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Annual Financial Report

3 Aug 2020 07:00

Invesco Perpetual Select Trust Plc - Annual Financial Report

Invesco Perpetual Select Trust Plc - Annual Financial Report

PR Newswire

London, July 31

Invesco Perpetual Select Trust plc

Annual Financial Report Announcement

Year Ended 31 May 2020

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FINANCIAL PERFORMANCE

CUMULATIVE TOTAL RETURNS(1)(2) TO 31 MAY 2020

UK Equity Share Portfolio

ONE YEARTHREE YEARSFIVE YEARS
Net Asset Value–12.4%–15.7%1.4%
Share Price–16.2%–18.6%–2.5%
FTSE All–Share Index–11.2%–8.4%6.9%

Global Equity Income Share Portfolio

ONE YEARTHREE YEARSFIVE YEARS
Net Asset Value–6.4%–0.4%28.3%
Share Price–6.1%–0.8%26.3%
MSCI World Index (£)8.9%24.1%64.0%

Balanced Risk Allocation Share Portfolio

ONE YEARTHREE YEARSFIVE YEARS
Net Asset Value–3.1%0.3%9.7%
Share Price–6.9%–3.4%6.0%
Merrill Lynch 3 month LIBOR plus 5% per annum5.9%17.1%28.2%

Managed Liquidity Share Portfolio

ONE YEARTHREE YEARSFIVE YEARS
Net Asset Value1.1%2.7%2.7%
Share Price1.6%1.6%1.2%

YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT

SHARE CLASSNET ASSET VALUE (PENCE)SHARE PRICE (PENCE) DISCOUNT
UK Equity145.8139.5(4.3)%
Global Equity Income178.5176.5(1.1)%
Balanced Risk Allocation135.1129.0(4.5)%
Managed Liquidity104.4101.5(2.8)%

(1) Alternative Performance Measure (APM). See Glossary of Terms and Alternative Performance Measures on pages 111 to 114 of the financial report for details of the explanation and reconciliations of APMs.

(2) Source: Refinitiv.

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CHAIRMAN’S STATEMENT

The Company

The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.

The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities.

The investment objectives and policies of all of the Portfolios are set out on pages 32 to 35.

The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. As set out on the inside of the front cover, shareholders have the opportunity to convert between Share classes, free of UK capital gains tax, every three months.

Performance

The NAV total return of the UK Equity Share Portfolio over the year was –12.4%, which compares with the total return from its benchmark, the FTSE All-Share Index, of –11.2%. The share price total return was –16.2%.

The NAV total return of the Global Equity Income Share Portfolio over the year was –6.4%, which compares with the total return from its benchmark, the MSCI World Index (£), of +8.9%. The share price total return was –6.1%.

The NAV total return of the Balanced Risk Allocation Share Portfolio was –3.1%, which compares with its benchmark, Merrill Lynch 3 months LIBOR plus 5%, return of +5.9%. The share price total return was –6.9%.

The NAV total return of the Managed Liquidity Share Portfolio was +1.1%. The share price total return was +1.6%.

It is extremely disappointing, both for the Board and for shareholders, to report on another year in which all three Portfolios based on risk assets underperformed their benchmarks. The Board is very aware that performance has been decidedly unsatisfactory over an extended period. Our Manager has taken steps to address the situation with some personnel changes and other initiatives and we will be closely monitoring the outcomes.

At the half year the UK Equity Portfolio was performing well, but this trend reversed in the second half of the financial year as equity markets fell in response to the Covid-19 pandemic. The sell-off impacted almost every stock, but domestically orientated companies, in which the Portfolio was overweight, were hit particularly hard. The negative returns were exacerbated by the gearing employed during this period.

The Global Equity Income Portfolio was also impacted by the level of gearing during the sell-off. The Portfolio was particularly affected by the underweight exposure, relative to the benchmark MSCI World Index, to the US market, which continued to outperform markets in the UK, Europe and Asia. As I reported in my interim statement, investment management responsibility for the Global Equity Income Portfolio moved to Stephen Anness in January of this year. Although the underweight position in the US is now less pronounced, it has still impacted returns.

The lockdowns across the world in response to the Covid-19 pandemic led to a significant decline in economic activity. As a result demand for oil and other commodities fell sharply, and prices dropped. The decline in commodity prices, along with the collapse in equity markets, resulted in a negative return from the Balanced Risk Allocation Portfolio. These declines in equities and commodities were only partially offset by the strong return from government bonds during the period.

Performance of the Managed Liquidity Portfolio was positive, despite the low interest rate environment. The underlying portfolio of the principal investment is primarily invested in short dated bonds and, therefore, this Share class has a lower risk profile than the Company’s other three Share classes. Nevertheless, this is not a cash fund, and as such is not without risk to capital.

Outlook

In my interim statement I suggested we should expect a period of consolidation in equity and bond markets following a decade of stellar returns. At the time, I also noted that the Covid-19 outbreak seemed to have been contained in Asia. Little did I anticipate that the virus would spread rapidly throughout the world, resulting in an unprecedented collapse in economic activity, and equity markets. Although there has been some recovery in equity prices, most markets are still somewhat below the highs reached earlier this year.

Markets have moved up in response to government stimulus packages and in anticipation of economies recovering as lockdown conditions ease in Europe and North America. Nevertheless, considerable uncertainty remains as to how quickly GDP will return to pre-Covid-19 levels. Likewise, some areas of the global economy, such as travel, leisure and hospitality, could be impacted for a significant period of time. The ways people work, shop and enjoy leisure time are likely to change, even when the pandemic has passed.

In such periods of social and economic dislocation, there will be ‘winners’ and ‘losers’ and business models will have to adapt rapidly. It is incumbent on our portfolio managers to analyse these trends and construct portfolios which will outperform in these changed circumstances. Since the inception of the Company, the various Portfolios have produced positive returns. However, in recent years the portfolios investing in risk assets have all underperformed their respective benchmarks over the industry standard reporting periods of one, three and five years. To some extent this outcome reflects the continued outperformance of growth stocks over the value stocks which our equity portfolio managers have favoured. Although the impact of this investment style on performance is understandable, the Board remains concerned about the returns being generated. Invesco has recently restructured its Henley investment centre and the Board will be monitoring the impact of these changes on the management of the Portfolios. It is important to see an improvement in performance and the Board will update shareholders in due course.

The impact of the Covid-19 pandemic has been profound in many ways and the implications for societies, economies and markets are very uncertain. It would be foolhardy to make bold predictions as to what changes will happen as a result of this dislocation. Nevertheless, societies and economies will adjust, GDP growth will resume and, in the longer term, markets will recover. The Company offers a unique mix of strategies and its structure, with opportunities to switch between Share classes, makes it ideal for investors who want enhanced control of their investments.

The Board

We attempted to recruit a new non-executive director last year, but although we identified a very strong candidate she was ultimately unable to accept the position. Resumption of the recruitment process has been postponed for the time being because of the difficulty of conducting interviews in lockdown conditions. However, we intend for the process to resume later this year. In the meantime, Alan Clifton, who will be the next Director to retire, has agreed to remain on the Board until a new Director is appointed.

Dividends

We have continued to apply the dividend policy adopted five years ago, and supported by shareholder advisory votes, whereby for both UK Equity and Global Equity Income Shares, dividends are paid by way of three equal interim dividends declared in July, October and January with a ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for the UK Equity Shares were each 1.5p per share and for the Global Equity Income Shares 1.55p per share. The fourth dividends were 2.1p per share for the UK Equity Shares, bringing the total to 6.6p per share for the year, and 2.4p per share for the Global Equity Income Shares, bringing that total to 7.05p per share for the year.

There were a number of dividend cuts in the last quarter of the Company’s financial year, because of Covid-19, meaning a greater contribution from capital was required for the Company’s dividends this year to meet the Board’s target level. For the Global Equity Income Shares a contribution from capital of approximately 0.4p per share was required to achieve the dividend level (2019: nil), with another 1.2p per share coming from brought forward revenue reserve, and for the UK Equity Shares a contribution from capital of approximately 2.5p per share was required (2019: 0.9p).

We intend to continue with the current policy and investors are again being given advisory votes on it. However, whereas in recent years we have set a target of at least maintaining the dividend level from year to year for each of the equity Portfolios, with the current uncertainty of future income flows because of Covid-19 the Directors have not set dividend targets for the year to 31 May 2021.

The first interim dividends declared in respect of the year to May 2021, which will be paid on 17 August 2020 to shareholders on the register on 24 July 2020, were 1.50p per share for UK Equity and 1.55p per share for Global Equity Income.

It continues to be the case that in order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on them to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. No dividends have been paid on the Balanced Risk Allocation Shares.

I am pleased to report that notwithstanding the continued low interest rate environment the Managed Liquidity Portfolio generated sufficient net revenue in the past year for the Board to declare a dividend of 0.8p per Managed Liquidity Share, which was paid on 15 May 2020. It remains the Directors’ intention to distribute substantially all net revenues earned by the Portfolio going forward. Given the quantum involved it is unlikely that such payments will be more frequent than annually and may indeed be less frequent.

Discount Policy

The Company adopted a discount control policy for all four Share classes in January 2013, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the prices of the Shares at close to their respective net asset values. The policy has been successful to date. The continued implementation of this policy is dependent upon the Company’s authority to buy back Shares and the Directors’ authority to issue Shares for cash on a non-preemptive basis being renewed at general meetings of the Company.

Share Capital Movements

During the year to 31 May 2020, the Company bought back and placed in treasury 1,460,772 UK Equity Shares, 3,213,136 Global Equity Income Shares, 164,000 Balanced Risk Allocation Shares and 875,893 Managed Liquidity Shares. Other than as an artefact of the share conversion process, no Shares were issued or sold from treasury and no treasury shares were cancelled. Since the year end a further 1,698,000 UK Equity Shares and 1,311,000 Global Equity Income Shares have been bought back into treasury. The Board intends to use the Company’s buy back and issuance authorities when this will benefit existing shareholders as a whole and to operate the discount control policy mentioned above, and will ask shareholders to renew the authorities as and when appropriate.

Share Class Conversions

The Company enables shareholders to adjust their asset allocation to reflect their views of prevailing market conditions. Shareholders have the opportunity to convert their holdings of Shares into any other class of Share without incurring any tax charge (under current legislation). The conversion dates for the forthcoming year are as follows: 3 August 2020; 2 November 2020; 1 February 2021; and 4 May 2021. Should you wish to convert Shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invesco.co.uk/investmenttrusts, or CREST instructions must be received at least 10 days before the relevant conversion date.

Annual General Meeting (‘AGM’)

The business of the AGM is summarised in the Directors’ Report on pages 59 to 61. The AGM will be held at 43-45 Portman Square, London W1H 6LY at 11.30 am on 6 October 2020. It is hoped that by that date restrictions due to Covid-19 will have eased sufficiently for the AGM to be held in the usual way and, if so, shareholders are encouraged to attend. However, should this not be the case the AGM may have to be held as a closed meeting. In this eventuality, or if shareholders are reticent about using public transport to reach the meeting venue, it is recommended that shareholders exercise their votes by means of registering them with the Company’s registrar ahead of the meeting, online or by completing paper proxy forms, and appoint the Chairman of the meeting as their proxy. Recognising the potential for shareholders to be unable to attend and ask questions, the Board invites anyone with questions on the business of the meeting, or otherwise, to address them to the Company Secretary, by email to investmenttrusts@invesco.com or, by letter, to 43-45 Portman Square, London W1H 6LY. Questions will be relayed to the Board and responses provided. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intends to do in respect of their own shares.

Graham KitchenChairman31 July 2020

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STRATEGIC REPORT

MARKET AND ECONOMIC BACKGROUND

Global equity markets have been impacted by a range of issues over the last twelve months, from political issues, to fears of recession and trade wars, but these were all surpassed by Covid-19. This challenge has been unique in our lifetimes and it is perhaps a surprise that global equity markets have been so resilient.

The period started on a cautious note. Through the summer of 2019 markets were weak as the global economy showed signs of a modest slowdown, especially in manufacturing sectors. This was reflected in a further decline in bond yields in many markets and yield curve inversion in the US and UK, a sign to many market participants of impending recession. In the late summer central banks, in particular the US Federal Reserve, once again stepped in with interest rate cuts and measures to improve liquidity in order to ensure the record-breaking global expansion would continue into 2020. These measures, together with signs of a modest rapprochement between the US and China on trade and a Brexit deal that promised to avoid a UK exit from the European Union on World Trade Organisation terms, further encouraged optimism for corporate earnings in the year ahead.

Common to all global equity markets was the persistent theme of stocks offering secular growth, or positive correlation to bond markets, performing well, whilst stocks and sectors more sensitive to the global economy or with more volatile earnings streams generally underperformed, almost regardless of valuation.

And so to 2020. While US-China trade relations, Brexit and domestic politics were known uncertainties in 2019, 2020 has delivered the market shock that no one could have foreseen. Global markets made new highs in February, despite news of a highly infectious virus in China and the severe lockdown imposed in some regions of the country. We had all lived through SARS in 2004, H1N1 in 2010 and MERS in 2012, none of which had a material impact on markets outside Asia. This time it was different. Markets were affected globally as news of the extent of the spread of Covid-19 to Europe and the resulting lockdowns and travel restrictions were absorbed. The eruption of an oil price war between Saudi Arabia and Russia was also unhelpful for markets.

The UK equity market fell by over 25% in the quarter to 31 March 2020, posting its biggest quarterly drop for more than three decades as the global economic costs of the Covid-19 pandemic continued to mount. Between 23 January 2020, the date that the World Health Organisation first met in Geneva to discuss the gathering crisis, and the low point on 23 March, the FTSE All-Share Index fell by 34.1%. Extreme levels of volatility were witnessed with large swings in prices on an intraday basis.

This was reflected globally. Equity markets fell 35% in the four weeks to mid-March. The impact was especially acute in those sectors most exposed, such as travel and leisure, banks and energy. Although, in contrast, a range of e-commerce and certain healthcare stocks were bolstered by the perception that they would benefit from the lockdown and increased healthcare spending.

In April and May, equity markets staged something of a recovery, on fresh stimulus measures and hopes that economies were on the mend as lockdowns eased. In June, the UK market was within around 16% of its level in February before the Covid-19 correction and the MSCI World Index, in sterling terms, was all the way back to that level. In large part this can be attributed to the expected impact of a dramatic easing of fiscal and monetary policies in all the major economies.

Investors seem to have pinned their hopes on a swift economic rebound, but some have been left wondering if this market rally has come too far, too fast. Investors have seemingly shrugged off the economic cost of the pandemic, which is likely to be significant. The UK is expected to face a severe recession and gross domestic product (GDP) is estimated to fall by around 16% in the second quarter, and by 8% for the year (Bloomberg consensus as at 29 May 2020).

However, the strength and depth of the measures announced in the UK by the Chancellor and the Bank of England should provide material support to employment, income and bank lending to the real economy, that will be of great benefit in enabling many businesses to navigate through to the recovery phase.

Overall, the financial response from central banks and governments around the world was well coordinated and powerful, unique in our opinion outside of wartime. Through late March, April and May investors were reassured of both the stability of the financial system and the path to eventual economic recovery. Share prices recovered sharply, recovering much lost ground, particularly in the US, Japan and Asia. However, many stocks and sectors within retail and travel and leisure, whose prospects are seen to be permanently impaired or their survival threatened, still trade at less than half the value they did but four short months ago.

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UK EQUITY SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.

Portfolio Review

The Portfolio modestly underperformed its benchmark over the year to 31 May 2020, with a net asset value total return of –12.4% compared with –11.2% for the FTSE All-Share Index, having been ahead by a similar margin before the Covid-19 related market disruption.

At the sector level, the largest source of positive performance was the Portfolio’s exposure to the basic materials sector. The Portfolio has a large overweight exposure to basic materials (relative to the FTSE All-Share Index), almost entirely represented by holdings in four North American gold mining companies, namely Barrick Gold, Newmont, Wheaton Precious Metals and Agnico Eagle Mines.

In times of crisis, equities tend to fall, and gold goes up, and this pattern has been borne out in recent months. As a perceived ‘safe-haven’ asset class, gold mining companies are a good portfolio diversifier in that they are inversely correlated with the broader market. The shock to global economies resulting from the global pandemic has served to accelerate the conditions favouring gold and, since gold miners are geared to the gold price, their share prices have performed very strongly. Each of these companies is at the low end of the cost curve, has a conservative balance sheet, a strong management team and a very clear capital allocation framework.

Media group Future and veterinary services firm CVS were also strong performers. Future has continued to grow both organically and via acquisition, with its full year results in November showing a near trebling of profits. More recently the company has seen an acceleration of audience growth as a result of Covid-19, which has helped offset the significant slowdown in magazine sales as high-street and travel-hub retailers have been closed. The recently completed acquisition of TI Media should deliver significant synergies and help to underpin the outlook for earnings. The performance of veterinary business CVS improved markedly under new management, resulting in a strong year for the shares, but the impact of Covid-19 lead to a reduction in both small animal billable visits and revenue. As a result, the decision was taken to temporarily close half of their small animal practices during the lockdown and cash management became the priority. More recently restrictions on vet appointments have been eased and trading is beginning to normalise. The company should emerge from the crisis relatively unscathed.

Other notable contributors to performance included retailers JD Sports Fashion and Tesco. JD Sports Fashion has benefited from the casualisation of fashion and the growth in ‘athleisure’ clothing in recent years. Since the advent of Covid-19, with its stores closed, the company took swift action to control its cost base and to maintain its capability to fulfil online orders, which have been extremely strong. There appears to be significant opportunity for the company to leverage its relationships with key brand partners and take market share in both online and offline sales. Meanwhile, Tesco reported a boost in sales on the back of panic buying in the early days of the pandemic and has benefited from its strong online presence, but the impact of additional payroll costs as a result of recruitment to replace self-isolating employees, distribution costs and store expenses is not insignificant. The company believes that if customer behaviour returns to normal by August it is likely that the additional cost headwinds will largely be offset by the benefits of food volume increases and business rates relief. Their dividend was maintained.

Fevertree Drinks, which produces soft drinks and mixers, was another strong performer. Against the challenging backdrop of recent months, sales benefited from the initial buying ahead of lockdown and subsequent ‘at-home’ consumption has remained robust, mitigating lost sales from shuttered pubs, bars and restaurants. The firm appears to be well positioned to manage its way through the current situation. It is a global business with revenue diversified across regions, channels and customers and has a strong cash position. The long-term trend towards premium spirits and premium long mixed drinks continues and the Group will be well placed when the disruption and uncertainty abate.

Conversely, the Portfolio’s holding in floorings manufacturer Victoria proved to be disappointing over the twelve months. Whilst short term trading has been affected by the impact of Covid-19, the long-term outlook appears positive. The wide geographic spread of both its manufacturing operations and its customers means that the virus's impact on Group revenue (and its subsequent recovery) is likely to occur at varying times and not simultaneously. In the meantime, Victoria enjoys comparatively low operational gearing across its business and, whilst the balance sheet does carry debt, it has sufficient cash on hand to support the business and management is taking every precaution to protect the liquidity of the Group.

Bushveld Minerals, which mines and processes vanadium, detracted from performance over the period. The share price weakened during 2019, in tandem with the price of vanadium, and then fell sharply as the company shut down production in accordance with the South African Government’s lockdown instructions. The company is well capitalised, operates at the low end of the cost curve and is now ramping production back up to normal levels. Demand for and the price of vanadium should be underpinned as end-markets for steel recover and may benefit in coming years if the nascent market in grid-scale vanadium redox flow batteries develops further.

Coats, which manufactures thread, zips and trim, was also among the larger detractors from performance. For the period from 1 January 2020 to 30 April 2020, sales declined 17% year-on-year, with the month of April down around 50% due to demand and supply impacts from the pandemic. The company had 15 manufacturing sites under enforced government closure. All but one of these have now reopened and cost mitigating actions taken by management should help in the months ahead. Importantly, the company’s balance sheet remains strong with comfortable levels of liquidity and from its starting position as clear global leader it looks set to take further market share.

In terms of sector exposure, the Portfolio’s holdings of banks (Barclays, Secure Trust Bank, Royal Bank of Scotland) were negative for performance over the twelve months, mitigated in relative terms by not holding HSBC or Lloyds. The portfolio’s limited exposure to health care (specifically not holding AstraZeneca or GlaxoSmithKline) was also a detractor to relative performance given that health care was the strongest performing sector over the twelve month period.

At the beginning of 2020 gearing was around 6% and edged upwards slightly towards 8% as Covid-19 disruption gradually unfolded. As the extent of the threat from Covid-19 became apparent exposure to some of the stocks and sectors that looked likely to be most heavily impacted was reduced, with that capital deployed into businesses that looked more resilient. As the UK market recovered gearing was increased, ending the period at around 10%. Looking at the period overall the deployment of the gearing was not helpful to performance, but in more recent months, as the FTSE All-Share has recovered and performance has improved, gearing has made a positive contribution.

Outlook

Economies and markets remain in the grip of perhaps the greatest global crisis since the late 1920s. In the face of human tragedy from Covid-19, the response from governments around the world was to shut down swathes of the global economy. With the gradual easing of these restrictions now underway, we await the evidence from lagged economic data (expected to include millions of job losses and many thousands of insolvencies) as well as company earnings to judge the full impact. Meanwhile, equity markets have made up much of the lost ground and implicitly are relying on a sharp recovery.

Estimates of second quarter UK GDP range from around -20% to -40% and economists are sparring over whether forthcoming quarters will resemble a V, a U, a back-to-front tick or an L, as well as the timing. There is risk on all sides; risk of further downside should this evolve into a multi-year rolling lockdown, but also upside risk if government priorities shift to restarting the economy or should a medical breakthrough appear.

Whilst my approach is centred around traditional, bottom up ‘stock picking’ and would therefore normally place less emphasis on the macro outlook, there are from time to time major turning points at which macro events take on greater significance and lead to meaningful changes in the investment environment. Covid-19 is clearly one of these turning points.

With no reliable insight into public policy or medical innovations, I have positioned the portfolio as best I can for the various possible scenarios. The changes made since February have de-risked the portfolio by reducing direct exposure to the worst affected sectors of the economy in favour of those that should prove resilient, but not to such an extent that the Portfolio would be left behind on the emergence of better news. In making these changes I have stuck rigidly to my valuation-based philosophy and only sold riskier shares at attractive relative prices and purchased their more defensive replacements at appealing absolute valuations. This will not change.

In the midst of all this uncertainty, there is one issue on which I have strong conviction. The fiscal and monetary response has been emphatic and has represented an intervention by the authorities on an historic scale. However, this support comes at a cost. Both in the UK and elsewhere, these programmes have been funded by an expansion of central banks’ balance sheets on a hitherto unprecedented scale. In the US in particular, the pace of expansion (from below US$4 trillion to almost US$7 trillion) and the broadening of the assets that qualify for purchase has been breath-taking. As we await deteriorating economic data, governments’ tax bases have been dramatically reduced whilst their spending commitments have significantly increased. I believe that announcements of further stimulus are therefore inevitable. There will be more of the same, but we should also be prepared for various flavours of Modern Monetary Theory, be that something akin to Ben Bernanke’s famous helicopter money or direct monetisation of ballooning fiscal deficits on an ever-larger scale.

The banks enter this crisis in a far stronger position to absorb the coming losses and are therefore more likely to lend to the real economy as it recovers. The US monetary base is already growing at twice the pace it did in 2009-2011 and four times the pace Japan’s has done during three decades of monetary experiment. There is no doubt that the environment today is deflationary and that is the direction for economic data in the near-term. But the ‘whatever-it-takes response’ has sown the seeds for that impending deflation to turn to inflation that will be very difficult to control at a desirable level. We have been used to monetary policy that has resembled fine tuning. This is closer to filling a hole in the ground by tipping soil from a 20 tonne truck: the hole will get filled but it will be impossible not to leave a large mound of soil where the hole used to be.

I have long believed the US fiscal position, and therefore the dollar’s reserve currency status, to be unsustainable. The economic impact of the virus has brought forward the inevitable and condensed what might have taken several years into what is likely to be several quarters. We have just witnessed the effective unification of the US Treasury and the US Federal Reserve into a single force to fight deflation, to monetise government deficits and to lay the ground for recovery. It may very well succeed, but will in my view prove to be inflationary. Inflationary forces that were already in play from tariffs and the rolling back of globalisation will also remain once economies stabilise and recover. Real interest rates can be expected to be in significantly negative territory for an extended period as all this new debt is inflated away.

The one currency that cannot be diluted in this way is gold. The portfolio’s four North American gold mining company holdings have performed their protective role admirably during this market rout and now represent around 15% of the portfolio. At the current gold price their valuations remain extremely attractive and if things develop as I anticipate, gold has further gains to make. These stocks continue to play a critical role and I intend to maintain the position at or around its current weighting for the foreseeable future.

As the recovery has continued, I have maintained gearing at around 10%. This is in part a reflection of my view that equity markets will be buoyed in the near term by the fiscal and monetary stimulus that has been unleashed. It also reflects my confidence in the positioning of the portfolio and the prospects of the companies held.

The outcome I expect will also be good for equities in general, certainly relative to (non-index-linked) bonds and cash. Within equities, inflation and negative real interest rates should prove helpful to the Value style relative to other investment styles. In the meantime, the recent changes I have made to increase the defensive allocation should offer protection as we face the potential of a deflationary shock. As the full impact of fiscal and monetary policy is felt in the coming years, changes may be required, but at this stage I believe that the portfolio is well balanced to mitigate risk and to generate attractive returns in such uncertain times.

James GoldstonePortfolio Manager31 July 2020

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UK EQUITY SHARE PORTFOLIOLIST OF INVESTMENTSAT 31 MAY 2020

Ordinary shares listed in the UK unless stated otherwise

COMPANY SECTOR† MARKET VALUE £’000 % OF PORTFOLIO
Barrick Gold – Canadian ListedMining2,8525.5
British American TobaccoTobacco2,4784.8
BarclaysBanks2,1314.1
TescoFood & Drug Retailers2,0804.0
SSEElectricity1,8573.6
BPOil & Gas Producers1,8373.5
Newmont – US ListedMining1,8143.5
Babcock InternationalAerospace & Defence1,5713.0
JD Sports FashionGeneral Retailers1,5423.0
NextGeneral Retailers1,5362.9
Agnico Eagle Mines – Canadian ListedMining1,3892.7
FutureMedia1,2962.5
Wheaton Precious Metals – Canadian ListedMining1,2512.4
Royal Dutch Shell – B sharesOil & Gas Producers9871.9
Ultra ElectronicsAerospace & Defence9851.9
CompassTravel & Leisure9841.9
Fevertree DrinksAIMBeverages9711.9
RELXMedia9671.8
PureTech HealthPharmaceuticals & Biotechnology8841.7
CVSAIMGeneral Retailers8561.6
AshteadSupport Services8531.6
CoatsGeneral Industrials8281.6
Johnson ServiceAIMSupport Services8181.6
Phoenix Spree DeutschlandReal Estate Investment & Services8141.6
Sigma CapitalAIMFinancial Services7991.5
ChesnaraLife Insurance7851.5
XPS PensionsFinancial Services7721.5
MJ GleesonHousehold Goods & Home Construction7471.4
National GridGas, Water & Multiutilities7251.4
VodafoneMobile Telecommunications7121.4
PRS REITReal Estate Investment Trusts7021.3
HomeServeGeneral Retailers6811.3
Barratt DevelopmentsHousehold Goods & Home Construction6561.2
Bushveld MineralsAIMMining5851.1
PennonGas, Water & Multiutilities5831.1
Royal Bank of ScotlandBanks5751.1
Secure Trust BankBanks5741.1
easyJetTravel & Leisure5291.0
DS SmithGeneral Industrials5231.0
EssentraSupport Services5061.0
HarworthReal Estate Investment & Services4981.0
ExperianSupport Services4850.9
Urban Logistics REITReal Estate Investment Trusts4820.9
Burford CapitalAIMFinancial Services4810.9
United UtilitiesGas, Water & Multiutilities4750.9
McBrideHousehold Goods & Home Construction4730.9
VictoriaAIMHousehold Goods & Home Construction4580.9
Legal & GeneralLife Insurance4540.9
CountrysideHousehold Goods & Home Construction4470.8
Sirius Real EstateReal Estate Investment & Services4380.8
HaysSupport Services4120.8
DFS FurnitureGeneral Retailers4090.8
On the BeachTravel & Leisure3430.7
PearsonMedia3170.6
ElementisChemicals2880.6
IAGTravel & Leisure2640.5
TungstenAIMFinancial Services2530.5
Sherborne Investors (Guernsey) CFinancial Services2520.5
Safestyle UKAIMGeneral Retailers2520.5
Alfa Financial SoftwareSoftware & Computer Services2340.4
Hadrian's Wall Secured InvestmentsEquity Investment Instruments1460.3
Distribution Finance CapitalAIMFinancial Services1410.3
AmigoFinancial Services490.1
N BrownGeneral Retailers20
TruFinAIMFinancial Services15
Total Holdings 65 (2019: 63)52,121100.0 

AIM Investments quoted on AIM

† FTSE Industry Classification Benchmark.

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Global Equity Income Share Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.

Portfolio Manager Change

As announced by the Board in January, from the beginning of 2020 Stephen Anness became the designated manager of the Global Equity Income Portfolio, taking over from the global equity income group, which was chaired by Nick Mustoe. Based in Henley, Stephen joined Invesco in 2002 to work in the UK equities team and moved on to manage global equity portfolios in 2012. Stephen now leads the dedicated Global Equity team, which takes responsibility for research, portfolio construction and communications. Additional idea generation and market insights are provided by regional equity market specialists in the Henley Investment Centre.

Portfolio Review

The portfolio underperformed its reference benchmark in the twelve months to the end of May 2020. On a total return basis, the Portfolio’s net asset value fell by 6.4% over the twelve months to the end of May 2020 compared to a rise of 8.9% in the MSCI World Index (£, total return, net of withholding tax).

Our investment process focusses on stocks that are attractively valued versus their history and the market, but which also pay attractive and growing dividends. Our valuation driven approach has been out of favour with the consensus for several years, but the last few months have been especially difficult.

The early part of the period, through the summer of 2019, was dominated by concerns of a new global recession and an end to globalisation due to US-Sino trade conflicts. The collapse in bond yields around the world and yield curve inversions in the US and UK were additional harbingers of gloom and encouraged a further stampede into equities perceived to have low volatility of earnings and secular, bond-like characteristics, almost regardless of valuation. By the end of August, global equity markets were at record levels of bifurcation in terms of valuation spread between the most expensive and the cheapest stocks in the market.

Our relative performance recovered somewhat through the autumn as evidence emerged of a stabilising global economy and renewed support from central banks. Several of our holdings in the banking sector, hitherto very much at the lower end of the valuation spectrum, such as BNP Paribas, JPMorgan Chase and Citigroup, performed strongly as financial results generally beat expectations and economic optimism improved. Other more economically sensitive stocks in the portfolio, unloved by consensus, such as Williams Sonoma, a US retailer, and Next in the UK, performed well, though the latter was also supported by some (temporary) resolution to the Brexit issue and a decisive election result in December 2019.

We have, for a number of years, been overweight in the energy sector due to the relatively low valuation upon which the sector has traded and the high level of dividends it offered. We felt the scope for cost cutting had been underestimated and the market was overly pessimistic about the long term trajectory for oil and gas demand. Whilst we feel vindicated on the cost cutting and valuation issue, we must acknowledge that the supply of oil and gas has exceeded our expectations and this, together with ongoing reluctance of many investors to engage with the industry due to environmental concerns, has meant the sector has performed poorly. In January we made the decision to materially reduce our exposure as we did not see an attractive risk reward profile in the medium term to justify such a large overweight position. We disposed of our holdings in Chevron, Royal Dutch Shell and Equinor. We still have exposure to the sector through BP, Total and Lundin Energy, a low cost medium sized Swedish oil producer. As to the broader environmental challenges posed by the sector, we believe it appropriate for us to own and engage with these companies with the aim of shifting their emphasis over time to less carbon intensive energy exposures and to mitigate their carbon footprint today. As much as we may wish fossil fuels away, they will remain an important component of our economic well-being for some decades to come.

As we entered 2020, we undertook a full portfolio review and decided to make some material changes in order to reduce risks that had dominated portfolio performance in previous years, such as over sensitivity to the oil price and interest rates. Whilst we acknowledge that the US market looks expensive in aggregate, we feel it contains many high quality cash generative businesses, not all of which are overvalued, and we have reduced the underweight to this market. Overall, we have sought to increase stock specific risks rather than exposure to global macro economic and geopolitical factors. As already discussed, we reduced exposure to the energy sector, also to European banks, which after strong performance in late 2019 no longer looked particularly attractively valued.

We added a range of new holdings to the portfolio through January and February. In Asia, we added NetEase, a Chinese computer gaming company listed in the US. Our colleagues in the Asian team have known this business for many years and, in our view, it has a great roster of gaming titles, is well managed, has a very strong balance sheet and plays to what is still a secular growth trend, with ever more time spent on computers and mobile phones. Purchases of Tencent, perhaps best thought of as a ‘Chinese WhatsApp’, Facebook, Amazon and Activision Blizzard also play to that theme. Purchases in the US included Home Depot, the leading home improvement retailer, and Analog Devices, the semiconductor chip manufacturer, and exposure was increased to companies such as Microsoft and Texas Instruments. We also saw attractive risk reward situations in some older, more cyclical, industries such as Ashtead, a UK listed plant and equipment hire company with very substantial US interests, Volkswagen and Delta Airlines.

Global equity markets performed well in the early part of 2020, the MSCI World Index making new all-time highs in mid-February as optimism around the outlook for economic growth, and hence corporate earnings, continued to improve. A new virus in a remote part of China was not seen as a problem. Previous outbreaks such as H1N1, SARS and MERS over the past two decades barely caused a ripple in equity markets outside Asia. However, all that changed towards the end of February as lockdowns and travel restrictions started to be implemented across Europe and the global scale of the pandemic became evident. Global equity markets fell 35% in five weeks, the most rapid decline in history.

The portfolio underperformed the benchmark index during this turmoil. The level of gearing in place was modest, at around 7%; nevertheless it magnified the extent of the underperformance somewhat. Whilst many of the newer holdings and the large healthcare holdings, such as Roche and Bristol-Myers Squibb, performed well, they were insufficient to offset underperformance in a few specific areas; foremost, travel and leisure. We had two relatively small positions in Delta Airlines and easyJet, and a larger position in Rolls-Royce, the civil aerospace engine manufacturer. With the collapse in air travel, these companies underperformed substantially. Holdings in other economically sensitive sectors such as banks (JPMorgan Chase, Wells Fargo and Erste) and automotive (Volkswagen) also underperformed. Our holdings in the energy sector (BP, Lundin Energy and Total) were also negative contributors, given concurrent geopolitical issues involving OPEC and Russia and the subsequent fall in the oil price.

Markets began to stabilise in late March 2020 as central banks around the world began to aggressively intervene to provide liquidity and to finance the huge increase in government spending needed to support the global economy. The recovery in equity markets through April and May was remarkable; although concentrated in those stocks and sectors that had already been resilient in the downturn. Confidence in a broad based economic recovery is elusive. We took opportunities where we saw them to improve the quality of the portfolio, buying good businesses when they were on sale, for example, Amadeus, the Spanish listed airline passenger management software company, and increasing our holding in Ashtead. We sold out of positions such as Delta Airlines where we saw risk of equity dilution and a slow recovery from the crisis. We expect the portfolio gearing being employed, which had a detrimental impact as the market fell sharply in March, will benefit the portfolio as confidence, earnings and dividends become more assured.

Outlook

It seems that in many parts of the world life is starting to normalise and economies to open for business once more. We would caution that the pace of recovery may be slower than we would like, given stubbornly high infection rates in the US and many emerging markets and potential changes in consumer behaviour. Government schemes in many geographies to minimise unemployment and preserve consumer spending power will be withdrawn in coming months. That notwithstanding, we expect a significant increase in economic activity in the second half of 2020. There is material pent up demand from consumers and we feel certain that governments will continue to spend on a range of infrastructure projects designed to stimulate economic activity – they can borrow at virtually zero interest rates.

Given the rapid recovery of markets from the March lows, and with the continued uncertainties around a potential second wave of infections, we believe the balance of risk and reward potential in a range of stocks we have recently analysed is more even. Consequently, we wish to maintain a degree of balance in the portfolio between companies with some defensive predictable earnings, for example in the Healthcare sector, and companies with more substantial upside if economies were to normalise more rapidly, for example Inditex and Rolls-Royce.

One area where we see substantial valuation asymmetry is the financial sector, where we continue to be overweight. This incorporates our positions in banks and insurance businesses. We believe that the market has discounted both sectors based on an outlook that is too pessimistic; indeed, in terms of insurance, we believe we are beginning to see early evidence of a hardening rate cycle (improving prices), while we believe banks will demonstrate a greater level of resilience than many believe. They are trading at extremely low relative valuations compared to the broader market.

Since the beginning of the Covid-19 crisis we have suffered a number of dividend cuts in the portfolio. These were principally in the most affected areas we described earlier, such as travel, and also certain industrials, including Rolls-Royce and Melrose Industries. Our US banks have continued to pay dividends. However, Standard Chartered has been asked (along with all other UK domiciled banks) to suspend their dividends until further clarity emerges later this year as to the likely scale of disruption caused by Covid-19. We are disappointed in some businesses such as Inditex, the owner of brands such as Zara, which deferred a dividend it can clearly afford to pay. We continue to expect dividend cuts globally for 2020 of around 25% to 30%, with restoration of many of those dividends in 2021.

Our overriding sense, however, is that Covid-19 has accelerated trends already present in economics and politics around the world; the support for austerity by policy makers around the world is zero and we may well have entered a new policy regime with far greater emphasis on fiscal policy and redistribution. Implications of this could be profound within global equity markets in the years to come.

Stephen AnnessPortfolio Manager31 July 2020

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

LIST OF INVESTMENTSAT 31 MAY 2020

Ordinary shares unless stated otherwise.

COMPANY INDUSTRY GROUP† COUNTRYMARKET VALUE £’000 % OF PORTFOLIO
Texas InstrumentsSemiconductors & Semiconductor EquipmentUnited States2,7614.9
MicrosoftSoftware & ServicesUnited States2,7354.9
Taiwan Semiconductor ManufacturingSemiconductors & Semiconductor EquipmentTaiwan2,3724.3
AshteadCapital GoodsUnited Kingdom2,1493.9
JPMorgan ChaseBanksUnited States2,0133.7
Analog DevicesSemiconductors & Semiconductor EquipmentUnited States1,9523.5
Samsung Electronics – preference sharesTechnology Hardware & EquipmentSouth Korea1,9113.4
NovartisPharmaceuticals, Biotechnology & Life SciencesSwitzerland1,8263.3
ZurichInsuranceSwitzerland1,7773.2
AlphabetMedia & EntertainmentUnited States1,6613.0
Home DepotRetailingUnited States1,6182.9
BayerPharmaceuticals, Biotechnology & Life SciencesGermany1,5592.8
Wells FargoBanksUnited States1,5492.8
American ExpressDiversified FinancialsUnited States1,5252.7
Bristol-Myers SquibbPharmaceuticals, Biotechnology & Life SciencesUnited States1,4682.6
RochePharmaceuticals, Biotechnology & Life SciencesSwitzerland1,4632.6
Automatic Data ProcessingSoftware & ServicesUnited States1,4182.5
AmadeusSoftware & ServicesSpain1,4092.5
Lundin EnergyEnergySweden1,3952.5
InditexRetailingSpain1,1572.1
BerkeleyConsumer Durables & ApparelUnited Kingdom1,1572.1
MastercardSoftware & ServicesUnited States1,1502.1
TencentRMedia & EntertainmentChina1,1262.0
AllianzInsuranceGermany1,1252.0
Colgate-PalmoliveHousehold & Personal ProductsUnited States1,0661.9
NetEase – ADRMedia & EntertainmentChina1,0501.9
Volkswagen – preference sharesAutomobiles & ComponentsGermany9961.8
NextRetailingUnited Kingdom9601.7
Rolls-RoyceCapital GoodsUnited Kingdom9531.7
SonyConsumer Durables & ApparelJapan9521.7
CitigroupBanksUnited States9231.7
Standard CharteredBanksUnited Kingdom9021.6
Sberbank – ADRBanksRussia8881.6
Melrose IndustriesCapital GoodsUnited Kingdom8621.5
TotalEnergyFrance8251.5
BPEnergyUnited Kingdom7501.3
easyJetTransportationUnited Kingdom7091.3
PepsicoFood, Beverage & TobaccoUnited States6671.2
Activision BlizzardMedia & EntertainmentUnited States6101.1
DiageoFood, Beverage & TobaccoUnited Kingdom6011.1
AIAInsuranceHong Kong5240.9
Accenture – A SharesSoftware & ServicesUnited States5230.9
Reckitt BenckiserHousehold & Personal ProductsUnited Kingdom3020.5
Las Vegas SandsConsumer ServicesUnited States2860.5
CumminsCapital GoodsUnited States1530.3
Total Holdings 45 (2019: 52)55,778100.0

† MSCI and Standard & Poor’s Global Industry Classification Standard.

ADR American Depositary Receipts – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.

R Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities, and commodities.

Portfolio Review

The Balanced Risk Allocation Portfolio NAV total return posted a negative return for the year of -3.1% in the year under review.

The Balanced Risk Allocation strategy seeks to achieve returns through balancing risk exposure between three asset classes: developed market equities, global government bonds and commodities. The asset class weightings are determined using a proprietary investment process, with assets being selected according to three key criteria: a correlation matrix to ensure diversification; the ability to generate excess returns relative to cash; and specific liquidity and transparency criteria. Exposure to the asset classes is principally obtained through highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral.

For the year to 31 May 2020 strategic exposure to bonds was a positive contributor to performance, whereas strategic exposure to both equities and commodities detracted from performance.

Strategic exposure to government bond markets aided results for the fiscal year, as yields fell across all four markets in which the strategy was invested. Bond markets started the period in positive territory. A combination of accommodative central bank policy, uncertainty about global economic activity and trade tensions helped push bond prices higher early in the period. Prices temporarily retreated later in 2019 as the apparent thawing of trade tensions between the US and China dampened enthusiasm for bonds. However, a flight-to-safety was quickly ignited in the first quarter of 2020, with uncertainty and fear about the Covid-19 health crisis fuelling a sharp sell-off in risk assets and bolstering safe-haven returns. While returns were positive through the sharp downturn in risk assets, the path there was anything but. During the height of the cash crunch in March, bonds became a source of liquidity, sending prices lower and volatility higher. Massive intervention by central banks in March to thaw frozen credit markets and exhaustion of selling pressure combined to buoy bond prices back up. Results in the asset class were led by the US, followed by Canada, Australia and finally the UK.

Strategic exposure to equities detracted from performance as the asset class suffered serious setbacks during the fiscal year. Equity results were generally positive in the earlier half of the period with many markets in which the strategy invests benefiting from accommodative central bank policy and trade deal optimism. However, in the first quarter of 2020 equity markets almost universally entered bear market territory with prices dropping off sharply. The main issue pushing prices lower was fear over the global spread of Covid-19 and concerns over the impact of containment efforts on manufacturing activity and global supply chains. Equity markets managed to snap back in the final two months of the period, on hopes that central bank intervention and the reopening of economies would lead to a rapid recovery. Hong Kong equities were the top detractor over the period followed by the UK. Hong Kong equities suffered declines as they were doubly hit by local unrest during the period. UK equities struggled with unpredictability around Brexit and were also hit hard in the late period sell-off, partially due to the UK index’s high energy weight.

Strategic exposure to commodities represented the largest drag on results during the fiscal year, with the energy complex being by far the hardest hit. Energy commodities were generally positive in the earlier parts of the period, but suffered a large setback in the first quarter of 2020 on demand fears created by efforts to contain the spread of Covid-19 and a supply shock in early March coming from the eruption of an oil price war between Saudi Arabia and Russia. Industrial metals also detracted from performance as prices for aluminium and copper fell on demand fears from the economic shutdown and the ensuing drop in global manufacturing activity. Agricultural prices declined in aggregate, with all but wheat and cocoa posting negative results for the period. Precious metals was the only positive contributor from a commodity complex perspective, benefiting from the low-rate environment and as nervous investors sought safe havens amid volatility in risk assets. Prices for both gold and silver jumped-up late in the period as investors assessed the potential for future inflation and potential currency debasement as global central banks massively expanded their balance sheets.

Tactical shifts helped results during the period, as gains from defensive positioning in commodities outweighed losses from overweight positioning in equities. The overall impact of tactical positioning in bonds was flat for the period.

Outlook

Up to this point, the recovery from the economic damage caused by Covid-19 containment efforts has gone about as well as anyone could expect. Economic activity across several fronts is approaching levels seen just prior to the lockdowns. However, the easy part of the recovery is likely behind us. The continued recovery from here is apt to be lumpy as pockets of infections resurge, which could cause a rollback of earlier containment efforts. Additionally, several prognosticators are suggesting that a full recapture of pre-Covid-19 economic activity levels won’t be seen until 2022 at the earliest. With this in mind, investors may be best served by taking a balanced approach to a broader set of economic outcomes that allow for fits and starts along the road to recovery.

Tactical positioning for June was overweight all equity markets, except for Hong Kong, which was carried at neutral. In fixed income, the strategy overweighted Australia, Canada, the UK and US, while Germany and Japan were excluded. Positioning in commodities was underweight agriculture, overweight metals and overweight energy, except for natural gas and gas oil (diesel), which were underweight.

For July all equity markets have been overweighted. In fixed income Australia, Canada and the US continue to be overweighted, with both Germany and the UK being excluded. Across commodities, the strategy continues to underweight most agricultural exposures, except for cocoa, lean hogs and live cattle, which are carried at neutral. Exposure to energy is neutral crudes and unleaded petrol, but underweight gas oil, natural gas and heating oil. Within metals, the strategy is overweight gold, silver and copper, but underweight aluminium.

Scott WollePortfolio Manager31 July 2020

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF DERIVATIVE INSTRUMENTSAT 31 May 2020

NOTIONAL EXPOSURE £’000NOTIONAL EXPOSURE AS % OF NET ASSETS
Government Bond Futures:
Australia2,41034.1
US86712.3
Canada81411.5
UK4125.8
Total Bond Futures (4)4,50363.7
Equity Futures:
Japan4706.6
US small cap4486.3
UK3635.1
Europe3625.1
Hong Kong3585.1
US large cap2453.5
Total Equity Futures (6)2,24631.7
Commodity Futures:
Agriculture
Cotton1612.3
Soybean meal1382.0
Soybean1371.9
Sugar841.2
Wheat420.6
Soybean oil400.6
Corn390.6
Coffee290.4
Precious Metals
Gold4276.0
Silver1502.1
Energy
Gasoline2103.0
Brent crude1832.6
WTI crude570.8
Low sulphur gasoline530.7
New York Harbor ultra-low sulphur diesel380.5
Natural gas220.3
Industrial Metals
Copper2173.1
Aluminium941.3
Total Commodity Futures (18)2,12130.0
Total Derivative Instruments (28)8,870125.4 

TARGET ANNUALISED RISK

The targeted annualised risk (volatility of monthly returns) for the portfolio as listed above is analysed as follows:

Asset ClassRISKCONTRIBUTION
Equities3.8%42.2%
Fixed Income3.5%38.3%
Commodities1.8%19.5%
9.1%100.0%

BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF INVESTMENTSAT 31 MAY 2020

YIELD %MARKET VALUE £’000 % OF PORTFOLIO
Short Term Investments
Invesco Liquidity Funds plc - Sterling 0.352,33036.7
UK Treasury Bill 0% 16 Nov 2020 0.131,51723.9
UK Treasury Bill 0% 09 Nov 2020 0.14 75011.8
UK Treasury Bill 0% 03 Aug 2020 0.68 5508.7
UK Treasury Bill 0% 06 Jul 2020 0.74 4507.1
UK Treasury Bill 0% 02 Nov 2020 0.19 3004.7
UK Treasury Bill 0% 17 Aug 2020 0.12 2824.5
UK Treasury Bill 0% 26 Oct 2020 0.15 1502.4
Total Short Term Investments6,32999.8 
Hedge Funds(1)
Harbinger Class PE Holdings150.2
Harbinger Class L Holdings 3
Total Hedge Funds 180.2 
Total Fixed Asset Investments6,347100.0 

(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments.

Derivative instruments held in the Balanced Risk Allocation Share Portfolio are shown on the previous page. At the year end all the derivative instruments held in the Balanced Risk Allocation Share Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy on page 34.

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MANAGED LIQUIDITY SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Managed Liquidity Share Portfolio is to produce an appropriate level of income return combined with a high degree of security.

Portfolio Review

The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2020 was 1.1%.

This Portfolio is invested principally in the PIMCO Sterling Short Maturity Source UCITS ETF, which is managed by PIMCO. In addition, since from time to time it is necessary to be able to realise assets quickly to meet short term payment obligations, a small proportion of the Portfolio's assets is invested in the Sterling Liquidity Portfolio of Invesco Liquidity Funds plc (formerly Short-Term Investments Company (Global Series) plc), which is a money market fund managed by Invesco. The underlying investments of the ETF carry greater risks than is typical for a money market fund and accordingly the Portfolio value may rise or fall.

The PIMCO Sterling Short Maturity Source UCITS ETF seeks to maximise current income consistent with the preservation of capital and a high degree of liquidity. The Fund is actively managed by PIMCO and has a diversified portfolio of UK sterling-denominated fixed income securities, including government bonds, corporate debt securities and unleveraged mortgage or other asset-backed securities. The Fund’s weighted average maturity is not expected to exceed three years and its average portfolio duration will be up to one year, based on PIMCO’s forecast for interest rates. The Fund invests only in investment grade securities that are rated at least Baa3 by Moody’s or BBB- by S&P or equivalently rated by Fitch (or, if unrated, determined by PIMCO to be of comparable quality).

The Sterling Liquidity Portfolio of Invesco Liquidity Funds plc is a sterling denominated, short-term low volatility net asset value money market fund. It invests in repurchase agreements, time deposits, commercial paper, certificates of deposit, medium-term notes and floating rate notes rated A-1/P-1 or better. At 31 May 2020 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor's and AAAmmf by Fitch Ratings.

As reported at in the Company’s half year report, although the UK election had removed much of the near-term Brexit uncertainty, PIMCO expected weakness in the global economy because of trade tensions and political uncertainty. In the second half of the Company’s year, financial securities markets suffered significant falls due primarily to concerns around the impact of Covid-19 on the global economy. Both of the abovementioned funds were affected, albeit not to a scale comparable with equities. 

During a special meeting on 10 March 2020, the Bank of England (BoE) Monetary Policy Committee decided to cut the Bank interest rate down from 0.75% to 0.25% to counter the economic shock resulting from the Covid-19 outbreak and also introduced a new Term Funding Scheme. Then, on 19 March, the BoE followed in the footsteps of other central banks by announcing a further rate cut, to bring the Bank rate down to 0.10%, and a new round of QE worth £200 billion, which reduced stress in money markets. 

Outlook

PIMCO expect the UK to have a deep but relatively short recession due to the Covid-19 pandemic, although the subsequent recovery is expected to be slow with activity remaining below pre-Covid-19 levels through 2021. The UK policy response has been prompt and coordinated, softening the fall and likely preventing the shock from creating lasting damage to the supply side of the economy. It appears that the Bank of England should remain a credible backstop for the sovereign balance sheet, keeping its policy rate at 0.1%, adding to existing asset purchases to broadly match the size of the fiscal deficit, and directly lending to the Treasury where appropriate.

Invesco31 July 2020

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MANAGED LIQUIDITY SHARE PORTFOLIO

LIST OF INVESTMENTSAS AT 31 MAY

20202019
MARKET VALUE £’000 % OF PORTFOLIOMARKET VALUE £’000 % OF PORTFOLIO
PIMCO Sterling Short Maturity Source UCITS ETF2,64298.5 4,49095.3
Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment Companies (Global Series) plc)401.5 2204.7
2,682100.0 4,710100.0

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BUSINESS REVIEW

Invesco Perpetual Select Trust plc is a UK investment company with four Share classes, each of which has separate investment objectives, as set out below, and is represented by a separate Portfolio. The Company’s purpose is to generate sustainable returns for its shareholders by providing a choice of investment strategies and the ability to switch between them, free of cost, according to their needs. The underlying strategies are each targeted at achieving returns corresponding with specified objectives through a disciplined investment process. The strategy the Board follows to achieve its overall objective and those of each Share class 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.

The business model the Company has adopted to achieve its objective has been to contract investment management and administration to appropriate external service providers. The Board has oversight of the Company’s service providers, and monitors them on a formal and regular basis. The Board has a collegiate culture and pursues its fiduciary responsibilities with independence, integrity and diligence, taking advice and outside views as appropriate and constructively challenging and interacting with service providers, including the Manager.

The principal service provider is Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’). In addition to managing the Portfolios in accordance with the Board’s strategy and under its oversight, the Manager is also responsible for providing company secretarial, marketing, accounting and general administration services. In practice, many of these services are performed under delegated authority by Invesco Asset Management Limited (IAML), a company related to IFML. References to the Manager in this annual financial report should consequently be considered to include both entities.

All administrative support is provided by third parties under the oversight of the Board. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Link Asset Services to act as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian.

Investment Policy

The Company’s and respective Share classes’ investment objectives, investment policies and risk and investment limits combine to form the ‘Investment Policy’ of the Company.

The Company

Investment Objective and Policy

The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.

The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities. The investment objectives, policies and risks and limits of the Portfolios for these Share classes follow. With the exception of borrowings, the limits for the Company and the four Share classes are measured at the point of acquisition of investments, unless otherwise stated.

Investment Limits of the Company

The Board has prescribed limits on the Investment Policy of the Company, which include the following:

– no more than 15% of the gross assets of the Company may be invested in a single investment; and

– no more than 10% of the gross assets of the Company may be invested in other listed investment companies (excluding property companies structured as REITs).

UK Equity Share Portfolio

Investment Objective

The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.

Investment Policy and Risk

The UK Equity Portfolio is invested primarily in UK equities and equity-related securities of UK companies across all market sectors. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded.

The Manager invests the UK Equity Portfolio so as to maximise exposure to the most attractive sectors and securities, within a portfolio structure that reflects the Manager’s view of the macroeconomic environment. The Manager does not set out to manage the risk characteristics of the UK Equity Portfolio relative to the FTSE All-Share Index (the ‘benchmark index’) and the investment process may result in potentially very significant over or underweight positions in individual sectors versus the benchmark. The size of weightings will reflect the Manager’s view of the attractiveness of a security and the degree of conviction held. If a security is not considered to be a good investment, it will not be held in the UK Equity Portfolio, irrespective of its weight in the benchmark index.

The Manager controls the stock-specific risk of individual securities by ensuring that the UK Equity Portfolio is always diversified across market sectors. In-depth and continual analysis of the fundamentals of investee companies allows the Manager to assess the financial risks associated with any particular security.

It is expected that, typically, the Portfolio will hold between 45 and 80 securities.

The Directors believe that the use of borrowings can enhance returns to shareholders and the UK Equity Portfolio will generally use borrowings in pursuing its investment objective.

Investment Limits

The Board has prescribed limits on the investment policy of the UK Equity Portfolio, which include the following:

– no more than 12% of the gross assets of the UK Equity Portfolio may be held in a single investment;

– no more than 10% of the gross assets of the UK Equity Portfolio may be held in other listed investment companies (excluding REITs);

– no more than 20% of the gross assets of the UK Equity Portfolio may be held in overseas assets; and

– borrowings may be used to raise equity exposure up to a maximum of 25% of the net assets of the UK Equity Portfolio when it is considered appropriate.

Global Equity Income Share Portfolio

Investment Objective

The investment objective of the Global Equity Income Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.

Investment Policy and Risk

The Portfolio will be invested predominantly in a portfolio of listed, quoted or traded equities worldwide, but may also hold other securities from time to time including, inter alia, fixed interest securities, preference shares, convertible securities and depositary receipts. Investment may also be made in regulated or authorised collective investment schemes. The Portfolio will not invest in companies which are not listed, quoted or traded at the time of investment, although it may have exposure to such companies where, following investment, the relevant securities cease to be listed, quoted or traded. The Manager will at all times invest and manage the Portfolio’s assets in a manner that is consistent with spreading investment risk, but there will be no rigid industry, sector, region or country restrictions.

The Portfolio may utilise derivative instruments including index-linked notes, contracts for differences, covered options and other equity-related derivative instruments for efficient portfolio management and investment purposes. Any use of derivatives for investment purposes will be made on the basis of the same principles of risk spreading and diversification that apply to the Portfolio’s direct investments, as described above.

It is expected that, typically, the Portfolio will hold between 40 and 55 securities (this guidance was changed by the Board, and announced to the market, on 20 April 2020. The previous guidance as to the typical range was 45 to 80 stocks).

The Directors believe that the use of borrowings can enhance returns to shareholders, and the Global Equity Income Portfolio may use borrowings in pursuing its investment objective.

The Company’s foreign currency investments will not be hedged to sterling as a matter of general policy. However, the Manager may employ currency hedging, either back to sterling or between currencies (i.e. cross hedging of portfolio investments).

Investment Limits

The Board has prescribed the following limits on the investment policy of the Global Equity Income Portfolio:

– no more than 20% of the gross assets of the Global Equity Income Portfolio may be invested in fixed interest securities;

– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in a single investment;

– no more than 10% of the gross assets of the Global Equity Income Portfolio may be held in other listed investment companies (excluding REITs); and

– borrowings may be used to raise equity exposure up to a maximum of 20% of the net assets of the Global Equity Income Portfolio, when it is considered appropriate.

Balanced Risk Allocation Share Portfolio

Investment Objective

The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.

Investment Policy and Risk

The Portfolio utilises two main strategies: the first seeks to balance the risk contribution from each of three asset classes (equities, bonds and commodities), with the aim of reducing the probability, magnitude and duration of capital losses, and the second seeks to shift tactically the allocation among the assets with the aim of improving expected returns.

The Portfolio is constructed so as to achieve appropriate diversity and to balance risk by asset class (bonds, equities and commodities) and by asset within each asset class. Neutral risk weighting is achieved when each asset class contributes an equal proportion of the total Portfolio risk and each asset contributes an equal proportion of the total risk for its respective asset class. The Manager is permitted to actively vary asset class weightings, subject to a maximum of 150% and a minimum of 50% of each asset class’s neutral weight. The Manager is also permitted to actively vary individual asset weightings, provided the asset class guidelines are not violated. Asset weights may not be less than zero (short) and will not exceed twice the neutral weight. For the purposes of the maximum weighting only, commodity exposures are aggregated and measured by commodity complex rather than by individual assets.

The Portfolio will be mainly invested directly in highly liquid and transparently priced exchange-traded futures contracts, with cash and cash equivalents being held as collateral. However, the Portfolio may also be invested in equities, equity-related securities and debt securities (including floating rate notes). Financial derivative instruments (including but not limited to futures and total return swaps) are used only to achieve long exposure to the three asset classes. The Portfolio may also use financial derivative instruments, including currency futures and forwards, for efficient portfolio management, hedging and investment purposes. Financial derivative instruments will not be used to create net short positions in any asset class. The derivatives portfolio will typically comprise between 20 and 33 investment positions.

It is expected that the Portfolio’s investments will mainly be denominated in sterling. Any non-sterling derivative investments may be hedged back into sterling at the discretion of the Manager when it is economic to do so.

Investment Limit

The Board has prescribed the following limits on the investment policy of the Balanced Risk Allocation Portfolio:

– the aggregate notional amount of financial derivative instruments positions may not exceed 250% of the net assets of the Balanced Risk Allocation Portfolio; and

– no more than 10% of the gross assets of the Balanced Risk Allocation Portfolio may be held in other listed investment companies.

Managed Liquidity Share Portfolio

Investment Objective

The investment objective of the Managed Liquidity Portfolio is to produce an appropriate level of income return combined with a high degree of security.

Investment Policy and Risk

The Managed Liquidity Portfolio invests mainly in a range of sterling-based or related high quality debt securities and similar assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through authorised funds investing in such instruments, including funds managed by Invesco.

The Managed Liquidity Portfolio generally invests in funds authorised as UCITS schemes (Undertakings for Collective Investments in Transferable Securities, being open ended retail investment funds in the EU), which are required under governing regulations to provide a prudent spread of risk. In the event that the Managed Liquidity Portfolio is invested directly in securities and instruments, the Manager will observe investment restrictions and risk diversification policies that are consistent with UCITS regulations.

Investment Limits

The Board has prescribed limits on the investment policy of the Managed Liquidity Portfolio, which include the following:

– no more than 10% of the gross assets of the Managed Liquidity Portfolio may be held in a single investment, other than authorised funds or high quality sovereign debt securities; and

– no more than 5% of the gross assets of the Managed Liquidity Portfolio may be held in unquoted investments, other than authorised funds.

Investors should note that the Managed Liquidity Shares are not designed to replicate the returns or other characteristics of a bank or building society deposit or money market fund. In particular, the Portfolio will typically contain some assets with a greater residual maturity, and as a whole will have greater weighted average maturity, than is prescribed by regulation governing money market funds.

Key Performance Indicators

The Board reviews the performance of the Company by reference to a number of Key Performance Indicators, at either a Company or Portfolio level, which include the following:

• Investment Performance

• Revenue and Dividends

• Discount/Premium

• Ongoing Charges

Investment Performance

To assess investment performance the Board monitors the net asset value (NAV) performance of the individual Share classes relative to that of benchmark indices it considers to be appropriate. However, given the requirements and constraints of the investment objectives and policies followed, no index can be expected to fully represent the performance that might reasonably be expected from any one or all of the Company’s Share classes.

The NAV total return performance of each of the Portfolios over the year to 31 May 2020 and of relevant benchmark indices were as follows:

UK Equity Portfolio–12.4%
FTSE All-Share Index–11.2%
Global Equity Income Portfolio–6.4%
MSCI World Index (£)8.9%
Balanced Risk Allocation Portfolio–3.1%
Merrill Lynch 3 month LIBOR plus 5% per annum5.9%
Managed Liquidity Portfolio1.1%

Source: Refinitiv.

Other performance periods, together with share price total returns, are shown on pages 7, 14, 21 and 28.

Revenue and Dividends

The Directors review revenue estimates and prospective dividend levels at each Board meeting. For the equity Share classes the Directors have become more focused on total return since sanctioning contributions to dividends from capital, but dividends paid continue to be mostly constituted from revenue and revenue is an important element of overall Portfolio returns.

UK Equity Shares

Revenue earnings per Share for the UK Equity Share Portfolio was 4.12p (2019: 5.73p), based on net revenue for the year of £1,340,000 (2019: £1,982,000), which included receipts of £61,000 (2019: £96,000) of non-recurring special dividends, equivalent to 0.19p (2019: 0.28p).

Dividend Policy:

It is the Board’s policy that the Directors will declare four dividends in respect of each accounting year (with payment in the month following) comprising of three equal interim dividends, declared in July, October and January, and a ‘wrap-up’ fourth interim dividend, declared in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the Board’s target level. In recent years the Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. The impact of Covid-19 constitutes unforeseen circumstances in this context and, given the current uncertainty of future income flows, the Directors have not set dividend targets for the year to 31 May 2021.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2020 totalling 6.60p per UK Equity Share (2019: 6.60p) of which 4.12p was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £2,145,000 (2019: £2,279,000) – the decrease reflects the reduction of shares in issue following conversions and buybacks in the year.

A first interim dividend for the year to 31 May 2021 of 1.50p was declared on 16 July 2020. In the absence of unforeseen circumstances, and in accordance with the dividend policy set out above, the Board intends for this to set the level for the next two quarterly dividends.

Global Equity Income Shares

Revenue earnings per Share for the Global Equity Income Share Portfolio was 5.39p (2019: 6.90p), based on net revenue for the year of £1,639,000 (2019: £2,234,000), which included £49,000 (2019: £38,000) of special dividends.

Dividend Policy:

It is the Board’s policy that the Directors will declare four dividends in respect of each accounting year (with payment in the month following) comprising of three equal interim dividends, declared in July, October and January, and a ‘wrap-up’ fourth interim dividend, declared in April. Depending on the level of income received in each quarter, and in the year, these four dividends may be enhanced with contributions from capital profits to achieve the Board’s target level. In recent years the Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual UK Equity dividends per share from year to year. The impact of Covid-19 constitutes unforeseen circumstances in this context and, given the current uncertainty of future income flows, the Directors have not set dividend targets for the year to 31 May 2021.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2020 totalling 7.05p (2019: 6.90p) per Global Equity Income Share, of which 5.39p was met from revenue earned in the year. The aggregate of dividends paid in respect of the year was £2,138,000 (2019: £2,232,000) – the decrease reflects the reduction of shares in issue following conversions and buybacks in the year.

A first interim dividend for the year to 31 May 2021 of 1.55p was declared on 16 July 2020. In the absence of unforeseen circumstances, and in accordance with the dividend policy set out above, the Board intends for this to set the level for the next two quarterly dividends.

Balanced Risk Allocation Shares

In order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust under section 1158 of the Corporation Tax Act 2010. The Portfolio recorded a net revenue loss of £1,000 in the year (2019: £25,000 net profit).

No dividends are required to be declared or paid for the year to retain investment trust status.

Managed Liquidity Shares

The Board intends to declare dividends on the Managed Liquidity Share Portfolio when the level of income available allows. The Managed Liquidity Portfolio recorded a net revenue profit for the year of £23,000 (2019: £27,000). An interim dividend of 0.8p per Managed Liquidity Share was declared on 15 April 2020 in respect of the year ended 31 May 2020 (2019: 0.8p), of which 0.65p was met from revenue earned in the year. It currently appears unlikely, given the quantum of revenue being earned, that future dividends will be more frequent than annual and they could be less frequent.

Discount/(Premium)

The Company has a discount control policy in place for all four Share classes, whereby the Company offers to issue or buy back Shares of all classes with a view to maintaining the market price of the shares at close to their respective net asset values and, by so doing, avoid significant overhangs or shortages in the market. It is the Board’s policy to buy back shares and to sell shares from treasury on terms that do not dilute the net asset value attributable to existing shareholders at the time of the transaction.

The operation of this policy is dependent upon the authorities to buy back and issue shares being renewed by shareholders. Notwithstanding the intended effect of this policy, there can be no guarantee that the Company’s shares will trade at close to their respective net asset values. Shareholders should also be aware that there is a risk that this discount policy may lead to a reduction in the size of the Company over time.

The Board and the Manager closely monitor movements in the Company’s share prices and dealings in the Company’s shares. Share movements in the year are summarised on page 39. At 31 May 2020, the share prices, net asset values (NAV) and the discounts of the four Share classes were as follows:

20202019
SHARE CLASSNET ASSET VALUE (PENCE)SHARE PRICE (PENCE) DISCOUNTNET ASSET VALUE (PENCE)SHARE PRICE (PENCE) DISCOUNT
UK Equity145.8139.5(4.3)%173.1173.50.2%
Global Equity Income178.5176.5(1.1)%197.6195.0(1.3)%
Balanced Risk Allocation135.1129.0(4.5)%139.5138.5(0.7)%
Managed Liquidity104.4101.5(2.8)%104.9101.5(3.2)%

The Shares of all four Portfolios generally traded in a range of 0% to 4% discount, but with the severity and speed of market moves during the height of the Covid-19 volatility prices became dislocated from NAVs and extreme levels of premium and discount were seen, particularly for the UK Equity and Global Equity Income Shares.

Ongoing Charges

The expenses of managing the Company are reviewed by the Board at every meeting. The Board aims to minimise the ongoing charges figure which provides a guide to the effect on performance of all annual operating costs of the Company. The ongoing charges figure is calculated by dividing the annualised ongoing charges, including those charged to capital, by the average daily net asset value during the year, expressed as a percentage.

At the year end the ongoing charges figure of the Company and that for the different Share classes were as follows:

COMPANY UK EQUITYGLOBAL EQUITY INCOMEBALANCED RISK ALLOCATION MANAGED LIQUIDITY
20200.90%0.89%0.88%1.25%0.35%
20190.87%0.86%0.86%1.21%0.38%

The above excludes rebates received by the Managed Liquidity Portfolio and, since neither the UK Equity nor Global Equity Income Portfolios outperformed their benchmarks over the past two years, there is no performance fee impact. In addition to inflationary effects, shrinkage from buybacks in connection with the discount control policy will tend to cause the ongoing charge percentages to gradually increase.

Financial Position

Assets and Liabilities

The Company’s balance sheet on page 76 shows the assets and liabilities at the year end. Details of the Company’s borrowing facility are shown in note 12(b) of the financial statements on page 90, with interest paid (finance costs) in note 5.

Owing to the readily realisable nature of the Company’s assets, cash flow does not have the same significance as for an industrial or commercial company. The Company’s principal cash flows arise from the purchases and sales of investments and the income from investments against which must be set the costs of borrowing and management expenses.

Borrowing Policy

Borrowing policy is under the control of the Board, which has established effective parameters for the Portfolios. Borrowing levels are regularly reviewed. As part of the Company’s Investment Policy, the approved borrowing limits are 25% of the net assets of the UK Equity Portfolio and 20% of net assets of the Global Equity Income Portfolio. The Balanced Risk Allocation Portfolio does not use borrowings, but is geared by means of the derivative instruments used to implement its investment policy. The Managed Liquidity Portfolio does not use borrowings.

Issued Share Capital

All Share classes have a nominal value of 1 penny per Share.

The following table summarises the Company’s share capital at the year end and movements during the year.

NUMBER OF SHARES UK EQUITYGLOBAL EQUITY INCOMEBALANCED RISK ALLOCATION MANAGED LIQUIDITY
Shares in issue at the year end:
– excluding treasury31,977,94128,786,8005,236,8862,497,032
– held in treasury11,977,81210,514,1595,321,2188,681,678
Movements during the year:
Increase/(decrease) arising from conversions350,118331,702(217,542)(997,436)
Shares bought back into treasury(1,460,772)(3,213,136)(164,000)(875,893)
Average price thereon167.4p197.8p138.2p101.3p

Since the year end another 1,698,000 UK Equity Shares and 1,311,000 Global Equity Income Shares have been bought into treasury at average prices of 141.2p and 178.0p, respectively.

Further details on net changes in issued share capital are set out in note 13 to the financial statements on pages 90 and 91. No treasury shares were cancelled during the year.

Current and Future Developments

As part of the Company’s overall strategy, the Company seeks to manage its affairs so as to maximise returns for shareholders. The Board also has a longer-term objective to increase the size of the Company in the belief that increasing the assets of the Company in this way will make the Company’s Shares more attractive to investors and improve the liquidity of the Shares.

Details of trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Chairman’s Statement and the portfolio managers’ reports. Further details as to the risks affecting the Company are set out under ‘Principal Risks and Uncertainties’ below.

Principal Risks and Uncertainties

The Audit Committee regularly undertakes a robust assessment of the risks the Company faces, including those that would threaten its business model, future performance, solvency, reputation or liquidity and emerging risks, on behalf of the Board (see Audit Committee Report on pages 49 to 51).

The following are considered to be the most significant risks to the Company and to shareholders in relation to their investments in the Company. Further details of risks and risk management policies as they relate to the financial assets and liabilities of the Company are detailed in note 16 to the financial statements.

Investment Objectives and Attractiveness to Investors

There is no guarantee that the Investment Policy of the Company and of each Portfolio will provide the returns sought by the Company. There can be no guarantee, therefore, that the Company will achieve its investment objectives or that the Shares will continue to meet investors’ needs.

The Board monitors the share registers and the performance of the Company and each Portfolio. It has established a structure offering a range of options for investors and has set guidelines to ensure that the Investment Policy of the Company and each Portfolio is pursued by the Manager.

Market Movements and Portfolio Performance

Individual Portfolio performance is substantially dependent on the performance of the securities (including derivative instruments) held within the Portfolio. The prices of these securities are influenced by many factors including the general health of regional and worldwide economies; interest rates; inflation; government policies; industry conditions; political and diplomatic events; tax laws; environmental laws; and by the demand from investors. The Manager strives to maximise the total return from Portfolios, but the investments held are influenced by market conditions and the Board acknowledges the external influences on the performance of each Portfolio. Further risks specifically applicable to the Balanced Risk Allocation Shares are set out on page 42.

The extreme market volatility experienced in February and March 2020 from the market reaction to Covid-19, and the continuing effects, exemplify the risks from external influences. All of the Company’s Portfolios, except for Managed Liquidity, were, and are still being, considerably affected. There is an ongoing risk to global economies from the measures taken in response to Covid-19, many companies are at risk from the effects of the imposed lockdowns on their production and revenues and this has a consequential effect on the availability of investment income.

The performance of the Manager is carefully monitored by the Board and the Chairman has brought attention to the Board’s concerns about recent performance on page 3. The continuation of the Manager’s mandates is reviewed each year. The Board has established guidelines to ensure that the investment policies of each class of Share are pursued by the Manager.

For a fuller discussion of the economic and market conditions facing the Company and the current and future performance of the different Portfolios of the Company, please see both the Chairman’s Statement on pages 3 to 5 and the portfolio managers’ reports starting on page 8.

Risks Applicable to the Company’s Shares

Shares in the Company are designed to be held over the long-term and may not be suitable as short-term investments. There can be no guarantee that any appreciation in the value of the Company’s Shares will occur and investors may not get back the full value of their investments. Owing to the potential difference between the mid-market price of the Shares and the prices at which they are sold, there is no guarantee that their realisable value will reflect their mid-market price.

The market value of a Share, as well as being affected by its net asset value (NAV), is also influenced by investor demand, its dividend yield, where applicable, and prevailing interest rates, amongst other factors. As such, the market value of a Share can fluctuate and may not reflect its underlying NAV. Shares may therefore trade at discounts to their NAVs. However, the Board has adopted a discount control policy that applies to all Share classes and the Board and the Manager monitor the market rating of each Share class.

Past performance of the Company’s Shares is not necessarily indicative of future performance.

While it is the intention of the Directors to pay dividends to holders of the UK Equity, Global Equity Income and Managed Liquidity Shares, this will be affected by the returns achieved by the respective Portfolios and the dividend policy adopted by the Board. Accordingly, the amount of dividends paid to shareholders may fluctuate. Any change in the tax or accounting treatment of dividends received or other returns may also affect the level of dividend paid on the Shares in future years. The Directors have resolved, in the absence of unforeseen circumstances, to supplement revenue with capital profits in order to pay equity Portfolio dividends at target levels set by the Board (see page 36).

Viability and Compulsory Conversion of a Class of Share

It is possible that through poor performance, market sentiment, or otherwise, lack of demand for one of the Company’s Share classes could result in the relevant Portfolio becoming too small to be viable. The Board monitors share conversions and Portfolio sizes and liaises with the Manager on the continued viability of each Share class. The Board has received assurances from the Manager that the size of the portfolios is not critical to the Manager being able to continue to offer its investment management services in respect of any of the Company’s four portfolio strategies.

The continued listing on the Official List of each class of Share is dependent on at least 25% of the Shares in that class being held in public hands. This means that if more than 75% of the Shares of any class were held by, inter alia, the Directors, persons connected with Directors or persons interested in 5% or more of the relevant Shares, the listing of that class of Share might be suspended or cancelled. The Listing Rules state that the FCA may allow a reasonable period of time for the Company to restore the appropriate percentage if this rule is breached, but in the event that the listing of any class of Shares were cancelled the Company would lose its investment trust status.

Accordingly, if at any time the Board considers that the listing of any class of Share on the Official List is likely to be cancelled and the loss of such listing would mean that the Company would no longer be able to qualify for approval as an investment trust under section 1158 of the Corporation Tax Act 2010, the Board may serve written notice on the holders of the relevant Shares requiring them to convert their Shares into another Share class.

Liability of a Portfolio for the Liabilities of Another Portfolio

The Directors intend that, in the absence of unforeseen circumstances, each Portfolio will effectively operate as if it were a stand-alone company. However, investors should be aware of the following factors:

• As a matter of law, the Company is a single entity. Therefore, in the event that any of the Portfolios has insufficient funds or assets to meet all of its liabilities, on a winding-up or otherwise, such a shortfall would become a liability of the other Portfolios and would be payable out of the assets of the other Portfolios in such proportions as the Board may determine; and

• The Companies Act 2006 prohibits the Directors from declaring dividends in circumstances where, following the distribution, the Company’s assets would represent less than one and a half times the aggregate of its liabilities or the amount of net assets would be less than the aggregate of its share capital and undistributable reserves. If the Company were to incur material liabilities in the future, a significant fall in the value of the Company’s assets as a whole may affect the Company’s ability to pay dividends on a particular class of Share, even though there are distributable profits attributable to the relevant Portfolio.

Gearing

Performance may be geared by use of the £20 million 364 day multicurrency revolving credit facility. The Company also has an uncommitted overdraft facility of up to 10% of net assets. There is no guarantee that these facilities will be renewed at maturity or on terms acceptable to the Company. If it were not possible to renew these facilities or replace them with one from another lender, the amounts owing by the Company would need to be funded by the sale of securities. This facility stood at £25 million over most of the financial year and, although the covenant attached to the facility was not in danger of being breached during the height of the Covid-19 market volatility, this risk was further mitigated by reducing the facility, together with the covenant, at its renewal in May this year.

The Balanced Risk Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 34) by means of the derivative instruments in which it invests. This is discussed separately below, under the heading: Additional Risks Applicable to Balanced Risk Allocation Shares.

Gearing levels of the different Portfolios will change from time to time in accordance with the respective portfolio managers’ assessments of risk and reward. Where market exposure is geared, any reduction in the value of the geared Portfolio’s investments may lead to a correspondingly greater percentage reduction in its NAV (which is likely to affect Share prices adversely). Any reduction in the number of Shares in issue (for example, as a result of buy backs) will, in the absence of a corresponding reduction in borrowings, result in an increase in a Portfolio’s gearing.

Whilst the use of borrowings by the Company should enhance the total return on a particular class of Share where the return on the underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling, further reducing the total return on that Share class. Similarly, the use of gearing by investment companies or funds in which the Company invests increases the volatility of those investments.

Hedging

The Company may use derivatives to hedge its exposure to currency or other risks and for the purpose of efficient portfolio management. There may be a correlation between price movements in the underlying securities, currency or index, on the one hand, and price movements in the investments, which are the subject of the hedge, on the other hand. In addition, an active market may not exist for a particular hedging derivative instrument at any particular time.

Regulatory and Tax Related

The Company is subject to various laws and regulations by virtue of its status as a public limited investment company registered under the Companies Act 2006, its status as an investment trust and its listing on the London Stock Exchange. Loss of investment trust status could lead to the Company being subject to UK Capital Gains Tax on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the London Stock Exchange, a fine or a qualified Audit Report. Other control failures, either by the Manager or any other of the Company’s service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.

The Manager reviews the level of compliance with the Corporation Tax Act 2010 and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers the risks to which the Company is exposed, the measures in place to control them and the potential for other risks to arise. The Board ensures that satisfactory assurances are received from service providers. The depositary and the Manager’s compliance and internal audit officers report regularly to the Company’s Audit Committee.

The risks and risk management policies and procedures as they relate to the financial assets and liabilities of the Company are also detailed in note 16 to the financial statements.

Additional Risks Applicable to Balanced Risk Allocation Shares

The use of financial derivative instruments forms part of the investment policy and strategy of the Balanced Risk Allocation Portfolio. The Portfolio’s ability to use these instruments may be limited by market conditions, regulatory limits and tax considerations. The absence of a liquid market for any particular instrument at any particular time may inhibit the ability of the Manager to liquidate a financial derivative instrument at an advantageous price. However, the Manager actively seeks the most liquid means of obtaining the required exposures. The financial derivative instruments used for the strategy are geared instruments and the aggregate notional exposure will usually exceed the net asset value of the Portfolio. Whilst this could result in greater fluctuations in the net asset value, and consequently the share price, the use of leverage is normally necessary to achieve the target volatility required to meet the return objective. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss and it would be necessary to increase the collateral held at the clearing broker to cover such loss. This is mitigated by the Company not using financial derivative instruments to create net short positions in any asset class combined with holding cash balances sufficient to meet collateral requirements.

Reliance on Third Party Service Providers

The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is therefore reliant upon the performance of third party service providers for its executive function. In particular, the Manager performs services that are integral to the operation of the Company and the custodian appointed by the depositary holds assets on its behalf. 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 successfully pursue its Investment Policy.

The Manager may be exposed to reputational risks. In particular, 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 potential 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 successfully pursue its Investment Policy.

The Directors continue to monitor the Covid-19 situation closely, together with the Manager and third-party service providers. A range of actions have been implemented to ensure that the Company and its service providers are able to continue to operate as normal, even in the event of prolonged disruption. The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements.

The Manager has mandated work from home arrangements and split team working will be implemented when business premises reopen. Any meetings are being held virtually or via conference calls.

The Company’s other service providers have similar working arrangements in place.

Viability Statement

The Company is an investment company which operates as a collective investment vehicle, designed and managed for long term investment. The Board considers long term for this purpose to be at least three years and so has assessed the Company’s viability over this period. However, the life of the Company is not intended to be limited to that or any other period.

In assessing the viability of the Company the Board considered the principal risks to which it is exposed, as set out on pages 39 to 42, together with mitigating factors. The risks of failure to meet the Company’s and the Portfolios’ investment objectives, contributory market and investment risks and the challenges of lack of scale were considered to be of particular importance. The Board also took into account the capabilities of the Manager and the varying market conditions already experienced by the Company since its launch in 2006, including from Covid-19 this year. Despite the disruption to markets from Covid-19 and the impact on global economies, the Directors remain confident that the Company's investment strategies will continue to serve shareholders well over the longer term. On the question of scale, the Board has concluded that if an individual Portfolio became too small it should not cause the Company itself to be unviable.

In terms of financial risks to viability, materially all of the investments comprising the portfolios are readily realisable. The equity portfolios also produce a stream of dividend income, which may fluctuate but which the Board expects to continue. The Company has no long term liabilities and the total value of the portfolios is a multiple of the value of the Company’s short term liabilities and annual operating costs. Consequently, there appears little to no prospect of the Company not being able to meet its financial obligations as they fall due in the next three years.

Based on the above, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

Audit Committee Report

The extended audit committee report required by the UK Corporate Governance Code is set out on pages 49 to 51. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.

Board’s Duty to Promote the Success of the Company

As set out in the Directors’ Report on page 52 the Directors have a statutory duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests (s172 Companies Act 2006). However, the Company has no employees and no customers in the traditional sense.

In fulfilling these duties, and in accordance 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. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews the Company’s relationships with other service providers, such as the registrar, depositary and custodian, at least annually. During the year the most significant engagement was with the Manager and, in particular the individual portfolio managers. Matters engaged upon included the change in the designated manager of the Global Equity Income Portfolio and the guidance on the number of holdings typically held in that portfolio, both of which were announced to the market and are covered elsewhere in this report. As would be expected, there was also engagement with service providers generally in connection with the lockdown conditions due to Covid-19, all of which were able to report business as usual capability.

The Board is committed to maintaining high standards of Corporate Governance. The Corporate Governance Statement required by the UKLA Listing Rules is set out on page 48.

Environment, Social and Governance considerations are dealt with in a separate section of this Strategic Report on pages 44 and 45.

Shareholder relations are given high priority by the Board and the Manager. The prime means by which the Company communicates with shareholders are the annual and half-yearly financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and its results. This information is supplemented by daily publication of the NAVs of the Company’s shares via the London Stock Exchange, ad hoc regulatory announcements, monthly factsheets and other information on the Manager’s website, including pre-investment information, key information document (KID), shareholder circulars, Portfolio disclosures, conversion forms and instructions, Stock Exchange announcements, schedule of matters reserved for the Board, terms of reference of Board Committees, Directors’ letters of appointment, the Company’s share price and proxy voting results.

The Chairman and Directors welcome contact with shareholders, although this has been difficult recently with the Covid-19 situation. There is a regular dialogue between the Manager and individual major shareholders to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to help develop a balanced understanding of their issues and concerns. The Company’s corporate broker, Investec Bank plc, is also consulted. General presentations to institutional shareholders and analysts take place throughout the year. All meetings between the Manager and institutional shareholders are reported to the Board.

It is the intention of the Board that the annual financial report and the notice of the AGM be issued to shareholders so as to provide at least twenty working days’ notice of the AGM. Shareholders wishing to lodge questions in advance of the AGM are invited to do so, either on the reverse of the proxy card or in writing to the Company Secretary at the address given on page 109.

There is a clear channel of communication between the Board and the Company’s shareholders via the Company Secretary. The Company Secretary has no express authority to respond to enquiries addressed to the Board and all such communication, other than junk mail, is redirected to the Chairman or Senior Independent Director as appropriate.

Shareholders normally have the opportunity to communicate directly with the Directors at the AGM. It is hoped that by the date of this year’s AGM on 6 October 2020 restrictions due to Covid-19 will have eased and, if so, shareholders are encouraged to attend the AGM. However, should this not be the case the AGM may have to be held as a closed meeting. In this eventuality it is recommended that shareholders exercise their votes by means of registering them with the Company's registrar ahead of the meeting, online or by completing paper proxy forms, and appoint the Chairman of the meeting as their proxy. Questions, on the business of the meeting or otherwise, may be addressed to the Company Secretary, by email to investmenttrusts@invesco.com or, by letter, to 43-45 Portman Square, London W1H 6LY.

Board Diversity

The Company’s policy on diversity is set out on page 55. At the year end the Board comprised three male and one female non-executive Directors resulting in female representation of 25%. A recruitment process last year was ultimately unsuccessful, as described on page 54, and its resumption has been postponed because of the difficulty of conducting it in lockdown conditions. The Board has reaffirmed that when the recruitment process for a new Director recommences later this year, it has a strong preference for the appointee to be female. If an appropriate female appointee is identified, female representation on the Board will become 40%, or 50% on the presumption that Alan Clifton would retire from the Board shortly thereafter (see page 54). Summary biographical details of all the current Directors are set out on page 46. The Company has no employees.

Environment, Social and Governance (ESG) Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. A greenhouse gas emissions statement is included in the Directors’ Report on page 57. In relation to the portfolios, the Company has delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments in the financial interests of shareholders.

The Manager is committed to being a responsible investor and applies, and is a signatory to, the United Nations Principles for Responsible Investment, which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency. The Manager is also a signatory to the FRC Stewardship Code 2012, which seeks to improve the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.

The equity investment teams incorporate ESG considerations in their investment processes as part of the evaluation of new opportunities, with identified ESG concerns feeding into the final investment decision and assessment of relative value. The portfolio managers make their own conclusions about the ESG characteristics of each investment held and about the overall ESG characteristics of the portfolio, although third party ESG ratings may inform their view. Additionally, the Manager’s ESG team provides formalised ESG portfolio monitoring. This is a rigorous semi-annual process where the portfolios are reviewed from an ESG perspective.

Regarding stewardship, the Board considers that the Company has a responsibility as a shareholder towards ensuring that high standards of corporate governance are maintained in the companies in which it invests. To achieve this, the Board does not seek to intervene in daily management decisions, but aims to support high standards of governance and, where necessary, will take the initiative to ensure those standards are met. The principal means of putting shareholder responsibility into practice is through the exercise of voting rights. The Company’s voting rights are exercised on an informed and independent basis.

The Company’s stewardship functions have been delegated to the Manager, which has adopted a clear and considered policy towards its responsibility as a shareholder on behalf of the Company. As part of this policy, the Manager takes steps to satisfy itself about the extent to which the companies in which it invests look after shareholders’ value and comply with local recommendations and practices, such as the UK Corporate Governance Code. A copy of the current Manager’s Stewardship Policy, which is updated annually, can be found at www.invesco.co.uk/investmenttrusts.

As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.

This Strategic Report was approved by the Board on 31 July 2020.

Invesco Asset Management LimitedCompany Secretary

.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

in respect of the preparation of the annual financial report

The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare 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 the profit or loss of the Company for that period.

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

• select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

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

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for 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 which enable them to ensure that the financial statements comply with the Companies Act 2006. They 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, a Directors’ Report, which includes a Corporate Governance Statement, and a Directors’ Remuneration Report that comply with that law and those regulations.

The Directors confirm that:

• in so far as they are aware, there is no relevant audit information of which the Company’s Auditor is unaware; and

• each Director has taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s Auditor is aware of that information.

The Directors of the Company each confirm to the best of their knowledge that:

• 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, net return and cash flows of the Company; and

• this annual financial 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.

The Directors consider that this 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 

Graham KitchenChairman

31 July 2020

.

INCOME STATEMENT

FOR THE YEAR ENDED 31 MAY

20202019
NOTESREVENUE £’000CAPITAL £’000TOTAL £’000REVENUE £’000CAPITAL £’000TOTAL £’000
Losses on investments held at fair value9(12,632)(12,632)(7,814)(7,814)
Gains/(losses) on derivative instruments102(159)(157)28(268)(240)
(Losses)/gains on foreign exchange(22)(22) 9 9
Income23,950804,0305,258215,279
Investment management fees3(206)(473)(679)(229)(520)(749)
Other expenses4(463)(9)(472)(466)(2)(468)
Net return before finance costs and taxation3,283(13,215)(9,932)4,591(8,574)(3,983)
Finance costs5(37)(88)(125)(77)(179)(256)
Return before taxation3,246(13,303)(10,057)4,514(8,753)(4,239)
Tax6(245)(245)(246)(246)
Return after taxation for the financial year3,001(13,303)(10,302)4,268(8,753)(4,485)
Return per ordinary share:7
– UK Equity Share Portfolio4.12p(24.75)p(20.63)p5.73p(15.34)p(9.61)p
– Global Equity Income Share Portfolio5.39p(16.58)p(11.19)p6.90p(9.82)p(2.92)p
– Balanced Risk Allocation Share Portfolio(0.02)p (3.88)p (3.90)p0.42p(4.86)p(4.44)p
– Managed Liquidity Share Portfolio0.65p0.03p0.68p0.59p0.54p1.13p

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation is the total comprehensive income and therefore no additional statement of other 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. Income Statements for the different Share classes are shown on pages 13, 20, 27 and 31 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.

.

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MAY

SHARE CAPITAL £’000SHARE PREMIUM ACCOUNT £’000 SPECIAL RESERVE £’000CAPITAL REDEMPTION RESERVE £’000 CAPITAL RESERVE £’000 REVENUE RESERVE £’000 TOTAL £’000
At 31 May 20181,057 1,290 76,594 351 71,624 300 151,216
Cancellation of deferred shares(2) 2
Shares bought back and held in treasury(9,925)(9,925)
Share conversions(2) 2
Return after taxation per the income statement(8,753) 4,268(4,485)
Dividends paid – note 8(297)(4,214)(4,511)
As at 31 May 2019 1,055 1,290 66,372353 62,871354 132,295
Cancellation of deferred shares(6)6
Shares bought back and held in treasury(9,986)(9,986)
Share conversions(5)5
Return after taxation per the income statement(13,303)3,001(10,302)
Dividends paid - note 8(931)(3,407)(4,338)
As at 31 May 20201,0501,290 55,454359 49,568(52) 107,669 

.

BALANCE SHEET

AS AT 31 MAY 2020

NOTES UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Fixed assets
Investments held at fair value through profit or loss952,12155,778 6,347 2,682 116,928 
Current assets
Derivative assets held at fair value through profit or loss10401 401 
Debtors11 236 2,60724815 3,106 
Cash and cash equivalents 14625150 447 
 236 2,75390065 3,954 
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss10(151)(151)
Other creditors12(a)(938)(2,179)(23)(140)(3,280)
Bank overdraft12(b)(2)(2)
Bank loan12(b)(4,800)(4,980)(9,780)
(5,740)(7,159)(174)(140)(13,213)
Net current (liabilities)/assets(5,504)(4,406)726(75)(9,259)
Net assets46,61751,372 7,073 2,607 107,669 
Capital and reserves
Share capital13(a) 439 393106 112 1,050 
Share premium14 1,290 1,290
Special reserve1425,93124,926 2,556 2,04155,454 
Capital redemption reserve147478 27 180 359 
Capital reserve1420,17325,975 3,151 26949,568
Revenue reserve14(57) 5(52)
Shareholders’ funds 46,61751,372 7,073 2,607 107,669
Net asset value per ordinary share15145.8p178.5p135.1p104.4p

The financial statements were approved and authorised for issue by the Board of Directors on 31 July 2020.

Signed on behalf of the Board of Directors

Graham KitchenChairman

.

BALANCE SHEET

AS AT 31 MAY 2019

NOTES UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 TOTAL £’000
Fixed assets
Investments held at fair value through profit or loss9 61,250 67,040 7,3854,710 140,385
Current assets
Derivative assets held at fair value through profit or loss10 175 175
Debtors113,580 518 41264,516
Cash and cash equivalents 476 245 153 10 884
4,056 763 740 165,575
Creditors: amounts falling due within one year
Derivative liabilities held at fair value through profit or loss10(223)(223)
Other creditors12(a)(670)(334)(65)(143)(1,212)
Bank loan12(b)(7,350)(4,880)(12,230)
(8,020)(5,214)(288)(143)(13,665)
Net current (liabilities)/assets(3,964)(4,451) 452(127)(8,090)
Net assets 57,286 62,589 7,8374,583 132,295
Capital and reserves
Share capital13(a) 436 389 108 1221,055
Share premium14 1,2901,290
Special reserve14 28,551 30,734 3,1063,981 66,372
Capital redemption reserve14 74 7826 175 353
Capital reserve14 28,225 31,015 3,363 268 62,871
Revenue reserve14 373(56) 37 354
Shareholders' funds  57,286 62,589 7,8374,583 132,295
Net asset value per ordinary share15173.1p197.6p139.5p104.9p

.

CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 MAY

NOTE2020 £’0002019 £’000
Cash flows from operating activities
Net return before finance costs and taxation(9,932)(3,983)
Tax on overseas income(245)(246)
Adjustments for:
Purchase of investments(97,439)(48,892)
Sale of investments110,92063,997
Sale of futures(455)35
13,02615,140
Scrip dividends(57)(53)
Losses on investments12,632 7,814
Losses on derivatives 157 240
Decrease/(increase) in debtors 463(152)
Decrease in creditors and provision(20)(4)
Net cash inflow from operating activities16,02418,756 
Cash flows from financing activities
Interest paid on bank borrowings(124)(256)
Decrease in bank borrowings(2,448)(5,346)
Share buy back costs(9,551)(9,717)
Equity dividends paid8(4,338)(4,511)
Net cash outflow from financing activities(16,461)(19,830)
Net decrease in cash and cash equivalents(437)(1,074)
Cash and cash equivalents at the start of the year 884 1,958
Cash and cash equivalents at the end of the year 447 884
Cash flow from operating activities includes:
Interest received 388
Dividends received 3,876 4,871

Analysis of changes in net debt AT 1 JUNE 2019 £’000  CASH FLOWS £’000AT 31 MAY 2020 £’000
Cash and cash equivalents884(437)447
Bank overdraft(2)(2)
Bank loans(12,230)2,450(9,780)
Total(11,346)2,011(9,335)

NOTES TO THE FINANCIAL STATEMENTS

1. 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 are set out below:

(a) Basis of preparation

(i) Accounting Standards applied

The financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards, including FRS 102 ‘the Financial Reporting Standard applicable in the UK and Republic of Ireland’, and applicable law (UK Generally Accepted Accounting Practice (UK GAAP)) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies (AIC) in October 2019. The financial statements are issued on a going concern basis as disclosed on page 56.

The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the presentation of gains and losses arising from disposals of investments and gains and losses on revaluation of investments have now been combined, as shown in note 9 with no impact to the net asset value or profit/(loss) reported for both the current or prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

The accounting policies applied to these financial statements are consistent with those applied for the preceding year.

(ii) Definitions used in the financial statements

‘Portfolio’ the UK Equity Share Portfolio, the Global Equity Income Share Portfolio, the Balanced Risk Allocation Share Portfolio and/or the Managed Liquidity Share Portfolio (as the case may be). Each comprises, or may include, an investment portfolio, derivative instruments, cash, loans, debtors and other creditors, which together make up the net assets as shown in the balance sheet.

‘Share’ UK Equity Share, Global Equity Income Share, Balanced Risk Allocation Share, Managed Liquidity Share and/or Deferred Share (as the case may be).

The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios’ income statements and summaries of net assets (shown on pages 13, 20, 27 and 31) do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice and the auditor does not express an opinion on each individual portfolio. These have been disclosed to assist shareholders’ understanding of the assets and liabilities, and income and expenses of the different Share classes.

In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the income statement between items of a revenue and capital nature has been presented alongside the income statement.

(iii) Functional and presentational currency

The Company’s investments are made in several currencies, however, the financial statements are presented in sterling, which is the Company’s functional currency. In arriving at this conclusion, the Directors considered that the Company’s shares are listed and traded on the London Stock Exchange, the shareholder base is predominantly in the United Kingdom and the Company pays dividends and expenses in sterling.

(iv) 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.

(v) Significant Accounting Estimates and Judgements

The preparation of the financial statements may require the Directors to make estimations where uncertainty exists. It also requires the Directors to make judgements, estimates and assumptions, in the process of applying the accounting policies. There have been no significant judgements, estimates or assumptions for the current or preceding year.

(b) Financial instruments

The Company has chosen to apply the provisions of Sections 11 and 12 of FRS 102 in full in respect of the financial instruments, which is explained below.

(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 interests 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 expire.

(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, including financial derivative instruments, are classified as held at fair value through profit or loss.

Financial assets held at fair value through profit or loss are initially recognised at fair value, which is taken to be their cost, with transaction costs expensed in the income statement, and are subsequently valued at fair value.

Fair value for investments, including financial derivative instruments, that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. For investments that are not actively traded or where active stock exchange quoted bid prices are not available, fair value is determined by reference to a variety of valuation techniques including broker quotes and price modelling. Where there is no active market, unlisted/illiquid investments are valued by the Directors at fair value with regard to the International Private Equity and Venture Capital Valuation Guidelines and on recommendations from Invesco’s Pricing Committee, both of which use valuation techniques such as earnings multiples, recent arm’s length transactions and net assets.

Financial liabilities

Financial liabilities, excluding financial derivative instruments but including borrowings, are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method.

(c) Derivatives and hedging

Derivative instruments are valued at fair value in the balance sheet. Derivative instruments may be capital or revenue in nature and, accordingly, changes in their fair value are recognised in revenue or capital in the income statement as appropriate.

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 included in capital reserves.

Futures contracts may be entered into for hedging purposes and any profits and losses on the closure or revaluation of positions are included in capital reserves. Where futures contracts are used for investment exposure any income element arising on bond futures is recognised as a gain on derivative instruments in the income statement and shown in revenue.

(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: highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value, have a maturity of less than three months at date of origination and provide a return no greater than the rate of a three-month high quality government bond. For the Balanced Risk Allocation and Managed Liquidity Portfolios, cash and cash equivalents do not include investments in Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment Companies (Global Series) plc) as this forms part of those Portfolio’s fixed assets.

(e) Income

Dividend income from investments is recognised when the shareholders’ right to receive payment has been established, normally the ex-dividend date. UK dividends are stated net of related tax credits. Interest income arising from cash is recognised on an accruals basis and underwriting commission is recognised as earned. Special dividends are taken to revenue unless they arise from a return of capital, when they are allocated to capital in the income statement. Income from fixed income securities is recognised in the income statement using the effective interest method.

(f) Expenses and finance costs

All expenses are accounted for on an accruals basis. Expenses are charged to the income statement and shown in revenue except where expenses are presented as capital items when a connection with the maintenance or enhancement of the value of the investments held can be demonstrated and thus management fees and finance costs are charged to revenue and capital to reflect the Directors’ expected long-term view of the nature of the investment returns of each Portfolio.

Expenses charged to the Company in relation to a specific Portfolio are charged directly to that Portfolio.

Expenses charged to the Company that are common to more than one Portfolio are allocated between those Portfolios in the same proportions as the net assets of each Portfolio at the latest conversion date.

Finance costs are accounted for on an accruals basis using the effective interest rate method.

The management fees and finance costs are charged in accordance with the Board’s expected split of long-term returns, in the form of capital gains and income, to the applicable Portfolio as follows:

PORTFOLIOREVENUE RESERVECAPITAL RESERVE
UK Equity30%70%
Global Equity Income30%70%
Balanced Risk Allocation30%70%
Managed Liquidity100%

Any entitlement to any investment performance fee which is attributable to the UK Equity and/or the Global Equity Income Portfolio is allocated 100% to capital as it is principally attributable to the capital performance of the investments in that Portfolio.

(g) Dividends

Dividends are accrued in the financial statements when there is an obligation to pay the dividends at the balance sheet date.

(h) Taxation

Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

For the Company, any allocation of tax relief to capital is based on the marginal basis, such that tax allowable capital expenses are offset against taxable income. Where individual Portfolios have extra tax capacity arising from unused tax allowable expenses which can be used by a different Portfolio, this extra tax capacity is transferred between the Portfolios at a valuation of 1% of the amount transferred.

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 has not been recognised in respect of surplus management expenses as the Company is unlikely to have sufficient future taxable revenue to offset against these.

Investment trusts which have approval under the appropriate tax regulations are not liable for taxation on capital gains.

2. Income

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

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Income from investments
UK dividends:
– ordinary dividends 1,401 361 1,762
– special dividends 612990
– Scrip dividends 50 757
 1,512 397 1,909
Overseas dividends:
– ordinary dividends1331,7871323 1,956
– special dividends2020
Unfranked investment income 1111
Interest from Treasury bills3838
 1,6562,2045123 3,934
Other income
Deposit interest 3 3
Rebates of management fee1313
Total income 1,6562,2045436 3,950

2019 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Income from investments
UK dividends:
– ordinary dividends 2,058 4632,521
– special dividends96 38 134
– Scrip dividends361753
 2,190 5182,708
Overseas dividends:
– ordinary dividends1082,29511 142,428
Unfranked investment income449 53
Interest from Treasury bills39 39
 2,3422,81350 235,228
Other income
Deposit interest11 57
Rebates of management fee 23 23
Total income 2,3432,81455 465,258

Special dividends of £32,000 in respect of the Global Equity Income Portfolio and £48,000 in respect of the UK Equity Portfolio were recognised in capital during the year (2019: £21,000 in respect of the UK Equity Portfolio).

3. Investment management and performance fees

This note shows the fees paid to the Manager. These are made up of the individual Portfolio investment management fees calculated quarterly on the basis of their net asset values and the performance fees of the UK Equity and Global Equity Income Portfolios.

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Investment management fee:
– charged to revenue 889717 4 206
– charged to capital206 22740 473
Total investment management fee294 32457 4 679
2019
Investment management fee:
– charged to revenue98 107186 229
– charged to capital 228 25042 520
Total investment management fee 326 357606 749

Details of the investment management agreement are given on page 56 in the Directors’ Report.

No performance fee was earned on the UK Equity and Global Equity Income Portfolios for the current or previous year and therefore no performance fee provision has been made in either year. Any under-performance must be fully offset by over-performance before any performance fee can be paid. Movements on the UK Equity and Global Equity Income Portfolios’ under-performance carried forward follow:

UK EQUITY 2020 £’000GLOBAL EQUITY INCOME 2020 £’000 UK EQUITY 2019 £’000GLOBAL EQUITY INCOME 2019 £’000
Under-performance brought forward(768)(1,491)(540)(893)
Under-performance in the year(142)(1,096)(228)(598)
Under-performance carried forward(910)(2,587)(768)(1,491)

4. Other expenses

The other expenses of the Company, including those paid to Directors and the auditor, are presented below; those paid to the Directors and the auditor are separately identified.

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i) 5864 8 3 133
Auditor’s fees (ii):
– for the audit of the Company’s financial statements 1720 3 141
Other expenses (iii)122 13329 5 289
197 21740 9 463
Charged to capital:
Custodian transaction charges3 5 1 9
Total200 22241 9 472
2019 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Charged to revenue:
Directors’ remuneration (i)70 74 95 158
Auditor’s fees (ii):
– for the audit of the Company’s financial statements14 15 21 32
Other expenses (iii) 115 125297 276
 199 21440 13 466
Charged to capital:
Custodian transaction charges112
Total 200 21540 13 468

(i) The Director's Remuneration Report provides information on Directors’ fees. Included within other expenses is £12,000 (2019: £14,000) of employer’s national insurance payable on Directors’ remuneration. As at 31 May 2020, the amounts outstanding on Directors' fees and employer's national insurance was £22,000 (2019: £27,000).

(ii) The Auditor’s fees shown include out of pocket expenses, but exclude VAT, which is included in other expenses.

(iii) Includes fees for depositary, broker and registrar, and also printing, postage and listing costs.

5. Finance costs

Finance costs arise on any borrowing the Company has utilised in the year. The Company has a committed £20 million revolving credit facility (see note 12(b) for further details).

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Interest payable on borrowings
repayable within one year as follows:
Charged to revenue 162137 
Charged to capital 404888 
Total 5669 125 
2019
Interest payable on borrowings
repayable within one year as follows:
Charged to revenue55 22 77
Charged to capital 127 52 179
Total 182 74 256

6. Tax

As an investment trust, the Company pays no tax on capital gains. However, the Company suffers tax on certain overseas dividends that is irrecoverable and this note shows details of the tax charge. In addition, this note clarifies the basis for the Company having no deferred tax asset or liability.

(a) Tax charge

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Overseas tax 15 230 245 
2019
Overseas tax9 237 246

The accounting policy for taxation is disclosed in note 1(h).

(b) Reconciliation of tax charge

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation(6,697)(3,171)(213)24(10,057)
Theoretical tax at the current
UK Corporation Tax rate of 19.00% (2019: 19.00%)(1,273)(602)(41) 5(1,911)
Effect of:
– Non-taxable losses on investments and derivatives 1,491 90931 2,431
– Non-taxable losses on foreign exchange1 1 2 4
– Non-taxable scrip dividends(19)(1)(20)
– Non-taxable UK dividends(265)(69)(334)
– Non-taxable UK special dividends(12)(16)(28)
– Non-taxable overseas dividends(25)(335)(360)
– Overseas tax 15 230 245
– Disallowable expenses1 1 2
– Accrued income taxable on receipt77
– Excess of allowable expenses over taxable income101 105 8(5)209
Tax charge for the year 15 230 245 
2019 UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Return before taxation(3,316)(710)(265) 52(4,239)
Theoretical tax at the current
UK Corporation Tax rate of 19.00% (2018: 19.00%)(630)(135)(50) 10(805)
Effect of:
– Non-taxable losses/(gains) on investments and derivatives 945 54649(5)1,535
– Non-taxable (gains)/losses on foreign exchange(1)1(2)(2)
– Non-taxable scrip dividends(7)(3)(10)
– Non-taxable UK dividends(385)(88)(473)
– Non-taxable UK special dividends(22)(7)(29)
– Non-taxable overseas dividends(20)(427)(447)
– Overseas tax9 237 246
– Accrued income taxable on receipt(8)(8)
– Excess of allowable expenses over taxable income 115 121 3 239
Transfer of expenses between Portfolios:
– revenue5(5)
Tax charge for the year9 237 246

Given the Company’s status as an investment trust, and the intention to continue meeting the conditions required to retain such status for the foreseeable future, the Company has not provided any UK corporation tax on any realised or unrealised capital gains or losses arising on investments.

(c) Factors that may affect future tax charges

The Company has excess management expenses and loan relationship deficits of £14,735,000 (2019: £13,595,000) that are available to offset future taxable revenue. A deferred tax asset of £2,800,000 (2019: £2,311,000), measured at the standard corporation tax substantively enacted rate of 19% (2019: 17%) 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 the deferred tax assets can be offset.

On 11 March 2020 it was announced (and substantively enacted on 17 March 2020) that the UK corporation tax rate would remain at 19% and not reduce to 17% (the previously enacted rate) from 1 April 2020.

7. Return per Ordinary Share

Return per share is the amount of profit (or loss) generated for each share class in the financial year divided by the weighted average number of the shares in issue.

Revenue, capital and total return per ordinary share is based on each of the returns after taxation shown by the income statement for the applicable Share class and on the following numbers of Shares being the weighted average number of Shares in issue throughout the year for each Share class:

AVERAGE NUMBER OF SHARES
SHARE20202019
UK Equity32,530,31534,607,613
Global Equity Income30,394,23232,378,620
Balanced Risk Allocation 5,465,5605,966,462
Managed Liquidity 3,551,6124,597,944

8. Dividends

Dividends are distributions of Portfolio returns to shareholders. These are determined by the Directors and paid four times a year.

Dividends paid for each applicable Share class, which represent distributions for the purpose of s1159 of the Corporation Tax Act 2010, follows:

20202019
NUMBER OF SHARESDIVIDEND RATE (PENCE)TOTAL £’000NUMBER OF SHARESDIVIDEND RATE (PENCE)TOTAL £’000
UK Equity
First interim33,048,823 1.50 496 35,536,9711.50534 
Second interim32,549,709 1.50 488 34,757,4431.50521 
Third interim32,334,465 1.50 485 34,732,0591.50521
Fourth interim32,203,602 2.10 676 33,490,9682.10703 
 6.60 2,1456.60 2,279 
Global Equity Income
First interim31,466,468 1.55 488 32,756,2191.50492 
Second interim31,189,234 1.55 483 32,410,6671.50486 
Third interim29,900,843 1.55 463 32,604,6201.50489
Fourth interim29,334,234 2.40 704 31,888,9512.40765 
 7.05 2,1386.90 2,232
Managed Liquidity
Prior year interim4,370,361 0.8035
Current year interim2,492,8140.8020
1.6055
Total paid in the year4,3384,511 

No dividends have been paid to Balanced Risk Allocation shareholders during the year (2019: nil).

The Company’s dividend policy permits the payment of dividends by the UK Equity, Global Equity Income and Managed Liquidity Portfolios from capital. An analysis of dividends paid in the year from revenue and capital follows.

2020 UK EQUITY £’000GLOBAL EQUITY INCOME £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Dividends paid in the year:
From revenue – current year 1,3401,639233,002
From revenue – reserves brought forward 37332 405
From revenue 1,3402,012553,407
From capital805 126 931 
 2,1452,138554,338
2019 UK EQUITY £’000GLOBAL EQUITY INCOME £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
Dividends paid in the year:
From revenue1,9822,2324,214
From capital297297
2,2792,2324,511

9. Investments held at fair value

The portfolio is made up of investments which are listed, i.e. traded on a regulated stock exchange, and a small proportion of investments which are valued by the Directors as they are unlisted or not regularly traded. Gains and losses are either:

• realised, usually arising when investments are sold; or

• unrealised, being the difference from cost of those investments still held at the year end.

(a) Analysis of investments by listing status

2020 £’0002019 £’000
UK listed investments58,15968,122
Overseas listed investments(i)58,75172,248
Unquoted hedge fund investments 1815
 116,928140,385

(i) Includes the Invesco Liquidity Funds plc – Sterling, money market fund (formerly Short-Term Investments Company (Global Series) plc) positions held by the Balanced Risk Allocation Portfolio of £2,330,000 (2019: £1,735,000) and Managed Liquidity Portfolio of £40,000 (2019: £220,000).

(b) Analysis of investment gains

2020 £’0002019 £’000
Opening valuation 140,385166,605
Movements in year:
Purchases at cost99,14948,735
Sales proceeds(109,974)(67,141)
Losses on investments in the year(12,632)(7,814)*
Closing valuation 116,928140,385
Closing book cost 123,110129,931
Closing investment holding (losses)/gains(6,182)10,454
Closing valuation 116,928140,385

The Company received £109,974,000 (2019: £67,141,000) from investments sold in the year. The book cost of these investments when they were purchased was £105,970,000 (2019: £64,033,000) realising a profit of £4,004,000 (2019: £3,108,000). 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.

* Due to adoption of the revised SORP issued in October 2019 (see Note 1(a)(i)). The losses on investments figure of £7,814,000 for the year ended 31 May 2019 is as follows:

2019 £’000
Net realised profit on sales3,108
Investment holding losses in the year (10,922)
Losses on investments(7,814)

(c) Transaction costs

Transaction costs were £158,000 (2019: £88,000) on purchases and £49,000 (2019: £42,000) on sales.

10. Derivative instruments

Derivative instruments are contracts whose price is derived from the value of other securities or indices. The Balanced Risk Allocation Portfolio uses futures, which represent agreements to buy or sell commodities or financial instruments at a pre-determined price in the future.

Excluding forward currency contracts used for currency hedging purposes.

2020 £’0002019 £’000
Opening derivative assets held at fair value through profit or loss 175 281 
Opening derivative liabilities held at fair value through profit or loss(223)(54)
Opening net derivative (liabilities)/assets held at fair value shown in the balance sheet(48) 227
Closing derivative assets held at fair value through profit or loss 401 175 
Closing derivative liabilities held at fair value through profit or loss(151)(223)
Closing net derivative assets/(liabilities) held at fair value shown in balance sheet 250(48)
Movement in derivative holding assets/liabilities 298(275)
Net realised (losses)/gains on derivative instruments(457) 7 
Net capital losses on derivative instruments as shown in the income statement(159)(268)
Net income arising on derivatives 228 
Total losses on derivative instruments(157)(240)

The derivative assets/liabilities shown in the balance sheet are the unrealised gains/losses arising from the revaluation to fair value of futures contracts held in the Balanced Risk Allocation Share Portfolio, as shown on page 25.

11. Debtors

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

2020 £’0002019 £’000
Amounts due from brokers 2,3003,246 
Collateral pledged for futures contracts244 398 
Tax recoverable223 271 
Prepayments and accrued income339 601 
 3,1064,516 

12(a). Other creditors

Creditors are amounts owed by the Company and include amounts due to brokers for the purchase of investments and amounts owed to suppliers, such as the Manager and auditor.

2020 £’0002019 £’000
Shares bought back653 218
Tax payable137 137
Amounts due to brokers 1,653
Performance fee accrued531 531 
Accruals306 326
Other payables 3,2801,212

12(b). Bank overdraft and loans

At the year end the Company had a £20 million (2019: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 14 May 2021 (2019: 15 May 2020). In addition, an overdraft facility for the purpose of short term settlement is also available. Both facilities are with The Bank of New York Mellon. For amounts drawn on the credit facility interest is payable based on LIBOR plus a margin. Additionally, there is a 0.15% commitment fee on the facility amount not utilised.

Under the facility’s covenants, the Company’s total indebtedness must not exceed 30% of total assets (excluding any Balanced Risk Allocation Portfolio assets) and the total assets must not be less than £60 million (2019: £75 million).

13. Share capital

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

All shares have a nominal value of 1 penny.

(a) Movements in Share Capital during the Year

Issued and fully paid:

UK EQUITYGLOBAL EQUITY INCOMEBALANCED RISK ALLOCATION MANAGED LIQUIDITYTOTAL SHARE CAPITAL
ORDINARY SHARES (NUMBER)
At 31 May 201933,088,595 31,668,2345,618,4284,370,361 74,745,618
Shares bought back into treasury(1,460,772)(3,213,136)(164,000)(875,893)(5,713,801)
Arising on share conversion:
 – August 2019886(234)(578)(240)(166)
 – November 201962,756(61,021) 6,0676,23814,040
 – February 2020 279,137403,391(225,335)(1,007,652)(550,459)
 – May 2020 7,339(10,434) 2,3044,218 3,427 
At 31 May 202031,977,941 28,786,8005,236,8862,497,032 68,498,659 
TREASURY SHARES (NUMBER)
At 31 May 201910,517,0407,301,0235,157,2187,805,785 30,781,066 
Shares bought back into treasury 1,460,7723,213,136 164,000875,8935,713,801 
At 31 May 202011,977,812 10,514,1595,321,2188,681,678 36,494,867

UK EQUITYGLOBAL EQUITY INCOMEBALANCED RISK ALLOCATION MANAGED LIQUIDITYTOTAL SHARE CAPITAL
ORDINARY SHARES OF 1 PENNY EACH (£’000)
At 31 May 2019331 3165644 747 
Shares bought back into treasury(15)(32)(2)(9)(58)
Arising on share conversion:
 – November 20191(1)
 – February 20202 5(2)(10)(5)
At 31 May 2020319 2885225 684
TREASURY SHARES OF 1 PENNY EACH (£’000)
At 31 May 2019105735278 308 
Shares bought back into treasury 1532 2 958 
At 31 May 2020120 1055487 366 
TOTAL SHARE CAPITAL (£’000)
Ordinary share capital319 2885225 684
Treasury share capital120 1055487 366 
At 31 May 2020439 393 106 112 1,050 
Average buy back price167.4p197.8p138.2p101.3p

The total cost of share buy backs was £9,986,000 (2019: £9,925,000). As part of the conversion process 614,700 (2019: 238,918) deferred shares of 1p each were created and subsequently cancelled during the year. No deferred shares were in issue at the start or end of the year.

No ordinary shares were issued from treasury during the year (2019: nil).

(b) Movements in Share Capital after the Year End

Since the year end, 1,698,000 UK Equity and 1,311,000 Global Equity Income shares have been bought back into treasury.

(c) Voting Rights

Rights attaching to the Shares are described in the Directors’ Report on pages 57 and 58.

(d) Deferred Shares

The Deferred shares do not carry any rights to participate in the Company’s profits, do not entitle the holder to any repayment of capital on a return of assets (except for the sum of 1p) and do not carry any right to receive notice of or attend or vote at any general meeting of the Company. Any Deferred shares that arise as a result of conversions of Shares are cancelled in the same reporting period.

(e) Future Convertibility of the Shares

Shares are convertible at the option of the holder into any other class of Share. Further conversion details are given on the inside front cover and in the Shareholder Information on page 110.

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 new shares, after deduction of the nominal amount of 1 penny and any applicable costs. The special reserve arose from the cancellation of the share premium account, in January 2007, and is available as distributable profits to be used for all purposes under the Companies Act 2006, including buy back of shares and payment of dividends. The capital redemption reserve arises from the nominal value of shares bought back and cancelled; this and the share premium are non-distributable.

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 payments of any dividends. The capital and revenue reserves are distributable.

15. Net asset value per Share

The total net assets (total assets less total liabilities) attributable to a share class are often termed shareholders’ funds and are converted into net asset value per share by dividing by the number of shares in issue.

The net asset value per Share and the net assets attributable at the year end were as follows:

ORDINARY SHARES20202019
NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000NET ASSET VALUE PER SHARE PENCE NET ASSETS ATTRIBUTABLE £’000
UK Equity 145.8 46,617 173.1 57,286 
Global Equity Income 178.5 51,372 197.6 62,589
Balanced Risk Allocation 135.17,073 139.57,837 
Managed Liquidity 104.42,607 104.94,583 

Net asset value per Share is based on net assets at the year end and on the number of Shares in issue (excluding Treasury Shares) for each Share class at the year end.

16. Financial instruments

This note summarises the risks deriving from the financial instruments that comprise the Company’s assets and liabilities.

The Company’s financial instruments comprise the following:

– investments in equities, fixed interest securities and liquidity funds which are held in accordance with the Company’s investment objectives and the investment objectives of the four Portfolios;

– short-term debtors, creditors and cash arising directly from operations;

– short-term forward foreign currency and futures contracts; and

– bank loans and short-term overdrafts, used to finance operations.

The financial instruments held in each of the four investment portfolios are shown on pages 12, 19, 25, 26 and 31.

The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for these financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured.

The Company’s principal risks and uncertainties are outlined in the Strategic Report on pages 39 to 42. This note expands on risk areas in relation to the Company’s financial instruments. The portfolios are managed in accordance with the Company’s investment policies and objectives, which are set out on pages 32 to 35. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 50 and 51.

The principal risks that an investment company faces in its portfolio management activities 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, whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

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

Credit risk, incorporating counterparty 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

As an investment trust the Company invests in equities and other investments for the long-term in accordance with its investment policies so as to meet its investment objectives. In pursuing its objectives, the Company is exposed to a variety of risks that could result in a reduction in the Company’s net assets or a reduction of the profits available for dividends. The risks applicable to the Company and the Directors’ policies for managing these risks follow. These have not changed from those applying in the previous year.

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

The main risk that the Company faces arising from its financial instruments is market risk – this risk is reviewed in detail below. Since the Company mainly invests in quoted investments and derivative instruments traded on recognised exchanges, liquidity risk and credit risk are significantly mitigated.

16.1 Market Risk

Market risk arises from changes in the fair value or future cash flows of a financial instrument because of movements in market prices. Market risk comprises three types of risk: currency risk (16.1.1), interest rate risk (16.1.2) and other price risk (16.1.3).

The Company’s portfolio managers assess the individual investment portfolio exposures when making each investment decision for their Portfolios, and monitor the overall level of market risk on the whole of their investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance for the four Portfolios and the Company, as disclosed in the Board Responsibilities section of the Directors’ Report on page 52. Borrowings can be used by the UK Equity and Global Equity Income Portfolios, which will increase the Company’s exposure to market risk and volatility. The borrowing limits for these Portfolios are 25% and 20% of attributable net assets, respectively.

16.1.1 Currency Risk

A majority of the Global Equity Income Portfolio, derivative instruments in the Balanced Risk Allocation Portfolio and a small proportion of the UK Equity Portfolio consist of assets, liabilities and income denominated in currencies other than sterling. As a result, movements in exchange rates will affect the sterling value of those items.

Management of Currency Risk

The portfolio managers monitor the separate Portfolios’ exposure to foreign currencies on a daily basis and report to the Board on a regular basis. Forward foreign currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates and to achieve portfolio characteristics that assist the Company in meeting its investment objectives in line with its investment policies. All contracts are limited to currencies and amounts commensurate with the exposure to those currencies. No such contracts were in place at the current or preceding year end. 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 accrued and its receipt.

Foreign Currency Exposure

The fair value or amortised cost of the Company’s monetary items that have foreign currency exposure at 31 May 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 in order to show the overall level of exposure.

UK EQUITY PORTFOLIO:

CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2020
Canadian Dollar2,852 2,852
Euro 2 2 2
US Dollar24244,454 4,478
26267,306 7,332
YEAR ENDED 31 MAY 2019
Canadian Dollar1,5911,591
Euro34342,2352,269
Swiss Franc484848
US Dollar441,7981,802
86865,6245,710

GLOBAL EQUITY INCOME PORTFOLIO:

CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2020
Brazilian Real 7 7 7
Canadian Dollar 1 1 1
Euro 256 2567,071 7,327
Hong Kong Dollar527(527)1,650 1,650
Japanese Yen 3 3 952 955
Korean Won1,911 1,911
Norwegian Krone 6 6 6
Swedish Krona 4 41,395 1,399
Swiss Franc438(835)(397)5,066 4,669
Taiwanese Dollar2,372 2,372
US Dollar826(159) 667 26,01626,683
2,067 1(1,521) 547 46,43346,980

CURRENCY DEBTORS (DUE FROM BROKERS AND DIVIDENDS) £’000 CASH/ (OVERDRAFT AT BANK) £’000 CREDITORS (DUE TO BROKERS AND ACCRUALS) £’000TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2019
Australian Dollar1,5151,515
Brazilian Real5555445500
Canadian Dollar111,3981,399
Euro12012018,63118,751
Japanese Yen22222,3902,412
Korean Won1,8781,878
Norwegian Krone66913919
Swiss Franc1231234,2434,366
Taiwanese Dollar1,5961,596
US Dollar70128223,44523,527
3961340956,45456,863

BALANCED RISK ALLOCATION PORTFOLIO:

CURRENCY DERIVATIVE ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 DEBTORS DUE FROM/ (CREDITORS DUE TO) BROKERS & DIVIDENDS/ ACCRUALS)* £’000 CASH/ (OVERDRAFT) AT BANK £’000 DERIVATIVE LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS £’000 TOTAL FOREIGN CURRENCY EXPOSURE ON NET MONETARY ITEMS £’000INVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS THAT ARE EQUITIES £’000 TOTAL NET FOREIGN CURRENCY EXPOSURE £’000
YEAR ENDED 31 MAY 2020
Australian Dollar8032(29)8383
Canadian Dollar2019(1)3838
Euro 76(12)53 117 117
Hong Kong Dollar4225(4)6363
Japanese Yen 57(36)234444
US Dollar207 17070(117) 33018 348
340 264 222(151) 67518 693
YEAR ENDED 31 MAY 2019
Australian Dollar98(52)358181
Canadian Dollar1920327171
Euro12294141
Hong Kong Dollar352(6)3131
Japanese Yen695(58)1616
US Dollar3127029(159)17115186
160371103(223)41115426

* Debtors includes collateral pledged for futures contracts.

Foreign Currency Sensitivity

The preceding exposure analysis is based on the Company’s monetary foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts, if used, that offset the effects of changes in currency exchange rates.

The effect of strengthening or weakening of sterling against other currencies to which the Company is exposed is calculated by reference to the volatility of exchange rates during the year using the standard deviation of currency fluctuations against the mean, giving the following exchange rate fluctuations:

20202019
£/Australian Dollar+/– 3.6%+/– 2.0%
£/Brazilian Real+/– 12.3%+/– 3.4%
£/Canadian Dollar+/– 2.6%+/– 1.6%
£/Euro+/– 2.7%+/– 1.6%
£/Hong Kong Dollar+/– 2.9%+/– 1.6%
£/Japanese Yen+/– 3.5%+/– 1.9%
£/Norwegian Krone+/– 6.1%+/– 2.1%
£/South Korean Won+/– 2.0%+/– 1.9%
£/Swedish Krona+/– 2.5%+/– 2.5%
£/Swiss Franc+/– 3.1%+/– 1.9%
£/Taiwan Dollar+/– 2.7%+/– 1.2%
£/US Dollar+/– 2.8%+/– 1.5%

The tables that follow illustrate the exchange rate sensitivity of revenue and capital returns arising from the Company’s financial non-sterling assets and liabilities for the year for the UK Equity, Global Equity Income and Balanced Risk Allocation Portfolios using the exchange rate fluctuations shown above.

If sterling had strengthened against other currencies by the exchange rate fluctuations shown in the table above, this would have had the following after tax effect:

UK EQUITY PORTFOLIO:
20202019
REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000
Canadian Dollar(74)(74)(25)(25)
Euro(1)(1)(36)(36)
US Dollar(5)(125)(130)(27)(27)
(6)(199)(205)(88)(88)

GLOBAL EQUITY INCOME PORTFOLIO:
20202019
REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000
Australian Dollar(1)(1)(1)(30)(31)
Brazilian Real –(2)(15)(17)
Canadian Dollar(1)(1)(1)(22)(23)
Euro(12)(195)(207)(15)(298)(313)
Hong Kong Dollar(15)(33)(48)(1)(1)
Japanese Yen(2)(33)(35)(2)(45)(47)
Norwegian Krone(2)(2)(1)(19)(20)
South Korean Won(1)(38)(39)(1)(36)(37)
Swedish Krona(35)(35)
Swiss Franc(15)(131)(146)(3)(81)(84)
Taiwan Dollar(2)(64)(66)(1)(19)(20)
US Dollar10(775)(765)(9)(352)(361)
(41)(1,304)(1,345)(37)(917)(954)
BALANCED RISK ALLOCATION PORTFOLIO:
20202019
REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000REVENUE RETURN £’000CAPITAL RETURN £’000TOTAL RETURN £’000
Australian Dollar(3)(3)(2)(2)
Canadian Dollar(1)(1)(1)(1)
Euro(3)(3)(1)(1)
Hong Kong Dollar(2)(2)
Japanese Yen(2)(2)
US Dollar(10)(10)(3)(3)
(21)(21)(7)(7)

If sterling had weakened to the same extent as the currencies above, the effect would have been the exact opposite.

16.1.2 Interest Rate Risk

Interest rate movements may affect:

– the fair value of the investments in fixed-interest rate securities;

– the level of income receivable on cash deposits; and

– the interest payable on variable rate borrowings.

Management of interest rate risk

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account as part of the portfolio management and borrowings processes of the portfolio managers. The Board reviews on a regular basis the investment portfolio and borrowings. This encompasses the valuation of fixed-interest and floating rate securities and gearing levels.

When the Company has cash balances, they are held in variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian or deposit taker. The Company has a £20 million (2019: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 14 May 2021. The Company uses the facility when required at levels approved and monitored by the Board.

Interest rate exposure

The Company also has available an uncommitted overdraft facility for settlement purposes and interest is dependent on the base rate determined by the custodian.

At 31 May 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 reset; and

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

The following table sets out the financial assets and financial liabilities exposure at the year end:

UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Exposure to floating interest rates:
Investments held at fair value through profit or loss(1)2,330 2,682 5,012
Cash and cash equivalents146 25150447
Bank loans(4,800)(4,980) –(9,780)
Overdraft(2)(2)
(4,802)(4,834)2,581 2,732(4,323)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including
UK Treasury Bills3,999 3,999
Net exposure to interest rates(4,802)(4,834)6,580 2,732(324)

UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
Exposure to floating interest rates:
Investments held at fair value through profit or loss(1) 1,735 4,710 6,445
Cash and cash equivalents476 245153 10 884
Bank loans(7,350)(4,880)(12,230)
(6,874)(4,635) 1,888 4,720(4,901)
Exposure to fixed interest rates:
Investments held at fair value through profit or loss including UK Treasury Bills 5,635 5,635
Net exposure to interest rates(6,874)(4,635) 7,523 4,720734

(1) Comprises holdings in PIMCO Sterling Short Maturity Source UCITS ETF and Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment Companies (Global Series) plc).

The income on the PIMCO Sterling Short Maturity Source UCITS ETF and Invesco Liquidity Funds plc – Sterling (formerly Short Term Investment Companies (Global Series) plc) investments is affected by interbank lending rates; the principal amount should normally remain stable regardless of interest rate movements.

Interest rate sensitivity

At the maximum possible borrowing level of £20 million (2019: £25 million), the maximum effect over one year of a 0.5% movement in interest rates would be a £100,000 (2019: £125,000) movement in the Company’s income and net assets.

The maximum effect of a 1% movement in the interest rates on investments held at fair value through profit and loss would be a £12,000 (2019: £16,000) movement in the Company’s income and net assets.

The above exposure and sensitivity analysis are not representative of the year as a whole, since the level of exposure changes frequently throughout the year.

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 role of the portfolio managers to manage the Portfolios to achieve the best returns they can.

16.1.3 Other Price Risk

Management of Other Price Risk

The Directors monitor the market price risks inherent in the investment portfolios by meeting regularly to review performance.

The Company’s investment portfolios are the product of the Manager’s investment processes and the application of the Portfolios' investment policies. Their value will move according to the performance of the shares held within them. However, the Portfolios do not replicate their respective benchmarks or the markets in which the Portfolios invest, so their performance may not correlate with them.

Notwithstanding the issue of correlation, if the fixed asset value of an investment portfolio moved by 10% at the balance sheet date, the profit after tax and net assets for the year would increase/decrease by the following amounts:

UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000
2020
Profit after tax increase/decrease due to rise/fall of 10% 5,2125,578635268 
2019
Profit after tax increase/decrease due to rise/fall of 10%6,1256,704739471

16.2 Liquidity Risk

Management of liquidity risk

Liquidity risk is mitigated by the investments held by the Company’s four portfolios being diversified and the majority being readily realisable securities which can be sold to meet funding commitments. If required, the Company’s borrowing facilities provide additional long-term and short-term flexibility.

The Directors' policy is that in normal market conditions short-term borrowings be used to manage short term liabilities and working capital requirements rather than realising investments.

Liquidity risk

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

UK EQUITY 3 MONTHS OR LESS £’000GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000BALANCED RISK ALLOCATION 3 MONTHS OR LESS £’000 MANAGED LIQUIDITY 3 MONTHS OR LESS £’000 MORE THAN 3 MONTHS £’000 3 MONTHS OR LESS £’000 COMPANY TOTAL £’000
2020
Overdraft22
Bank loans 4,800 4,9809,780
Amounts due to brokers1321,5211,653
Other creditors and accruals275658 23 1401,096
Performance fee accrued531531
Derivative financial instruments 95 56151
 5,2095317,159118 56 14013,213
UK EQUITY 3 MONTHS OR LESS £’000GLOBAL EQUITY INCOME MORE THAN 3 MONTHS £’000BALANCED RISK ALLOCATION 3 MONTHS OR LESS £’000 MANAGED LIQUIDITY 3 MONTHS OR LESS £’000 MORE THAN 3 MONTHS £’000 3 MONTHS OR LESS £’000 COMPANY TOTAL £’000
2019
Bank loans 7,350 4,88012,230
Other creditors and accruals139 33465143681
Performance fee accrued531531
Derivative financial instruments16162 223
7,489531 5,2142266214313,665

16.3 Credit Risk

Credit risk is that the failure of the counterparty in a transaction to discharge its obligations under that transaction could result in the Company suffering a loss.

This risk is managed as follows:

– investment transactions are carried out with a selection of brokers, approved by the Manager and settled on a delivery versus payment basis. Brokers’ credit ratings are regularly reviewed by the Manager, so as to minimise the risk of default to the Company;

– the derivative financial instruments are all exchange traded and the exchange guarantees their settlement;

– the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the daily review of failed trade reports and the use of daily stock and cash reconciliations. Only approved counterparties are used;

– the Company’s ability to operate in the short-term may be adversely affected if the Company’s Manager, other outsource service providers, or their delegates suffer insolvency or other financial difficulties. The Board reviews annual controls reports from major service providers;

– where an investment is made in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; and

– cash balances are limited to a maximum of £2.5 million for each Portfolio with any one deposit taker (other than cash collateral on derivative instruments), with only deposit takers approved by the Manager being used. Cash held at brokers includes any cash collateral on futures contracts and during the year only one futures clearing broker, Merrill Lynch, was used.

The following table sets out the maximum credit risk exposure at the year end:

UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Bonds (UK Treasury bills) 3,999 3,999
Cash held as short-term investment(1) 2,33040 2,370
Unquoted securities 1818
Derivative financial instruments250 250
Debtors(2) 2362,607248153,106
Cash and cash equivalents 14625150 447
 2362,753 7,096 10510,190
UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
Bonds (UK Treasury bills) 5,635 5,635
Cash held as short-term investment(1) 1,735220 1,955
Unquoted securities1515
Derivative financial instruments(48)(48)
Debtors(2)3,580518412 6 4,516
Cash and cash equivalents 47624515310884
4,056763 7,902236 12,957

(1) Invesco Liquidity Funds plc, money market fund (formerly Short-Term Investments Company (Global Series) plc.)

(2) Cash collateral pledged for futures contracts of £244,000 is included in debtors (2019: £398,000).

17. Fair Values of Financial Assets and Financial Liabilities

‘Fair value’ in accounting terms is the amount at which an asset can be bought or sold in a transaction between willing parties, i.e. a market-based, independent measure of value. This note sets out the fair value hierarchy comprising three ‘levels’ and the aggregate amount of investments in each level.

The financial assets and financial liabilities are either carried in the balance sheet at their fair value (investments and derivative instruments), or the balance sheet amount is a reasonable approximation of fair value.

FRS 102 as amended for fair value hierarchy disclosures sets out three fair value levels. These are:

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. The majority of the Company’s investments are quoted equity investments and Treasury bills which are deemed to be Level 1. Level 2 comprises all other quoted fixed income investments, derivative instruments and liquidity funds held in the Balanced Risk Allocation and Managed Liquidity Portfolios. Level 3 investments comprise any unquoted securities and the remaining hedge fund investments of the Balanced Risk Allocation Portfolio.

UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2020
Financial assets at fair value through profit or loss:
Level 1 52,12155,7783,9992,642 114,540
Level 22,731 40 2,771
Level 3 –1818
Total for financial assets 52,12155,7786,7482,682 117,329
Financial liabilities:
Level 2 – Derivative instruments 151 151 
UK EQUITY £’000GLOBAL EQUITY INCOME £’000BALANCED RISK ALLOCATION £’000 MANAGED LIQUIDITY £’000 COMPANY TOTAL £’000
2019
Financial assets at fair value through profit or loss:
Level 161,25067,0405,6354,490 138,415
Level 21,910 2202,130
Level 3 1515
Total for financial assets61,25067,0407,5604,710 140,560
Financial liabilities:
Level 2 – Derivative instruments 223 223

18. Capital Management

This note is designed to set out the Company’s objectives, policies and processes for managing its capital. The capital is funded from monies invested in the Company by shareholders (both initial investment and any retained amounts) and any borrowings by the Company.

The Company’s total capital employed at 31 May 2020 was £117,449,000 (2019: £144,525,000) comprising borrowings of £9,780,000 (2019: £12,230,000) and equity share capital and other reserves of £107,669,000 (2019: £132,295,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 32 to 35, including that borrowings may be used to raise equity exposure up to a maximum of 25% of net assets. At the balance sheet date, maximum possible gross gearing was 18.6% (2019: 18.9%). The Company’s policies and processes for managing capital are unchanged from the preceding year.

The main risks to the Company’s investments are shown in the Directors’ Report under the ‘Principal Risks and Uncertainties’ section on pages 39 to 42. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio's investment objectivity and policy and that this will amplify the effect on equity of changes in the value of each applicable portfolio.

The Board can also manage the capital structure directly since it has taken the powers, which it is seeking to renew, to issue and buy back shares and it also determines dividend payments.

The Company is subject to externally imposed capital requirements with respect to the obligation and ability to pay dividends by Corporation Tax Act 2010 and by the Companies Act 2006, respectively, and with respect to the availability of the overdraft facility, by the terms imposed by the lender. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year.

Borrowings comprise any drawings on the credit and/or overdraft facilities, details of which are given in note 12.

19. Contingencies, guarantees and financial commitments

Any liabilities the Company is committed to honour but which are dependent on a future circumstance or event occurring would be disclosed in this note if any existed.

There were no contingencies, guarantees or financial commitments of the Company at the year end (2019: £nil).

20. Related party transactions and transactions with the Manager

A related party is a company or individual who has direct or indirect control or who has significant influence over the Company. Under accounting standards, the Manager is not a related party.

Under UK GAAP, the Company has identified the Directors as related parties. The Directors’ remuneration and interests have been disclosed on pages 63 to 65 with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Director's Report on page 56 and note 3.

21. Post Balance Sheet Events

Any significant events that occurred after the Company’s financial year end but before the signing of the balance sheet will be shown here.

There are no significant events after the end of the reporting period requiring disclosure.

However, there continues to be potential for economic and market impacts from Covid-19, which may affect the Company’s investment portfolio. As at close of business on 30 July 2020 the NAV, price and discount of each class of the Company’s Shares were as follows:

SHARE CLASSNET ASSET VALUE (PENCE)SHARE PRICE (PENCE) DISCOUNT
UK Equity143.2142.0(0.8)%
Global Equity Income183.1181.5(0.9)%
Balanced Risk Allocation141.4133.5(5.6)%
Managed Liquidity105.0101.5(3.3)%

.

The financial information set out above does not constitute the Company’s statutory accounts for the year ended 31 May 2020. The financial information for 2019 is derived from the statutory accounts for the year ended 31 May 2019, which have been delivered to the Registrar of Companies. The auditor has reported on the 2019 accounts; the audit report was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498 of the Companies Act 2006. The statutory accounts for the year ended 31 May 2020 have been finalised and audited but have not yet been delivered to the Registrar of Companies. 

The audited annual financial report will be available to shareholders, and will be delivered to the Registrar of Companies, shortly. Copies may be obtained during normal business hours from the Company’s Registered Office, from its correspondence address, 43-45 Portman Square, London W1H 6LY, and via the web pages of all of the Share classes on the Manager’s website at www.invesco.co.uk/investmenttrusts .

The Annual General Meeting will be held on 6 October 2020 at 11.30am at 43-45 Portman Square, London W1H 6LY.

By order of the BoardInvesco Asset Management Limited31 July 2020

Contacts:Angus Pottinger 020 3753 1000Paul Griggs 020 3753 1000

.

Notice of Annual General Meeting

NOTICE IS GIVEN that the Annual General Meeting (AGM) of Invesco Perpetual Select Trust plc will be held at 43-45 Portman Square, London W1H 6LY at 11.30am on 6 October 2020 for the following purposes:

Ordinary Business of the Company

1. To receive the Annual Financial Report for the year ended 31 May 2020.

2. To approve the Directors’ Remuneration Policy.

3. To approve the Annual Statement and Report on Remuneration.

4. To re-elect Craig Cleland as a Director of the Company.

5. To re-elect Alan Clifton as a Director of the Company.

6. To re-elect Graham Kitchen as a Director of the Company.

7. To re-elect Victoria Muir as a Director of the Company.

8. To re-appoint Grant Thornton UK LLP as Auditor to the Company and authorise the Audit Committee to determine the Auditor’s remuneration.

Special Business of the Company

To consider and, if thought fit, to pass the following resolution which will be proposed as an Ordinary Resolution:

9. THAT:

the Directors be and they are hereby generally and unconditionally authorised, for the purpose of section 551 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to exercise all the powers of the Company to allot relevant securities (as defined in sections 551(3) and (6) of the 2006 Act) up to an aggregate nominal amount equal to £1,000,000 of UK Equity Shares, £1,000,000 of Global Equity Income Shares, £1,000,000 of Balanced Risk Allocation Shares and £1,000,000 of Managed Liquidity Shares, provided that this authority shall expire at the conclusion of the next AGM of the Company or the date falling fifteen months after the passing of this resolution, whichever is the earlier, but so that such authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant securities in pursuance of such offers or agreements as if the power conferred hereby had not expired.

To consider and, if thought fit, to pass the following resolutions which will be proposed as Special Resolutions:

10. THAT:

the Directors be and they are hereby empowered, in accordance with sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this resolution (‘2006 Act’) to allot Shares in each class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity) for cash, either pursuant to the authority given by resolution 9 set out above or (if such allotment constitutes the sale of relevant Shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, as if section 561 of the 2006 Act did not apply to any such allotment, provided that this power shall be limited:

(a) to the allotment of Shares in connection with a rights issue in favour of all holders of a class of Share where the Shares attributable respectively to the interests of all holders of Shares of such class are either proportionate (as nearly as may be) to the respective numbers of relevant Shares held by them or are otherwise allotted in accordance with the rights attaching to such Shares (subject in either case to such exclusions or other arrangements as the Directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of, any regulatory body or any stock exchange in any territory or otherwise);

(b) to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £30,279 of UK Equity Shares, £27,475 of Global Equity Income Shares, £5,236 of Balanced Risk Allocation Shares and £2,497 of Managed Liquidity Shares; and

(c) to the allotment of equity securities at a price of not less than the net asset value per Share as close as practicable to the allotment or sale

and this power shall expire at the conclusion of the next AGM of the Company or the date fifteen months after the passing of this resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry of this power which would or might require equity securities to be allotted after such expiry as if the power conferred by this resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the 2006 Act shall bear the same meanings in this resolution.

11. THAT:

the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with section 701 of the Companies Act 2006 as amended from time to time prior to the date of passing this resolution (‘2006 Act’) to make market purchases (within the meaning of section 693(4) of the 2006 Act) of its issued Shares in each Share class (UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity).

PROVIDED ALWAYS THAT

(i) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of each class of the Company’s share capital at 6 October 2020, the date of the Annual General Meeting (equivalent, at 30 July 2020, to 4,538,963 UK Equity Shares, 4,118,622 Global Equity Income Shares, 785,009 Balanced Risk Allocation Shares and 374,305 Managed Liquidity Shares);

(ii) the minimum price which may be paid for a Share shall be 1p;

(iii) the maximum price which may be paid for a Share in each Share class must not be more than the higher of: (a) 5% above the average of the mid-market values of the Shares for the five business days before the purchase is made; and (b) the higher of the price of the last independent trade in the Shares and the highest then current independent bid for the Shares on the London Stock Exchange;

(iv) any purchase of Shares will be made in the market for cash at prices below the prevailing net asset value per Share (as determined by the Directors);

(v) the authority hereby conferred shall expire at the conclusion of the next AGM of the Company or, if earlier, on the expiry of 15 months from the passing of this resolution unless the authority is renewed at any other general meeting prior to such time; and

(vi) the Company may make a contract to purchase Shares under the authority hereby conferred prior to the expiry of such authority which will be executed wholly or partly after the expiration of such authority and may make a purchase of Shares pursuant to any such contract.

12. THAT:

the period of notice required for general meetings of the Company (other than Annual General Meetings) shall be not less than 14 days.

Ordinary Business of the UK Equity Share Class

Only holders of UK Equity Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:

13. To approve the UK Equity Share Class Portfolio dividend payment policy as set out on page 36 of the 2020 annual financial report.

Ordinary Business of the Global Equity Income Share Class

Only holders of Global Equity Income Shares may vote on this resolution, which will be proposed as an Ordinary Resolution:

14. To approve the Global Equity Income Share Class Portfolio dividend payment policy as set out on page 36 of the 2020 annual financial report.

All Resolutions are explained further in the Directors’ Report on pages 59 to 61.

Dated 31st July 2020

By order of the Board

Invesco Asset Management Limited

Company Secretary

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28th Mar 20247:00 amPRNResults of General Meeting and Class Meetings
27th Mar 202412:04 pmPRNNet Asset Value(s)
26th Mar 20245:47 pmPRNResults of the Tender Offers
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25th Mar 202412:02 pmPRNNet Asset Value(s)
22nd Mar 202411:52 amPRNNet Asset Value(s)
21st Mar 202411:41 amPRNNet Asset Value(s)
20th Mar 202411:50 amPRNNet Asset Value(s)
19th Mar 202411:22 amPRNNet Asset Value(s)
18th Mar 202411:29 amPRNNet Asset Value(s)
15th Mar 202411:31 amPRNNet Asset Value(s)
14th Mar 202411:32 amPRNNet Asset Value(s)
13th Mar 202411:26 amPRNNet Asset Value(s)
12th Mar 202412:10 pmPRNNet Asset Value(s)
11th Mar 202411:56 amPRNNet Asset Value(s)
8th Mar 202411:54 amPRNNet Asset Value(s)
7th Mar 202411:51 amPRNNet Asset Value(s)
6th Mar 202411:49 amPRNNet Asset Value(s)
5th Mar 202411:34 amPRNNet Asset Value(s)
4th Mar 202411:30 amPRNNet Asset Value(s)
4th Mar 202410:54 amPRNPortfolio Update
1st Mar 202411:26 amPRNNet Asset Value(s)
1st Mar 20247:00 amPRNAppointment of Joint Corporate Broker and Financial Adviser
29th Feb 202411:30 amPRNNet Asset Value(s)
28th Feb 202411:29 amPRNNet Asset Value(s)
27th Feb 202411:25 amPRNNet Asset Value(s)
26th Feb 202412:44 pmPRNNet Asset Value(s)
23rd Feb 202411:38 amPRNNet Asset Value(s)
22nd Feb 202411:17 amPRNNet Asset Value(s)
21st Feb 202411:32 amPRNNet Asset Value(s)
20th Feb 202411:30 amPRNNet Asset Value(s)
19th Feb 202411:32 amPRNNet Asset Value(s)
16th Feb 202412:02 pmPRNNet Asset Value(s)
15th Feb 202411:39 amPRNNet Asset Value(s)
15th Feb 20247:00 amPRNPublication of Circular
14th Feb 202412:10 pmPRNNet Asset Value(s)
13th Feb 202411:34 amPRNNet Asset Value(s)
12th Feb 202411:41 amPRNNet Asset Value(s)
9th Feb 202412:46 pmPRNNet Asset Value(s)
9th Feb 20247:00 amPRNHalf-year Report
8th Feb 202411:50 amPRNNet Asset Value(s)
7th Feb 202411:54 amPRNNet Asset Value(s)
6th Feb 202411:23 amPRNNet Asset Value(s)
5th Feb 202411:58 amPRNNet Asset Value(s)
2nd Feb 202412:04 pmPRNNet Asset Value(s)
1st Feb 20245:58 pmPRNPortfolio Update
1st Feb 202411:30 amPRNNet Asset Value(s)
31st Jan 202412:33 pmPRNNet Asset Value(s)
30th Jan 202411:36 amPRNNet Asset Value(s)
29th Jan 202412:05 pmPRNNet Asset Value(s)

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