FIDELITY EUROPEAN TRUST PLC
Final Results for the year ended 31
December 2022
Financial Highlights:
- The Board of Fidelity European Trust PLC (the “Company”)
recommends a final dividend of 4.62
pence which together with the interim dividend payment of
3.08 pence per share (totalling
7.70 pence) represents an increase of
12.7% over the total dividend of 6.83
pence paid in the prior year.
- Over the reporting year, the net asset value (“NAV”) of the
Company returned -3.6% but outperformed the Benchmark Index which
fell by -7.0%. The share price return was -3.8%.
- The Company was the top performer in its peer group at the end
of the reporting year.
- The Company continues to focus on attractively valued companies
with strong balance sheets and consistent dividend growth.
Contacts
For further information, please
contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN’S STATEMENT
The year under review was one of the most extraordinary in
recent memory, rivalling the one in which COVID-19 first erupted.
It is barely a year since Russia
invaded Ukraine, devastating an
entire country and sending shockwaves around the globe. Everything
from grain to oil prices, energy and commodity costs and spending
on defence, were impacted. The UK had three prime ministers in the
space of a few months, while Continental Europe saw a new ruling
coalition in Italy and a tightly
contested election in France.
Meanwhile, central banks raised interest rates significantly and
moved from quantitative easing to quantitative tightening. The
European Central Bank was somewhat later than others to embark on
this important change of policy.
With so much going on, one would be forgiven for overlooking the
impact that COVID-19 has had on consumers and businesses. Having
said that, China announced a
surprising end to its zero-COVID policy in December 2022, potentially opening up one of the
world’s major economies again and benefiting demand for European
companies’ products. With elevated levels of volatility and a
difficult market environment, the Board and I are pleased to see
the Portfolio Managers sticking to their tried and tested
philosophy of bottom-up stock picking, namely finding attractively
valued dividend growers with strong business franchises and balance
sheets.
Performance
The Company’s performance, although negative over the period, was
better than the Benchmark Index, the FTSE World Europe (ex-UK),
with a net asset value “NAV” total return of -3.6% and a share
price total return of -3.8%. In comparison, the Benchmark Index
total return was -7.0%. The discount widened slightly from 5.1% at
the start of the year to end the year at 5.4%. Both the NAV and
share price total performance returns over three, five and ten
years remain well ahead of the Benchmark Index, as can be seen from
the chart on the Financial Highlights page in the Annual Report.
These are pleasing results for the Company.
Outlook
Inflation appears to have peaked in Europe at 10.6% in October 2022. The last quarter of 2022 saw equity
markets bounce given unusually mild weather in Europe which helped bring down gas prices from
elevated levels, and of course, positive news from China where property market stimulus and a
relaxation of zero-COVID policies helped to buoy markets. In
Europe, results for the third
quarter also held up better than expected, in part supported by a
weak euro.
The risks of a global recession at some stage in 2023 loom
large, however, and so there is a tone of caution about the
operating environment for the year ahead. Companies with prudently
managed balance sheets look well-positioned to weather any
potential economic problems, and it is exactly these types of
resilient companies in which the Company’s Portfolio Managers look
to invest.
The portfolio remains balanced in terms of sector positioning
and the Portfolio Managers’ focus is on finding attractively valued
companies with good prospects for cash generation and dividend
growth over the longer term. Positioning is driven by opportunities
at the individual stock level rather than by macro developments, as
the Portfolio Managers believe that calling the general direction
of the market is a difficult, if not an impossible task. The
investment strategy of the Company remains unchanged.
Environmental, Social and Governance (ESG) Investment
ESG factors remain central to the work of both the Board and the
Portfolio Managers. Businesses are under pressure to ensure that
their activities are environmentally sustainable and demonstrate
social responsibility and good corporate governance. Although there
is progress in the form of commitments and initiatives across a
wide range of areas from deforestation to clean energy transition,
much more needs to be done. Continuing deterioration in the climate
and other ESG concerns present their own investment risk to your
portfolio. Fidelity International has a sustainable investing
approach, including engagement and voting principles and
guidelines. It continues to evolve its approach to ESG, for
example, in its proprietary forward-looking ESG ratings. The
proprietary sustainability ratings system leverages Fidelity
International’s internal research and interactions with issuers,
and the ratings are designed to generate a forward-looking and
holistic assessment of ESG risks and opportunities based on sector
specific performance indicators. Analysts quantify the direction of
change of companies’ ESG performance and rate the companies using a
scale of A to E. The ratings of the companies within the portfolio
are well ahead of the broader market and continue to improve.
The Portfolio Managers outline how they use Fidelity
International’s approach to ESG in their report and what this means
for the Company’s investment portfolio. The Fidelity group of
companies (including the Manager) has embedded ESG factors in its
investment decision making process. Further details are in the
Annual Report.
OTHER MATTERS
Dividends
The Board does not influence the Portfolio Managers by imposing any
income objective in any particular year, and the investment focus
on companies capable of growing their dividends remains. The Board
acknowledges that both capital and income growth are components of
performance, as reflected in the investment objective of the
Company. It therefore has a policy whereby it seeks to pay a
progressive dividend in normal circumstances and to pay dividends
twice yearly in order to smooth dividend payments for the reporting
year. Unlike open-ended funds, investment trusts can hold back some
of the income they receive in good years, thereby building up
revenue reserves, which can then be used to supplement dividends
during difficult times. The Board has over the past few years
augmented revenue reserves by retaining a small proportion of
earnings to be used in difficult times, as in the case of the final
dividend paid in May 2021.
The Company’s revenue return for the year to 31 December 2022 was 9.00
pence per ordinary share (2021: 7.50
pence), and an interim dividend of 3.08 pence per ordinary share was paid on
28 October 2022 (2021: 2.65 pence). The Board recommends a final
dividend of 4.62 pence per ordinary
share for the year ended 31 December
2022 (2021: 4.18 pence) for
approval by shareholders at the Annual General Meeting (“AGM”) on
10 May 2023. The interim and final
dividends (total of 7.70 pence)
represent an increase of 0.87 pence
(12.7%) over the 6.83 pence paid for
the year ended 31 December 2021.
The final dividend will be payable on 16
May 2023 to shareholders on the register at close of
business on 31 March 2023
(ex-dividend date 30 March 2023).
Shareholders may choose to reinvest their dividends for additional
shares in the Company.
Discount Management and Treasury Shares
The Board has an active discount management policy, the primary
purpose of which is to reduce discount volatility. It seeks to
maintain the discount in single digits in normal market conditions.
Buying shares at a discount also results in an enhancement to the
NAV per ordinary share.
In order to assist in managing the discount, the Board has
shareholder approval to hold ordinary shares repurchased by the
Company in Treasury, rather than cancelling them. Shares in
Treasury are then available to be re-issued at NAV per ordinary
share or at a premium to NAV per ordinary 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 AGM on 10 May 2023.
Between August and October 2022,
as the Company’s discount widened, it repurchased 2,285,526
ordinary shares into Treasury. Since then the discount has remained
in single digits and no further shares have been repurchased.
Gearing
The Company continues to gear through the use of derivative
instruments, primarily contracts for difference (“CFDs”), and the
Portfolio Manager has flexibility to gear within the parameters set
by the Board. As at 31 December 2022,
the Company’s gross gearing was 11.7% (2021: 11.1%). Net gearing
was the same at 11.7% (2021: 11.1%) due to the absence of any short
derivative positions in the portfolio. In the reporting year,
gearing made a negative 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.
It should be stressed that all gearing is subject to the Portfolio
Managers’ confidence in identifying attractive investment
opportunities, and to their remaining attractive.
Board of Directors
After serving on the Board for nine years, Marion Sears stepped down from the Board on
10 May 2022 as a non-executive
Director and Senior Independent Director. Her successor as a
non-executive Director, Milyae Park, was appointed on 1 January 2022. Milyae was subsequently elected
by shareholders at the AGM held on 10 May
2022. Paul Yates succeeded
Marion as Senior Independent Director on 10
May 2022.
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
for Directors of FTSE 350 Companies, all Directors will be subject
to annual re-election at the AGM on 10 May
2023. The Directors’ biographies can be found in the Annual
Report and between them they have a wide range of appropriate
skills and experience to form a balanced Board for the Company.
Continuation Vote
In accordance with the Company’s Articles of Association, the
Company is subject to a continuation vote every two years. The next
such vote is at this year’s AGM on 10 May
2023.
The Company’s performance record has been strong since it
launched on 5 November 1991, with a
NAV total return of 4,899.3% and a share price total return of
4,784.6% compared to a Benchmark Index total return of 1,280.5%.
The NAV and share price returns over one, three and five years
remain well ahead of the Benchmark Index as can be seen from the
“Standardised Performance Total Return” chart on the Financial
Highlights page in the Annual Report. In addition, the prospects of
the Company over a five year investment horizon can be found in the
Viability Statement below. Therefore, your Board recommends that
Shareholders vote in favour of the continuation of the Company.
Annual General Meeting
The Company’s AGM is at 12 noon on Wednesday, 10 May 2023, and the Board and I hope to see as
many shareholders as possible. Details of the AGM are below.
Vivian Bazalgette
Chairman
20 March 2023
ANNUAL GENERAL MEETING – WEDNESDAY, 10
MAY 2023 AT 12 NOON
The AGM of the Company will be held at 12 noon on Wednesday,
10 May 2023 at 4 Cannon Street,
London EC4M 5AB (nearest tube
stations are St Paul’s or Mansion House) and virtually via the
online Lumi AGM meeting platform. Full details of the meeting are
given in the Notice of Meeting in the Annual Report.
For those shareholders who would prefer not to attend in person,
we will live-stream the formal business and presentations of the
meeting online.
Sam Morse, the Portfolio Manager,
will be making a presentation to shareholders highlighting the
achievements and challenges of the year past and the prospects for
the year to come. He, the Co-Portfolio Manager and the Board will
be very happy to answer any questions that shareholders may have.
Copies of his presentation can be requested by email at
investmenttrusts@fil.com or in writing to the Company
Secretary at FIL Investments International, Beech Gate,
Millfield Lane, Lower Kingswood,
Tadworth, Surrey KT20 6RP.
Properly registered shareholders joining the AGM virtually will
be able to vote on the proposed resolutions. Please see Note 9 to
the Notes to the Notice of Meeting in the Annual Report for details
on how to vote virtually. Investors viewing the AGM online will be
able to submit live written questions to the Board and the
Portfolio Managers and we will answer as many of these as possible
at an appropriate juncture during the meeting.
Further information and links to the Lumi platform may be found
on the Company’s website at www.fidelity.co.uk/europe. On
the day of the AGM, in order to join electronically and ask
questions via the Lumi platform, shareholders will need to connect
to the website https://web.lumiagm.com.
Please note that investors on platforms, such as Fidelity
Personal Investing, Hargreaves Lansdown, Interactive Investor or AJ
Bell Youinvest, will need to request attendance at the AGM in
accordance with the policies of your chosen platform. They may
request that you submit electronic votes in advance of the meeting.
If you are unable to obtain a unique IVC and PIN from your nominee
or platform, we will also welcome online participation as a guest.
Once you have accessed https://web.lumiagm.com from your web
browser on a tablet or computer, you will need to enter the Lumi
Meeting ID which is 186-425-859. You should then select
the ‘Guest Access’ option before entering your name and who you are
representing, if applicable. This will allow you to view the
meeting and ask questions, but you will not be able to vote.
Portfolio Managers’ Review
Question
You have both had another year of navigating challenging
investment conditions under your belts. What lessons have you
learned?
Answer
Sam:
1. Expect the unexpected. We do not spend a
lot of time trying to predict what comes next (did you predict the
global pandemic or the invasion of Ukraine?) but we do spend a lot of time trying
to identify well-funded companies that we think will be able to
deliver consistent dividend growth irrespective of what comes
next.
2. Stay fully invested. The first portfolio
manager of your company, Anthony
Bolton, always reminds us that it is important not to become
more bearish as the market falls. The stock market looks forward
and often recovers its poise when investors least expect it.
3. Stay balanced. Diversification is a free
gift – it provides protection from unexpected outcomes and reduces
the number of sleepless nights in times of high volatility (which
has been the norm in 2022 and recent years.)
Marcel: I fully agree with all that Sam has mentioned. I
would add that sometimes when it comes to trading during periods of
crisis “less is more”. This runs counter to the conventional wisdom
that you need to trade more during these periods in order to
protect your portfolio. We were not smart enough to predict the
pandemic and invasion of Ukraine
and all the second and third order impacts. However, when we looked
at the Company’s holdings individually, as well as in aggregate, we
felt confident that the Company was well setup to handle what the
market would potentially throw at us. This indeed proved to be the
case and vindicated our approach to avoid “doing something” just
for the sake of it.
Question
What stocks have performed particularly well during this period
and why?
Answer
Sam: As the old saying goes: ‘You wait forever for a
London bus and then three come
along one after the other.’ The Company had not had a takeover
offer for one of its holdings for some time, but in 2022, we
received three offers which, on a combined basis, accounted for
much of the NAV outperformance of the Company, relative to its
Benchmark Index. The most significant boost to performance came
from Swedish Match for which Philip Morris International (think
Marlboro man) originally offered SEK106 per share in May and ended up giving us
SEK116 per share six months later.
Although we did not think it was overly generous, we decided to
accept the SEK116 offer. Swedish
Match has been a dividend growing stalwart in the Company for many
years and has enjoyed a lot of recent success in the USA. We expect this to continue with its
nicotine pouch brand Zyn. Atlantia, the Italian infrastructure
company, was taken over by the Benetton family who already had a
controlling stake in the company, in league with the private equity
giant Blackstone. Finally, at the end of the year, Novozymes, a
major player in industrial enzymes, announced an all-Danish
‘merger’ with another holding in the Company, Christian Hansen, a major player in food enzymes
and cultures.
Top 5 Stock Contributors
(on a relative basis) |
% |
Swedish Match |
+1.6 |
TotalEnergies |
+1.1 |
Novo Nordisk |
+0.7 |
Deutsche Börse Group |
+0.7 |
Bankinter |
+0.7 |
|
========= |
Top 5 Stock Detractors
(on a relative basis) |
% |
Partners Group |
-0.8 |
EQT |
-0.6 |
Legrand |
-0.6 |
Novartis |
-0.6 |
Dassault Systèmes |
-0.5 |
|
========= |
Question
What impact has heightened geopolitical risk had on the
Company?
Answer
Marcel: Clearly, the primary impact has been that the sense
of security which the market, and indeed society at large, has had
for a number of years, has been shattered as a result of the
largest European conflict since 1945. As such the “peace dividend”
that markets have enjoyed over many years is substantially reduced
with the market now also repricing risks of not just Eastern Europe but also other regions such as
Taiwan and Korea. Additionally,
the second order impact of the Ukraine invasion has been materially higher
inflation and interest rate expectations over the coming years. All
of the above has resulted in a sharp de-rating in the market, even
if at an aggregate level, European corporate earnings are still
expected to grow in 2023.
Question
How optimistic are you about corporate earnings?
Answer
Marcel: The short answer is less optimistic than sell-side
consensus estimates. Surprisingly to us, consensus still expects
earnings growth in 2023 for European listed equities in aggregate,
despite the challenging macroeconomic outlook and likely headwinds
over the next 12 months. Fidelity’s analysts in aggregate are more
bearish, expecting earnings to decline by 5%+ in 2023, with which
we would agree. Additionally, there is likely to be more downside
risk to these earnings numbers than upside risk. Having said this,
we believe aggregate earnings in the Company should prove to be
more resilient than the market given we can seek shelter in sectors
with pricing power, balance sheet strength and tailwinds from
structural demand and a strong US dollar. Key sector examples of
this would be luxury goods, software and aerospace and defense.
Thus, Fidelity analysts are less optimistic than the market on
earnings growth for European companies in 2023, but the stocks in
the portfolio should prove more resilient (see chart in the Annual
Report).
Question
What are some of the more recent portfolio changes that you have
made and how are you positioned for 2023?
Answer
Sam: For much of 2022, we have been sitting on our hands.
Turnover has been low. Although we have seen some big drops in the
share prices of high growth companies, owned and not owned, we must
not forget that, in many cases, they were dropping from very
elevated levels (a corollary of ultra-low interest rates). Towards
the end of the year, however, we did begin to add selectively to
existing holdings which might be categorised as ‘growth cyclicals’
with a particular focus on those with strong balance sheets, given
our expectation that interest rates would stay high in 2023 and
that we might experience a more recessionary environment too. We
used the proceeds from Swedish Match and Atlantia to add to our
holdings in ASML, Partners Group and Kone – all of which have been
derated aggressively during 2022, but all of which enjoy strong
balance sheets and retain, in our opinion, strong long term
prospects for dividend growth. We also have some high growth stocks
on our watch list that are not currently owned by the Company, but
have fallen to more attractive entry levels, having been overly
expensive for many years, so we expect to see more turnover in the
Company in early 2023 relative to recent years. Our focus, in terms
of positioning, is the same as always: we will stay balanced by
sector groupings and stay anchored on well-funded companies which
are able to grow their dividends consistently on a three to five
year view.
QUESTION
Markets went down last year. Why did you stay geared?
Answer
Sam: In keeping with Fidelity’s long-held conviction that it
is a “mug’s game” to try to time markets, Marcel and I will, with
the Board’s endorsement, maintain a fixed level of gearing within a
10%-15% range. The agreed level of gearing takes into account our
cautious investment approach and allows considerable headroom in
the event of a sharp sell-off in the market. Gearing is, of course,
one of the great advantages of an investment trust, and although it
may amplify volatility in the short term, we expect it to enhance
long term returns. Yes, it is painful when markets fall, as they
did in 2022, and it is often tempting to reduce the gearing when
that happens, but markets do recover and often when least expected.
If you miss out on those early days of recovery, you may fail to
gain all the potential benefit of gearing.
Question
What headwinds do you see facing the portfolio in the next 12
months?
ANSWER
Sam: The health of the consumer is critical especially in more
mature economies where private consumption often represents the
majority of GDP. The inflation shock of 2022 will continue to be a
headwind for most consumers in 2023. It is unlikely that wages will
rise as fast as the cost of living so disposable incomes will be
squeezed again in real terms. Rising unemployment could also add
fuel to the fire. Many of the companies we own in the Company’s
portfolio, especially those that are consumer-facing, will suffer a
headwind of declining demand and they will have to work hard to
off-set the forces of operational leverage if they are to avoid
seeing a geared negative impact on their bottom line. Pricing power
will continue to be an important antidote in this battle,
particularly while inflation remains elevated. As mentioned at last
year’s AGM, we have always focused on pricing power as an enabler
for delivering consistent dividend growth. There are many examples
of pricing power across the Company’s holdings. Some have products
with inelastic demand, such as Hermes handbags, some sell ‘small
but critical’ products, such as the food ingredients sold by
Symrise, and some enjoy pricing power thanks to their dominant
position in their industry, such as ASML.
Question
Are you planning to make any changes to your investment
approach?
Answer
Sam: No. Companies that deliver consistent dividend growth
consistently outperform those that do not. Backward-looking
analysis demonstrates that this is true. The challenge, of course,
is to be able to identify which companies will grow their dividends
consistently going forward – and in this respect, the past is not
necessarily always a reliable guide. We focus on certain key
criteria to help us identify which companies will grow their
dividends on a three to five year horizon. We look for positive
fundamentals, such as proven business models that enjoy attractive
cash flow returns on cash invested, a strong balance sheet (we
certainly want to avoid companies where financial leverage could
jeopardise their ability to grow dividends) and strong cash
generation (a good track record in cash generation usually goes
hand in hand with a good track record in dividend growth). Finally,
we try to make sure we do not pay too much for the dividend growth
we expect – this is not dividend growth at any price but dividend
growth at an attractive or, at least, a reasonable price. Our
investment strategy will not change but we are always trying to
improve our execution of that strategy!
Question
How have you taken advantage of developments in Fidelity’s
approach to ESG this year?
Answer
Marcel: Fidelity’s recent evolution of its proprietary ESG
ratings framework (see the Annual Report) has resulted in our ESG
analysis going much deeper than before and with additional focus on
the comparability of stocks across various sectors and geographies.
While the Company is not an ESG fund, we do clearly use ESG factors
as an input. Put simply we view “sustainability” and the
“sustainability of dividends” as very closely related concepts.
Given our longer than average holding periods, we do not want to be
taking any undue ESG risks: these risks might come to light while
we own the stocks! As such we have welcomed the increased depth of
ESG analysis as it allows us more accurately to evaluate the ESG
risks or relative lack thereof on the Company’s holdings. An
example of this would be aerospace and defense, which is a sector
that is sometimes shunned by investors given the defense exposure
most companies have. Events over the last year, however, have shown
how a more nuanced approach is required than simply excluding
defense exposed stocks outright and as such the deeper dive on ESG
for MTU Aero Engines was invaluable. It uncovered MTU as one of the
best global ESG aerospace and defense stories (without many of the
typical red flags the industry faces), which was part of what gave
us the confidence to increase our holding in the company.
Below, we share a voting case study on TotalEnergies.
SAM MORSE
Portfolio Manager
20 March 2023
Marcel Stötzel
Co-Portfolio Manager
20 March 2023
TOTALENERGIES: VOTING CASE STUDY
BACKGROUND
French oil major TotalEnergies is a high conviction holding in
Fidelity European Trust PLC’s portfolio. At Fidelity, we take our
ownership of companies seriously and actively vote on shareholder
resolutions, a process which is driven by our sustainable investing
team, who act in consultation with the portfolio managers and
investment analysts. Fidelity engaged with the company before an
advisory shareholder vote on its sustainability and climate
transition plan at its 2022 AGM, using the insights gleaned to
conclude that TotalEnergies’ progress merited support on balance.
This decision corresponds with our view that TotalEnergies is
making positive strides with its transition plan, further
bolstering our conviction in the stock.
A HIGH CONVICTION HOLDING
TotalEnergies is a core holding in the Fidelity European Trust PLC
portfolio and we have long liked the company for its low-cost
upstream portfolio, large integrated chemicals footprint, good
asset mix and strong capital allocation policies. Importantly for
us, the company has a strong balance sheet and solid shareholder
distributions, with a 6% dividend yield and a dividend per share
that is growing at 3-5% a year. Further strengthening our
conviction in the stock is the fact that the company is ahead of
its peers when it comes to transforming its business for a low
carbon future.
DUE DILIGENCE INFORMS OUR VOTING DECISION
In May 2022, TotalEnergies held an
advisory shareholder vote on its sustainability and climate
transition plan as part of its 2022 AGM. Shareholder voting is a
process that is driven by our sustainable investing (“SI”) team, in
consultation with the fundamental analyst covering the stock and
the portfolio managers who own it. As is typical, for the
TotalEnergies shareholder vote, we were consulted by the SI team in
advance, who outlined to us their intentions and the reasons why
they intended to vote in favour of the plan.
Our SI team and the investment analyst told us that they
believed TotalEnergies had a well-articulated climate transition
plan, including a description of how it expects its portfolio mix
to look in 2050 to reach net zero. Renewable electricity is to
account for 50% of production, new decarbonised molecules from
biomass or from renewable electricity will account for 25%, and
hydrocarbons will account for the remaining 25%, with residual
emissions fully captured, recycled or offset. TotalEnergies has
also been able to set more ambitious scope 3 targets than the
sector, largely through a pivot to LNG and electricity. Our SI team
and fundamental analyst pointed out that TotalEnergies is the only
oil major whose long term targets/pathway are currently deemed net
zero aligned by the Transition Pathway Initiative. TotalEnergies
also articulates how its capital allocation aligns to its climate
strategy, and a substantial level of its management’s remuneration
incentives are linked to climate objectives.
Our SI team and analyst also engaged with the company before
reaching a final voting decision. This was partly to address the
concern about the board’s decision to exclude a climate-related
shareholder proposal from the agenda. The board had deemed the
resolution to be inadmissible due to encroaching on the board’s
duty to set strategy, a matter of settled law in France. Although our SI team and analyst were
satisfied with the company’s explanation, they have emphasised that
this is an issue they will keep under review.
A BROADER VANTAGE POINT
TotalEnergies has clearly made progress on decarbonisation, but it
is important to acknowledge that the oil industry as a whole is not
yet on a decarbonisation path that would result in meeting the
goals of the Paris Agreement. The issue is clearly complex: the
vast majority of the sector’s emissions come from clients over
which TotalEnergies and others do not have direct control, so
achieving net zero will only be possible with determined engagement
from the industry, clients’ willingness to adapt, and a supportive
broader environment, including government cooperation at an
international level. Change in demand for fossil fuels caused by
the war in Ukraine may also impact
the ability to meet near term emissions reduction targets.
These are constraints that our SI team took into consideration
when deciding how to vote on TotalEnergies’ shareholder motion, and
these are, of course, also issues we take into consideration when
assessing how viable and attractive our Company’s portfolio
holdings business models are. The SI team made it clear to us that
their voting decision was based on an assessment of what companies
throughout the industry are doing to contribute to global
decarbonisation now, and how they are positioning themselves for
the requirements of a low carbon economy in the future, drawing
comparisons with competitors and globally accepted decarbonisation
frameworks.
Based on their engagement with and the assessment of the
company, our SI team concluded that TotalEnergies’ progress merited
support on balance.
STRENGTHENING OUR CONVICTION
Our SI team’s assessment of TotalEnergies’ approach to
decarbonisation, their engagement with the company, and the
consideration of broader industry dynamics, all strengthened our
view that TotalEnergies is among the leading oil majors when it
comes to decarbonisation strategy, targets, and reporting. It is at
a more advanced stage than sector peers in terms of decarbonisation
and portfolio diversification, and its climate objectives are the
strongest. All of this bolsters our conviction in the stock,
confirming our view that the company not only has strong
fundamental characteristics, but that its proactive approach to
decarbonisation gives us confidence that it is focused on ensuring
its business will remain viable in the years to come.
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 and emerging
risks and uncertainties faced by the Company, including those that
could 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 and uncertainties that the Company
faces. The Audit Committee continues 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 the Company’s strategic objectives.
Climate change, which refers to a large scale shift in the
planet’s weather patterns and average temperatures, continues to be
a key emerging issue as well as a principal risk confronting asset
managers and their investors. The Board notes that the Manager has
integrated ESG considerations, including climate change, into the
Company’s investment process. Further details are in the Annual
Report. The Board will continue to monitor how this may impact the
Company as a risk on investment valuations and potentially
shareholder returns.
Other emerging risks may continue to evolve from unforeseen
geopolitical and economic events, in addition to those currently
being faced globally, such as the energy supply crisis, the cost of
living crisis, rising inflation, food supply crisis and
cyberattacks on critical infrastructure.
The Manager also has responsibility for risk management for the
Company. It works with the Board to identify and manage the
principal and emerging 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.
Principal Risks |
Description and Risk Mitigation |
Economic and Geopolitical
Risks |
The Company and its
assets may be impacted by economic and geopolitical risks, in
particular concerns over global economic growth, inflation and
financial distress. Inflation remains elevated across most
economies driven by a combination of increased demand, as the
pandemic restrictions are lifted, global labour shortages in some
sectors, supply chain shortages and ramifications of the
Russia-Ukraine war. This weighs on European stocks, as does the
progressive raising of interest rates by the European Central Bank
and the Bank of England. The economic impact from the war in
Ukraine is significant and threatens consumer spending and
industrial activity amid soaring energy costs and currency
instability. Volatile gas prices on lower supply raises the risk of
a European recession and weighs heavily on industry and production,
and although financial markets have now largely priced in this
risk, the outlook remains uncertain. A settlement of the conflict
in the short term looks unlikely. In the meantime, significant
macro and geopolitical effects will continue to need to be managed.
The expected growth in global GDP has already been revised
downwards in 2022 since Russia’s invasion.
Monetary tightening by the European Central Bank and the Bank of
England heightens risks of default for highly leveraged businesses
amid recession concerns. The Federal Reserve’s hike in interest
rates further strengthens the US dollar, whilst political turmoil
and quantitative tightening in the UK may further exacerbate the UK
sterling foreign exchange rate and yield volatility.
Globally, geopolitical uncertainty is significantly impacted by
deglobalisation trends driven by the prioritisation of the
resiliency of supply chains as well as from political pressure. The
ramifications of onshoring include regulatory protectionism across
regions, heightening geopolitical tensions on the continent and
overseas. US-China tensions over trade and technology rivalry
increase the concerns of China-Taiwan relations escalating to
military conflict and potential defence implications to other
countries. More fragmented global order increases the geopolitical
importance of trade agreements.
The Board reviews economic and geopolitical risks and legislative
changes at each Board meeting. The Portfolio Manager, with support
from the Co-Portfolio Manager, provides an investment review at
each meeting which includes a review of the economic and political
environment and any risks and challenges faced by the Company. The
Company has no direct investments in Russia and Ukraine. Whilst the
companies in the portfolio are exposed to these risks, most of
these companies are global businesses and therefore, also exposed
to global economic trends. The Chairman’s Statement and the
Portfolio Managers’ Review above provide more detail. |
Market Risk |
The principal market
related risks are financial market related such as market
downturns, interest rate movements, inflation, exchange rate
movements and market shocks such as the post pandemic economic
recovery and volatility from the war in Ukraine. Russia and Ukraine
are both significant net exporters of oil, natural gas and a
variety of soft commodities, and supply limitations are fuelling
global inflation and economic instability. This is leading to
prolonged cost- of-living crisis risks and potentially impacting
investors’ risk appetite. Inflationary pressures may last longer
than central banks or governments may like.
COVID continues to be a global pandemic with the potential for
severe market and economic impacts with future variants. The risk
of the likely effects of the pandemic on the markets are somewhat
mitigated by the Company’s investment trust structure which means
no forced sales need to take place to deal with any redemptions.
Therefore, investments can be held over a longer time horizon.
The Portfolio Managers’ investment philosophy of stock-picking and
investing in attractively valued dividend growers with strong
balance sheets should continue to outperform the Benchmark Index
over time.
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. |
Discount Control Risk |
Due to the nature of
investment companies, the price of the Company’s shares and its
discount to NAV are factors which are not totally within the
Company’s control. The Board has an active discount management
policy in place, the primary purpose of which is to reduce discount
volatility and maintain the Company’s discount in single digits in
normal market conditions. Some short term influence over the
discount may be exercised by the use of share repurchases at
acceptable prices and within the parameters set by the Board. The
demand for shares can be influenced through good performance and an
active investor relations program.
The Company’s share price, NAV and discount volatility are
monitored daily by the Manager and the Company’s Broker and
considered by the Board at each of its meetings. |
Operational Risk from
Cybercrime |
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
International’s (“Fidelity”) information security teams and has
resulted in the implementation of new tools and processes,
including improvements to existing ones. Fidelity has established a
dedicated cybersecurity team which provides regular awareness
updates and best practice guidance.
Risks are increased due to the Russia/Ukraine conflict and the
trend to more working from home. These primarily relate to
phishing, remote access threats, extortion and denial-of-services
attacks. The Manager has dedicated detect and respond resources
specifically to monitor the cyber threats associated with the
change in workplace cyber activity following Russia’s invasion of
Ukraine. There are a number of mitigating actions in place
including, control strengthening, geo-blocking, and phishing
mitigants, combined with enhanced resilience and recovery
options.
The Company’s third party service providers also have similar
measures in place. |
Investment Performance
Risk (including the use of derivatives and
gearing) |
The achievement of the
Company’s investment performance objective relative to the market
requires the taking of risk such as investment strategy, asset
allocation and stock selection, and may lead to NAV and share price
underperformance compared to the Benchmark Index and/ or peer group
companies. The Board relies on the Portfolio Managers’ skills and
judgement to make investment decisions based on research and
analysis of individual stocks and sectors. The Board reviews the
performance of the asset value of the portfolio against the
Company’s Benchmark Index and its competitors, and also considers
the outlook for the market with the Portfolio Managers at each
Board meeting. The emphasis is on long term investment performance
as there is a risk for the Company of volatility of performance in
the shorter term.
The Company’s assets consist mainly of listed securities. The
Portfolio Managers’ success or failure to protect and increase the
Company’s assets against this background is core to the Company’s
continued success.
Derivative instruments are used to protect and enhance investment
returns. There is a risk that the use of derivatives may lead to
higher volatility in the NAV and the share price than might
otherwise be the case. The Board has put in place policies and
limits to control the Company’s use of derivatives and exposures.
These are monitored on a daily basis by the Manager’s Compliance
team and regular reports are provided to the Board. Further details
on derivative instruments risk is included in Note 17 to the
Financial Statements below.
The Company gears through the use of long CFDs which provide
greater flexibility and are currently cheaper than bank loans. The
principal risk is that the Portfolio Managers fail to use gearing
effectively, resulting in a failure to outperform in a rising
market or to underperform in a falling market. The Board regularly
considers the level of gearing and gearing risk and sets limits
within which the Manager must operate. |
Environmental, Social and
Governance (“ESG”) Risk |
There is a risk that
the value of the assets of the Company are negatively impacted by
ESG related risks, including climate change risk. ESG risks include
investor expectations and how the Company is positioned from a
marketing perspective and whether it is compliant with its ESG
disclosure requirements. Fidelity has embedded ESG factors in its
investment decision- making process. ESG integration is carried out
at the fundamental research analyst level within its investment
teams, primarily through Fidelity’s Proprietary Sustainability
Rating which is designed to generate a forward-looking and holistic
assessment of a company’s ESG risks and opportunities based on
sector-specific key performance indicators across 127 individual
and unique sub-sectors. The Portfolio Managers are also active in
analysing the effects of ESG when making investment decisions. The
Board continues to monitor developments in this area and reviews
the positioning of the portfolio considering ESG factors.
ESG ratings and carbon emissions of the companies within the
Company’s portfolio compared to the MSCI Europe ex UK Index are
provided in the Annual Report. Further detail on ESG considerations
in the investment process and sustainable investing is in the
Annual Report. |
Key Person and Operational
Support Risks |
The Portfolio Manager’s
style is intrinsically linked with the Company’s investment
philosophy and strategy and, therefore, the Company has a key
person dependency on him. Fidelity has succession plans in place
for its portfolio managers which have been discussed with the Board
and provides some assurance in this regard. There is a Co-Portfolio
Manager who works alongside the Portfolio Manager and has extensive
experience in European markets and companies and shares a common
investment approach and complementary investment experience with
the Portfolio Manager. This helps strengthen the investment process
by introducing greater challenge and also increases the ability to
be able to meet more companies.
There is also a risk that the Manager has inadequate succession
plans for other key operational individuals. 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, particularly for portfolio managers |
Operational Resilience
Risk |
Investment team key
activities, including portfolio managers, analysts and
trading/support functions, are performing well despite the
operational challenges posed when working from home during the
pandemic, and more recently, from the rail strikes.
With variants of COVID continuing to evolve, it is evident that
although the pandemic is being tackled by vaccines, risks remain,
especially on how long the effectiveness of vaccines last. There
continues to be increased focus from financial services regulators
around the world on the contingency plans of regulated financial
firms. The risks following Russia’s invasion into Ukraine,
specifically regarding the potential loss of power and or broadband
services, are increasingly stable as work transfer recovery options
are established for business-critical activities.
The Manager carries on reviewing its business continuity plans and
operational resilience strategies on an ongoing basis. The Manager
continues to take all reasonable steps in meeting its regulatory
obligations and to assess operational risks, the ability to
continue operating and the steps it needs to take to serve and
support its clients, including the Board. There have not been any
significant changes to Fidelity’s control environment as a result
of the pandemic and the rail strikes and the Manager has provided
the Board with assurance that the Company has appropriate business
continuity plans and the provision of services has continued to be
supplied without interruption.
Specific risks posed by the pandemic continue to ease with
increasing levels of staff returning to routine office-based
working, albeit under hybrid working arrangements which allow
greater flexibility on remote working as part of the new operating
model.
The Company’s other third party service providers, principally the
Registrar, Custodian and Depositary, have also confirmed the
implementation of similar measures to ensure no business disruption
and that they continue to manage their operational resilience risk
and have appropriate business continuity plans in place. The
Registrar, Custodian and Depositary are all subject to a risk-based
program 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 raised are investigated. Risks
associated with these services are generally rated as low, although
the financial consequences could be serious, including reputational
damage to the Company. |
Other risks facing the Company include:
Tax and Regulatory Risks
There is a risk of the Company 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 at each Audit
Committee meeting.
The Board monitors tax and regulatory changes at each Board
meeting and through active engagement with regulators and trade
bodies by the Manager.
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 AGM held on 11
May 2021, 99.99% of shareholders voted in favour of the
continuation of the Company. The next continuation vote will take
place at this year’s AGM on 10 May
2023 and the Directors expect the vote to be passed.
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 level of
gearing;
· The Company’s NAV and share
price performance;
· The principal and emerging risks
and uncertainties facing the Company and their potential impact as
set out above;
· 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 for the five year reporting period to
31 December 2022 was well ahead of
the Benchmark Index, with a NAV total return of 53.4% and a share
price total return of 61.2% compared to the Benchmark Index total
return of 29.4%. The Board regularly reviews the 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 fact that the portfolio
mainly comprises readily realisable securities which can be sold to
meet funding requirements if necessary;
· The Board’s discount management
policy; and
· The ongoing processes for
monitoring operating costs and income which are considered to be
reasonable in comparison to the Company’s total assets.
In preparing the Financial Statements, the Directors have
considered the impact of climate change, particularly in the
context of the climate change risk identified within the ESG Risk
above. The Board has also considered the impact of regulatory
changes and the uncertainty heightened by the ongoing Russia and Ukraine conflict, and how this may affect the
Company.
In addition, the Directors’ assessment of the Company’s ability
to operate in the foreseeable future is included in the Going
Concern Statement which is below. The Company is also subject to a
continuation vote at this year’s AGM on 10
May 2023 and the Board expect that shareholders will vote in
favour of continuation.
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 and
its expenditure and cash flow projections. The Directors, having
considered the liquidity of the Company’s portfolio of investments
(being mainly securities which are readily realisable) and the
projected income and expenditure, are satisfied that the Company is
financially sound and has adequate resources to meet all of its
liabilities and ongoing expenses and continue in operational
existence for the foreseeable future. The Board has therefore
concluded that the Company has adequate resources to continue to
adopt the going concern basis for the period to 31 March 2024 which is at least twelve months
from the date of approval of the Financial Statements. This
conclusion also takes into account the Board’s assessment of the
ongoing risks from evolving variants of COVID, the war in
Ukraine and significant market
events, as set out in the Operational Resilience Risk in the
Strategic Report above. The prospects of the Company over a period
longer than twelve months can be found in the Viability Statement
above.
Accordingly, the Financial Statements of the Company have been
prepared on a going concern basis.
The Board has also considered the upcoming continuation vote at
the AGM on 10 May 2023 and are not
aware of any circumstances that would result in the continuation
vote not being passed.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a
company must act in a way they consider, in good faith, would be
most likely to promote the success of the Company for the benefit
of its members as a whole, and in doing so have regard (amongst
other matters) to the likely consequences of any decision in the
long term; the need to foster relationships with the Company’s
suppliers, customers and others; the impact of the Company’s
operations on the community and the environment; the desirability
of the Company maintaining a reputation for high standards of
business conduct; and the need to act fairly as between members of
the Company.
As an externally managed Investment Trust, the Company has no
employees or physical assets, and a number of the Company’s
functions are outsourced to third parties. The key outsourced
function is the provision of investment management services by the
Manager, but other professional service providers support the
Company by providing administration, custodial, banking and audit
services. The Board considers the Company’s key stakeholders to be
the existing and potential shareholders, the external appointed
Manager (FIL Investment Services (UK) Limited) and other
third-party professional service providers. The Board considers
that the interest of these stakeholders is aligned with the
Company’s objective of delivering long term capital growth to
investors, in line with the Company’s stated objective and
strategy, while providing the highest standards of legal,
regulatory and commercial conduct.
The Board, with the Portfolio Managers, sets the 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 and reviewed and are set out in the Annual
Report.
The Board places great importance on communication with
shareholders. The Annual General Meeting provides the key forum for
the Board and the Portfolio Manager to present to the shareholders
on the Company’s performance and future plans and the Board
encourages all shareholders to attend in person or virtually and
raise any questions or concerns. The Chairman and other Board
members are available to meet shareholders as appropriate.
Shareholders may also communicate with Board members at any time by
writing to them at the Company’s registered office at FIL
Investments International, Beech Gate, Millfield Lane, Tadworth, Surrey KT20 6RP
or via the Company Secretary at the same address or by email at
investmenttrusts@fil.com. The Portfolio Managers meet with
major shareholders, potential investors, stock market analysts,
journalists and other commentators throughout the year. These
communication opportunities help inform the Board in considering
how best to promote the success of the company over the long
term.
The Board seeks to engage with the Manager and other service
providers and advisers in a constructive and collaborative way,
promoting a culture of strong governance, while encouraging open
and constructive debate, in order to ensure appropriate and regular
challenge and evaluation. This aims to enhance service levels and
strengthen relationships with service providers, with a view to
ensuring shareholders’ interests are best served, by maintaining
the highest standards of commercial conduct while keeping cost
levels competitive.
Whilst the Company’s direct operations are limited, the Board
recognises the importance of considering the impact of the
Company’s investment strategy on the wider community and
environment. The Board believes that a proper consideration of
Environmental, Social and Governance (“ESG”) issues aligns with the
Company’s investment objective to deliver long term growth in both
capital and income, and the Board’s review of the Manager includes
an assessment of their ESG approach, which is set out in detail in
the Annual Report.
In addition to ensuring that the Company’s investment objective
was being pursued, key decisions and actions taken by the Directors
during the reporting year, and up to the date of this report, have
included:
· As part of the Board’s
succession plan, the appointment and induction of Milyae Park to
the Board as Marion Sear’s successor with effect from 1 January 2022;
· As part of the Board’s
succession plan, the decision to appoint Paul Yates as the Senior Independent Director on
10 May 2022 when Marion Sear stepped down from the Board;
· The decision to hold a hybrid
AGM in 2022 (and again this year) in order to make the AGM more
accessible and improve the shareholder experience;
· The decision to pay an interim
dividend of 3.08 pence per share and
a final dividend of 4.62 pence per
share (a total of 7.70 pence per
share), to maintain the Board’s policy to pay progressive dividends
in normal circumstances. The Company has paid an increased dividend
for 12 years in a row; and
· Authorising the repurchase of
2,285,526 ordinary shares into Treasury during the reporting year
when the Company’s discount widened.
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 year. Under that law, the Directors
have elected to prepare the Financial Statements in accordance with
UK Generally Accepted Accounting Practice (“UK Accounting
Standards” and applicable law), including Financial Reporting
Standard FRS 102: The Financial Reporting Standard applicable in
the UK and Republic of Ireland
(“FRS 102”). Under company law, the Directors must not approve the
Financial Statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period.
In preparing these Financial Statements, the Directors are
required to:
· Select suitable accounting
policies in accordance with Section 10 of FRS 102 and then apply
them consistently;
· Make judgements and accounting
estimates that are reasonable and prudent;
· Present information, including
accounting policies, in a fair and balanced manner that provides
relevant, reliable, comparable and understandable information;
· State whether applicable UK
Accounting Standards, including FRS 102, 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 keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy, at any time,
the financial position of the Company and enable them to ensure
that the Company and 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 which comply with that law and those regulations.
The Directors have delegated the 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.fidelity.co.uk/europe to the Manager. They
have delegated this responsibility 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, to the best of their knowledge:
· The Financial Statements,
prepared in accordance with UK Generally Accepted Accounting
Practice, including FRS 102, give a true and fair view of the
assets, liabilities, financial position and loss of the
Company;
· The Annual Report, including the
Strategic 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; and
· 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.
The Statement of Directors’ Responsibilities was approved by the
Board on 20 March 2023 and signed on
its behalf by:
VIVIAN BAZALGETTE
Chairman
FINANCIAL STATEMENTS
Income Statement for the year ended
31 December 2022
|
|
Year
ended 31 December 2022 |
Year
ended 31 December 2021 |
|
Notes |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
(Losses)/gains on investments |
10 |
– |
(63,812) |
(63,812) |
– |
221,090 |
221,090 |
(Losses)/gains on derivative
instruments |
11 |
– |
(22,034) |
(22,034) |
– |
38,145 |
38,145 |
Income |
3 |
43,042 |
– |
43,042 |
37,879 |
– |
37,879 |
Investment management fees |
4 |
(2,362) |
(7,087) |
(9,449) |
(2,438) |
(7,313) |
(9,751) |
Other expenses |
5 |
(919) |
– |
(919) |
(908) |
– |
(908) |
Foreign exchange losses |
|
– |
(372) |
(372) |
– |
(27) |
(27) |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Net return/(loss) on ordinary
activities before finance costs and taxation |
|
39,761 |
(93,305) |
(53,544) |
34,533 |
251,895 |
286,428 |
Finance costs |
6 |
(196) |
(586) |
(782) |
(134) |
(403) |
(537) |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Net return/(loss) on ordinary
activities before taxation |
|
39,565 |
(93,891) |
(54,326) |
34,399 |
251,492 |
285,891 |
Taxation on return/(loss) on
ordinary activities |
7 |
(2,641) |
– |
(2,641) |
(3,547) |
– |
(3,547) |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Net return/(loss) on ordinary
activities after taxation for the year |
|
36,924 |
(93,891) |
(56,967) |
30,852 |
251,492 |
282,344 |
|
|
========= |
========= |
========= |
========= |
========= |
========= |
Return/(loss) per ordinary
share |
8 |
9.00p |
(22.88p) |
(13.88p) |
7.50p |
61.15p |
68.65p |
|
|
========= |
========= |
========= |
========= |
========= |
========= |
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 2022
|
Notes |
Share
capital
£’000 |
Share
premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Capital
reserve
£’000 |
Revenue
reserve
£’000 |
Total
shareholders’
funds
£’000 |
Total shareholders’ funds at 31
December 2021 |
|
10,411 |
58,615 |
5,414 |
1,372,360 |
27,433 |
1,474,233 |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Net (loss)/return on ordinary
activities after taxation for the year |
|
– |
– |
– |
(93,891) |
36,924 |
(56,967) |
Repurchase of ordinary shares |
14 |
– |
– |
– |
(6,473) |
– |
(6,473) |
Dividends paid to shareholders |
9 |
– |
– |
– |
– |
(29,798) |
(29,798) |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Total shareholders’ funds at 31
December 2022 |
|
10,411 |
58,615 |
5,414 |
1,271,996 |
34,559 |
1,380,995 |
|
|
========= |
========= |
========= |
========= |
========= |
========= |
Total shareholders’ funds at 31
December 2020 |
|
10,411 |
58,615 |
5,414 |
1,122,325 |
23,520 |
1,220,285 |
|
|
|
|
|
|
|
|
Net return on ordinary activities
after taxation for the year |
|
– |
– |
– |
251,492 |
30,852 |
282,344 |
Repurchase of ordinary shares |
14 |
– |
– |
– |
(1,457) |
– |
(1,457) |
Dividends paid to shareholders |
9 |
– |
– |
– |
– |
(26,939) |
(26,939) |
|
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Total shareholders’ funds at 31
December 2021 |
|
10,411 |
58,615 |
5,414 |
1,372,360 |
27,433 |
1,474,233 |
|
|
========= |
========= |
========= |
========= |
========= |
========= |
The Notes below form an integral part of these Financial
Statements.
Balance Sheet as at 31 December
2022
Company number 2638812
|
Notes |
2022
£’000 |
2021
£’000 |
Fixed assets |
|
|
|
Investments |
10 |
1,325,389 |
1,447,997 |
|
|
--------------- |
--------------- |
Current assets |
|
|
|
Derivative instruments |
11 |
521 |
4,010 |
Debtors |
12 |
8,128 |
8,957 |
Amounts held at futures clearing
houses and brokers |
|
12,891 |
2,962 |
Cash and cash equivalents |
|
44,884 |
11,366 |
|
|
--------------- |
--------------- |
|
|
66,424 |
27,295 |
|
|
========= |
========= |
Current liabilities |
|
|
|
Derivative instruments |
11 |
(9,633) |
– |
Other creditors |
13 |
(1,185) |
(1,059) |
|
|
--------------- |
--------------- |
|
|
(10,818) |
(1,059) |
|
|
========= |
========= |
Net current assets |
|
55,606 |
26,236 |
|
|
========= |
========= |
Net assets |
|
1,380,995 |
1,474,233 |
|
|
========= |
========= |
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 |
1,271,996 |
1,372,360 |
Revenue reserve |
15 |
34,559 |
27,433 |
|
|
--------------- |
--------------- |
Total shareholders’
funds |
|
1,380,995 |
1,474,233 |
|
|
========= |
========= |
Net asset value per ordinary
share |
16 |
337.87p |
358.68p |
|
|
========= |
========= |
The Financial Statements above and below were approved by the
Board of Directors on 20 March 2023
and were signed on its behalf by:
VIVIAN BAZALGETTE
Chairman
The Notes below form an integral part of these Financial
Statements.
Notes to the Financial Statements
1 Principal Activity
Fidelity European Trust 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 July 2022. 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. The Directors have a
reasonable expectation that the Company has adequate resources to
continue in operational existence up to 31
March 2024 which is at least twelve months from the date of
approval of these Financial Statements. In making their assessment
the Directors have reviewed income and expense projections,
reviewed the liquidity of the investment portfolio and considered
the Company’s ability to meet liabilities as they fall due. This
conclusion takes into account the Director’s assessment of the
risks faced by the Company and their consideration of the upcoming
continuation vote at the AGM on 10 May
2023 as detailed in the Going Concern Statement above. The
Directors recommend that the shareholders vote in favour of the
continuation of the Company.
In preparing these Financial Statements, the Directors have
considered the impact of climate change risk as an emerging risk as
well as a principal risk as set out above, and have concluded that
there was no further impact of climate change to be taken into
account as the investments are valued based on market pricing. In
line with FRS 102, investments are valued at fair value, which for
the Company are quoted bid prices for investments in active markets
at the balance sheet date and therefore reflect the market
participants view of climate change risk on the investments held by
the Company.
The Company’s Going Concern Statement above takes account of all
events and conditions up to 31 March
2024 which is at least twelve months from the date of
approval of these Financial Statements.
b) Significant accounting estimates and judgements – The
Directors make judgements and estimates concerning the future.
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, such as expectations of
future events, and are believed to be reasonable under the
circumstances. Actual results may differ from these estimates. The
Company’s Financial Statements contain no key sources of estimation
or uncertainty.
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 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, collateral and money
market funds is accounted for on an accruals basis and credited to
the revenue column of the Income Statement. Interest received on
CFDs represent the finance costs calculated by reference to the
notional value of the CFDs.
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 in line with the
Board’s expected long term split of revenue and capital return from
the Company’s portfolio of investments; 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 at the rates of exchange ruling
at the Balance Sheet date. Foreign exchange gains and losses
arising on translation are recognised in the Income Statement as a
revenue or a capital item depending on the nature of the underlying
item to which they relate.
h) Finance costs – Finance costs comprises interest paid
on collateral and bank deposits, and finance costs paid on CFDs,
which are accounted for on an accruals basis. Finance costs are
allocated 25% to revenue and 75% to capital in line with the
Board’s expected long term split of revenue and capital return from
the Company’s portfolio of investments.
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 (losses)/gains on investments in the capital
column of the Income Statement and has disclosed these costs in
Note 10 below.
l) Derivative instruments – When appropriate, permitted
transactions in derivative instruments are used. Derivative
transactions into which the Company may enter include long and
short CFDs 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 current
liabilities.
m) Debtors – Debtors include accrued income, taxation
recoverable and other debtors and prepayments 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 on behalf of brokers
as collateral against open derivative contracts. These are carried
at amortised cost.
o) Cash and cash equivalents – Cash and cash equivalents
may comprise cash at bank and money market funds which are short
term, highly liquid and are readily convertible to a known amount
of cash. These are subject to an insignificant risk of changes in
value.
p) 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.
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
· Cost of repurchasing shares.
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, states that 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
31.12.22
£’000 |
Year ended
31.12.21
£’000 |
Investment income |
|
|
Overseas dividends |
35,333 |
30,799 |
Overseas scrip dividends |
1,052 |
513 |
UK dividends |
1,910 |
1,374 |
|
--------------- |
--------------- |
|
38,295 |
32,686 |
|
========= |
========= |
Derivative income |
|
|
Income recognised from futures
contracts |
1,208 |
1,834 |
Dividends received on long CFDs |
3,025 |
2,700 |
Interest received on
CFDs1 |
422 |
659 |
|
--------------- |
--------------- |
|
4,655 |
5,193 |
|
========= |
========= |
Investment and derivative
income |
42,950 |
37,879 |
|
========= |
========= |
Other interest |
|
|
Interest received on collateral,
bank deposits and money market funds |
88 |
– |
Interest received on tax
reclaims |
4 |
– |
|
--------------- |
--------------- |
|
92 |
– |
|
========= |
========= |
Total income |
43,042 |
37,879 |
|
========= |
========= |
1 Due to negative interest rates during the current
and prior year, the Company received interest on its long CFDs.
Special dividends of £1,115,000 (2021: £82,000) have been
recognised in capital.
4 Investment Management Fees
|
Year
ended 31 December 2022 |
Year
ended 31 December 2021 |
|
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Investment management fees |
2,362 |
7,087 |
9,449 |
2,438 |
7,313 |
9,751 |
|
========= |
========= |
========= |
========= |
========= |
========= |
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 2021, FII charges
investment management fees at an annual rate of 0.85% of net assets
up to £400 million and 0.65% of net assets in excess of £400
million. Prior to this date, the investment management fees were
charged at an annual rate of 0.85% of net assets up to £400 million
and 0.75% of net assets in excess of £400 million. Fees are payable
monthly in arrears and are calculated on a daily basis.
Investment management fees have been allocated 75% to capital
reserve in accordance with the Company’s accounting policies.
5 Other Expenses
|
Year ended
31.12.22
£’000 |
Year ended
31.12.21
£’000 |
AIC fees |
21 |
21 |
Custody fees |
123 |
143 |
Depositary fees |
61 |
64 |
Directors’ fees1 |
174 |
158 |
Legal and professional fees |
60 |
170 |
Marketing expenses |
209 |
126 |
Printing and publication
expenses |
132 |
116 |
Registrars’ fees |
75 |
61 |
Fees payable to the Company’s
Independent Auditor for the audit of the Financial
Statements2 |
45 |
29 |
Other expenses |
19 |
20 |
|
--------------- |
--------------- |
|
919 |
908 |
|
========= |
========= |
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 2022 |
Year
ended 31 December 2021 |
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
£’000 |
Interest paid on collateral and bank
deposits1 |
28 |
82 |
110 |
40 |
122 |
162 |
Interest paid on CFDs |
168 |
504 |
672 |
94 |
281 |
375 |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
|
196 |
586 |
782 |
134 |
403 |
537 |
|
========= |
========= |
========= |
========= |
========= |
========= |
1 Due to negative interest rates during
the current and prior year, the Company paid interest on its
collateral and deposits.
Finance costs have been allocated 75% to capital reserve in
accordance with the Company’s accounting policies.
7 TAXATION ON RETURN/(LOSS) ON ORDINARY
ACTIVITIES
|
Year
ended 31 December 2022 |
Year
ended 31 December 2021 |
|
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
a) Analysis of the taxation
charge for the year |
|
|
|
|
|
|
Overseas taxation |
2,641 |
– |
2,641 |
3,547 |
– |
3,547 |
Taxation charge for the year (see
Note 7b) |
2,641 |
– |
2,641 |
3,547 |
– |
3,547 |
|
========= |
========= |
========= |
========= |
========= |
========= |
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% (2021:
19%). A reconciliation of the standard rate of UK corporation tax
to the taxation charge for the year is shown below:
|
Year
ended 31 December 2022 |
Year
ended 31 December 2021 |
|
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Net return/(loss) on ordinary
activities before taxation |
39,565 |
(93,891) |
(54,326) |
34,399 |
251,492 |
285,891 |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Net return/(loss) on ordinary
activities before taxation multiplied by the standard rate of UK
corporation tax of 19% (2021: 19%) |
7,517 |
(17,839) |
(10,322) |
6,536 |
47,783 |
54,319 |
Effects of: |
|
|
|
|
|
|
Capital losses/(gains) not
taxable1 |
– |
16,381 |
16,381 |
– |
(49,249) |
(49,249) |
Income not taxable |
(7,276) |
– |
(7,276) |
(6,210) |
– |
(6,210) |
Expenses not deductible |
– |
111 |
111 |
– |
76 |
76 |
Excess management expenses |
(241) |
1,347 |
1,106 |
(326) |
1,390 |
1,064 |
Overseas taxation |
2,641 |
– |
2,641 |
3,547 |
– |
3,547 |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
Total taxation charge for the
year (see Note 7a) |
2,641 |
– |
2,641 |
3,547 |
– |
3,547 |
|
========= |
========= |
========= |
========= |
========= |
========= |
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 £15,501,000 (2021: £14,046,000), in respect
of excess expenses of £56,499,000 (2021: £50,680,000) and excess
loan interest of £5,505,000 (2021: £5,505,000), has not been
recognised as it is unlikely that there will be sufficient future
taxable profits to utilise these expenses.
In the Spring Budget of 2021, the UK Government announced that
from 1 April 2023 the corporation tax
rate would increase to 25%. This rate has been substantively
enacted at the balance sheet date and has therefore been applied to
calculate the unrecognised deferred tax asset for the current year
(2021: 25%).
8 Return/(Loss) per Ordinary Share
|
Year
ended
31.12.22 |
Year
ended
31.12.21 |
Revenue return per ordinary
share |
9.00p |
7.50p |
Capital (loss)/return per ordinary
share |
(22.88p) |
61.15p |
Total (loss)/return per ordinary
share |
(13.88p) |
68.65p |
|
========= |
========= |
The net return/(loss) per ordinary share is based on the net
return/(loss) on ordinary activities after taxation for the year
divided by the weighted average number of ordinary shares held
outside Treasury during the year, as shown below:
|
£’000 |
£’000 |
Net revenue return on ordinary
activities after taxation |
36,924 |
30,852 |
Net capital (loss)/return on
ordinary activities after taxation |
(93,891) |
251,492 |
|
--------------- |
--------------- |
Total (loss)/return on ordinary
activities after taxation |
(56,967) |
282,344 |
|
========= |
========= |
|
Number |
Number |
Weighted average number of ordinary
shares held outside Treasury |
410,346,447 |
411,286,049 |
|
========== |
========== |
9 Dividends Paid to Shareholders
|
Year
ended
31.12.22
£’000 |
Year
ended
31.12.21
£’000 |
Dividends paid |
|
|
Interim dividend of 3.08 pence per
ordinary share paid for the year ended 31 December 2022 |
12,618 |
– |
Final dividend of 4.18 pence per
ordinary share paid for the year ended 31 December 2021 |
17,180 |
– |
Interim dividend of 2.65 pence per
ordinary share paid for the year ended 31 December 2021 |
– |
10,892 |
Final dividend of 3.90 pence per
ordinary share paid for the year ended 31 December 2020 |
– |
16,047 |
|
--------------- |
--------------- |
|
29,798 |
26,939 |
|
========= |
========= |
Dividends proposed |
|
|
Final dividend of 4.62 pence per
ordinary share proposed for the year ended 31 December 2022 |
18,883 |
– |
Final dividend of 4.18 pence per
ordinary share proposed for the year ended 31 December 2021 |
– |
17,180 |
|
--------------- |
--------------- |
|
18,883 |
17,180 |
|
========= |
========= |
The Directors have proposed the payment of a final dividend for
the year ended 31 December 2022 of
4.62 pence per ordinary share which
is subject to approval by shareholders at the Annual General
Meeting on 10 May 2023 and has not
been included as a liability in these Financial Statements. The
dividend will be paid on 16 May 2023
to shareholders on the register at the close of business on
31 March 2023 (ex-dividend date
30 March 2023).
10 Investments
|
2022
£’000 |
2021
£’000 |
Investments held at fair
value |
1,325,389 |
1,447,997 |
Opening book cost |
862,576 |
784,273 |
Opening investment holding
gains |
585,421 |
416,390 |
|
--------------- |
--------------- |
Opening fair value |
1,447,997 |
1,200,663 |
|
========= |
========= |
Movements in the year |
|
|
Purchases at cost |
136,091 |
166,196 |
Sales – proceeds |
(194,887) |
(139,952) |
(Losses)/gains on investments |
(63,812) |
221,090 |
|
--------------- |
--------------- |
Closing fair value |
1,325,389 |
1,447,997 |
|
========= |
========= |
Closing book cost |
872,694 |
862,576 |
Closing investment holding
gains |
452,695 |
585,421 |
|
--------------- |
--------------- |
Closing fair value |
1,325,389 |
1,447,997 |
|
========= |
========= |
The Company received £194,887,000 (2021: £139,952,000) from
investments sold in the year. The book cost of these investments
when they were purchased was £125,973,000 (2021: £87,893,000).
These investments have been revalued over time and until they were
sold any unrealised gains/losses were included in the fair value of
the investments.
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of
investments, which are included in the (losses)/gains on
investments above, were as follows:
|
Year
ended
31.12.22
£’000 |
Year
ended
31.12.21
£’000 |
Purchases transaction costs |
164 |
239 |
Sales transaction costs |
57 |
48 |
|
--------------- |
--------------- |
|
221 |
287 |
|
========= |
========= |
The portfolio turnover for the year was 12.7% (2021: 11.6%). 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
31.12.22
£’000 |
Year ended
31.12.21
£’000 |
(Losses)/gains on derivative
instruments |
|
|
(Losses)/gains on long CFD positions
closed |
(4,300) |
27,807 |
Losses on short CFD positions
closed |
– |
(471) |
(Losses)/gains on futures contracts
closed |
(4,612) |
8,515 |
Movement in investment holding
(losses)/gains on long CFDs |
9,718 |
1,525 |
Movement in investment holding gains
on short CFDs |
– |
300 |
Movement in investment holding
(losses)/gains on futures |
(3,404) |
469 |
|
--------------- |
--------------- |
|
(22,034) |
38,145 |
|
========= |
========= |
|
2022
Fair value
£’000 |
2021
Fair value
£’000 |
Derivative instruments recognised
on the Balance Sheet |
|
|
Derivative instrument assets |
521 |
4010 |
Derivative instrument
liabilities |
(9,633) |
– |
|
--------------- |
--------------- |
|
(9,112) |
4, 010 |
|
========= |
========= |
|
Fair value
£’000 |
2022
Asset
exposure
£’000 |
Fair value
£’000 |
2021
Asset
exposure
£’000 |
At the year end the Company held
the following derivative instruments |
|
|
|
|
Long CFDs |
(6,658) |
152,446 |
3,060 |
136,841 |
Long Futures |
(2,454) |
65,056 |
950 |
53,348 |
|
--------------- |
--------------- |
--------------- |
--------------- |
|
(9,112) |
217,502 |
4,010 |
190,189 |
|
========= |
========= |
========= |
========= |
12 Debtors
|
2022
£’000 |
2021
£’000 |
Accrued income |
784 |
555 |
Taxation recoverable |
7,232 |
8,286 |
Other debtors and prepayments |
112 |
116 |
|
--------------- |
--------------- |
|
8,128 |
8,957 |
|
========= |
========= |
13 Other Creditors
|
2022 |
2021 |
|
£’000 |
£’000 |
Creditors and accruals |
1,185 |
1,059 |
|
========= |
========= |
14 Share Capital
|
2022 |
2021 |
|
Number of
shares |
£’000 |
Number of
shares |
£’000 |
Issued, allotted and fully
paid |
|
|
|
|
Ordinary shares of 2.5 pence each
held outside Treasury |
|
|
|
|
Beginning of the year |
411,016,049 |
10,275 |
411,466,049 |
10,286 |
Ordinary shares repurchased into
Treasury |
(2,285,526) |
(57) |
(450,000) |
(11) |
|
----------------- |
----------------- |
----------------- |
----------------- |
End of the year |
408,730,523 |
10,218 |
411,016,049 |
10,275 |
|
========== |
========== |
========== |
========== |
Ordinary shares of 2.5 pence each
held in Treasury* |
|
|
|
|
Beginning of the year |
5,431,861 |
136 |
4,981,861 |
125 |
Ordinary shares repurchased into
Treasury |
2,285,526 |
57 |
450,000 |
11 |
|
----------------- |
----------------- |
----------------- |
----------------- |
End of the year |
7,717,387 |
193 |
5,431,861 |
136 |
|
========== |
========== |
========== |
========== |
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 £6,473,000 (2021: £1,457,000).
15 Capital and Reserves
|
Share
capital
£’000 |
Share
premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Capital
reserve
£’000 |
Revenue shareholders’
reserve
£’000 |
Total
funds
£’000 |
At 1 January 2022 |
10,411 |
58,615 |
5,414 |
1,372,360 |
27,433 |
1,474,233 |
Losses on investments (see Note
10) |
– |
– |
– |
(63,812) |
– |
(63,812) |
Losses on derivative instruments
(see Note 11) |
– |
– |
– |
(22,034) |
– |
(22,034) |
Foreign exchange losses |
– |
– |
– |
(372) |
– |
(372) |
Investment management fees (see Note
4) |
– |
– |
– |
(7,087) |
– |
(7,087) |
Finance costs (see Note 6) |
– |
– |
– |
(586) |
– |
(586) |
Repurchase of ordinary shares (see
Note 14) |
– |
– |
– |
(6,473) |
– |
(6,473) |
Revenue return on ordinary
activities after taxation for the year |
– |
– |
– |
– |
36,924 |
36,924 |
Dividends paid to shareholders (see
Note 9) |
– |
– |
– |
– |
(29,798) |
(29,798) |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
At 31 December 2022 |
10,411 |
58,615 |
5,414 |
1,271,996 |
34,559 |
1,380,995 |
|
========= |
========= |
========= |
========= |
========= |
========= |
At 1 January 2021 |
10,411 |
58,615 |
5,414 |
1,122,325 |
23,520 |
1,220,285 |
Gains on investments (see Note
10) |
– |
– |
– |
221,090 |
– |
221,090 |
Gains on derivative instruments (see
Note 11) |
– |
– |
– |
38,145 |
– |
38,145 |
Foreign exchange losses |
– |
– |
– |
(27) |
– |
(27) |
Investment management fees (see Note
4) |
– |
– |
– |
(7,313) |
– |
(7,313) |
Finance costs (see Note 6) |
– |
– |
– |
(403) |
– |
(403) |
Repurchase of ordinary shares (see
Note 14) |
– |
– |
– |
(1,457) |
– |
(1,457) |
Revenue return on ordinary
activities after taxation for the year |
– |
– |
– |
– |
30,852 |
30,852 |
Dividends paid to shareholders (see
Note 9) |
– |
– |
– |
– |
(26,939) |
(26,939) |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
At 31 December 2021 |
10,411 |
58,615 |
5,414 |
1,372,360 |
27,433 |
1,474,233 |
|
========= |
========= |
========= |
========= |
========= |
========= |
The capital reserve balance at 31
December 2022 includes investment holding gains of
£452,695,000 (2021: gains of £585,421,000) as detailed in Note 10
above. See Note 2 (q) above for further details. The revenue and
capital reserves are distributable by way of dividend.
16 Net Asset Value per Ordinary Share
The calculation of the net asset value per ordinary share is based
on the following:
|
2022 |
2021 |
Total shareholders’ funds |
£1,380,995,000 |
£1,474,233,000 |
Ordinary shares held outside of
Treasury at year end |
408,730,523 |
411,016,049 |
Net asset value per ordinary
share |
337.87p |
358.68p |
|
============ |
============ |
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 economic and
geopolitical, market, discount control, operational risk from
cybercrime, investment performance, environmental, social and
governance (“ESG”), key person and operational support and
operational resilience. Other risks identified are tax and
regulatory. 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:
|
2022
£’000 |
2021
£’000 |
Exposure to financial instruments
that bear interest |
|
|
Long CFDs – exposure less fair
value |
159,104 |
133,781 |
Exposure to financial instruments
that earn interest |
|
|
Amounts held at futures clearing
houses and brokers |
12,891 |
2,962 |
Cash and cash equivalents |
44,884 |
11,366 |
|
--------------- |
--------------- |
|
57,775 |
14,328 |
|
========= |
========= |
Net exposure to financial
instruments that bear interest |
101,329 |
119,453 |
|
========= |
========= |
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.
Currency exposure of financial assets
The currency exposure profile of the Company’s financial assets is
shown below:
Currency |
Investments
held at
fair value
£’000 |
Long
exposure
to derivative
instruments
£’000 |
Debtors1
£’000 |
Cash and
cash
equivalents2
£’000 |
2022
Total
£’000 |
Euro |
788,014 |
217,502 |
5,086 |
17,473 |
1,028,075 |
Swiss franc |
323,257 |
– |
1,798 |
3,724 |
328,779 |
Danish krone |
83,544 |
– |
414 |
1,548 |
85,506 |
Swedish krona |
39,892 |
– |
– |
19,362 |
59,254 |
Norwegian krone |
31,369 |
– |
– |
378 |
31,747 |
UK sterling |
59,313 |
– |
13,721 |
2,399 |
75,433 |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
|
1,325,389 |
217,502 |
21,019 |
44,884 |
1,608,794 |
|
========= |
========= |
========= |
========= |
========= |
1 Debtors include amounts held at
futures clearing houses and brokers.
2 Cash and cash equivalent are made up
of £44,878,000 cash at bank and £6,000 held in Fidelity
Institutional Liquidity Fund.
Currency |
Investments
held at
fair value
£’000 |
Long
exposure
to derivative
instruments
£’000 |
Debtors1
£’000 |
Cash and
cash
equivalents2
£’000 |
2021
Total
£’000 |
Euro |
824,825 |
190,189 |
3,258 |
1,629 |
1,019,901 |
Swiss franc |
362,721 |
– |
4,655 |
1,872 |
369,248 |
Swedish krona |
83,699 |
– |
– |
50 |
83,749 |
Danish krone |
64,182 |
– |
352 |
80 |
64,614 |
Norwegian krone |
48,096 |
– |
– |
2,909 |
51,005 |
UK sterling |
64,474 |
– |
3,654 |
4,826 |
72,954 |
|
--------------- |
--------------- |
--------------- |
--------------- |
--------------- |
|
1,447,997 |
190,189 |
11,919 |
11,366 |
1,661,471 |
|
========= |
========= |
========= |
========= |
========= |
1 Debtors include amounts held at
futures clearing houses and brokers.
2 Cash and cash equivalent are made up
of £10,696,000 cash at bank and £670,000 held in Fidelity
Institutional Liquidity Fund.
Currency exposure of financial liabilities
The currency profile of the Company’s financial liabilities is
shown below:
Currency |
Other
creditors
£’000 |
2022
Total
£’000 |
Euro |
126 |
126 |
UK sterling |
1,059 |
1,059 |
|
--------------- |
--------------- |
|
1,185 |
1,185 |
|
========= |
========= |
Currency |
Other
creditors
£’000 |
2021
Total
£’000 |
UK sterling |
1,059 |
1,059 |
|
========= |
========= |
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 Managers are
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 2022, the undiscounted
gross cash outflows of the financial liabilities were all repayable
within one year and consisted of derivative instrument liabilities
of £9,633,000 (2021: £nil) and creditors of £1,185,000 (2021:
£1,059,000).
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 2022, there was no amounts held by
brokers in a segregated collateral account on behalf of the
Company, to reduce the credit risk exposure of the Company (2021:
J.P. Morgan Securities plc £3,225,000). £12,891,000 (2021:
£2,962,000), shown as amounts held at futures clearing houses and
brokers on the Balance Sheet, was held by the Company in cash
denominated in UK sterling in a segregated collateral account on
behalf of the brokers, to reduce the credit risk exposure of the
brokers. This collateral comprised of: J.P. Morgan Securities plc
£4,540,000 (2021: £nil) and UBS AG £8,351,000 (2021: £2,962,000) in
cash.
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 instrument risk
The risks and risk management processes which result from the use
of derivative instruments, are set out in a documented Risk
Management Process 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 Managers believe
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 2022, an increase of
1.00% in interest rates throughout the year, with all other
variables held constant, would have increased the net loss on
ordinary activities after taxation for the year and decreased the
net assets of the Company by £1,013,000 (2021: decreased the net
return and decreased the net assets by £1,195,000). A decrease of
1.00% 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 the Balance Sheet date, a 10% strengthening of the UK sterling
exchange rate against foreign currencies, with all other variables
held constant, would have increased the Company’s net loss on
ordinary activities after taxation for the year and decreased the
Company’s net assets (2021: decreased the net return and decreased
the net assets) by the following amounts:
Currency |
2022
£’000 |
2021
£’000 |
Euro |
93,450 |
92,718 |
Swiss franc |
29,889 |
33,568 |
Danish krone |
7,773 |
5,874 |
Swedish krona |
5,387 |
7,614 |
Norwegian krone |
2,886 |
4,637 |
|
--------------- |
--------------- |
|
139,385 |
144,411 |
|
========= |
========= |
Based on the financial instruments held and currency exchange
rates at the Balance Sheet date, a 10% weakening of the UK sterling
exchange rate against foreign currencies, with all other variables
held constant, would have decreased the Company’s net loss on
ordinary activities after taxation for the year and increased the
Company’s net assets (2021: increased the net return and increased
the net assets) by the following amounts:
Currency |
2022
£’000 |
2021
£’000 |
Euro |
114,216 |
113,322 |
Swiss franc |
36,531 |
41,028 |
Danish krone |
9,501 |
7,179 |
Swedish krona |
6,584 |
9,305 |
Norwegian krone |
3,527 |
5,667 |
|
--------------- |
--------------- |
|
170,359 |
176,501 |
|
========= |
========= |
Other price risk – exposure to investments sensitivity
analysis
Based on the investments held and share prices at 31 December 2022, an increase of 10% in share
prices, with all other variables held constant, would have
decreased the Company’s net loss on ordinary activities after
taxation for the year and increased the net assets of the Company
by £132,539,000 (2021: increased the net return and increased the
net assets by £144,800,000). A decrease of 10% in share prices
would have had an equal and opposite effect.
Other price risk – net exposure to derivative instruments
sensitivity analysis
Based on the derivative instruments held and share prices at
31 December 2022, an increase of 10%
in the share prices underlying the derivative instruments, with all
other variables held constant, would have decreased the Company’s
net loss on ordinary activities after taxation for the year and
increased the net assets of the Company by £21,750,000 (2021:
increased the net return and increased the net assets by
£19,019,000). 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 Notes 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 inputs other
than quoted prices included in level 1 that are observable (i.e.
developed using market data) for the asset or liability, either
directly or indirectly |
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 Notes 2 (k) and (l). The table
below sets out the Company’s fair value hierarchy:
Financial assets at fair value through profit or loss |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
2022
Total
£’000 |
Investments |
1,325,389 |
– |
– |
1,325,389 |
Derivative instrument assets |
– |
521 |
– |
521 |
|
--------------- |
--------------- |
--------------- |
--------------- |
|
1,325,389 |
521 |
– |
1,325,910 |
|
========= |
========= |
========= |
========= |
Financial liabilities at fair
value through profit or loss |
|
|
|
|
Derivative instrument
liabilities |
(2,454) |
(7,179) |
– |
(9,633) |
|
========= |
========= |
========= |
========= |
Financial assets at fair value through profit or loss |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
2021
Total
£’000 |
Investments |
1,447,997 |
– |
– |
1,447,997 |
Derivative instrument assets |
950 |
3,060 |
– |
4,010 |
|
--------------- |
--------------- |
--------------- |
--------------- |
|
1,448,947 |
3,060 |
– |
1,452,007 |
|
========= |
========= |
========= |
========= |
Financial liabilities at fair
value through profit or loss |
|
|
|
|
Derivative instrument
liabilities |
– |
– |
– |
– |
|
========= |
========= |
========= |
========= |
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 above and in Note 17 above.
The Company’s gross gearing and net gearing at the year end is
set out below:
|
2022 |
|
Gross
gearing |
Net
gearing |
|
Asset
exposure
£’000 |
%1 |
Asset
exposure
£’000 |
%1 |
Investments |
1,325,389 |
96.0 |
1,325,389 |
96.0 |
Long CFDs |
152,446 |
11.0 |
152,446 |
11.0 |
Long futures |
65,056 |
4.7 |
65,056 |
4.7 |
Gross asset exposure/net market
exposure |
1,542,891 |
111.7 |
1,542,891 |
111.7 |
Shareholders’ funds |
1,380,995 |
|
1,380,995 |
|
Gearing2 |
|
11.7 |
|
11.7 |
|
========= |
========= |
========= |
========= |
|
2021 |
|
Gross
gearing |
Net
gearing |
|
Asset
exposure
£’000 |
%1 |
Asset
exposure
£’000 |
%1 |
Investments |
1,447,997 |
98.2 |
1,447,997 |
98.2 |
Long CFDs |
136,841 |
9.3 |
136,841 |
9.3 |
Long futures |
53,348 |
3.6 |
53,348 |
3.6 |
Gross asset exposure/net market
exposure |
1,638,186 |
111.1 |
1,638,186 |
111.1 |
Shareholders’ funds |
1,474,233 |
|
1,474,233 |
|
Gearing2 |
|
11.1 |
|
11.1 |
|
========= |
========= |
========= |
========= |
1 Asset exposure to the market expressed
as a percentage of shareholders’ funds.
2 Gearing is the amount by which gross
asset exposure/net market 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 in the Annual Report and in Note 4 above. During
the year, fees for portfolio management services of £9,449,000
(2021: £9,751,000) were payable to FII. At the Balance Sheet date,
fees for portfolio management services of £832,000 (2021: £871,000)
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 £209,000 (2021: £126,000). At the
Balance Sheet date, marketing services of £nil (2021: £5,000) were
accrued and included in other creditors.
Disclosures of the Directors’ interests in the ordinary shares
of the Company and Directors’ fees and taxable expenses relating to
reasonable travel expenses paid to the Directors are given in the
Directors’ Remuneration Report in the Annual Report. In addition to
the fees and taxable expenses disclosed in the Directors’
Remuneration Report, £18,000 (2021: £16,000) of Employers’ National
Insurance Contributions was also paid by the Company. As at
31 December 2022, Directors’ fees of
£14,000 (2021: £14,000) were accrued and payable.
Alternative Performance Measures
Discount/Premium
The discount/premium is considered to be an Alternative Performance
Measure. It is the difference between the NAV of the Company and
the ordinary share price and is expressed as a percentage of the
NAV. Details of the Company’s discount/premium are on the Financial
Highlights page in the Annual Report and both are defined in the
Glossary of Terms in the Annual Report.
Gearing
Gearing is considered to be an Alternative Performance Measure. See
Note 18 above for details of the Company’s gearing.
Net Asset Value (“NAV”) per Ordinary Share
The NAV per ordinary share is considered to be an Alternative
Performance Measure. See the Balance Sheet above and Note 16
above.
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.
|
2022 |
2021 |
Investment management fees
(£’000) |
9,449 |
9,751 |
Other expenses (£’000) |
919 |
908 |
Ongoing charges (£’000) |
10,368 |
10,659 |
Average net assets (£’000) |
1,330,434 |
1,346,519 |
Ongoing charges ratio |
0.78% |
0.79% |
|
========= |
========= |
Revenue, Capital and Total Returns per Ordinary Share
Revenue, capital and total returns per ordinary share are
considered to be Alternative Performance Measures. See the Income
Statement above and Note 8 above for further details.
Total Return Performance
Total return performance is considered to be an Alternative
Performance Measure. NAV per ordinary share total return includes
reinvestment of the dividend in the NAV of the Company on the
ex-dividend date. Ordinary 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
ordinary share prices of the Company, the impact of the dividend
reinvestments and the total returns for the years ended
31 December 2022 and 31 December 2021.
2022 |
Net asset
value per
ordinary
share |
Ordinary
share
price |
31 December 2021 |
358.68p |
340.50p |
31 December 2022 |
337.87p |
319.50p |
Change in year |
-5.8% |
-6.2% |
Impact of dividend reinvestment |
+2.2% |
+2.4% |
|
--------------- |
--------------- |
Total return for the
year |
-3.6% |
-3.8% |
|
========= |
========= |
2021 |
Net asset
value per
ordinary
share |
Ordinary
share
price |
31 December 2020 |
296.57p |
286.00p |
31 December 2021 |
358.68p |
340.50p |
Change in year |
+20.9% |
+19.1% |
Impact of dividend reinvestment |
+2.6% |
+2.6% |
|
--------------- |
--------------- |
Total return for the year |
+23.5% |
+21.7% |
|
========= |
========= |
The Annual Financial Report Announcement is not the Company's
statutory accounts. The above results for the year ended
31 December 2022 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 2021 and 2022 statutory accounts received
unqualified reports from the Company's Auditor and did not include
any reference to matters to which the Auditor drew attention by way
of emphasis without qualifying the reports and did not contain a
statement under s.498 of the Companies Act 2006. The financial
information for 2021 is derived from the statutory accounts for
2021 which have been delivered to the Registrar of Companies. The
2022 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.fidelity.co.uk/specialvalues 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