Edinburgh Investment Trust PLC Regulatory News (EDIN)

LEI: 549300HV0VXCRONER808 30 May 2023

The Edinburgh Investment Trust plc

ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED 31 MARCH 2023

30 May 2023 - The Directors of the Edinburgh Investment Trust plc ("the Company") have today announced the annual results for the period ending 31 March 2023.

Highlights

· Net Asset Value (NAV) per share (with debt at fair value) on a total return basis increased by 7.9%, comfortably exceeding the 2.9% return on the FTSE All-Share Index. The share price total return was 8.4%.

· Final dividend proposed of 6.7p per share. Dividends for the financial year +5.6% compared with the previous year, equivalent to a yield of 4.0%

· Net gearing at 31 March 2023 of 4.7%

· Share price discount to NAV narrowed marginally from 7.7% to 7.5%

· Since James de Uphaugh became Manager of the Company in March 2020, the cumulative NAV return of +65.9% and the share price return of +75.5% have outperformed the FTSE All-Share return of +47.4% (all in total return terms)

Elisabeth Stheeman, Chair, said: "It has been a great pleasure to lead the Company in my first year as the Chair of the Board. Together with my fellow Directors, and the Company's Manager, we have continued to build on the strengthening investment track record to position the Company as a core holding for long-term savers.

"It has been another encouraging twelve months for the Company's investment returns. Growth in both the NAV and the share price comfortably exceeded the FTSE All-Share Index. The NAV return in total return terms was 7.9% against the index return of 2.9%. We are therefore building a track record under the new Manager that meets the Company's first investment objective - a long-term increase of the NAV per share in excess of the index.

"Despite the ever-uncertain economic outlook, there is enthusiasm about the underlying prospects for the stocks in the Company's portfolio. The Manager's approach of maintaining a diversified portfolio is therefore an important feature that should help protect shareholders' capital over time. We believe the Company is well positioned to deliver to shareholders attractive total returns."

James de Uphaugh, Manager, said: "It is now just over three years since we became the Manager of the Company. We took over in the midst of the market sell-off in March 2020, as the full implications of the COVID pandemic began to dawn. Since then, our investment approach has helped us deal with an at times rapidly changing economic and market backdrop. As it turns out, we became stewards of your portfolio towards the lowest levels of the market. Absolute returns have been strong since then.

"In terms of the main stock contributors over the last year, the top three were BAE Systems, NatWest and Centrica. These stocks encapsulate the diversified nature of the portfolio. Other contributions came from Greggs, Standard Chartered and Weir.

"The better recent returns from the UK equity market strike us as the early stages of a recovery in the market. This recovery is rooted in the undervaluation of UK equities that has built up over time and we remain optimistic about the specific prospects for the Company's holdings.

"Overall, 2023 could see lower inflation, peaking interest rates and perhaps a slightly better tenor from the consumer. A balanced, diversified portfolio is as important as ever."

The Edinburgh Investment Trust plc

ANNUAL FINANCIAL REPORT

FOR THE YEAR ENDED 31 MARCH 2023

Financial Information and Performance Statistics

The Company's benchmark is the FTSE All-Share Index.

Notes:

(1) These terms are defined in the Glossary of Terms and Alternative Performance Measures, including reconciliations, on pages 83 to 86. NAV with debt at fair value is widely used by the investment company sector for the reporting of performance, premium or discount, gearing and ongoing charges.

(2) Source: Refinitiv.

(3) Key Performance Indicator.

(4) Alternative Performance Measures.

References to page numbers in the Annual Financial Report, which will be available from the Company's website: www.edinburgh-investment-trust.co.uk

Chair's Statement

DEAR SHAREHOLDER

It has been a great pleasure to lead your Company in my first year as the Chair of the Board. Together with my fellow Directors, and the Company's Manager, we have continued to build on the strengthening investment track record to position the Company as a core holding for long-term savers.

I would particularly like to thank my predecessor, Glen Suarez, who stood down as planned at last year's Annual General Meeting after nine years on the Board. In recent years he oversaw a transition of the Company with a new Manager and supporting team, a sustainable and rising dividend, very attractively priced long-term debt financing and the initiation of a new marketing strategy, which has been further refined in the past year. This is an excellent position from which the rest of the Board and I look forward to building further.

PERFORMANCE

It has been another encouraging twelve months for the Company's investment returns. Growth in both the Net Asset Value (NAV) and the share price comfortably exceeded the benchmark index, the FTSE All-Share Index. The NAV return was 7.9% against the index return of 2.9%. These are in total return terms (i.e. the combination of capital appreciation plus income received). We are therefore building a track record under the new Manager that meets the Company's first investment objective - a long-term increase of the NAV per share in excess of the index.

The Company's share price total return was 8.4% over the year: the share price itself moved from 634p to 660p, a rise of 4.1%, with the balance coming from the dividends paid to shareholders. The share price return differs from the NAV return because of the changing share price discount to NAV. For this year the discount narrowed marginally from 7.7% to 7.5%.

There are a number of investment factors that have influenced the Company's returns over the year. Most important are the performance of the businesses held in the Company's portfolio. Your Manager takes mainly a 'bottom-up' approach, seeking to construct a diversified portfolio. Echoing this, some of the major drivers of returns over the year included the holdings in BAE Systems, NatWest, Centrica and Greggs. To a lesser extent there were offsetting negative returns from some of the mining stocks held, including Anglo American and Newmont. Other factors that contributed to the overall return were:

● UK equities continue to rebound, outperforming global equities. After an extended period of dull returns for UK equities, extending to before the Brexit referendum of 2016, a combination of strong fundamentals and attractive starting valuations have come to the fore;

● The positive returns have been despite the challenging geopolitical situation, including the war between Russia and Ukraine;

● Another headwind for elements of the equity market has been inflation. Here in the UK there is hope that this might start to recede and that the cost of living crisis might in turn abate;

● The UK equity market appears to have taken the recent concerns about some banks in the US and Switzerland in its stride. The Manager is alert to how this may affect bank lending appetites, including in the UK, which could in turn impact the economic outlook;

● The effect of marking the Company's new loan notes to fair value, reflecting the fall in value of the debt that the Company issued in 2021/2 due to the rise in government bonds yields. As I wrote in the interim report, this boosted the NAV by c.4% during the year and is explained in more detail below.

It is also important to consider longer term returns: it has now been three years since the change of Manager to James de Uphaugh and his team. It is gratifying to see that the Company's growth in NAV has exceeded that of the FTSE All-Share Index in each of the three successive 12-month periods. Taken as a whole, over the three years to 31 March 2023, the Company's cumulative NAV total return has been 65.9%, with the Company's benchmark index returning 47.4% over the same period. Over the past five years, the Company's NAV return has been 25.2% cumulatively, compared with the Company's benchmark index returning 27.9% over the same period. In all these cases, the NAV is stated after deducting debt at fair values.

In our view, three years is the minimum period over which investment success can be properly assessed. It is clearly positive that the Company has had such encouraging returns over this period. Growth in the share price has been more volatile, outperforming the index in two of these three years. Further, the discount has narrowed from 11.5% in March 2020 to 7.5% at the end of March 2023. This results in an overall share price return (which is ultimately what shareholders experience - as distinct from the NAV) of 75.5%, which exceeds the NAV return. I will come back to the approach we have taken towards the discount below.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE INVESTMENT FACTORS

We believe an important component of profitable investment decisions is the consideration of Environmental, Social and Governance (ESG) factors. Well managed and governed companies tend to make successful long-term investments. The Manager therefore considers such issues as an integral part of their research and investment process. The Manager's report describes this in more detail, as does the summary of the Manager's voting activities in respect of each investee company. This is the first time that we have included the detail of how we have exercised the Company's voting rights as a shareholder. You will also see that we have included some examples of the engagement the Manager had with investee companies on some of the more contentious issues. I encourage you to read these interesting examples.

DIVIDENDS

We have announced three interim dividends so far this year, totalling 19.5 pence per share. For the final dividend, the Board is proposing a payment of 6.7p per share, taking the total to 26.2p per share. This final figure is a 5.6% increase on last year. When divided by the year end share price of 660p, it results in a dividend yield of 4.0%. This compares with the dividend yield on the FTSE All-Share Index of 3.5% on average.

The dividend increase of 5.6% is behind the level of UK inflation over the same period. As is evident from the bar chart of longer-term dividend growth rates on page 4, we are not currently meeting the second of the Company's two objectives: to grow dividends per share in excess of UK inflation. We used these reserves to maintain the dividend initially, but it became apparent that the natural level of income generated by the portfolio was not going to be sufficient, in the long run, to maintain the dividend and, after much deliberation, decided to reduce it in the financial year to March 2021. Looking forward, with expectations for inflation coming down and noting our confidence in the ability of our portfolio companies to grow their distributions, we anticipate a return to the dividend rising above normalised inflation.

For this last financial year, I am pleased to report that dividends received by the portfolio have continued to rise and in conjunction with our lower costs of debt the P&L is in better shape. This means that the dividends in respect of this financial year are almost entirely covered by earnings: as the table on page 2 shows, dividends for the year of 26.2p compare with revenues of 26.0p.

Another important feature to note is that many of the stocks held in the Company's portfolio are buying back their own shares for cancellation. The Manager explores this in more detail in his report later in this document but suffice to say, share buybacks are another form of redistribution to shareholders, but in the form of capital rather than income. Sometimes these buybacks complement dividends paid to shareholders, other times they replace them. Either way, the returns to shareholders of capital or income support the broader concept of total returns which I used when reporting performance at the beginning of this statement.

BORROWINGS

An element of borrowings, sensibly managed, should enhance long-term returns to shareholders. For investment companies this requires the returns from the equity portfolio to exceed the cost of the debt.

This year has marked a major change in the borrowing costs of the Company. The last of the Company's debentures, a £100m issue dating back to 1997 and costing 7.75% per annum, matured last September. The debt that has replaced it costs an average of 2.44%: an immediate interest saving of over £5m a year. You may ask how such an attractive rate of interest has been achieved, given the much higher interest rates that have become prevalent of late. The answer is that the Company contracted this interest rate with its lenders in September 2021, a year in advance of the debenture maturing. With hindsight, this proved extremely fortuitous timing.

To reiterate an earlier point, the fall in government bond prices (and rise in their yields) has contributed to a reduction in the fair value of the outstanding loans. This does not affect the balance sheet presented later in this report, where loans are stated at par. But this does effect the level of reported gearing (and investment returns) for which our long-standing practice - and that of the Investment Trust sector generally - is to deduct loans at fair value. Gearing calculations on this basis are set out in full in the Glossary on page 84. Net gearing was 4.7% at the year end.

The Board monitors the level of gearing against various conservative thresholds. The stated policy is that it should not exceed 25%. The current level of gearing is therefore significantly below this threshold. But, in the event of unhelpful market moves that drive up the level of gearing, the portfolio is highly liquid. None of the NAV is attributed to unlisted, unquoted, or private investments, and we have no plans to go down that route.

Overall, the borrowings have positively enhanced shareholder returns in the last financial year - this is quantified in the table on page 15 - and we are optimistic that this should also apply over the next three years and beyond.

SHARE PRICE DISCOUNT TO NET ASSET VALUE

The discount varied from a low of 12.0% to a high of 4.8%. It finished the year at 7.5%. We consider this an acceptable performance as discounts across the investment trust universe as a whole have generally widened. But we are not complacent. We would like to see the discount narrow further as more investors are attracted to the Company as a reliable long-term savings vehicle. The marketing initiatives I describe below are designed to help narrow the discount.

While the discount is at current levels, we will continue with our policy of periodic share buy backs. Over the year we have bought back 3% of the Company's shares which we have retained in Treasury. These buybacks modestly enhance net asset value for shareholders (see table on page 15) and we are continuing with our policy of actively buying back shares while the discount persists. A further 655,000 (0.33% of the issued share capital) of the Company's shares have been repurchased since the end of the financial year.

MARKETING

As mentioned earlier we have embarked on a range of new or enhanced promotional activities. You may have seen our new website, press advertisements, or noticed our greater digital promotion through avenues such as Twitter and LinkedIn. The clear intention here is to raise the profile of the Company and generate increased buying of shares, whether from new or existing shareholders. The Board is monitoring a series of Key Performance Indicators to assess the effectiveness of this promotional spend and would encourage you to sign up on our website to receive monthly updates.

BOARD AND GOVERNANCE

At this year's Annual General Meeting, Vicky Hastings will not be standing for re-election. The board has been very fortunate to have had Vicky's wise counsel and exceptional attention to detail for ten years. The last twelve months were an extension to the normal nine years, in order to avoid having the Chair and the Senior Independent Director standing down at the same time last year.

We will all miss Vicky's hugely valuable insights and her infectious enthusiasm, and we wish her all the very best with her other corporate and charitable board responsibilities. Aidan Lisser has kindly agreed to take on Vicky's role as Senior Independent Director after the conclusion of the Annual General Meeting in July.

In February we welcomed Annabel Tagoe-Bannerman as a non-executive Director to the Board. She brings particular operational legal and governance experience to the Board. With Annabel's appointment, it means that we are in the fortunate position of having five directors going forward each bringing different skills and expertise to the boardroom discussions. These are in a range of relevant fields for your Company, including equity portfolio management, marketing, accounting, risk management and regulation. We also have a board that meets or exceeds all the recommended diversity guidelines. I thank all my fellow directors for their hard work on behalf of shareholders over the last year.

ANNUAL GENERAL MEETING

This year's Annual General Meeting will take place on Wednesday 19 July 2023 at 11.00am at the Balmoral Hotel in Edinburgh. Please note the change of venue from last year. The whole Board and I look forward to meeting as many of you as possible. For those unable to attend in person, the AGM will also be streamed online, with the ability to post questions live into the meeting. The link for electronic access will be displayed prominently on the Company's website and it will not require a passcode. Please see page 77 for the Notice of AGM for more information.

There will also be a shareholder presentation and update in central London on 27 September. All members of the Board, the Manager and members of his team will attend. Further details will be posted on the Company's website from next month.

OUTLOOK

As you will see from the Portfolio Manager's report, there is enthusiasm about the underlying prospects for the stocks in the Company's portfolio. Set against this is the ever-uncertain economic outlook. The Manager's approach of maintaining a diversified portfolio is therefore an important feature that should help protect shareholders' capital over time. Meanwhile, many UK equity market constituents in the portfolio stand at a valuation discount to their international peers. Over time, if these companies deliver the operational results that we believe they can, it seems reasonable to expect this valuation differential to close. Combined with a dividend yield of 4.0%, we believe this leaves the Company well positioned to deliver to shareholders attractive total returns.

ELISABETH STHEEMAN / Chair / 26 May 2023

Portfolio Manager's Report

For the year ended 31 March 2023

As we review the twelve months to the end of March 2023 and consider what may be ahead for stock markets and economies, it is worth beginning with a reminder of how we manage your Company:

• We manage the Company's investments by constructing a portfolio of 40-50 stocks. While this is a relatively concentrated portfolio by many standards, we also manage it with the aim of ensuring an adequate level of diversification across industries and economic themes.

• In order to meet the Company's two investment objectives, we manage the portfolio with a 'total return' approach, with ESG factors considered throughout the investment process.

• Most holdings are UK-listed, and we have the flexibility to hold up to 20% in overseas stocks.

• Our aim is to construct a portfolio that has the potential to outperform the UK equity index return over rolling three‑year periods.

• We take the view that returns in excess of the UK equity index should, over the long term, provide a satisfactory return for savers when compared with other equity strategies and asset classes.

• An adequate degree of leverage, appropriately managed, should further enhance long-term shareholder returns.

TOTAL RETURNS OVER THE LAST TWELVE MONTHS

Net Asset Value (NAV) per share rose 7.9%, while the share price rose 8.4%. Both figures exceed the UK equity index return of 2.9%. As the Chair's statement has described, the NAV's outperformance of the index came primarily through superior stock selection as well as through the revaluation of the Company's long-term debt.

In terms of the main stock contributors, the top three were BAE Systems, NatWest and Centrica. These stocks encapsulate the diversified nature of the portfolio, a defence contractor, a UK bank and a domestic energy distribution company. Other contributions came from food-on-the-go retailer Greggs, the international bank Standard Chartered and the mining technology group Weir. The portfolio had exposure to mining stocks and two of the three biggest negatives were Anglo American and Newmont. The third notable negative was from not holding BP for most of the period, as its share price recovered (we bought shares in BP towards the end of the period, as we describe below).

The discount of the shares to NAV narrowed slightly, hence the modestly higher return in the shares than in the NAV.

TRANSACTIONS OVER THE LAST TWELVE MONTHS

We have made fewer than average transactions over the year, with portfolio turnover of 21%. This means the holding period is equivalent to just under five years on average.

The biggest change to the portfolio was the purchase of a holding in BP. The shares were acquired following its latest results, in which the group increased its investment plans in high return energy transition growth engines such as Bioenergy and EV Charging. In addition, it also announced new investment plans in high-return upstream assets, which will help to meet the global requirement for greater energy security post the war in Ukraine. Consequently, the projected medium-term return on investment should improve through to 2030. Capex on energy transition related projects will still represent 45% of mid-term capex. We funded the purchase of BP with a sale of the French energy group Total Energies, which is more exposed to fluctuations in the LNG and gas price.

Other significant purchases included GlaxoSmithKline and its de-merged consumer goods unit, Haleon. Both stand at attractive valuations and should have the additional benefit of refocused management teams. Elsewhere, among the more stable growth stocks in the portfolio, we sold Diageo and Reckitt Benckiser: where we view their share prices as fully capturing their future prospects.

More recently, we have added selectively to our holdings in UK cyclicals with strong market positions such as easyJet, Dunelm, Travis Perkins and Marks & Spencer. The UK economic pulse has been stronger than the consensus expected, with energy bills coming down from the highs of last summer. This takes some pressure off the consumer. These additions to the portfolio were funded by reductions of a number of the more internationally focussed companies such as KPN and Smith & Nephew.

These changes leave the portfolio sensibly diversified, in our view. In addition to diversification by industry and sector, which is evident from the portfolio listing on pages 16 to 17, we also think about the broader drivers of future investment returns. Again, we believe there is suitable diversification that should provide sources of portfolio outperformance, whatever the economic development or condition. These drivers of returns, and the holdings that should benefit, include:

• Supply chain resilience - Tesco, Compass and Intel;

• Capitalising on data analytics technology - WPP, Dunelm & Weir;

• The revenge of the incumbent - NatWest, Marks & Spencer and Centrica;

• Businesses becoming stronger through corporate Darwinism - Whitbread, Serco, RS Group;

• Profitability edge through cost curve positioning - Howdens, Mondi and Anglo American.

ESG CONSIDERATIONS

We take careful account of the ESG considerations of any investment case. Taking account of such things are essential for good investment performance and we do not place any major restrictions on what we can invest in. For this reason, as we note above, stocks like BP and BAE Systems, which might not make it into other investors' portfolios, are acceptable to us. The acceptability comes with the important caveat that we have to be able to assure ourselves, to the best extent possible, that they are behaving responsibly and making positive change for the future.

To illustrate the kind of interactions we undertake when assessing investments, the team engaged with Dunelm, the British home furnishings retailer, in April and February 2023 and in September 2022:

• During the meeting in April 2023, the team engaged on the group's proposed remuneration policy ahead of Dunelm's 2023 AGM. The proposal included a new maximum opportunity for the CEO of 375% of salary (up from 325%) which the team felt was reasonable.

• In a subsequent meeting, the group asked for our input on what we consider to be Dunelm's most material issues, such as the sourcing of their goods and relationship with suppliers. We also fed back that we appreciate the company's clear efforts to demonstrate connectivity between the group's strategy, material issues, and executive pay in its reporting.

• At the meeting in February 2023, the team discussed the group's near-term earnings and strategy. Dunelm aims to develop product excellence across all price points and effective marketing. It has increased efforts to develop product mastery across more nascent categories where market shares are lower, with the ultimate goal of becoming the one-stop for home spend. The group is also introducing credit to facilitate more spend in bigger‑ticket group sections, like Furniture, which is an area in the market that is growing substantially.

• In September 2022, the team met with Dunelm to discuss how it is controlling costs. The group reported that it was seeing a high percentage of incremental UK homeware spend which could fuel EPS growth through 2023. This engagement work reinforces our view of Dunelm's business model resiliency. In turn this should support its ability to deliver dividend growth in excess of inflation over the long-term. This is the rationale for it being one of the larger positions in the portfolio.

There are further examples of our ESG engagement with companies on pages 25 to 26.

BORROWINGS

We were pleased to see the successful completion of the Company's long-term refinancing of its debt last September. The new debt, with an average interest coupon of 2.44% per annum, means a significantly reduced cost of borrowings, leading in practice to a future saving of over £5m per annum compared with the previous arrangements.

We utilise this favourable financing by maintaining a fully invested portfolio. The nature of the borrowings, with an average maturity of 25 years, means that they are essentially permanent in nature. We therefore tend to manage the portfolio with the borrowings fully invested. When the portfolio's value rises, the gearing should enhance returns, and the converse also applies: when underlying returns are negative, the borrowings make the losses greater. With this in mind, we take a tactical view of the economic and market backdrop and can introduce a cash position to reduce this impact by lowering 'net' gearing. For example, we may allow the cash position to build up if we are struggling to find attractively priced investment opportunities and fear the market might be ripe for correction. However, shareholders should think of us as investing the vast majority of the borrowings under normal circumstances. Our gross gearing (borrowings) total would amount to 6.6% as at year end with an offsetting cash balance reducing the net gearing to 4.7%.

DIVIDENDS RECEIVED

Actual revenue per share for the 12 months to 31 March 2023 was 26.0p. This compares with 22.4p in the previous year - a rise of 15.9%. Clearly this is a very satisfactory outcome. For context, top line portfolio income was £49.0m (+10.8% on 2022), which was split between ordinary dividends of £41.6m (+11.0%) and special dividends of £7.4m (+10.0%). The reason for the revenue per share rise of 15.9% exceeding underlying income growth of 10.8% is that revenues are calculated after deducting costs including debt interest. The new borrowing arrangements, as noted above, have resulted in a significant fall in interest expense.

Looking ahead, we forecast more modest revenue per share growth. Some of this is in part due to a mix effect in the portfolio, with the sale of some higher yielding stocks including Total Energies and Direct Line. Dividend generation nonetheless is robust across the portfolio. Furthermore, the ordinary and special dividends being received understate the shareholder distributions made by investee companies which also include share buybacks. These remain significant: there are ongoing share buybacks by BP, Shell, Unilever and NatWest, plus from many other portfolio holdings. Overall, c40% of portfolio holdings have declared some form of ongoing share buyback. This is supportive of the 'total return' ethos that should underpin returns to the Company's shareholders - whether income or capital growth - in the years ahead.

The Directors' decision to recommend total dividends for the year of 26.2p mean that dividends are almost entirely covered by revenues for the year: a welcome position to be in.

THREE-YEAR REFLECTIONS

It is now just over three years since we became the Manager of your Company. We took over in the midst of the market sell-off in March 2020, as the full implications of the COVID‑19 pandemic began to dawn.

Since then, our investment approach has helped us deal with an at times rapidly changing economic and market backdrop. The roll-out of COVID‑19 vaccines, the "mini-budget" crisis, rising interest rates, a falling sterling currency and the tech sector sell-off have all had to be navigated. A key advantage throughout this period has been the diversified portfolio.

As it turns out, we became stewards of your portfolio towards the lowest levels of the market. Absolute returns have been strong since then. The end result is, as the Chair has already noted, a cumulative total return of the Company's Net Asset Value (NAV) per share of 65.9%. The share price, thanks to a narrowing of its discount to NAV, has risen 75.5%. These returns compare with a FTSE All-Share Index return of 47.4%.

In keeping with the stock-driven investment approach, when we analyse the key drivers of returns over the period, we look at the key stock contributors. For the last three years, the big winners also reflect the flexible investment style we take. To illustrate, the top five stock contributors to the outperformance were Ashtead (industrial equipment hire), NatWest (banking), BAE Systems (defence), Centrica (gas utility) and Anglo American (mining). Hence clearly a bias towards a mix of cyclical companies - benefitting from the recovery in the economy over the period compared with expectations at the depths of the pandemic.

Inevitably there have been some less successful decisions along the way. Interestingly, the biggest factor was having little or no exposure to two large commodity groups - BP and Glencore. An important part of the portfolio construction (and risk oversight) process is managing these larger risks. A (very) small number of holdings disappointed in their results, but in each case the holding size had been calibrated to take account of the greater downside risk.

In terms of the income generated over the last three years, revenue per share has been disappointing for shareholders, moving from 27.8p in 2020 to 26.0p in the last financial year. The portfolio was overly dependent on unsustainable dividend income prior to March 2020. We believe it is on a more sustainable and progressive footing now.

Our view is that underlying fundamentals of the portfolio's holdings ultimately drive the Company's total returns. We therefore prefer to hold stocks for sufficient time to allow those fundamentals to come through. We have long held the view that this means a three-year period, and this does in fact coincide with the average holding period since we were appointed in 2020.

Overall, we believe the last three years demonstrate the merits of a flexible, long-term total return investment approach.

OUTLOOK

While we are cautious about the outlook for equity markets in general, the better recent returns from UK equities strike us as being the early stages of a recovery in the market. This recovery is rooted in the undervaluation of UK equities that has built up over time for a variety of well-rehearsed reasons such as Brexit and final-salary pension funds reducing equity exposures. Just as these headwinds appear to be waning, we remain optimistic about the specific prospects for the Company's holdings.

We are cautious about markets because inflation remains a challenge. It will naturally come down to a degree, helped by some inputs such as gas prices being markedly lower than a year ago. But consumer expectations have ratcheted up. Economic history tells us that it is much harder to squeeze inflation back into the bottle, once the inflation genie is out.

At the market level, this economic slowdown is likely to be different from those we have experienced since the turn of the millennium. They may be more reminiscent of those of the 1980s and 1990s: more typical slowdowns when inflation has been too high and interest rates have been raised to choke it off. At the same time, bank lending criteria are likely to tighten in the US because of the recent set of banking failures and near failures in the US and Switzerland, which could present downside risk to economic growth.

On a more positive note, at the corporate level, the current elevated rate of inflation means nominal revenue growth should be tolerable even if real GDP falters. Another help is that China has 'reopened'. Overall, 2023 could see lower inflation, peaking interest rates and perhaps a slightly better tenor from the consumer.

Therefore, a balanced, diversified portfolio is as important as ever. In market terms, we may have entered a new and different investing environment from that which has prevailed since the financial crisis of 2008. For much of the period since then, it often seemed that an investment style that focused on buying and holding growth stocks - sometimes with little regard to valuation or how durable the growth would be - was all that was required. Now, we have a return to an investment environment in which an understanding of company fundamentals matters, as does an appreciation of how the valuation paid for a stock ultimately determines investment returns.

JAMES DE UPHAUGH / PORTFOLIO MANAGER CHRIS FIELD / DEPUTY PORTFOLIO MANAGER

26 MAY 2023

Portfolio Manager's Core Investment Beliefs

Our competitive edge rests on the combination of our Global Fundamental team's structure within Liontrust and our flexible investment style. Liontrust provides a stable environment in which our Portfolio Manager operates, and our investment approach produces portfolios that aim to deliver long-term outperformance on a repeatable basis.

ACTIVE MANAGEMENT

Stock-driven. Share prices follow fundamentals over the long term. Through our proven investment approach, we expect to outperform over the long term, net of fees.

High conviction portfolio. We expect the portfolio to contain around 40 to 50 stocks. Holdings sizes reflect the conviction we have in each company and our assessment of the upside and downside potential of its share price.

Risk. We think of risk as permanent capital loss. To mitigate this, our analysis of a company's valuation is the first line of defence. Our risk management process combines our depth of knowledge of the stocks in the portfolio, plus separate oversight by Liontrust's Portfolio Risk Committee.

FLEXIBLE INVESTMENT STYLE

Open-minded approach. We do not have dogmatic style biases, such as 'growth' or 'value'. We are also prepared to invest in companies that we identify as having scope for recovery through management change, business transformation or an improving business environment. We expect the profile of the portfolio to evolve depending on our assessment of individual companies and our reading of the economic and market background.

Disciplined, rigorous, fundamental research. In keeping with the stock-driven nature of the portfolio, approximately three quarters of our effort takes the form of in-depth stock research. The remainder is spent on macroeconomic and geopolitical analysis.

Full Environmental, Social and Governance ('ESG') integration. ESG-related considerations have financial implications for the portfolio's holdings. We prioritise and engage our holdings on their key, material issues, many of which are ESG-related. The outcomes from our in-depth analysis and engagements help form our conviction level and investment decisions. In this way, ESG lies at the heart of our investment process.

TOTAL RETURN STRATEGY

A focus on both capital growth and income. We take a total return approach: investor returns should derive over the long term from both capital appreciation and dividend income. We often prefer companies with organic investment opportunities: as such, we normally expect companies with growing profits - and share prices - to contribute to returns. We view income as an important component rather than the primary driver of investment return. This aligns with the Company's twin objectives.

LONG TERM

Typical holding period of 3-5 years. This is an appropriate period to ensure that underlying corporate fundamentals drive investment returns. It is therefore also a sensible period over which to measure an active manager.

Gearing should enhance shareholder returns. One of the advantages of an investment trust is the ability to borrow to enhance equity returns. We therefore expect gearing to boost investment returns over time.

CAPACITY MANAGEMENT

Scale diseconomies. In our view, investment performance can rapidly suffer if assets under management become too large. We carefully manage capacity to ensure that the interests of existing clients take precedence over new clients. The approach ensures we retain a size advantage. It enables us to reposition the portfolio - and those of all our other clients - quickly and efficiently when required.

DEEP INVESTMENT RESOURCE WITH GLOBAL PERSPECTIVE

A close-knit investment team. Average experience for each member of the team is 15 years. The team has been stress‑tested across various market cycles.

Challenge and debate. This is encouraged within a structured risk control environment, with robust oversight processes. Team members own Liontrust equity and co-invest in the team's investment strategies, which in turn underpins teamwork and collaboration.

Business Review

STRATEGY AND BUSINESS MODEL

The Edinburgh Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders.

The business model the Company has adopted to achieve its investment objective has been to contract the services of the Manager to manage and administer the portfolio in accordance with the Board's strategy and under its oversight. The portfolio manager with individual responsibility for the day-to-day management of the portfolio is James de Uphaugh and the deputy portfolio manager is Chris Field.

In addition, the Company has contractual arrangements with Link Group to act as registrar, The Bank of New York Mellon (International) Limited as depositary and custodian, and Apex Listed Companies Services (UK) Limited, (formerly Sanne Fund Services (UK) Limited) to act as Company Secretary.

INVESTMENT OBJECTIVE AND POLICY

Investment Objective

The Company invests primarily in UK securities with the long-term objective of achieving:

1. an increase of the Net Asset Value per share in excess of the growth in the FTSE All-Share Index; and

2. growth in dividends per share in excess of the rate of UK inflation.

Investment Policy

The Company will generally invest in companies quoted on a recognised stock exchange in the UK. The Company may also invest up to 20% of the market value of the Company's investment portfolio, measured at the time of any acquisition, in securities listed on stock exchanges outside the UK. The portfolio is selected by the Portfolio Manager on the basis of its assessment of the fundamental value available in individual securities. Whilst the Company's overall exposure to individual securities is monitored carefully by the Board, the portfolio is not primarily structured on the basis of industry weightings. No acquisition may be made which would result in a holding being greater than 10% of the market value of the Company's investment portfolio. Similarly, the Company may not hold more than 5% of the issued share capital (or voting shares) in any one company. Investment in convertibles is subject to normal security limits. Should these or any other limit be exceeded by subsequent market movement, each resulting position is specifically reviewed by the Board.

The Company may borrow money to provide gearing to the equity portfolio of up to 25% of net assets.

Use of derivative instruments is monitored carefully by the Board and permitted within the following constraints: the writing of covered calls against securities which in aggregate amount to no more than 10% of the value of the portfolio and the investment in FTSE 100 futures which when exercised would equate to no more than 15% of the value of the portfolio. Other derivative instruments may be employed, subject to prior Board approval, provided that the cost (and potential liability) of exercise of all outstanding derivative positions at any time should not exceed 25% of the value of the portfolio at that time. The Company may hedge exposure to changes in foreign currency rates in respect of its overseas investments.

RESULTS AND DIVIDENDS

At the year end the share price was 660.0p per ordinary share (2022: 634.00p). The net asset value (debt at fair value) per ordinary share was 713.73p (2022: 686.69p).

The Directors declared a third interim dividend for the year ended 31 March 2023 of 6.70 pence per ordinary share (2022: 6.40 pence), an increase of 4.7% compared with each of the first two interim dividends. This dividend is payable on 26 May 2023 to ordinary shareholders on the register on 5 May 2023. The shares were quoted ex-divided on 4 May 2023.

The Board is recommending a final dividend of 6.70p per share which is the same as the third interim dividend declared last month, implying a full year payout of 26.20 pence per share. This represents an increase of 5.6% compared with the total underlying ordinary dividends paid for the financial year to 31 March 2022.

PERFORMANCE

The Board reviews the Company's performance by reference to a number of key performance indicators (KPIs) which are shown on page 2. Notwithstanding that some KPIs are beyond its control, they are measures of the Company's absolute and relative performance. The KPIs assist in managing performance and compliance and are reviewed by the Board at each meeting.

The Chair's Statement on pages 5 to 7 gives a commentary on the performance of the Company during the year, the gearing and the dividend.

The Board reviews an analysis of expenditure at each Board meeting, and the Audit and Management Engagement Committees formally review the fees payable to the main service providers, including the Manager, on an annual basis. The ongoing charges figure is calculated in accordance with the AIC methodology and is reviewed by the Board annually in comparison to peers.

The Board also regularly reviews the performance of the Company in relation to the 23 investment trusts in the UK Equity Income sector (including the Company). As at 31 March 2023 the Company was ranked 2nd by NAV performance in this sector over one year, 5th over three years and 10th over five years (source: Morningstar).

OUTLOOK, INCLUDING THE FUTURE OF THE COMPANY

The main trends and factors likely to affect the future development, performance and position of the Company's business can be found in the Portfolio Manager's Report. Details of the principal risks affecting the Company can be found on pages 18 to 21.

FINANCIAL POSITION AND BORROWINGS

The Company's balance sheet on page 58 shows the assets and liabilities at the year end. Borrowings at the year end comprised of £120 million of Unsecured Senior Loan Notes (2022: £20 million and £100m Debenture).

PERFORMANCE ATTRIBUTION

(1) Source: Refinitiv.

Performance Attribution - analyses the performance of the Company relative to its benchmark index. The Analysis of Relative Performance estimate the quantum of relative performance that is attributable to each of the factors set out in this table. The table is intended to be indicative rather than precise; the accuracy of each estimate is determined by a variety of factors such as the volatility of investment returns over the year and intra-month, and the timing of income receipts and expenditure payments.

Relative performance - represents the arithmetic difference between the NAV and benchmark returns.

Portfolio total return - represents the return of the holdings in the portfolio including transaction costs, cash and income received, but excluding expenses incurred by the Company.

Net gearing effect - measures the impact of the unsecured senior loan notes and cash on the Company's relative performance. This will be positive if the portfolio has positive capital performance, total return is positive and negative if capital performance total return is negative.

Interest - the debenture stock, unsecured senior loan notes and bank facility interest paid has a negative impact on performance.

Market value movement - represents the change in market value of the Company's borrowings, measured to the end of the financial year or maturity from the start of the financial year or issuance, each as appropriate.

Management fee - the base fee reduces the Company's net assets and decreases returns.

Other expenses and tax - reduce the level of assets and therefore result in a negative effect on relative performance.

Share buybacks - measures the effect of ordinary shares bought back at a discount to net asset value on the Company's relative performance.

Investments in Order of Valuation

At 31 March 2023

UK LISTED ORDINARY SHARES UNLESS OTHERWISE STATED

S - Delisted

UQ - Unquoted investment

Principal Risks and Uncertainties

RISK MANAGEMENT AND MITIGATION

The Manager (AIFM) is responsible for the portfolio management of the Company and for exercising the risk management function in respect of the Company. As part of this risk management function, the AIFM maintains a register of identified risks including emerging risks likely to impact the Company. This is updated regularly, following discussions with the Manager and highlighted to the Board.

The Board, through the Audit Committee and with the assistance of the Manager, regularly reviews a report of potential risks to the Company in the form of a risk control summary. The document includes a description of each identified risk, the mitigating action taken, reporting and disclosure to the Board and an impact and probability risk rating. The rating is given both prior to and after the Board's mitigation of each risk. The information is then displayed in matrix form which allows the Board to identify the Company's key risks. As the changing risk environment in which the Company operates has evolved, the total number of risks has fluctuated, with certain risks having been removed and new risks added with emerging risks actively discussed as part of this process and, so far as practicable, mitigated.

The composition of the Board is regularly reviewed to ensure its members offer sufficient knowledge and experience to assess, anticipate and mitigate these risks, as far as possible.

The Company's key long-term investment objectives are an increase in the net asset value per share in excess of the growth in the FTSE All-Share Index (the 'benchmark') and an increase in dividends in excess of the annual rate of UK inflation. The principal risks and uncertainties facing the Company are an integral consideration when assessing the operations in place to meet these objectives, including the performance of the portfolio, share price and dividends. The Board is ultimately responsible for the risk control systems but the day-to-day operation and monitoring are delegated to the Manager. The Board has carried out a robust assessment of the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The following sets out a description of the principal and emerging risks and how they are being managed or mitigated.

MARKET RISK

A great majority of the Company's investments are traded on recognised stock exchanges. The principal risk for investors in the Company is a significant fall and/or a prolonged period of decline in those markets. The Company's investments and the income derived from them are influenced by many factors such as general economic conditions, interest rates, inflation, a recurrence of a pandemic, geopolitical events, the war in Ukraine and government policies as well as by supply and demand reflecting investor sentiment. Such factors are outside the control of the Board and Manager and may give rise to high levels of volatility in the prices of investments held by the Company. The asset value and price of the Company's shares and its earnings and dividends may consequently also experience volatility and may decline.

Fluctuations in interest rates and exchange rates could reduce returns and lead to depreciation of the Company's net asset value.

Market risk is included in the risk control summary report that is prepared by the Manager and reviewed by the Board at each meeting. Additionally, the Board receives reports on the performance of the portfolio at each meeting. The portfolio is positioned by the Manager for medium to long-term returns.

INVESTMENT PERFORMANCE RISK

The Board sets investment policy and risk guidelines, together with investment limits, and monitors adherence to these at each Board meeting. All individual investment decisions are delegated to the Portfolio Manager. The Portfolio Manager's approach is to construct a portfolio which should benefit from expected future trends in the UK and global economies. The Portfolio Manager is a long-term investor, prepared to take substantial positions in securities and sectors across a range of different types of stock. This reflects the Portfolio Manager's high conviction, stock-driven investment process and total return approach. Strategy, asset allocation and stock selection decisions by the Portfolio Manager can lead to underperformance of the portfolio relative to the benchmark and/or income targets.

The Portfolio Manager's style may result in a concentrated portfolio with significant overweight or underweight positions in individual stocks or sectors compared to the index and consequently, the Company's performance may deviate significantly, possibly for extended periods, from that of the benchmark. In a similar way, the Portfolio Manager manages other portfolios holding many of the same stocks as the Company which reflects the Portfolio Manager's high conviction style of investment management. This could increase the liquidity and price risk of certain stocks under certain scenarios and market conditions. However, the Board and Portfolio Manager believe that the investment process and policy outlined above should, over the long term, meet the Company's objectives of Net Asset Value per share growth in excess of the benchmark and real dividend per share growth. Investment selection is delegated to the Portfolio Manager. The Board does not specify asset allocations. Information on the Company's performance against the benchmark and peer group is provided to the Board at each Board meeting. The Board uses this to review the performance of the Company, taking into account how performance relates to the Company's objectives. The Portfolio Manager is responsible for monitoring the portfolio selected and seeks to ensure that individual stocks meet an acceptable risk-reward profile.

As described in the investment policy, derivatives may be used provided that the market exposure arising is less than 25% of the value of the portfolio.

Investment Performance risk is included in the risk control summary report that is prepared by the Manager and reviewed by the Board at each meeting. The Board also receives reports on the performance of the portfolio and on compliance with the Company's investment policy guidelines from the Manager at each meeting. As part of the annual assessment, the Board reviews the performance of the Manager and the management contract at the Management Engagement Committee meeting.

The Board also reviews the annual depository report and report from the compliance department of the Manager and any breaches of the investment policy, limits or guidelines are reported immediately to the Board and Audit Committee Chairs.

Investment risk is increased through the Company's borrowing, namely the £120m Unsecured Senior Loan Notes. This facilitates additional investment exposure than would be the case for an unleveraged portfolio; if the investments fall in value, this will increase the adverse impact on performance. On a routine basis the Board monitors the appropriateness of gross and net gearing levels, and the amount of headroom above minimum NAV levels as agreed with the lenders.

INCOME/DIVIDEND RISK

The Company is subject to the risk that income generation from its investments fails to reach the level of income required to meet its objectives.

The Board monitors this risk through the review of detailed income and dividend forecasts and comparison against budget. These are contained within the Board papers and the Board considers the level of income at each meeting. Revenue estimates are presented at each Board meeting and Board committee meeting which determine the three interim dividends and propose the final dividend.

The Board also takes into account the size of the Company's accumulated income and capital reserves which can be used to supplement dividends for a period where income levels alone do not cover the proposed dividend payments.

SHARE PRICE RISK

There is a risk that the Company's prospects and NAV may not be fully reflected in the share price from time-to-time and that the Company's objectives are no longer meeting investors' expectations.

The share price is monitored on a daily basis and, at the request of the Board, the Company is empowered to repurchase shares within agreed parameters which are regularly reviewed with the Company's broker. The discount at which the shares trade to NAV can be influenced by share repurchases. During the year, the Company repurchased 5,601,604 shares for holding in treasury (2022: 1,104,800).

Risk management activity includes systematic reviews of the investment objective and investment strategy and regular dialogue with major shareholders and marketing activities.

Share price risk is included in the risk control summary report that is prepared by the Manager and reviewed by the Board at each meeting. In addition, the Board monitors the Company's investment performance against its stated objectives and peer group and reviews the marketing report at every Board meeting.

CORPORATE GOVERNANCE AND INTERNAL CONTROLS RISK

The Board has delegated to third-party service providers the management of the investment portfolio, depositary and custody services (which include the safeguarding of the assets), registration services, accounting and company secretarial services.

The principal risks arising from the above contracts relate to the performance of the Manager, the performance of administrative, registration, depositary, custodial and banking services, and the failure of information technology systems used by third-party service providers. These risk areas could lead to the loss or impairment of the Company's assets, inadequate returns to shareholders and loss of investment trust status. Consequently, in respect of these activities the Company is dependent on the Manager's control systems and those of its administrator, depositary, custodian and registrar.

An annual review of the control environments of all service providers is carried out by the Company Secretary who provides an assessment of these risks and the operation of the controls for consideration by the Audit Committee and is formally reported to and considered by the Board.

Investment trust status is assessed by the Manager, reviewed at every Board meeting and confirmed by the Audit Committee and HMRC annually. Taxation matters are dealt with by independent accountants.

RELIANCE ON THE MANAGER AND OTHER THIRD-PARTY PROVIDERS RISK

The Company is reliant upon the performance of third-party service providers for its executive function and other service provisions. The Company's most significant contract is with the Manager, to whom responsibility for the management of the Company's portfolio is delegated. The Company has other contractual arrangements with third parties to act as administrator, company secretary, registrar, depositary and broker. The Company's operational structure means that all cyber risk (information and physical security) arises at its third-party service providers, including fraud, sabotage or crime against the Company. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to pursue successfully its investment policy and expose the Company to risk of loss or to reputational risk.

In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.

The Board seeks to manage these risks in a number of ways:

- The Company Secretary reviews the performance and the service organisation control reports of third-party service providers and reports to the Board on an annual basis at the Audit Committee meeting.

- The Board reviews the performance of the Manager at every Board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.

- The day-to-day management of the portfolio is the responsibility of the named Portfolio Manager, James de Uphaugh, Head of the Liontrust Global Fundamental team. James joined Liontrust in April 2022 as part of the acquisition of Majedie Asset Management Limited where he was Chief Investment Officer. He is a Fund Manager and Analyst with 34 years' investment experience in UK and international equity markets. James is responsible for co-managing the UK Equity Fund of Liontrust and managing The Edinburgh Investment Trust plc.

- The risk that the Portfolio Manager might be incapacitated or otherwise unavailable is mitigated by the fact that he works within, and is supported by, the wider Liontrust team. Moreover, Chris Field, as Deputy Portfolio Manager, would be able to manage the portfolio if James de Uphaugh was unable to do so for any reason.

- The Board has set guidelines within which the Portfolio Manager is permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and compliance with the guidelines and the guidelines themselves are reviewed at every Board meeting.

PHYSICAL AND TRANSITIONAL CLIMATE CHANGE

Globally, climate change effects are already emerging in the form of changing weather patterns. Extreme weather events could potentially impair the operations of individual investee companies, potential investee companies, their supply chains and their customers. Legislative changes are driving an economic adjustment towards a low-carbon economy. There are considerable risks to the value, business model and operations of investee and potential investee companies due to stranded assets and how investors, financial regulators and policymakers respond to climate concerns. The Portfolio Manager takes such risks into account, along with the downside risk to any company - whether in the form of its business prospects, market valuation or sustainability of dividends - that is perceived to be making a detrimental contribution to climate change. Further details on the Portfolio Manager's process for considering climate risk relating to each portfolio holding are supplied in the s.172 statement on page 23. The Company invests in a broad portfolio of businesses with operations spread geographically, which should limit the impact of location-specific weather events.

Climate change related risks are regularly monitored by the Manager and reviewed by the Board at every meeting as required, together with any new guidance.

OTHER RISKS

The Company is subject to laws and regulations by virtue of its status as an investment trust and is required to comply with certain regulatory requirements that are applicable to listed closed-ended investment companies. The Company is subject to the continuing obligations imposed by the UK Listing Authority on all companies whose shares are listed on the Official List.

The Manager reviews compliance with investment trust tax conditions and other financial and regulatory requirements on a daily basis with any issues being immediately brought to the attention of the Board.

The Company may be exposed to other business, strategic and political risks in the future, as well as regulatory risks (such as an adverse change in the tax treatment of investment companies), credit, liquidity and concentration risks. The risk control summary report allows the Board to consider all these risks, the measures in place to control them and the possibility of any other risks that could arise.

The Board ensures that satisfactory assurances are received from the service providers. The Manager's compliance officers produce regular reports for review by the Company's Audit Committee.

Additionally, the depositary monitors stock, cash, borrowings and investment restrictions throughout the year. The depositary reports formally once a year and also has access to the Company Chair and the Audit Committee Chair if needed during the year.

Please see note 16 on page 70 to read more about risk management and financial instruments.

EMERGING RISKS

The Board has put in place robust procedures to assist with identifying emerging risks that arise from existing risks or from new situations. The Board is kept informed through its advisors and Manager regarding any political, economic, legal or regulatory changes that it is anticipated may significantly affect the Company.

For example, there are currently a growing number of risks as a result of emerging geopolitical factors that may translate into greater stock market risk, as well as heightened macro-economic changes in inflation, interest rates and energy costs, the ever-evolving global regulatory and trade environments and a risk of re-emergence of a global pandemic. Geopolitical factors include the war in Ukraine, Scottish independence and global supply chain issues . Whilst these risks currently exist, their extent and long-term impact are yet to emerge but they are regularly assessed by the Manager and the Board.

Viability Statement

The Directors' view of the Company's viability has not changed since last year. The Company, as an investment trust, is a collective investment vehicle rather than a commercial business venture and is designed and managed for long‑term investment. The Company's investment objective clearly sets this out. 'Long-term' for this purpose is considered by the Directors to be at least five years, a timeframe in which the accuracy of estimates and assumptions is deemed to be reasonable. The Company's viability has thus been assessed over that period. Five years is considered a reasonable time frame for a forecast, however, the life of the Company is not intended to be limited to that or any other period.

There are no current plans to amend the investment strategy, which has delivered long-term good investment performance above or in line with benchmark for shareholders and, the Directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.

In assessing the viability of the Company under various scenarios, the Directors undertook a robust assessment of the risks to which it is exposed (including the issues arising from the COVID-19 pandemic, Russia's invasion of Ukraine and climate change), as set out on page 18 together with mitigating factors. The risks of failure to meet the Company's investment objective, and contributory market and investment risks, were considered to be of particular importance. The Directors also took into account: the investment capabilities of the portfolio manager; the liquidity of the portfolio, with nearly all investments being listed and readily realisable; the Company's borrowings as considered in further detail in the Going Concern Statement on page 41; the ability of the Company to meet its liabilities as they fall due; the Company's annual operating costs and that, as a closed ended investment trust, the Company is not affected by the liquidity issues of open- ended companies caused by large or unexpected redemptions.

In taking account of these factors and on reviews conducted as part of the detailed internal controls and risk management processes set out on page 40, the Directors have undertaken a reverse stress test seeking to identify the financial circumstances that might result in the Company becoming unviable. This concluded that the viability of the Company may start to be challenged if the value of Total Shareholders Funds were to fall permanently by approximately 80% from the level at the year end, a fall that the Board considers to be near implausible having noted that since the inception of the Company's All-Share Index Total Return benchmark in December 1985, the largest fall over any calendar year has been 29.9%, the largest fall over any rolling five year period was 28.8% and the largest fall over any period was 42.9% (all based on benchmark calendar month end values).

Based on the above, and assuming there is no adverse change to the regulatory environment and tax treatment of UK investment trusts to the extent that would challenge the viability of the UK investment trust industry as a whole, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of assessment.

Section 172 Statement, Company Sustainability and Stakeholders

BOARD RESPONSIBILITIES

The responsibilities of the Board include setting the Company's strategic aims, providing the leadership to put them into effect, supervising the Manager and reporting to shareholders on their stewardship. The Board is ultimately responsible for the direction, management, performance and long-term sustainable success of the Company.

The Board sets the Company's strategy and objectives, taking into account the interests of all its stakeholders. However, the Company has no employees and no customers in the traditional sense. Consistent with the Company's nature as an investment trust, the Board's principal concern has been, and continues to be, the interests of the Company's shareholders taken as a whole.

COMPANY SUSTAINABILITY AND STAKEHOLDERS

A good understanding of the Company's stakeholders enables the Board to consider the potential impact of strategic decisions on each stakeholder group during the decision‑making process. By considering the Company's purpose, vision and values, together with its strategic priorities, the Board aims for its decisions to be fair and take account of the interests of the key stakeholder groups. As an externally managed investment company, the Company does not have any employees. The Board considers its main stakeholders to be its shareholders, service providers, investee companies and the Manager.

SECTION 172 STATEMENT

During the year under review, the Board believes that it has acted in good faith and discharged its duties under Section 172 of the Companies Act 2006 to promote the success of the Company for the benefit of its members as a whole and having regard to the interest of stakeholders and the factors set out in s172. The Board performed its role as outlined in the schedule of matters reserved for the Board and taking into account the interest of the key stakeholders during the decision-making process.

The following sections include examples of how the Company's stakeholders were considered during the key Board decisions. Key Board decisions include payment of dividends, liquidity management via share issuance and buy‑backs, marketing, performance evaluation, negotiation on debt and re-appointment of the Investment Manager and other key service providers, ESG integration into investment decisions and Board succession planning. Please see the table below for a reference to where this information can be found:

ENGAGEMENT WITH SHAREHOLDERS

Shareholder relations are given high priority by both the Board and the Manager and the Board welcomes feedback from shareholders throughout the year. The prime medium by which the Company communicates with shareholders is through the half-yearly and annual financial reports, which aim to provide shareholders with a full understanding of the Company's activities and results. This information is supplemented by the daily publication of the net asset value, monthly factsheets as well as dividend and other announcements.

Feedback from shareholders forms part of the discussion at all Board meetings and at the Board's annual strategy meeting which involves consideration of how the Company is meeting shareholder expectations.

Shareholders can also visit the Company's website www.edinburgh-investment-trust.co.uk in order to access copies of the annual and half-yearly financial reports, pre-investment information, Key Information Documents (KIDs), proxy voting results, factsheets and stock exchange announcements. The Company's website also hosts videos and other applicable written materials by the Manager to enhance the information available. Shareholders can send their questions using a dedicated section of the Company's website.

Typically, at each AGM, a presentation is made by the Manager following the formal business of the meeting and shareholders have the opportunity to attend, vote and most importantly to communicate directly with the Manager and Board. Presentations to both institutional shareholders and analysts also follow the publication of the annual results. The Company held a physical AGM with virtual attendance on 21 July 2022 which allowed shareholders to join via a live weblink and to submit questions during the meeting. In addition to the AGM and presentations, the Board and Manager hosted a shareholder event in London on 22 September 2022. The Chair uses these events to lead the Company's engagement with its shareholders. Please see page 77 for the notice of 2023 Annual General Meeting and page 7 for details of the 2023 shareholder event.

Regular dialogue is maintained between the Manager and major institutional shareholders throughout the year to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop an understanding of their issues and concerns. All meetings between the Manager and shareholders are reported to the Board.

There is a clear channel of communication between the Board and the Company's Shareholders via the Company Secretary. The Company Secretary passes to the Chair all correspondence addressed to the Board of the Company.

The strategy of the Company is reviewed by the Board on an annual basis. At the strategy day in September 2022 the Board discussed discount management, marketing and board recruitment. Whilst feedback from shareholders is sought regularly, shareholders' feedback provided by the Company's Broker and Manager is a major consideration at this meeting.

ENGAGEMENT WITH THE MANAGER

The Board has regular dialogue with and reports from the Manager on the portfolio of investments, including performance against set objectives and risk management and the Manager attends each Board meeting to provide updates and answer questions from the Board. The Board has also discussed the AIFM's responsibility under the Consumer Duty Act with the Manager and received comfort as to how those responsibilities will be met.

ENGAGEMENT WITH SERVICE PROVIDERS

As an externally managed investment trust, the Company conducts all its business through its key service providers. The Board believes that maintaining a collaborative relationship with each of the Company's service providers Is essential to the Board's decision-making and the ongoing success of the Company. At least annually the Board reviews the performance and services of its key service providers including the Manager and receives and considers the internal control reports on a quarterly basis covering their operations, policies and control environments.

The Board reviews the quarterly reports of the service providers and whether the services meet the requirements of the Company, represent value for money and are therefore in the best interests of shareholders. We expect to conduct ourselves fairly with all service providers, to maintain a reputation as a trusted, fair and reliable partner. The Board and/or delegates of the Board engage with key providers on a periodic basis through service review meetings or, by invitation, attendance at Board or committee meetings. Such engagement gives opportunity to both parties to discuss any challenges being experienced and potential solutions thereon, and to identify planned developments at the Company or the service provider. We aim to pay promptly and if in dispute, to engage openly to resolve matters in a timely manner.

Following the COVID-19 pandemic, the Board continues to ensure that service providers are as prepared as possible for all such eventualities which could disrupt the performance of their respective functions.

ENGAGEMENT WITH INVESTEE COMPANIES

The Manager is a long-term investor and develops strong relationships with both investee and potential investee companies and reports their conversations back to the Board. Both the Board and the Manager believe that engagement with investee companies is positive, beneficial and welcomed.

Voting is a key activity in the dialogue with investee companies and these decisions are reported to the Board on a quarterly basis. Voting is undertaken by the same team that manages the portfolio assets rather than it being delegated to an independent third party.

The Board supports the Manager's approach to ESG in the context of its management of the portfolio, please see below on ESG matters and stewardship of investee companies.

ENVIRONMENTAL SOCIAL AND GOVERNANCE ("ESG") MATTERS

As an investment company with no employees, property or activities outside investment, environmental policy has limited application, yet the Board is committed to taking a responsible approach to ESG matters. The Company's compliance with the AIC Code of Corporate Governance is detailed in the Corporate Governance Statement on page 32, which demonstrates the Company's own responsibilities on matters such as governance.

In respect of the Company's investments, the Manager and the other members of the investment team integrate ESG risks and opportunities (including climate change related risks) as part of a material assessment undertaken for all holdings. Consistent with the Manager's investment approach, this analysis is undertaken on a bottom-up, stock basis. The risks and opportunities that each holding faces over a three-to-five-year period are then identified and prioritised. Many of these issues can be sub-categorised as "E", "S" and "G" issues. The issues that are identified as the key ones are at the forefront of engagement discussions on holdings with the investee companies. These frequently include issues related to global warming, including those focused on transitional risks, legislation risks, and/or physical risks. The Manager is a signatory to the Principles of Responsible Investment ('PRI'). Further information is available at www.liontrust.co.uk and through the investment company ESG disclosures at www.theaic.co.uk.

The Board recognises that the most material way in which the Company can have an impact is through responsible ownership of its investments. See below how the Manager engages with the management of investee companies to encourage that high standards of ESG practice are adopted.

The Company made no political donations during the year in review.

STEWARDSHIP CODE AND EXERCISE OF VOTING POWERS

The Board considers that the Company has a responsibility as a shareholder to ensure that high ESG standards are maintained in the companies in which it invests. One of the principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company aims to provide investment specific active stewardship and the Company's voting rights are exercised on an informed and independent basis. The Manager has adopted a clear and considered policy towards its stewardship responsibility on behalf of the Company. The Manager takes steps to satisfy itself about the extent to which investee companies protect shareholder value and comply with local recommendations and practices, such as the UK Corporate Governance Code. The Manager's approach to corporate governance and the UK Stewardship Code can be found on the Manager's website at www.liontrust.co.uk together with a copy of the Manager's Stewardship Policy and the Manager's global proxy voting policy.

Members of the Manager's investment team are responsible for overseeing all aspects of the Stewardship process, including voting on all resolutions at all Annual General Meetings and Extraordinary General Meetings in the UK and overseas. The Manager assesses corporate governance, remuneration policies and, if deemed necessary, will challenge management where it is felt that the best interests of shareholders are not being met.

The Board reviews the Manager's voting record at each meeting. The table below demonstrates how the Manager voted during the year in review. The Manager voted at all meetings, except for an unlisted legacy holding in Raven Property.

1 The large number of against votes relates to a policy of voting against UK Political Donations and Expenditure.

2 The term return on capital employed (ROCE) refers to a financial ratio that can be used to assess a company's profitability and capital efficiency.

The Managers' policy is to invest in well managed companies with robust ESG policies. The examples below demonstrate how the Manager voted on certain ESG issues and its rationale behind it.

- NatWest Group. Resolution summary: to re-elect Frank Dangeard as Director. The Manager voted against this proposal because, in addition to his role as NED of the Company, Frank Dangeard serves on the boards of three other publicly listed companies. Furthermore, he is the Chair of the Board in two of those companies. This could potentially compromise his ability to commit sufficient time to his role at NatWest Group. The outcome of the vote was that the resolution was passed, albeit with 20% of votes against. We will continue to engage with the management on this issue.

- RS Group. Resolution summary: to approve the company's remuneration policy. Although it was a contentious policy, with some third-party advisors recommending their clients to vote against it, the Manager supported the resolution. The Manager believe the CEO and Financial Director have done an outstanding job in reversing the fortunes of the company and positioning the business for long term success. It is important for the remuneration to be competitive. Moreover, the award targets are extremely stretching and have the strong underpinning of the 20% ROCE2 condition. The resolution was passed, albeit with over 39% of votes against.

- Shell Group. Resolution summary: this was a shareholder‑filed resolution, which requested Shell to set and publish targets for greenhouse gas (GHG) emissions. The Manager voted against this proposal as it was considered unnecessary, because a separate management-filed proposal at the same meeting, to approve the Shell energy transition progress update, showed good progress with the plan. The shareholder-filed resolution was therefore redundant as Shell had already disclosed those targets. The resolution was not passed, with 80% of votes against.

- Ashtead Group. Resolution summary: to approve the company's remuneration report. The Manager voted against this management proposal. This was because the actions taken by the Remuneration Committee in response to the significant levels of dissent recorded against the remuneration-related resolutions at the 2021 AGM were not considered sufficient to address the underlying concerns raised. The resolution was passed, with 33% of votes against the report. We will continue to engage with the management on this issue.

In addition, the Manager publishes an annual Responsible Capitalism report, providing cumulative voting statistics, full disclosure on voting policy and extracts of engagement for the year. The Manager publishes a quarterly voting record on its website www.liontrust.co.uk.

MODERN SLAVERY DISCLOSURE

The Company aims to adopt the highest standards of conduct and is committed to integrating responsible business practices throughout its operations. The prevention of modern slavery is an important part of corporate good governance.

The Company is an investment vehicle and does not provide goods or services in the normal course of its business or have customers or employees. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

ANTI-BRIBERY AND CORRUPTION

It is the Company's policy to conduct its business in an honest and ethical manner. The Company takes a zero‑tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company's policy and the procedures that implement it are designed to support that commitment.

PREVENTION OF THE FACILITATION OF TAX EVASION

The Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion.

GREENHOUSE GAS EMISSIONS AND STREAMLINED ENERGY AND CARBON REPORTING ('SECR')

The Company has no employees, physical assets, property or operations of its own, does not provide goods or services and does not have its own customers. It follows that the Company has little or no direct environmental impact. In consequence, the Company has limited greenhouse gas emissions to report from its operations aside from travel to board meetings, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. As the Company has no material operations and therefore has low energy usage, it has not included an energy and carbon report.

CONCLUSION

The Directors believe that they have fulfilled their duties under s172 of the Companies Act 2006 in their deliberations on all matters. The Board takes into account the interests of all the Company's key stakeholders, as outlined above, in its decision-making which reflects the Board's belief that the long-term sustainable success of the Company is linked directly to its key stakeholders. Work of the Board and its Committees is described in the Governance Report on pages 29 to 44.

This Strategic Report was approved by the Board on 26 May 2023

Signed by order of the Board of Directors

APEX LISTED COMPANIES SERVICES (UK) LIMITED / COMPANY SECRETARY / 26 MAY 2023.

Statement of Directors' Responsibilities

IN RESPECT OF THE PREPARATION OF THE ANNUAL FINANCIAL REPORT

The Directors are responsible for preparing the annual financial 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 they are required to prepare the financial statements in accordance with UK accounting standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.

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 its profit or loss for that period.

In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

- use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 its financial statements comply with the Companies Act 2006.

They are responsible for such internal controls as they determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, which is maintained by the Company's Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF THE ANNUAL FINANCIAL REPORT

We confirm that to the best of our knowledge:

- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

- 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 that it faces.

We consider the annual financial report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

Signed on behalf of the Board of Directors

ELISABETH STHEEMAN

CHAIR

26 MAY 2023

Income Statement

For the year ended 31 March

The total column of this statement represents the Company's income statement, prepared in accordance with UK Accounting Standards. The return/(loss) after taxation is the total comprehensive income/(expense) and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

The accompanying notes are an integral part of these financial statements.

Balance Sheet

At 31 March 2023

The financial statements on pages 57 to 75 were approved and authorised for issue by the Board of Directors on 26 May 2023.

ELISABETH STHEEMAN / CHAIR

Signed on behalf of the Board of Directors

The accompanying notes are an integral part of these financial statements.

Statement of Changes in Equity

For the year ended 31 March

1 The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.

2 Shares bought back and held in treasury includes transaction costs.

The accompanying notes are an integral part of these financial statements.

Cash Flow Statement

For the year ended 31 March

The accompanying notes are an integral part of these financial statements.

Notes to the Financial Statements

1. PRINCIPAL ACCOUNTING POLICIES

Accounting policies describe the Company's approach to recognising and measuring transactions during the year and the position of the Company at the year end.

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied during the year and the preceding year.

A. Basis of Preparation

Accounting Standards Applied

The financial statements have been prepared in accordance with the Companies Act 2006, applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) including FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies (SORP) in April 2021 (as amended in July 2022).

The financial statements are issued on a going concern basis. Details of the Directors' assessment of the going concern status of the Company, which considered the adequacy of the Company's resources and the impacts of the COVID-19 pandemic, are given on page 41.

As an investment fund the Company has the option not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a Statement of Changes in Equity is provided: all of which are satisfied.

However the Directors' have elected to present a cash flow statement in the annual financial report to present additional relevant information to readers of the financial statements.

Significant Accounting Estimates, Assumptions and Judgements

The preparation of the financial statements may require the use of estimates, assumptions and judgements which may affect the reported amounts of assets and liabilities at the reporting date. While estimates are based on best judgement using information and financial data available the actual outcome may differ from these estimates. The Directors have applied their judgement for the allocation of the investment management fee and finance costs between capital and revenue in the income statement as set out in Note 1G and the treatment of special dividend income between capital and income, as set out in Note 1J. The Directors do not believe that these judgements nor any accounting estimates, assumptions or judgements that have been applied to the financial statements have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year.

B. Foreign Currency and Segmental Reporting

(i) Functional and presentational currency

The financial statements are presented in sterling, which is the Company's functional and presentational currency and the currency in which the Company's share capital and expenses, as well as its assets and liabilities, are denominated.

(ii) Transactions and balances

Transactions in foreign currency, whether of a revenue or capital nature, are translated to sterling at the rates of exchange ruling on the dates of such transactions. Foreign currency assets and liabilities are translated to sterling at the rates of exchange ruling at the balance sheet date. Any gains or losses, whether realised or unrealised, are taken to the capital reserve or to the revenue account, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.

(iii) Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business of investing in equity and debt securities, issued by companies quoted mainly on the UK or other recognised stock exchanges.

C. Financial Instruments

The Company has chosen to apply Section 11 and 12 of FRS102 in full in respect of the financial instruments.

(i) Recognition of financial assets and financial liabilities

The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and intends to settle on a net basis.

(ii) Derecognition of financial assets

The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in the transferred financial asset that is created or retained by the Company is recognised as an asset.

(iii) Derecognition of financial liabilities

The Company derecognises financial liabilities when its obligations are discharged, cancelled or have expired.

(iv) Trade date accounting

Purchases and sales of financial assets are recognised on trade date, being the date on which the Company commits to purchase or sell the assets.

(v) Classification and measurement of financial assets and financial liabilities

- Financial assets

The Company's investments are classified as held at fair value through profit or loss.

Financial assets held at fair value through profit or loss are initially recognized as fair value, which is taken to be their acquisition price, with transaction costs expensed in the income statement. These are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. Fair value for investments that are actively traded but where active stock exchange quoted bid prices are not available is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Unquoted, unlisted or illiquid investments are valued by the Directors at fair value using a variety of valuation techniques including earnings multiples, recent transactions and other market indicators, cash flows and net assets.

- Financial liabilities

Financial liabilities, including borrowings, are initially measured at transaction price, being the fair value. For liabilities issued at a discount or with significant associated transaction costs, such discount and costs are subsequently measured at amortised cost using the effective interest method.

D. Cash and Cash Equivalents

Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria: short term in duration (typically three months or less from the date of acquisition), highly liquid investments that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.

E. Hedging

Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are recognised in the income statement and taken to capital reserves.

F. Income

Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Dividend income arises from equity investments held and is recognised on the date investments are marked 'ex-dividend'. Special dividends are looked at individually to ascertain the reason behind the payment. This will determine whether they are treated as income or capital in the income statement.

Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

G. Expenses and Finance Costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method in the income statement.

The investment management fee and finance costs are allocated 70% to capital and 30% to revenue. This is in accordance with the Board's expected long-term split of returns, in the form of capital gains and income respectively, from the portfolio. Transaction costs are recognised as capital in the income statement. All other expenses are allocated to revenue in the income statement.

H. Taxation

The liability to corporation tax is based on net revenue for the year, excluding non-taxable dividends. The tax charge is allocated between the revenue and capital account on the marginal basis whereby revenue expenses are matched first against taxable income in the revenue account.

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more tax or a right to pay less tax in the future have occurred. Timing differences are differences between the Company's taxable profits and its results as stated in the financial statements. Deferred taxation assets are recognised where, in the opinion of the Directors, it is more likely than not that these amounts will be realised in future periods.

A deferred tax asset is only recognised in respect of surplus management expenses, losses on loan relationships and eligible unrelieved foreign tax to the extent that it is probable that the Company will be able to recover them from future taxable revenue.

I. Dividends Payable

Dividends are not recognised in the financial statements unless there is an obligation to pay at the balance sheet date. Proposed dividends are recognised in the year in which they are paid to shareholders.

J. Critical accounting estimates and judgements

No critical accounting judgements or estimates were made during the year.

K. Accounting for reserves

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.

The revenue reserve shows the net revenue retained after payment of any dividends. The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.

L. Shares repurchased and held in treasury

The cost of repurchasing ordinary shares (for cancellation or to hold in treasury) including the related stamp duty and transaction cost is charged to the capital reserve and dealt with in the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis. Where shares are cancelled (or are subsequently cancelled having previously been held in treasury), the nominal value of those shares is transferred out of Called up share capital and into the Capital redemption reserve. Should shares held in treasury be reissued, the sales proceeds will be treated as a realised capital profit up to the amount of the purchase price of those shares and will be transferred to capital reserves. The excess of the sales proceeds over the purchase price will be transferred to Share premium.

2. INCOME

This note shows the income generated from the portfolio (investment assets) of the Company and income received from any other source.

No special dividends have been recognised in capital during the year (2022: £10,036,000).

3. INVESTMENT MANAGEMENT FEE

This note shows the fee due to the Manager. This is calculated and paid monthly.

Details of the investment management agreement is disclosed on page 41 in the Directors' Report. At 31 March 2023 investment management fees of £429,000 (2022: £427,000) were accrued.

4. OTHER EXPENSES

The other expenses(i) of the Company are presented below, those paid to the Directors and the auditors are separately identified.

The maximum Directors' fees authorised by the Articles of Association are £250,000 per annum.

(i) Other expenses include:

- £18,000 (2022: £17,000) of employer's National Insurance payable on Directors' remuneration. As at 31 March 2023, the amounts outstanding on Directors' remuneration and employer's National Insurance was £64,000 (2022: £nil); and

- custodian transaction charges of £7,000 (2022: £9,000). These are charged to capital.

(ii) There were seven directors for a period during the year and the Director's Remuneration Report on page 45 provides further information on Directors' fees.

(iii) Auditor's fees include expenses but exclude VAT.

5. FINANCE COSTS

Finance costs arise on any borrowing facilities the Company has used. Borrowing facilities are the £120m notes (2022 £100m debenture stock, £20m notes and a £25m bank revolving credit facility). Please see note 12 for additional details of the Unsecured Senior Loan Note terms.

6. TAXATION AND TOTAL RETURN ON ORDINARY ACTIVITIES

As an investment trust the Company pays no tax on capital gains. As the Company invests principally in UK equities, it has little overseas tax and the overseas tax charge is the result of withholding tax deducted at source. This note also clarifies the basis for the Company having no deferred tax asset or liability.

(a) Tax charge

(b) Reconciliation of tax charge

(c) Deferred tax

Owing to the Company's status as an investment company, and the Directors' intention that it continues to meet the conditions required to maintain that approval in the foreseeable future, no deferred tax has been provided on any capital gains and losses arising on the revaluation or disposal of investments.

(d) Factors that may affect future tax changes

The Company has cumulative excess management expenses of £502,750,000 (2022: £491,547,000) that are available to offset future taxable revenue.

A deferred tax asset of £125,687,483 (2022: £122,886,688) at 25% (2022: 25%) has not been recognised in respect of these expenses since the Directors believe that there will be no taxable profits in the future against which deferred tax assets can be offset.

7. RETURN/(LOSS) PER ORDINARY SHARE

Return per share is the amount of gain generated for the financial year divided by the weighted average number of ordinary shares in issue.

The basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation and on 168,985,796 (2022: 172,100,486) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

8. DIVIDENDS ON ORDINARY SHARES

Dividends represent the distribution of income to shareholders. The Company pays four dividends a year - three interims and one final dividend.

The proposed final dividend is subject to approval by ordinary shareholders at the AGM.

9. INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT AND LOSS

The portfolio comprises investments which are principally listed on a regulated stock exchange or traded on AIM. A very small proportion of investments are valued by the Directors as they are unlisted.

Gains or losses are either:

- realised, usually arising when investments are sold; or

- unrealised, being the difference from cost on those investments still held at the year end.

(a) Analysis of investments by listing status

(b) Analysis of investment gains:

The Company received £250,823,000 (2022: £461,781,000) from investments sold in the year. The book cost of these investments when they were purchased was £261,072,000 (2022: £405,848,000) realising a loss of £10,249,000 (2022: gain of £55,933,000). These investments have been revalued over time and until they were sold any unrealised profits/losses were included in the fair value of the investments.

The transaction costs included in gains on investments amount to £1,162,000 (2022: £1,698,000) on purchases and £99,000 (2022: £152,000) for sales.

10. DEBTORS

Debtors are amounts which are due to the Company, such as monies due from brokers for investments sold and income which has been earned (accrued) but not yet received.

11. OTHER PAYABLES: AMOUNTS FALLING DUE WITHIN ONE YEAR

Creditors are amounts which must be paid by the Company and are split between those payable within 12 months of the balance sheet date and those payable after that time. The main creditors have historically been the debenture and bank borrowings. The other creditors include any amounts due to brokers for the purchase of investments, amounts owing on share buy backs awaiting settlement or amounts owed to suppliers (accruals) such as the Manager and auditors.

The debenture was redeemed at par on 30 September 2022.

The effect on the net asset value of deducting the debenture stock at fair value, rather than at par, is disclosed in the Alternative Performance Measures on page 85.

As at 31 March 2022 the Company had a 364 day committed revolving credit facility (the 'bank facility') of £25 million with The Bank of New York Mellon. The facility had not been utilised for a number of years, and a decision was taken that it would not be renewed when it matured on 15 June 2022.

The Company has arranged refinancing for the debenture as previously noted.

12. UNSECURED SENIOR LOAN NOTES: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

These creditors are amounts that must be paid, as shown by note 11, but are due more than one year after the balance sheet date.

The Unsecured Senior Loan Notes comprise four separate notes. As shown above, each has a fixed interest rate and contracted maturity date when the par value must be repaid. Interest is payable on a semi-annual basis, with equal amounts payable on each of 31 March and 30 September each year. These notes require the Net Assets of the Company to remain not less than £300m. This requirement was met throughout the year.

13. CALLED UP SHARE CAPITAL

Share capital represents the total number of shares in issue, including treasury shares.

During the year the Company bought back, into treasury, 5,601,604 (2022: 1,104,800) ordinary shares at an average price of 632.40p (2022: 632.95p) (including costs). Since the year end until 22 May 2023, (being the last practicable day prior to the publication of this report), 655,000 shares have been bought back into treasury Note 1L on page 63 explains the policy on the transaction costs related to the shares repurchased and held in treasury.

The Directors' Report on pages 36 and 43 sets out the Company's share capital structure, restrictions and voting rights.

14. RESERVES

This note explains the different reserves attributable to shareholders. The aggregate of the reserves and share capital (see previous note) make up total shareholders' funds.

The share premium comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 25 pence and any applicable issue costs. The capital redemption reserve maintains the equity share capital of the Company and arose from the nominal value of any shares bought back and cancelled; both are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date. It also includes cumulative realised gains/(losses) and costs related to share buybacks. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve.

The revenue reserve and certain amounts of the capital reserve are distributable by way of dividend.

15. NET ASSET VALUE PER ORDINARY SHARE

The Company's total net assets (total assets less total liabilities) are often termed shareholders' funds and are converted into NAV per ordinary share by dividing by the number of shares in issue (excluding treasury shares).

NAV - debt at par value

The shareholders funds in the balance sheet are accounted for in accordance with accounting standards. Prior to the redemption of the £100m debenture stock on 30 September 2022 this did not reflect the rights of shareholders on a return of assets under the Articles of Association. Those rights were reflected in the net assets with debt at par and the corresponding NAV per share. A reconciliation between the two sets of figures follows. As the £120m Unsecured Senior Loan Notes were issued at and being recorded at par, a reconciliation is not required.

A reconciliation showing the NAV per share and Shareholders funds using debt at fair value is shown in the Alternative Performance Measures on page 85.

16. RISK MANAGEMENT, FINANCIAL ASSETS AND LIABILITIES

Financial instruments comprise the Company's investment portfolio, derivative instruments (if any) as well as cash, and any borrowings, debtors and creditors. This note sets out the Company's financial instruments and the risks related to them.

Financial instruments

The Company's financial instruments mainly comprise its investment portfolio (as shown on pages 16 and 17), loan notes, a bank facility as well as its cash, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. For the purpose of this note 'cash' should be taken to comprise cash and cash equivalents as defined in note 1D. The accounting policies in note 1C include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The main financial risks that the Company faces from its financial instruments are market risk, liquidity risk, and credit risk. These are set out below:

Market risk - arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk:

- Currency risk - arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in foreign exchange rates;

- Interest rate risk - arising from fluctuations in the fair value or future cash flows of a financial instrument because of changes in market interest rates; and

- Other price risk - arising from fluctuations in the fair value or future cash flows of a financial instrument for reasons other than changes in foreign exchange rates or market interest rates.

Liquidity risk - arising from any difficulty in meeting obligations associated with financial liabilities.

Credit risk - arising from financial loss for a company where the other party to a financial instrument fails to discharge an obligation.

Risk Management Policies and Procedures

The Directors have delegated to the Manager the responsibility for the day-to-day investment activities and management of gearing of the Company as more fully described in the Directors' Report.

As an investment trust the Company invests in equities and other investments for the long-term so as to fulfil its investment policy (incorporating the Company's investment objective). In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction of the profits available for dividends. The associated risk management policies are summarised below and have remained substantially unchanged for the two years under review

16.1 Market Risk

The Company's Manager assesses the Company's exposure when making each investment decision, and monitors the overall level of market risk for the whole of the investment portfolio on an ongoing basis. The Board has meetings in each calendar quarter to assess risk and review investment performance, as disclosed in the Board Responsibilities on pages 35 and 36. Any borrowing to gear the investment portfolio is used to enhance returns but also increases the Company's exposure to market risk and volatility. The Company has the ability to gear using its £120 million Unsecured Senior Loan Notes.

16.1.1 Currency risk

The majority of the Company's assets and all of its liabilities are denominated in sterling. There is some exposure to US dollar, Swiss franc and the Euro.

16.1.2 Inflation risk

The Company has no assets or liabilities that have direct inflation link properties.

Management of the currency risk

The Manager monitors the Company's direct exposure to foreign currencies on a daily basis and reports to the board on a regular basis. Forward currency contracts can be used to reduce the Company's exposure to foreign currencies arising naturally from the Manager's choice of securities. All contracts are limited to currencies and amounts commensurate with the assets denominated in currencies. No Forward currency contracts were used during the year (2022: none).

Income denominated in foreign currencies is converted to sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between the time that income is included in the financial statements and its receipt.

The Company may invest up to 20% of the portfolio in securities listed on non-UK stock exchanges. At the year end holdings of non-UK securities total £93.8 million (2022: £144.3 million) representing 7.7% (2022: 12.0%) of the portfolio.

Currency exposure

The fair values of the Company's monetary items that had a material currency exposure at 31 March are shown below. Where the Company's equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

The above may not be representative of the exposure to risk during the year, because the levels of foreign currency exposure may change significantly throughout the year.

Currency sensitivity

In respect of the Company's material direct foreign currency exposure to investments denominated in currencies, if sterling had weakened by 3.9% (2022: 2.0%) for the US dollar, 3.5% (2022: 1.5%) for the Swiss franc, 2.0% (2022: 1.2%) for the Euro, and for the Danish Krone, 2.0% (2022: £nil) during the year, the capital return and net assets of the Company would have increased for all currency exposures by £3.2 million (2022: £2.3 million). Conversely, if sterling had strengthened to the same extent for the currencies mentioned above, the capital return and net assets of the Company would have decreased by the same amount. The exchange rate variances noted above have been based on market volatility in the year, using the standard deviation of sterling's fluctuation to the applicable currency. This sensitivity takes no account of any impact on the market values of the Company's investments arising from the foreign currency mix of their respective revenues, expenses, assets and liabilities.

16.1.3 Interest rate risk

Interest rate movements will affect the level of income receivable on cash deposits and money market funds, and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate determined by the custodian, The Bank of New York Mellon (International) Limited.

The Company has Unsecured Senior Loan Notes of £120 million (2022: £20 million). The Unsecured Senior Loan Notes have a fixed interest rate which only exposes the Company to changes in market value in the event that the debt is repaid before maturity. Specifics of the Unsecured Senior Loan Notes are shown in note 12. The details of their fair value and the affect on net asset value within the Net Asset Value (NAV) - Debt at Fair Value reconciliation within the Alternative Performance Measures on page 85.

The Company held two fixed income securities during the year (2022: one), both being short-term zero coupon government bonds which matured during the financial year. As at 31 March 2023 no government bonds (2022: one) to the value of £nil (2022: £19.98m) were recognised as a Cash and Cash Equivalent on the Balance Sheet.

Interest rate exposure

At 31 March the exposure of financial assets and financial liabilities to interest rate risk is shown by reference to:

- floating interest rates (giving cash flow interest rate risk) - when the interest rate is due to be re-set; and

- fixed interest rates (giving fair value interest rate risk) - when the financial instrument is due for repayment.

16.1.4 Other price risk

Other price risks (i.e. changes in market prices other than those arising from interest rate risk or currency risk) may affect the value of the equity investments, but it is the business of the Manager to manage the portfolio to achieve the best return that he can.

Management of the other price risk

The Directors manage the market price risks inherent in the investment portfolio by meeting regularly to monitor on a formal basis the Manager's compliance with the Company's stated objectives and policies, and to review investment performance.

The Company's portfolio is the result of the Manager's investment process and need not be highly correlated with the Company's benchmark or the market in which the Company invests. The value of the portfolio will not move in line with the market but will move as a result of the performance of the company shares within the portfolio.

If the value of the portfolio fell by 10% at the balance sheet date, the profit after tax for the year and the net assets of the Company would decrease by £122.7 million (2022: £121.9 million). Conversely, if the value of the portfolio rose by 10%, the profit after tax and the net assets of the Company would increase by the same amounts.

16.2 Liquidity risk

Liquidity risk is minimised as the majority of the Company's investments constitute a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary.

Liquidity risk exposure

The contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

16.3 Credit risk

Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company's ability to operate in the short-term may be adversely affected if the Company's custodian suffers insolvency or other financial difficulties. However, with the support of the depositary's restitution obligation the risk of outright credit loss on the investment portfolio is remote. The Board reviews the custodian's annual controls report and the Manager's management of the relationship with the custodian. Cash balances are limited to a maximum of 1% of net assets with any one deposit taker, with only approved deposit takers being used, and a maximum deposit of 6% of net assets in aggregate in liquidity funds with credit ratings of AAAm (or equivalent). These limits are at the discretion of the Board and are reviewed on a regular basis. The investment policy also allows for UK Government Treasuries to be held. Such holdings are recorded as cash equivalents if they meet the criteria set out in Note 1D on page 59.

16.4 Custody risk

All investment assets are held in custody by The Bank of New York Mellon (International) Limited in accounts segregated from the bank's own assets.

17. CLASSIFICATION UNDER FAIR VALUE HIERARCHY

The values of the financial assets and financial liabilities are carried either at their fair value (investments), or at a reasonable approximation of fair value (amounts due from brokers, dividends receivable, accrued income, amounts due to brokers, accruals, cash and any drawings on the bank facility) or at amortised cost (debenture).

Fair Value Hierarchy Disclosures

All except two of the Company's portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures (March 16). The three levels set out in this follow.

Level 1 - the unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 - Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability.

The valuation techniques used by the Company are explained in the accounting policies note.