share which together with the interim
dividend payment of 2.59 pence per share (totalling 6.47 pence) represents
an increase of 3% over the dividend of 6.28 pence per share paid in the
prior year
* The Company recorded a net asset value ("NAV") total return of +23.8% for
the year ended 31 December 2019, outperforming its Benchmark Index which
returned +20.4%.
* The discount to NAV narrowed from 10.7% to 6.2%, due to an impressive share
price total return of +30.6%.
* To better align the Company's name more closely to its objective, and to
avoid confusion with value investment products, the Board has decided to
change the Company's name from Fidelity European Values PLC to Fidelity
European Trust PLC with effect from 12 May 2020.
Contacts
For further information, please contact:
Bonita Guntrip
Senior Company Secretary
01737 837320
FIL Investments International
CHAIRMAN'S STATEMENT
Fidelity European Values PLC (the "Company") aims to be the cornerstone long
term investment of choice for those seeking European exposure across market
cycles.
The Company's portfolio is built on companies with well-formed, long-standing
foundations. Europe is home to the world's largest economy and some of the
strongest, most stable and resilient companies. These global household names
are famed for standing the test of time, even through periods of economic
uncertainty.
Using Fidelity's extensive research team, Portfolio Manager, Sam Morse, aims to
select well-established European companies with proven business models,
attractive valuations and the ability to grow dividends both now and in the
future. It's these leaders with market-beating potential that have helped the
Company outperform its Benchmark Index over the long term.
Company Name Change
In order to clarify the Company's investment proposition to investors and its
strategy to grow the Company, the Board has concluded that the word "values" in
the Company's name is no longer relevant to the objective of the Company.
Therefore, so as to align the Company's name more closely to its objective, and
to avoid confusion with value investment products, the Board has decided to
change the Company's name from Fidelity European Values PLC to Fidelity
European Trust PLC with effect from 12 May 2020. I should emphasise that there
will be no change to the way the investment portfolio is managed.
The change of name will take effect following the requisite statutory filings,
which are expected to be made to allow the change to take effect from 12 May
2020. The Company will, however, retain its existing ticker (FEV.L), SEDOL
(BK1PKQ9) and ISIN (GB00BK1PKQ95).
Performance
The net asset value ("NAV") of the Company increased by 23.8% for the year
ended 31 December 2019, outperforming the Benchmark Index, the FTSE World
Europe (ex UK) Index, which returned 20.4%. The share price return over this
period was a more impressive 30.6% (all performance data on a total return
basis). In what turned out to be a very strong year of absolute performance for
the Company, our Portfolio Manager's strong stock selection capabilities were
once again the primary drivers of outperformance versus the Benchmark Index
with several of his high-conviction holdings contributing significantly to
returns. In addition, the Company's NAV and share price total return
performance over three and five years remains well ahead of the Benchmark
Index, as can be seen from the chart on the Financial Highlights page in the
Annual Report.
European equity market performance during the year was broadly driven by the
accommodative monetary policy stance adopted by most major global central banks
and improving geopolitical conditions towards the end of the year. After the
sharp fall in equities in the fourth quarter of 2018, the first four months of
2019 witnessed a strong rebound. While weakening global economic data, Brexit
related uncertainty, FY19 corporate earnings downgrades and trade tensions
between the US and China did lead to some volatility mid-year, sentiment was
much improved towards the end of the reporting year. Positive policy signals
from the European Central Bank ("ECB"), the UK general election victory for the
ruling Conservative party and an apparent easing in US-China trade relations
were the key drivers of this shift in momentum.
Due Diligence Trip
In November 2019, the Board carried out its due diligence trip which started at
Fidelity's London office with analyst meetings, trading demonstrations, risk
management at Company and portfolio levels, research reviews and a market macro
update. The Board then travelled to Fidelity's Frankfurt office where it had
presentations on how Fidelity's analysts work, some of the funds managed and
specialist sector reviews. The Board also visited Deutsche Boerse. The due
diligence oriented exercise is important in providing the Board with useful
context about continental European markets in which the Company invests. It
also gives perspective on the Portfolio Manager's analysis and investment
approach.
Outlook
Investors are clearly very concerned about the likely effects of the
Coronavirus, COVID-19, on the world economy. At the end of his report below,
Sam Morse outlines his response in respect of the portfolio. As he implies,
things should sooner or later return to normal; it is just a matter of when.
Before the virus struck, my intention was to inform you that I was "cautiously
optimistic" about the prospects for the Company. Now, however, as one market
strategist wrote recently when observing the US bond market: "......the 10-year
bond doesn't have a medical degree....it is hard to define how growth will be
impacted." Nor do most equity market investors know.
The virus's behaviour is not yet fully understood. Like flu, it may well die
away during the warmer summer months of the northern hemisphere. It may also
reassert itself when winter returns. Investors should therefore be prepared for
market fluctuations to echo these vicissitudes, and it may well be that
sentiment will only fully recover once an immunising vaccine is widely
available. This could take up to another year or more to develop.
In these circumstances it is helpful to remember the timescale in which you
originally bought shares in this Company. If that was, say, a rolling three
years at a minimum - for most of our shareholders it is much longer - then
these events will in retrospect constitute a minor bump on the long road of
history. Even the great crash of 1987 looks just like that on the long term
graph.
While most industrial and commercial sectors are affected in the short term,
stronger companies, which Sam makes a point of holding, should usually be able
to ride out the challenges presented by falling demand or interrupted supply
chains. Though the portfolio is not immune, its constituents are typically
resilient and, like most human beings, likely to experience mild and temporary
symptoms at the hands of the virus. I hope that it will not be long before I
can write in a more optimistic vein based on more conventional economic and
market analysis.
Environmental, Social and Governance (ESG) Investment
Recent years have seen increasing concern about global warming, and the growth
of serious efforts to counter its effects. Businesses for their part are under
pressure to ensure that their activities are environmentally sustainable, as
well as demonstrating social responsibility and good corporate governance. In
his report, Sam Morse outlines Fidelity's approach to this important subject
and what this means for the Fidelity European Values investment portfolio.
OTHER MATTERS
Dividends
As reported in last year's Annual Report, and in order to smooth dividend
payments throughout the year, the Board decided that from the 2019 financial
year the Company would pay both an interim and a final dividend. As a result,
an interim dividend of 2.59 pence per ordinary share was paid on 1 November
2019.
The Board recommends a final dividend of 3.88 pence per ordinary share for the
year ended 31 December 2019 for approval by shareholders at the Annual General
Meeting ("AGM") on 12 May 2020. The dividend will be payable on 15 May 2020 to
those shareholders who appear on the share register at close of business on 27
March 2020 (ex-dividend date 26 March 2020). The interim and final dividends,
totalling 6.47 pence, represent a total increase of 3.0 per cent over the 6.28
pence per ordinary share paid for the year ended 31 December 2018.
While the Board has not sought to influence the Portfolio Manager by imposing
any income objective in any particular year - and this remains the case - the
investment focus on companies capable of growing their dividend has seen the
Company's dividend payments rise over time. Because the Board acknowledges that
both capital and income growth are components of performance, as reflected in
the change of investment objective approved by shareholders at the Annual
General Meeting in 2018, it considered that this was an appropriate time to
move to a more clearly defined progressive dividend practice.
The aim, therefore, as I stated in the last Annual Report, is to increase the
dividend each year. The unusual circumstances in which this may not prove
possible include, firstly, if sterling were to rise substantially against the
euro; secondly, if economic trends prove to be unusually adverse; and thirdly,
if the Portfolio Manager shifts the emphasis of companies held to ones with a
materially lower overall yield than hitherto.
In order to help realise its aim, the Board has decided gradually to augment
revenue reserves by retaining a minor proportion of earnings from year to year.
By law this proportion is not permitted to exceed 15 per cent. By way of
example, for the 2019 financial year the dividend of 6.47 pence is being paid
from earnings of 7.00 pence per share, a retention rate of about 7.5 per cent.
The Board expects that as revenue reserves build up they will assist, if
necessary, in smoothing dividend growth year on year, in the event of the sorts
of exceptional circumstances outlined above.
Discount Management and Treasury Shares
The Board operates an active discount management policy, the primary purpose of
which is to reduce discount volatility. Buying shares at a discount also
results in an enhancement to the NAV per share. As a consequence, the Board
seeks to maintain the discount in single digits in normal market conditions. In
order to assist in managing the discount, the Board has shareholder approval to
hold in Treasury ordinary shares repurchased by the Company, rather than
cancelling them. These shares are then available to re-issue at NAV per share
or at a premium to NAV per share, facilitating the management of and enhancing
liquidity in the Company's shares. The Board is seeking shareholder approval to
renew this authority at the forthcoming AGM.
As a result of discount management during the year, the Company repurchased
706,777 ordinary shares into Treasury. Since the end of the reporting year and
as at the date of this report, the Company has not repurchased any further
ordinary shares into Treasury or for cancellation.
Gearing
The Company continues to gear through the use of derivative instruments,
primarily contracts for difference ("CFDs"), and the Manager has flexibility to
gear within the parameters set by the Board. As at 31 December 2019, the
Company's gross gearing was 7.1% (2018: 10.1%) whilst net gearing was 4.7%
(2018: 6.1%). In the reporting year, gearing made a positive contribution to
performance, as can be seen from the attribution analysis table in the Annual
Report.
The Board monitors the level of gearing and the use of derivative instruments
carefully and has defined a risk control framework for this purpose which is
reviewed at each Board meeting.
Board of Directors
After serving on the Board for over ten years as a non-executive Director, Dr
Robin Niblett will step down from the Board at the conclusion of the AGM on 12
May 2020. Robin has made a unique and invaluable contribution to the Board and
the Company with the perspective of his Chief Executive role at Chatham House
(the Royal Institute of International Affairs) and as a member of the World
Economic Forum's Regional Future Council on Europe. I would like to take this
opportunity to thank him on behalf of the Board and all of the Company's
stakeholders for all that he has accomplished and for his unfailing dedication,
wisdom and good humour. He takes with us our very best wishes for the future.
As Robin's successor, I am pleased to welcome Sir Ivan Rogers as a
non-executive Director. He joined the Board on 1 January 2020. Sir Ivan is a
former British civil servant, formerly the Permanent Representative of the UK
to the European Union ("EU") for over three years until the beginning of 2017.
Before this, he was Principal Private Secretary to one British prime minister
and head of the Europe and Global Issues Secretariat for another. He was twice
the UK's G7/G8 Sherpa as well as the EU and G20 Sherpa. He has worked closely
with and for both the UK government and EU institutions for the majority of his
career. In addition to this, he spent five years in the private sector holding
senior public sector banking roles for Citigroup UK and Barclays Capital.
We continue to review Board composition and Directors' succession on a regular
basis to ensure that we have a Board with a mix of tenures and one which
provides diversity of perspective together with the range of appropriate skills
and experience for your Company. In accordance with the UK Corporate Governance
Code, and being a FTSE 350 Company, I together with Fleur Meijs, Marion Sears
and Paul Yates are subject to annual re-election at the AGM on 12 May 2020. Sir
Ivan Rogers, being newly appointed, is subject to election at the forthcoming
AGM. Biographical details of all the Directors standing for election and
re-election can be found in the Annual Report. The Directors, between them,
have a wide range of appropriate skills and experience to form a balanced Board
for the Company.
Annual General Meeting - Tuesday, 12 May 2020
In view of the emerging public health impact of the Coronavirus (COVID-19) and
in the interests of the wellbeing of our shareholders, the Board has decided to
change the format of the Annual General Meeting this year. We are actively
encouraging (and making it as easy as possible for) shareholders to vote by
proxy in advance of the meeting so that it is not necessary to attend in
person. A proxy form will be sent to shareholders on the main register.
The Portfolio Manager will not attend the meeting and his presentation will be
pre-recorded and made available on the website www.fidelityinvestmenttrusts.com
in advance of the meeting. Hard copies of the presentation will also be made
available by post on request to the Secretary, contact details for which can be
found in the Annual Report.
It is a legal requirement to hold the AGM and it will go ahead, unless advice
is received from the Government to the contrary. The meeting will be held at
midday on 12 May 2020 at Flat 2, Fidelity International, 130 Tonbridge Road,
Hildenborough, Tonbridge, Kent, TN11 9DZ with a reduced program. The AGM will
be restricted to the formal business of the meeting as set out in the Annual
Report and voting on the resolutions therein. On this occasion external guests
who are not shareholders, or proxies or representatives for shareholders, will
not be permitted to attend the meeting and no refreshments will be served.
If you hold shares through the Fidelity Platform, or through another platform
or nominee (and not directly in your own name) and you do wish to attend,
please ensure that you are validly appointed as a representative of the
relevant nominee and bring evidence of that appointment with you to the
meeting. Please contact the company that you hold your shares with should you
have any questions in relation to being appointed as a representative for the
AGM.
Investors should consult Government guidance and those who show any of the
symptoms associated with Coronavirus (however mild) or who have recently
travelled from a high-risk area are asked not to attend but to vote by proxy.
The AGM and proxy results will be announced and made available following the
AGM on the website www.fidelityinvestmenttrusts.com.
We sincerely hope to resume the meeting's usual format in future years.
VIVIAN BAZALGETTE
Chairman
18 March 2020
PORTFOLIO MANAGER'S REVIEW
Question
How has the Company performed in the year under review?
Answer
During 2019, the net asset value ("NAV") total return was +23.8% compared to a
total return of +20.4% for the FTSE World Europe (ex UK) Index which is the
Company's Benchmark Index. The share price total return was +30.6% benefiting
from a narrowing of the discount. The second half of the year saw positive
returns but was not as rewarding as the first half partly due to the strength
of UK sterling which dampened returns for UK sterling-based investors. It is
particularly pleasing that the Company outperformed in what was a very strong
year for absolute returns. This was partly due to gearing but mostly thanks to
the stock-picking efforts of the in-house Fidelity research team - a team of
forty or so analysts covering European companies, keeping on top of existing
investments and scouring the continental European markets for new opportunities
which fit the investment criteria of the Company.
Question
And what about performance of the broader market environment?
Answer
2019 turned out to be something of a banner year for continental European
equities (a mirror image of the very disappointing 2018). In many ways, this
was surprising especially considering that aggregate earnings did not grow and
the US yield curve inverted (traditionally seen as a reliable forewarning of
global recession). Monetary easing and improving sentiment (not fundamentals)
have, however, been key drivers of improving equity prices (see the chart in
the Annual Report on 2019 return drivers). In the first half of the year,
investors remained wary and the market was initially led higher by bond proxies
thanks to the Federal Reserve's guidance on lower interest rates and monetary
easing. The second half of the year, however, saw the return of more 'animal
spirits', especially following the confirmation of a restart to the European
Central Bank's ("ECB") quantitative easing and some relief in trade tensions.
This led to a greater demand for economy-sensitive cyclicals and so-called
value stocks, particularly in September, as investors began to add risk to
their portfolios. The year ended on a positive note with the outcome of the UK
general election which was generally seen to be market friendly. We enter 2020,
therefore, almost at the other end of the spectrum versus 2019 in terms of
investor mood but it should not be forgotten that, in market terms, travelling
is often better than arriving!
Question
What have been the key contributors to performance? And detractors?
Answer
The performance of the Company was largely driven by stock-picking in 2019
although gearing contributed positively too. ASML, the manufacturer of
chip-making equipment (semiconductors not potatoes!), was the star of the year
with the company's shares almost doubling. Semiconductor shares generally
performed well as investors anticipated a recovery in demand for memory chips
and as trade tensions between the US and China began to ease. ASML got an
additional boost with strong demand from logic chip makers with the third
quarter results delivering its strongest ever order intake. LVMH Moët Hennessy
was another strong performer, continuing the trend commented on in the interim
report, as the spending power of the Chinese luxury consumer surprised
positively, despite the disturbances in Hong Kong, and as future earnings
prospects were further enhanced by the agreed acquisition of Tiffany's which
will complete this year. Detractors included ABN AMRO Bank, the Dutch banking
group, which suffered in the latter half of 2019 from growing worries about
possible negative impacts relating to a lack of robustness in its
anti-money-laundering processes. Telenor, the Norwegian multinational
telecommunications group also underperformed in the second half of the year,
especially following its failure to complete the mooted merger of some of its
Asian operations with a local competitor, Axiata.
Top 5 Stock Contributors (on a relative basis) %
ASML +1.2
LVMH Moët Hennessy +0.7
3i Group +0.6
Legrand +0.5
Telefonica +0.4
========
====
Top 5 Stock Detractors
(on a relative basis) %
ABN AMRO Bank -1.0
Telenor -0.7
Red Electrica -0.6
Sampo -0.5
Royal Dutch Shell -0.5
========
====
Question
Looking across the markets, European equities appear cheap versus bonds and
better value than US equities - would you agree?
Answer
Not really. One should be careful when comparing the aggregate valuation of
equities across different regions. Don't forget there are armies of analysts at
Fidelity and elsewhere whose job is to seek out valuation anomalies from market
to market. The rise of global funds, which can take advantage of these
anomalies, means that any inefficiencies in valuation are arbitraged away
rapidly. This is especially true of the larger companies in the Benchmark Index
which often have a number of global comparators. Remember too that these larger
companies represent the bulk of any index by value. So a lot of the 'cheapness'
of one region versus another will be down to mix differences or accounting
differences or other factors rather than differences in intrinsic value. The US
market's relative exposure to technology is an often-cited example of the mix
impact on aggregate valuation. And yes, European equities do "appear" cheap
versus bonds but does that mean European equities are cheap? Perhaps it simply
means that bonds are too expensive. This gap in valuation might, for instance,
be corrected with both asset classes falling, if or when the bond "bubble" is
pricked, rather than by equities outpacing bonds. As always, the Company will
focus on continental European companies that are not overly leveraged and which
will be able to deliver consistent dividend growth. We will also try to make
sure that we do not pay too much for these companies.
Question
In recent months European equities have been growing in popularity among asset
allocators. What has been the impetus behind this change in sentiment and will
it continue?
Answer
It could not have become much worse. European equities have been hugely
unpopular and have suffered large outflows for many years in favour of global
and US equity funds. This is understandable -- the earnings and dividend growth
of continental European companies have lagged their transatlantic peers for
many years. This may be a long term trend that continues but, as always, there
will be times when the pessimism is overdone and that can provide an
opportunity. When an asset class is out of fashion, as a result of years of
underperformance, then the canny asset allocator will take another look to see
if the 'baby has been thrown out with the bath water'. European equities may be
enjoying such a moment as asset allocators have generally become more
risk-seeking with some of the concerns that plagued markets in 2018 receding
during 2019. Continental European equities are often seen by asset allocators
as a high beta play on global growth -- if global economic growth picks up
again in 2020 thanks to central bank easing and a de-escalation of the trade
tensions then European equities may get a relative boost. A view on the
direction of the US dollar will, of course, also be very important and here
there is a healthy debate between those that think the US dollar is overvalued
on a purchase power parity basis and those that think it still provides a safe
haven with an attractive relative yield.
Question
What have been the major changes to the portfolio over the period?
Answer
We don't really do "major". There have been incremental changes but overall the
turnover in the portfolio will always be relatively low in keeping with the
Company's longer term investment horizon. No apologies for that. Low turnover
means that the transaction costs are low as well. So what has changed in 2019?
Two new investments were made in companies involved in the private equity
industry: Partners Group and EQT. The latter was an IPO which performed very
well but unfortunately the Company was not able to get a large allocation so it
remains, for the time being, a very small position. Partners Group, however, is
a more significant constituent in the Company's portfolio. It is a company that
fits the Company's criteria well: a 3% dividend yield and a long track record
of double-digit dividend growth (thanks to its robust cash generation). The
company enjoys high returns and a strong balance sheet with net cash. It is
largely an agency business with a long track record of successfully investing
clients' funds in the private sector (equity and debt) and in infrastructure
projects. It is a business where success breeds success and, as a result,
Partners Group is growing market share in an industry which is seeing a growing
share of asset allocators' wallets as the hunt for yield continues while
interest rates stay low. The opportunity to enter arose when the shares pulled
back on slightly disappointing results due to the increased levels of
investment required to prepare for the next stage of growth in assets under
management. The only disposal of the year was Flughafen Zurich which was sold
when it became evident that the upcoming regulatory review would be more
draconian than anticipated and was, therefore, likely to result in a reduced
dividend. As always, there have been a number of additions and reductions to
existing names which accounted for the majority of the turnover in the
portfolio. In general, the strategy here has been to trim stocks that have
risen to less reasonable levels of valuation and to add to those that have
experienced a temporary hiccup. A good example is EssilorLuxottica which
suffered while mired in a very public spat between the management of Essilor
and the majority owner of Luxottica shortly following the completion of their
merger. This provided an opportunity to add to holdings in what will, in the
long run, be a dominant powerhouse in the optical industry. The shares
recovered handsomely when senior management changes were agreed and the
combined group went on to announce an important (and very accretive)
acquisition of the spectacles retailer Grandvision.
Question
How has your derivative strategy performed in the period under review?
Answer
Gearing, achieved through the use of contracts for difference ("CFDs"), has
added 1.3% to the performance of the Company during what has, of course, been a
very strong year for absolute returns. The Company's short portfolio, which is
very small in relation to the total net assets of the Company, has, however,
been a mixed bag and has neither added nor detracted from the overall
performance of the Company, relative to its Benchmark Index, during the period.
You may, therefore, be asking: why do it? Well, it is constantly under review
and it will remain a small part of the Company until we are convinced that it
can add value. Having said that, it is still early days and there are some soft
benefits associated with the practice (e.g. regular access to Fidelity's
shorting resource etc.). Be assured, if it were ever felt that the shorting
strategy was a distraction that diluted the overall performance of the Company,
there would be no hesitation in stopping it.
Question
How significant a concern is Brexit?
Answer
It is important to put the UK's significance in context. The UK represents, in
aggregate, less than 5% of the sales and profits of continental European
companies (see chart in the Annual Report). Some companies are, of course, more
exposed (think Spanish banks or German car companies) than others. Brexit,
technically speaking, has already happened but the process of leaving the
European Union is on-going: the UK's future relationship with its largest
trading partner is still to be decided. Given the timelines required, if the
Prime Minister sticks to his end of year pledge, then it is likely that only a
"barebones" agreement on the trade in goods will be in place by the deadline
with a lot still to agree on services, etc. For those names with a heightened
exposure to the UK, this may be a source of volatility during 2020 and in
future years. The health of the global economy, in contrast, will be much more
significant in general for continental European companies. In the long run
Brexit may be seen as a test case for the European Union project and it may
have a lasting impact on the latter's pace of integration and risk of
disintegration. Time will tell.
Question
There is a lot of press comment about Environmental, Social and Governance
("ESG") in connection with investing. What precisely is it about, what is the
Fidelity capability in this area, what is your approach as Portfolio Manager
and how does the investment portfolio measure up?
Answer
It is certainly true that much ink has been spilt on the subject of
Environmental, Social and Governance ("ESG") related investment matters in
recent times. As I see it, investing in companies which operate high standards
on corporate responsibility is more likely to protect and enhance investment
returns for shareholders. This is just good sense.
The best run companies are invariably those which consider their long term
value proposition and look after their stakeholders appropriately. Needless to
say, ESG matters affect different companies differently depending on their
business models and stakeholder groups. The 'Environmental' component alone is
multi-faceted, taking into account the depletion of resources, emissions,
biodiversity, waste and water management and of course carbon pollution.
In analysing each stock, I obtain a deep understanding of ESG issues at a
company level, aided by Fidelity's research analysts' team. We have responded
to our clients' demands in recent years by substantially developing our
in-house resources to scrutinise and map sustainability risks. Most recently,
this has resulted in the implementation of our proprietary ESG ratings system.
Fidelity's analysts are encouraged to explore any material differences between
their internal ratings of companies and the external ESG ratings provided by
third-party research agencies. For new or emerging securities, or support on
regional specifics, our dedicated Sustainable Investing Team will add
additional input where necessary.
As a house, Fidelity favours a positive engagement approach, discussing ESG
issues with the management of the companies in which we invest, or are
contemplating investing in, in the belief that this is the most effective way
to improve the attitude of businesses towards corporate responsibility.
Ultimately, ESG cannot be boiled down to a tick-box exercise. I am pleased to
say, however, that Fidelity European Values PLC is rated 'above average' in its
sustainability rating scoring by Morningstar. There is more detail on
Fidelity's approach to ESG in the Strategic Report in the Annual Report.
Question
Where should investors direct their attention in the months ahead?
Answer
As always, investors should pay attention to the companies in which they are
invested. As Peter Lynch, the respected American investor, famously said:
"Nobody can predict interest rates, the future direction of the economy, or the
stock market. Dismiss all such forecasts and concentrate on what's actually
happening to the companies in which you've invested". The Company will, as
always, stay fully invested and focus its attention on the prospects for its
constituent companies' dividend growth and will consider to what extent that
dividend growth is already discounted in the share price. Why does the Company
stay fully invested? Fidelity has published a lot of research which has shown
that trying to call the market is a mug's game: you may be able to call the top
but if you don't get back in near the bottom you will miss some of the
strongest days of return and leave a lot of money on the table. It is also
important to note that due to the Company's investment trust structure and the
low gearing, I will not need to liquidate any assets to meet any redemptions.
Much remains to be seen regarding the impact of COVID-19; notwithstanding the
human cost, there will likely be winners and losers. As always, there are a lot
of little devils hiding in the details. The bottom line for me is that I do not
try to time markets - I will stay fully invested. I will also stay focused on
companies with strong balance sheets. Companies with strong balance sheets can
take advantage in difficult times, like this, while companies with weak balance
sheets may be in peril. The cost of trading can also rise dramatically in times
of high volatility so my default setting will be to sit on my hands (unless I
have a very good reason for doing otherwise). I am investing in businesses that
I think are tough long term franchises and, as the saying goes, when the going
gets tough, the tough get going.
SAM MORSE
Portfolio Manager
18 March 2020
STRATEGIC REPORT
RISK FRAMEWORK
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provisions 28 and 29 of the 2018 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, including those
that would threaten its business model, future performance, solvency or
liquidity. 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 existing and emerging risks that the Company faces.
The Audit Committee carried out a separate exercise in November 2019 to
identify any new emerging risks and take any action necessary to mitigate their
potential impact. The risks identified are placed on the Company's risk matrix
and graded appropriately. This process, together with the policies and
procedures for the mitigation of existing and emerging 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. There have been no changes to these since the prior
reporting year.
Principal Risks Description and Risk Mitigation
Market 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, exchange rate movements and ESG investing, including climate risk.
The Portfolio Manager's success or failure to protect and increase the
Company's assets against this background is core to the Company's continued
success.
The risk of the likely effects of the Coronavirus (COVID-19) on the markets is
covered in the Chairman's Statement and Portfolio Manager's Review above. These
risks are somewhat mitigated by the investment trust structure which means no
forced sales will need to take place to deal with any redemptions. Therefore,
investments can be held over a longer time horizon.
Risks to which the Company is exposed in the market risk category are included
in Note 17 to the Financial Statements below together with summaries of the
policies for managing these risks.
Performance risk The achievement of the Company's performance objective relative to the market
requires the application of risk such as strategy, asset allocation and stock
selection and may lead to underperformance of the Benchmark Index. The Board
reviews the performance of the portfolio against the Company's Benchmark and
that of its competitors and the outlook for the market with the Portfolio
Manager at each Board meeting. The Portfolio Manager is responsible for
actively 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 may experience volatility of performance in the shorter term.
Key person risk There is a risk that the Manager has an inadequate succession plan for key
individuals, particularly with investment trust expertise. The loss of the
Portfolio Manager or key individuals could lead to potential performance,
operational or regulatory issues. The Manager identifies key dependencies which
are then addressed through succession plans. Fidelity has succession plans in
place for portfolio managers and these are discussed regularly with the Board.
Economic and political The Company may be impacted by economic and political risks, including from the
risk UK's departure from the European Union and the outcome of future negotiations.
The Board is provided with a detailed investment review which covers material
economic, market and legislative changes at each Board meeting. The review also
covers risks relating to trade tensions, rising interest rates and political
unrest.
The Chairman's Statement and the Portfolio Manager's Review above provide more
detail.
Discount control risk The price of the Company's shares and its discount to NAV are factors which are
not within the Company's total control. The Board continues to adopt an active
discount management policy. 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 at
each of its meetings.
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 the Portfolio
Manager may fail to use gearing effectively, resulting in a failure to
outperform in a rising market or to underperform in a falling market. Other
risks are that the cost of gearing may be too high or that the term of the
gearing is 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 significantly 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 provide both 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 derivatives risk is included in Note 17 to the Financial
Statements below.
Operational risks The operational 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. The risk is frequently re-assessed by Fidelity's
information security and technology teams and has resulted in the
implementation of new tools and processes as well as improvements to existing
ones. Fidelity has also established a dedicated cybersecurity team which
provides regular awareness updates and best practices guidance.
Other significant operational risks, such as those currently arising from the
Coronavirus (COVID 19), following the Company's year end, are being managed by
Fidelity's Contagious Illness Response Team (CIRT) which is part of Fidelity's
overall Event Management Framework. There are contingency plans in place to
allow for the continuation of Fidelity's operations and to look after the
safety of their employees.
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk to the Company of not complying with tax and regulatory
requirements.
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.
There is a risk that outstanding withholding tax reclaims may not be
recoverable from some jurisdictions and may need to be written-off. The
Manager's tax team works closely with the Custodian to keep these under review
and the Board is kept updated on the recoverability of the withholding tax
reclaims.
The Board monitors tax and regulatory changes at each Board meeting and through
active engagement with regulators and trade bodies by the Manager.
Other 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 are investigated. Risks associated with these services
are generally rated as low, but the financial consequences could be serious,
including reputational damage to the Company.
CONTINUATION VOTE
A continuation vote takes place every two years. There is a risk that
shareholders do not vote in favour of the continuation of the Company during
periods when performance of the Company's NAV and share price is poor. At the
Company's AGM held on 13 May 2019, 100% of shareholders voted in favour of the
continuation of the Company. The next continuation vote will take place at the
AGM in 2021.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 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 growth in both
capital and income. 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 discount 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 for the five year reporting period to
31 December 2019, with a NAV total return of 77.7%, a share price total return
of 80.8% and a Benchmark Index total return of 61.6%. The Board regularly
reviews the Company's investment policy and considers whether it remains
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 Investment Manager's compliance with the Company's investment
objective and policy, its investment strategy and asset allocation;
· The portfolio mainly comprises readily realisable securities which can be
sold to meet funding requirements if necessary;
· The Board's discount management policy;
· The ongoing processes for monitoring operating costs and income which are
considered to be reasonable in comparison to the Company's total assets; and
* The Board's assessment of the risks arising from COVID-19 as set
out above.
In addition, the Directors' assessment of the Company's ability to operate in
the foreseeable future is included in the Going Concern Statement below.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act, the Directors have a duty to promote
the success of the Company for the benefit of its stakeholders. This includes
having regard (amongst other matters) to the likely consequences of any
decision in the long term, fostering relationships with the Company's
stakeholders and the desirability of the Company maintaining a reputation for
high standards of business conduct.
As an Investment Trust the Company has no employees or physical assets, the
Manager is our predominant supplier and our customers are our shareholders. The
Board, with the Portfolio Manager, sets an overall investment strategy and
reviews this at an annual strategy day which is separate from the regular cycle
of board meetings. In order to ensure good governance of the Company, the Board
has set various limits on the investments in the portfolio, whether in the
maximum size of individual holdings, the use of derivatives, the level of
gearing and others. These limits and guidelines are regularly monitored.
It is one of the Board's long term intentions that the share price should trade
at a level close to the underlying net asset value of the shares. In order to
achieve this, the Board has an active discount policy in order to reduce
discount volatility and will execute share repurchases (in normal market
conditions) in order to keep the discount in single figures.
The Board is mindful that investors expect their funds to be managed for a
competitive fee. The Board last renegotiated the fee payable to the Manager in
2018 and details can be found in the Director's Report section of the Annual
report. The tiered structure of the fee will mean that as assets grow over
time, the benefits of scale will be passed on to shareholders.
It is important that shareholders have access to both the Portfolio Manager and
the Board. The Portfolio Manager meets with major shareholders, stock market
analysts, journalists and other commentators during the year. The Chairman,
Senior Independent Director and the other Directors are also available to meet
shareholders.
As long term investors, we look to the future - the Portfolio Manager in
constructing the portfolio and the Board in governing the Company. The
performance of the Company and its reputation for transparency and good
governance are paramount to its long term success for the benefit of all its
stakeholders.
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. This conclusion also takes into account the Board's assessment of the
risks arising from COVID-19 as set out above. The prospects of the Company over
a period longer than twelve months can be found in the Viability Statement
above.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial period. 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 reporting 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 presume 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 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 own jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with FRS 102, 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 18 March 2020 and signed on its behalf by:
VIVIAN BAZALGETTE
Chairman
Income Statement for the year ended 31 December 2019
Year ended 31 December 2019 Year ended 31 December 2018
Notes
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Gains/(losses) on 10 - 183,944 183,944 - (64,871) (64,871)
investments
Gains/(losses) on 11 - 17,516 17,516 - (6,143) (6,143)
derivative instruments
Income 3 34,201 - 34,201 33,763 - 33,763
Investment management 4 (2,119) (6,357) (8,476) (2,030) (6,090) (8,120)
fees
Other expenses 5 (857) - (857) (846) - (846)
Foreign exchange gains/ - 199 199 - (17) (17)
(losses)
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Net return/(loss) on 31,225 195,302 226,527 30,887 (77,121) (46,234)
ordinary activities before
finance costs and
taxation
Finance costs 6 (254) (760) (1,014) (448) (1,345) (1,793)
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Net return/(loss) on 30,971 194,542 225,513 30,439 (78,466) (48,027)
ordinary activities before
taxation
Taxation on return/(loss) 7 (2,155) - (2,155) (1,706) - (1,706)
on ordinary activities
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Net return/(loss) on 28,816 194,542 223,358 28,733 (78,466) (49,733)
ordinary activities after
taxation for the year
=========== =========== =========== =========== =========== ===========
Return/(loss) per ordinary 8 7.00p 47.26p 54.26p 6.94p (18.96p) (12.02p)
share
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
The Company does not have any other comprehensive income. Accordingly the net
return/(loss) 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 below form an integral part of these Financial Statements.
Statement of Changes in Equity for the year ended 31 December 2019
share capital total
share premium redemption capital revenue shareholders'
capital account reserve reserve reserve funds
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Total shareholders' funds 10,411 58,615 5,414 844,043 36,828 955,311
at 31 December 2018
Net return on ordinary - - - 194,542 28,816 223,358
activities after taxation
for the year
Repurchase of ordinary 14 - - - (1,578) - (1,578)
shares
Dividends paid to 9 - - - - (36,529) (36,529)
shareholders
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Total shareholders' funds 10,411 58,615 5,414 1,037,007 29,115 1,140,562
at 31 December 2019
=========== =========== =========== =========== =========== ===========
Total shareholders' funds 10,411 58,615 5,414 929,452 26,156 1,030,048
at 31 December 2017
Net (loss)/return on - - - (78,466) 28,733 (49,733)
ordinary activities after
taxation for the year
Repurchase of ordinary 14 - - - (6,943) - (6,943)
shares
Dividend paid to 9 - - - - (18,061) (18,061)
shareholders
------------------- ------------------- ------------------- ------------------- ------------------- -------------------
Total shareholders' funds 10,411 58,615 5,414 844,043 36,828 955,311
at 31 December 2018
=========== =========== =========== =========== =========== ===========
The Notes on pages below form an integral part of these Financial Statements.
Balance Sheet as at 31 December 2019 Company number 2638812
2019 2018
Notes GBP'000 GBP'000
Fixed assets
Investments 10 1,108,702 938,826
Current assets
Derivative instruments 11 16,576 2,391
Debtors 12 5,134 6,405
Amounts held at futures clearing houses and brokers 2,029 4,279
Fidelity Institutional Liquidity Fund 46 1,847
Cash at bank 9,444 4,427
------------------ ------------------
33,229 19,349
========== ==========
Creditors
Derivative instruments 11 (457) (2,024)
Other creditors 13 (912) (840)
------------------ ------------------
(1,369) (2,864)
------------------ ------------------
Net current assets 31,860 16,485
------------------ ------------------
Net assets 1,140,562 955,311
========== ==========
Capital and reserves
Share capital 14 10,411 10,411
Share premium account 15 58,615 58,615
Capital redemption reserve 15 5,414 5,414
Capital reserve 15 1,037,007 844,043
Revenue reserve 15 29,115 36,828
------------------ ------------------
Total shareholders' funds 1,140,562 955,311
========== ==========
Net asset value per ordinary share 16 277.19p 231.77p
------------------ ------------------
The Financial Statements above and below were approved by the Board of
Directors on 18 March 2020 and were signed on its behalf by:
Vivian Bazalgette
Chairman
The Notes on pages below form an integral part of these Financial Statements.
Notes to the Financial Statements
1 PRINCIPAL ACTIVITY
Fidelity European 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 2638812, 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 October 2019 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.
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") is 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, bank deposits and money market funds 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 investment management fee is allocated 25% to revenue and 75% to
capital; 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 functional and reporting
currency of the Company is UK sterling, which is the currency of the primary
economic environment in which the Company operates. 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 in the rates of exchange ruling at the Balance Sheet date.
Foreign exchange gains and losses arising on the 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 deposits 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
allocated 25% to revenue and 75% to capital.
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.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within gains/(losses) 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 and futures. 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; and
· Futures - the difference between the contract price and the quoted trade
price.
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/(losses) 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 accrued income, taxation recoverable 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 subject to an
insignificant risk of changes in value.
o) Other creditors - Other creditors include investment management 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) Fidelity Institutional Liquidity Fund plc - The Company holds an investment
in the Fidelity Institutional Liquidity Fund plc, a short term money market
fund investing in a diversified range of short term instruments. It is readily
convertible to cash and is considered a cash equivalent.
q) 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;
· 75% of investment management fees and finance costs;
· Dividends receivable which are capital in nature; and
· Costs of repurchasing ordinary shares.
As a result of technical guidance issued by the Institute of Chartered
Accountants in England and Wales in TECH 02/17BL: 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.
3 INCOME
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
Investment income
Overseas dividends 29,019 26,394
Overseas scrip dividends 795 1,685
UK dividends 2,058 2,005
------------------ ------------------
31,872 30,084
========== ==========
Derivative income
Income recognised from futures contracts 567 2,591
Dividends received on long CFDs 1,658 985
Interest received on long CFDs* 45 11
------------------ ------------------
2,270 3,587
------------------ ------------------
Investment and derivative income 34,142 33,671
========== ==========
Other interest
Interest received on deposits and money market funds 48 92
Interest received on tax reclaims 11 -
------------------ ------------------
59 92
========== ==========
Total income 34,201 33,763
========== ==========
* Due to negative interest rates during the reporting year, the Company
received interest on its long CFDs.
No special dividends have been recognised in capital during the reporting year
(2018: GBP671,000).
4 INVESTMENT MANAGEMENT FEES
Year ended 31 December Year ended 31 December
2019 2018
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investment management fees 2,119 6,357 8,476 2,030 6,090 8,120
======== ======== ======== ======== ======== ========
== == == == == ==
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 April 2018, FII charges investment management fees at an annual rate of
0.85% of net assets up to GBP400 million and 0.75% of net assets in excess of GBP
400 million. Prior to this date the investment management fees were charged at
a rate of 0.85% of net assets. Fees are payable monthly in arrears and are
calculated on a daily basis.
5 OTHER EXPENSES
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
AIC fees 22 21
Custody fees 112 113
Depositary fees 75 77
Directors' fees1 151 161
Legal and professional fees 55 101
Marketing expenses 189 146
Printing and publication expenses 126 112
Registrars' fees 75 67
Fees payable to the Company's Independent Auditor for the audit of the 29 25
Financial Statements2
Other expenses 23 23
------------------ ------------------
857 846
========== ==========
1 Details of the breakdown of Directors' fees are disclosed in the Directors'
Remuneration Report in the Annual Report.
2 The VAT payable on audit fees is included in other expenses.
6 FINANCE COSTS
Year ended 31 December 2019 Year ended 31 December 2018
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Interest paid on deposits 30 89 119 1 3 4
Interest paid on short CFDs1 27 81 108 64 193 257
Dividends paid on short CFDs 197 590 787 383 1,149 1,532
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
254 760 1,014 448 1,345 1,793
========== ========== ========== ========== ========== ==========
1 Due to negative interest rates during the year, the Company has paid
interest on its short CFDs and deposits.
7 TAXATION ON RETURN/(LOSS) ON ORDINARY ACTIVITIES
Year ended 31 December 2019 Year ended 31 December 2018
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
a) Analysis of the taxation charge
for the year
Overseas taxation 2,155 - 2,155 1,706 - 1,706
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Total taxation charge for the year 2,155 - 2,155 1,706 - 1,706
(see Note 7b)
========== ========== ========== ========== ========== ==========
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 December 2019 Year ended 31 December 2018
revenue capital total revenue capital total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net return/(loss) on ordinary 30,971 194,542 225,513 30,439 (78,466) (48,027)
activities before taxation
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Net return/(loss) on ordinary
activities
before taxation multiplied by the
standard
rate of UK corporation tax of
19.00%
(2018: 19.00%) 5,884 36,963 42,847 5,783 (14,909) (9,126)
Effects of:
Capital (gains)/losses not - (38,315) (38,315) - 13,495 13,495
taxable1
Income not taxable (5,418) - (5,418) (5,238) - (5,238)
Expenses not deductible - 128 128 - 256 256
Expense relief for overseas (8) - (8) (5) - (5)
taxation
Excess management expenses (458) 1,224 766 (540) 1,158 618
Overseas taxation 2,155 - 2,155 1,706 - 1,706
------------------ ------------------ ------------------ ------------------ ------------------ ------------------
Total taxation charge for the year 2,155 - 2,155 1,706 - 1,706
(see Note 7a)
========== ========== ========== ========== ========== ==========
1 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 GBP7,599,000 (2018: GBP6,914,000), in respect of excess
expenses of GBP39,197,000 (2018: GBP35,165,000) and excess loan interest of GBP
5,505,000 (2018: GBP5,505,000), has not been recognised as it is unlikely that
there will be sufficient future taxable profits to utilise these expenses.
8 RETURN/(LOSS) PER ORDINARY SHARE
Year ended 31 December Year ended 31 December
2019 2018
revenue capital total revenue capital total
Return/(loss) per ordinary share 7.00p 47.26p 54.26p 6.94p (18.96p) (12.02p)
======== ======== ======== ======== ======== ========
== == == == == ==
The returns/(losses) per ordinary share are based on, respectively; the net
revenue return on ordinary activities after taxation for the year of GBP
28,816,000 (2018: GBP28,733,000), the net capital gain on ordinary activities
after taxation for the year of GBP194,542,000 (2018: loss of GBP78,466,000) and the
net total return on ordinary activities after taxation for the year of GBP
223,358,000 (2018: loss of GBP49,733,000), and on 411,645,789 ordinary shares
(2018: 413,917,816), being the weighted average number of ordinary shares held
outside of Treasury during the year.
9 DIVIDS PAID TO SHAREHOLDERS
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
Dividends paid
Interim dividend of 2.59 pence per Ordinary Share for the year ended 10,657 -
31 December 2019
Final dividend of 6.28 pence per Ordinary Share for the year ended 31 25,872 -
December 2018
Final dividend of 4.35 pence per Ordinary Share paid for the year - 18,061
ended 31 December 2017
------------------ ------------------
36,529 18,061
========== ==========
Dividend proposed
Final divided proposed of 3.88 pence per Ordinary Share for the year 15,965 -
ended 31 December 2019
Final dividend of 6.28 pence per Ordinary Share for the year ended 31 - 25,884
December 2018
------------------ ------------------
15,965 25,884
========== ==========
The Directors have proposed the payment of a final dividend for the year ended
31 December 2019 of 3.88 pence per ordinary share which is subject to approval
by shareholders at the Annual General Meeting on 12 May 2020 and has not been
included as a liability in these Financial Statements. The dividend will be
paid on 15 May 2020 to shareholders on the register at the close of business on
27 March 2020 (ex-dividend date 26 March 2020).
10 INVESTMENTS
2019 2018
GBP'000 GBP'000
Investments held at fair value 1,108,702 938,826
=========== ===========
Opening book cost 723,726 679,196
Opening investment holding gains 215,100 331,918
=========== ===========
Opening fair value 938,826 1,011,114
Movements in the year
Purchases at cost 127,818 169,608
Sales - proceeds (141,886) (177,025)
Sales - gains 46,247 51,947
Movement in investment holding gains/(losses) 137,697 (116,818)
------------------- -------------------
Closing fair value 1,108,702 938,826
=========== ===========
Closing book cost 755,905 723,726
Closing investment holding gains 352,797 215,100
------------------- -------------------
Closing fair value 1,108,702 938,826
=========== ===========
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
Gains/(losses) on investments
Gains on sales of investments 46,247 51,947
Investment holding gains/(losses) 137,697 (116,818)
------------------- -------------------
183,944 (64,871)
=========== ===========
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments,
which are included in the gains/(losses) on investments above, were as follows:
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
Purchases transaction costs 154 212
Sales transaction costs 62 70
------------------- -------------------
216 282
=========== ===========
The portfolio turnover for the year was 12.7% (2018: 17.3%). The portfolio
turnover rate measures the Company's trading activity. It is calculated by
taking the average of the total amount of securities purchased and the total
amount of the securities sold in the reporting year divided by the average
investment portfolio value of the Company.
11 DERIVATIVE INSTRUMENTS
Year ended Year ended
31.12.19 31.12.18
GBP'000 GBP'000
Gains/(losses) on derivative instruments
Gains on long CFD positions closed 333 1,715
(Losses)/gains on short CFD positions closed (2,761) 1,577
Gains/(losses) on futures contracts closed 4,192 (12,725)
Movement in investment holding gains/(losses) on long CFDs 14,507 (477)
Movement in investment holding gains on short CFDs 720 2,849
Movement in investment holding gains on futures 525 918
------------------- -------------------
17,516 (6,143)
=========== ===========
2019 2018
fair value fair value
GBP'000 GBP'000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 16,576 2,391
Derivative instrument liabilities (457) (2,024)
------------------- -------------------
16,119 367
=========== ===========
2019 2018
gross asset gross asset
fair value exposure fair value exposure
GBP'000 GBP'000 GBP'000 GBP'000
At the year end the Company held the following derivative instruments
Long CFDs 15,755 72,774 1,248 58,843
Short CFDs 501 13,973 (219) 19,348
Long futures (137) 26,151 (662) 35,125
------------------- ------------------- ------------------- -------------------
16,119 112,898 367 113,316
=========== =========== =========== ===========
12 DEBTORS
2019 2018
GBP'000 GBP'000
Accrued income 375 1,199
Taxation recoverable 4,740 5,179
Other debtors and prepayments 19 27
------------------- -------------------
5,134 6,405
=========== ===========
13 OTHER CREDITORS
2019 2018
GBP'000 GBP'000
------------------- -------------------
Creditors and accruals 912 840
=========== ===========
14 SHARE CAPITAL
2019 2018
number of number of
shares GBP'000 shares GBP'000
Issued, allotted and fully paid
Ordinary shares of 2.5 pence each held outside
Treasury
Beginning of the year 412,172,826 10,304 415,202,177 10,380
Ordinary shares repurchased into Treasury (706,777) (18) (3,029,351) (76)
----------------------- ----------------------- ----------------------- -----------------------
End of the year 411,466,049 10,286 412,172,826 10,304
============ ============ ============ ============
Ordinary shares of 2.5 pence held in Treasury*
Beginning of the year 4,275,084 107 1,245,733 31
Ordinary shares repurchased into Treasury 706,777 18 3,029,351 76
----------------------- ----------------------- ----------------------- -----------------------
End of the year 4,981,861 125 4,275,084 107
============ ============ ============ ============
Total share capital 10,411 10,411
============ ============
* Ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
The cost of ordinary shares repurchased into Treasury during the year was GBP
1,578,000 (2018: GBP6,943,000).
15 RESERVES
The share premium account represents the amount by which the proceeds from the
issue of ordinary shares has exceeded the cost 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 capital reserve represents realised gains or losses on investments and
derivatives sold, unrealised increases and decreases in the fair value of
investments and derivatives held and other income and costs recognised in the
capital column of the Income Statement. Refer to Notes 10 and 11 above for
information on investment holding gains/(losses) included in the 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. See Note 2 (q) above for further details.
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 net asset value per ordinary share is based on net assets of GBP1,140,562,000
(2018: GBP955,311,000) and on 411,466,049 (2018: 412,172,826) ordinary shares,
being the number of ordinary shares of 2.5 pence each held outside of Treasury
at the year end. It is the Company's policy that shares held in Treasury will
only be reissued at net asset value per ordinary share or at a premium to net
asset value per ordinary share and, therefore, shares held in Treasury have no
dilutive effect.
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 and political, discount control, gearing, derivatives and
operational risks. Other risks identified are tax and regulatory and other
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 above.
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 held in accordance with the Company's investment objective
and policies;
· Derivative instruments which comprise CFDs and futures on 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 2018
GBP'000 GBP'000
Exposure to financial instruments that bear interest
Long CFDs - exposure less fair value 57,019 57,595
Exposure to financial instruments that earn interest
Short CFDs - exposure plus fair value 14,474 19,129
Amounts held at futures clearing houses and brokers 2,029 4,279
Fidelity Institutional Liquidity Fund 46 1,847
Cash at bank 9,444 4,427
------------------- -------------------
25,993 29,682
=========== ===========
Net exposure to financial instruments that bear interest 31,026 27,913
=========== ===========
Due to negative interest rates during the year, the Company has received
interest on its long CFDs and paid interest on its short CFDs and Euro amounts
held as cash.
Foreign currency risk
The Company's net return/(loss) 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 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 exchange rates affecting the value of investments and
derivative instruments;
· Movements in exchange rates affecting short term timing differences; and
· Movements in exchange rates affecting income received.
The portfolio management team monitor foreign currency risk but it is not the
Company's current policy to hedge against currency risk.
Currency exposure of financial assets
The currency exposure profile of the Company's financial assets is shown below:
2019
long
investments exposure
held at to derivative cash at
currency fair value instruments debtors1 bank total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Euro 703,676 72,774 1,517 3,598 781,565
Swiss franc 215,249 - 2,752 1,875 219,876
Norwegian krone 61,528 - - - 61,528
Danish krone 42,781 - 502 83 43,366
Swedish krona 32,749 - - - 32,749
US dollar - - - 14 14
UK sterling 52,719 - 2,438 3,874 59,031
------------------- ------------------- ------------------- ------------------- -------------------
1,108,702 72,774 7,209 9,444 1,198,129
=========== =========== =========== =========== ===========
2018
long
investments exposure to
held at derivative cash at
currency fair value instruments debtors1 bank total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Euro 617,503 93,968 2,901 4 714,376
Swiss franc 167,780 - 2,642 - 170,422
Norwegian krone 48,214 - - - 48,214
Danish krone 38,688 - 438 - 39,126
Swedish krona 17,445 - - - 17,445
UK sterling 49,196 - 6,550 4,423 60,169
------------------- ------------------- ------------------- ------------------- -------------------
938,826 93,968 12,531 4,427 1,049,752
=========== =========== =========== =========== ===========
1 Debtors include amounts held at futures clearing houses and brokers and
amounts invested in the Fidelity Institutional Liquidity Fund plc.
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:
2019
short
exposure
to derivative other
currency instruments creditors total
GBP'000 GBP'000 GBP'000
Euro 13,973 - 13,973
UK sterling - 912 912
------------------- ------------------- -------------------
13,973 912 14,885
=========== =========== ===========
2018
short
exposure
to derivative other
currency instruments creditors total
GBP'000 GBP'000 GBP'000
Euro 19,348 - 19,348
UK sterling - 840 840
------------------- ------------------- -------------------
19,348 840 20,188
=========== =========== ===========
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.
Liquidity risk
Due to the closed-ended nature of the Company, the liquidity risk is limited.
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 December 2019, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of GBP457,000 (2018: GBP2,024,000) and other creditors of GBP
912,000 (2018: GBP840,000).
Counterparty risk
Certain derivative instruments in which the Company invests 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. These are known as Over The Counter ("OTC") trades. 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, this risk is minimised 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 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 December 2019, GBP16,660,000 (2018: GBP1,125,000) 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. This collateral
comprised of: HSBC Bank Plc, GBP9,730,000 (2018:1,125,000) held in cash
denominated in UK sterling and Goldman Sachs International Ltd GBP6,930,000
(2018: nil) held in cash denominated in UK sterling. At 31 December 2019, GBP
2,029,000 (2018: GBP4,249,000) was held by the Company in cash, shown as amounts
held at futures clearing houses and brokers on the Balance Sheet, in a
segregated collateral account on behalf of the brokers, to reduce the credit
risk exposure of the brokers. This collateral comprised of: UBS AG GBP2,029,000
in cash denominated in UK sterling (2018: UBS AG GBP3,169,000, Deutsche Bank AG GBP
590,000 and Goldman Sachs International Ltd GBP520,000, all in cash denominated
in UK sterling).
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; and
· 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 December 2019,
an increase of 0.25% in interest rates throughout the year, with all other
variables held constant, would have decreased the net return on ordinary
activities after taxation for the year and decreased the net assets of the
Company by GBP78,000 (2018: increased the net loss and decreased the net assets
by GBP70,000). 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
December 2019, a 10% strengthening of the UK sterling exchange rate against
foreign currencies, with all other variables held constant, would have
(decreased)/increased the Company's net return/(loss) 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:
2019 2018
currency GBP'000 GBP'000
Euro (69,781) (63,184)
Swiss franc (19,989) (15,493)
Norwegian krone (5,593) (4,383)
Danish krone (3,942) (3,557)
Swedish krona (2,977) (1,586)
US dollar (1) -
------------------- -------------------
(102,283) (88,203)
=========== ===========
If the UK sterling exchange rate had weakened by 10% the impact would
have been:
2019 2018
currency GBP'000 GBP'000
Euro 85,288 77,225
Swiss franc 24,431 18,936
Norwegian krone 6,836 5,357
Danish krone 4,818 4,347
Swedish krona 3,639 1,938
US dollar 2 -
------------------- -------------------
125,014 107,803
=========== ===========
Other price risk - exposure to investments sensitivity analysis
Based on the investments held and share prices at 31 December 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 GBP110,870,000 (2018:
decreased the net loss and increased the net assets by GBP93,883,000). A decrease
of 10% in share prices would have had an equal and opposite effect.
Other price risk - net exposure to derivative investments sensitivity analysis
Based on the derivative instruments held and share prices at 31 December 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 GBP8,495,000 (2018: decreased the net loss and increased
the net assets by GBP7,462,000). A decrease of 10% in share prices of the
investments underlying the derivative instruments 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 and cash equivalents, 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:
2019
Financial assets at fair value through profit or level 1 level 2 level 3 total
loss GBP'000 GBP'000 GBP'000 GBP'000
Investments 1,108,702 - - 1,108,702
Derivative instrument assets - 16,576 - 16,576
------------------- ------------------- ------------------- -------------------
1,108,702 16,576 - 1,125,278
=========== =========== =========== ===========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities (137) (320) - (457)
=========== =========== =========== ===========
2018
Financial assets at fair value through profit or level 1 level 2 level 3 total
loss GBP'000 GBP'000 GBP'000 GBP'000
Investments 938,826 - - 938,826
Derivative instrument assets - 2,391 - 2,391
------------------- ------------------- ------------------- -------------------
938,826 2,391 - 941,217
=========== =========== =========== ===========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities (662) (1,362) - (2,024)
=========== =========== =========== ===========
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 above, 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 in the Annual
Report. The principal risks and their management are disclosed in the Strategic
Report and in Note 17 above.
The Company's gearing at the end of the year is set out below:
2019
gross asset exposure net asset exposure
GBP'000 %1 GBP'000 %1
Investments 1,108,702 97.2 1,108,702 97.2
Long CFDs 72,774 6.4 72,774 6.4
Long futures 26,151 2.3 26,151 2.3
------------------- ------------------- ------------------- -------------------
Total long exposures 1,207,627 105.9 1,207,627 105.9
=========== =========== =========== ===========
Short CFDs 13,973 1.2 (13,973) (1.2)
Gross/net asset exposure 1,221,600 107.1 1,193,654 104.7
=========== =========== =========== ===========
Shareholders' funds 1,140,562 1,140,562
=========== ===========
Gearing2 7.1 4.7
=========== ===========
2018
gross asset exposure net asset exposure
GBP'000 %1 GBP'000 %1
Investments 938,826 98.3 938,826 98.3
Long CFDs 58,843 6.1 58,843 6.1
Long futures 35,125 3.7 35,125 3.7
------------------- ------------------- ------------------- -------------------
Total long exposures 1,032,794 108.1 1,032,794 108.1
=========== =========== =========== ===========
Short CFDs 19,348 2.0 (19,348) (2.0)
Gross/net asset exposure 1,052,142 110.1 1,013,446 106.1
=========== =========== =========== ===========
Shareholders' funds 955,311 955,311
=========== ===========
Gearing2 10.1 6.1
=========== ===========
1 Exposure to the market expressed as a percentage of Shareholders' funds.
2 Gearing is the amount by which gross/net asset exposure exceeds
Shareholders' funds expressed as a percentage of Shareholders' funds.
19 TRANSACTIONS WITH THE MANAGERS 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
section of the Annual Report, and in Note 4 above. During the year, fees for
portfolio management services amounted to GBP8,476,000 (2018: GBP8,120,000). At the
Balance Sheet date, management fees of GBP752,400 (2018: GBP654,000) 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 GBP
189,000 (2018: GBP146,000). At the Balance Sheet date, GBP7,000 (2018: GBP1,000) for
marketing services was 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
paid to the Directors are given in the Directors' Remuneration Report section
of the Annual report. In addition to the fees and taxable expenses disclosed in
the Directors' Remuneration Report, GBP15,000 (2018: GBP16,000) of Employers'
National Insurance Contributions was also paid by the Company. As at 31
December 2019, Directors' fees of GBP14,000 were accrued and payable.
20 POST BALANCE SHEET EVENT
The Board has considered the risks arising from COVID 19 as part of its process
to approve the Company's Financial Statements and the going concern assessment.
The Board has taken into account the recent share price volatility and further
information is provided in the Chairman's Statement above, the Portfolio
Manager's Review above and in the Principal Risks above.
Alternative Performance Measures
TOTAL RETURN
Total return is considered to be an alternative performance measure (as defined
in the Glossary of Terms in the Annual Report). NAV total return includes
reinvestment of the dividend in the 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 December 2019 and 31 December 2018.
Net asset
value per
ordinary Share
2019 share price
31 December 2018 231.77p 207.00p
31 December 2019 277.19p 260.00p
Change in year +19.6% +25.6%
Impact of dividend reinvestment +4.2% +5.0%
------------------- -------------------
Total return for the year +23.8% +30.6%
=========== ===========
Net asset
value per
ordinary Share
2018 share price
31 December 2017 248.08p 226.70p
31 December 2018 231.77p 207.00p
Change in year - 6.6% -8.7%
Impact of dividend reinvestment +1.8% +1.9%
------------------- -------------------
Total return for the year -4.8% - 6.8%
=========== ===========
ONGOING CHARGES
Ongoing charges are considered to be an alternative performance measure. The
ongoing charges ratio has been calculated in accordance with guidance issued by
the AIC as the total of investment management fees and other expenses expressed
as a percentage of the average net asset values throughout the year.
2019 2018
Investment management fees (GBP'000) 8,476 8,120
Other expenses (GBP'000) 857 846
Ongoing charges (GBP'000) 9,333 8,966
Average net assets (GBP'000) 1,076,838 1,021,359
------------------- -------------------
Ongoing charges ratio 0.87% 0.88%
=========== ===========
GEARING
Gearing is considered to be an alternative performance measure. See Note 18
above for details of the Company's gearing.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 December 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 later this month 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.
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
END
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