Invesco Sel. Mg Regulatory News (IVPM)

Invesco Perpetual Select Trust Plc - Annual Financial Report

PR Newswire

London, July 30

Invesco Perpetual Select Trust plc

Annual Financial Report Announcement

Year Ended 31 May 2018

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FINANCIAL PERFORMANCE

CUMULATIVE TOTAL RETURNS(1) TO 31 MAY 2018

(1) Defined in the Glossary of Terms and Alternative Performance Measures on page 105 Source: Thomson Reuters.

YEAR END NET ASSET VALUE, SHARE PRICE AND DISCOUNT

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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 30 to 33.

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 capital gains tax, every three months.

Performance

The NAV total return of the UK Equity Portfolio over the year was +1.1%, which compares with the total return of +6.5% posted by the FTSE All-Share Index.

The NAV total return of the Global Equity Income Portfolio over the year was +7.8%, compared with the MSCI World Index (£), net of withholding tax, return of +8.2%.

The Balanced Risk Allocation Portfolio returned +6.4% compared with the total return of +5.4% for its benchmark of 3 months LIBOR plus 5% per annum.

The Managed Liquidity Portfolio performance continued to be affected by the ongoing low interest environment, with an NAV total return of +0.3%.

The performance of the UK Equity Portfolio was disappointing. The Board believes it is highly probable that the Manager’s policy of investing in well-financed, cash generative companies on reasonable valuations will be successful. However, there have been setbacks in its delivery, notably from a few stock-specific problems. Aversion to the mining industry during a cyclical upswing and the entirely reasonable unwillingness to chase highly valued technology companies also contributed to underperformance. It is, however, the case that the Manager has an excellent longer term record, which gives us confidence that good performance can be delivered.

The Global Equity Income Portfolio’s very minor underperformance can almost entirely be attributed to reluctance, detailed in the portfolio manager’s report, to invest in very highly valued technology companies and the fact that these do not really fit in a portfolio whose aims include delivering above average and growing income.

The Balanced Risk Allocation Portfolio had another good year, again outperforming its benchmark of 3 month LIBOR plus 5% and cementing its strong showing since the adoption of the strategy in 2012. It has performed much better than many of its competitors who seek to provide stable returns with relatively low correlations, particularly to equity markets. The table attached to that portfolio manager’s report shows the gross contributions made by the three major asset classes and by tactical asset allocation. It is very encouraging to note how well the portfolio withstood both a very severe bear market in commodities and now a period of very low or negative bond returns. Asset allocation changes have generally been positive in varying market conditions and have handled sharp changes in volatility effectively. Despite this good performance, the share class has failed to secure strong support although the investment objective clearly has considerable appeal. The strategy is very scalable and potential investors should not be put off by the small current size of the share class. The Board is committed to a policy of tight discount control and therefore there should always be a narrow spread in the share prices.

As announced in February this year, we decided to amend the name of this share class to Balanced Risk Allocation on the basis that this expansion of the name better reflects the Managers’ investment process and brings it into line with the naming convention used for the Invesco group’s other products using the same strategy.

The Managed Liquidity Portfolio was again dominated by the continuing very low level of short term interest rates, although correction of a management fee rebates error, explained in my half-year report, has brought a modest improvement in the return compared with last year. Investors who held shares during the period the rebates issue persisted will be reimbursed directly by Invesco, which has made a proposal to HMRC to simplify the tax treatment of the restitution, including the interest thereon, in the hands of both the past and present shareholders affected. As I confirmed in my half-yearly statement, the form of the restitution means that historical net asset value records and share conversion calculations are not affected.

“It is a tale told by an idiot, full of sound and fury, signifying nothing”. Thus soliloquized MacBeth, but there have been many moments in the last year which have evoked such sentiments, whether on the domestic UK scene or more internationally. They have served to obscure a generally conventional evolution of policy, especially by central banks, and its effects on markets. There has, however, been a major example of unconventional policy in the substantial easing of US fiscal policy at a time when the economy was already expanding quickly. Markets, most obviously the US, have seen rising interest rates and reversals or reductions in quantitative easing. While these have caused bond markets to be very dull or negative, equity markets have benefited from a better environment for profits and have therefore continued to make progress, very approximately at the same rate as their return on equity, aided in the US by the reduction of corporate tax rates.

Outlook

The quotation from MacBeth was appropriate for our last financial year. There is a strong possibility that political events will have more actual impact during this year. A Brexit settlement will be reached, the US will have mid-term elections and serious discriminatory tariffs may be imposed. The problem is that one is merely guessing at the likely outcome of non-binary issues. However, it does still appear to be in both the UK and the EU’s interest to avoid the “No-deal” scenario. The US elections are most likely to see a swing away from the Republican party in line with mid-term tradition though whether control of Congress will change is unclear. One can only hope that the realisation will dawn on the US government that a trade war is at least as harmful to the US as to its trading partners.

Economically it still seems likely that there is reasonable momentum in the current acceleration of growth worldwide and that we should therefore expect further upward movements in short term interest rates. However, in the likely absence of a concerted investment effort to thwart climate change, the underlying deflationary trends should mean that rates and inflation remain relatively subdued compared to previous cycles. It is, however, very difficult to judge whether this expansion will end with a bang or a whimper or when either will happen. In the meantime our portfolio managers will continue to deploy a well-tested investment philosophy in which we have considerable confidence.

On the regulatory front it is worth noting that MiFID II threatens to be a case of “be careful what you wish for”. The changes that it is causing in the structure of the investment industry are far-reaching and their consequences for both the industry and securities markets may not be benign.

The Board

We have continued the process of Board renewal. The Board appointed a new non-executive Director, Graham Kitchen, with effect from 1 June 2018. He has a wealth of investment experience both as a fund manager and manager of fund managers. I recommend that shareholders support his election at the forthcoming AGM.

Sir Michael Bunbury will retire from the Board at the Annual General Meeting in October and I would like to take this opportunity to record my thanks for his contributions to the Board and particularly for his able chairmanship of the Company’s Audit Committee until July 2017.

Dividends

For the last three financial years we have applied the dividend policy 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 larger ‘wrap-up’ fourth interim declared in April. For the year under review the first three dividends declared for both Share classes were 1.45p per share. The fourth dividends were 2.1p per share for the UK Equity Shares, bringing the total to 6.45p per share for the year, and 2.35p per share for the Global Equity Income Shares, bringing that total to 6.7p per share for the year.

For the Global Equity Income Shares the revenue earned in the year plus the brought forward revenue reserve was sufficient to cover the dividends paid and no contribution from capital was required (2017: 0.8p per share). However, for the UK Equity Shares revenue earned in the year plus the brought forward revenue reserve was not enough to cover the dividends paid, so this was achieved with a contribution from capital of approximately 0.3p (2017: 0.9p) per share.

We intend to continue with this policy and have set a target for each Portfolio for the year ending 31 May 2019 of at least maintaining the dividend level. However, we are conscious that since dividends are all announced on a quarterly timeframe linked to the quarterly share class conversion opportunities shareholders do not get an opportunity to vote on the dividends. Accordingly, we have introduced an advisory ordinary resolution in the notice of meeting this year to give shareholders of the equity investment share classes the opportunity to vote on the dividend payment policy.

The first interim dividends in respect of the year to May 2019 were 1.5p per share for both the UK Equity and Global Equity Income share classes.

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 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. No dividends have been paid on the Balanced Risk Allocation Shares.

The Managed Liquidity shareholders have not received any dividends since May 2012. It remains the Directors’ intention to distribute substantially all net revenues earned shortly before conversion dates, but this Portfolio currently generates insufficient net revenue, due to continued very low interest rates together with that Portfolio’s share of administrative costs.

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 and the level of share buy backs since its adoption has been modest. The ongoing 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 pre-emptive basis being renewed at general meetings of the Company.

Share Capital Movements

During the year to 31 May 2018, the Company bought back and placed in treasury 685,000 UK Equity Shares, 825,000 Global Equity Income Shares, 483,000 Balanced Risk Allocation Shares and 232,000 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 450,000 UK Equity Shares, 566,000 Global Equity Income Shares and 248,000 Balanced Risk Allocation 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: 1 August 2018; 1 November 2018; 1 February 2019; and 1 May 2019. Should you wish to convert Shares at any of these dates, conversion forms, which are available on the Manager’s website at www.invescoperpetual.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 55 and 56. The AGM will be held at 1st Floor, 43-45 Portman Square, London W1H 6LY at 11.30 am on 4 October 2018 and shareholders are cordially invited to attend. Refreshments will be provided. The Board recommends that shareholders vote in favour of all resolutions as each of the Directors intend to do in respect of their own Shares.

Patrick GiffordChairman30 July 2018

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STRATEGIC REPORT

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.

Market and Economic Review

The UK stock market delivered positive returns over the twelve months to 31 May 2018. However, the market’s mid-single digit performance masked periods of significant volatility during the year, which included notable weakness in the first three months of 2018.

The FTSE All-share Index reached record highs in late 2017 and again towards the end of the Company’s financial year, fuelled by bouts of sterling weakness against the US dollar. Ongoing domestic political concerns, which centred around the weakened Conservative government following the June 2017 snap election and continuing Brexit negotiations, weighed on the pound’s value relative to other currencies. The dollar’s relative strength supported the performance of the UK market’s many international constituents, explaining the perhaps counterintuitive reality that periods of significant sterling weakness lead to improved UK stock market returns. For much of the period, the UK stock market also benefited from the rally seen in mining stocks, with rising commodity prices aiding the performance of the sector during 2017. Strength in the oil price, which broke through US$75 per barrel in April 2018, also supported market returns.

However, there were notable periods of negative performance during the 12 months, including the first quarter of the New Year. A post-referendum peak in the relative strength of the domestic currency, spurred by news of a record high in the UK employment rate and coupled with improving news on Brexit negotiations, weighed on UK stock market performance, while protectionist rhetoric from President Trump fuelled global market unease.

Expectations around central bank monetary policy proved another dominant theme during the period, with both the Bank of England (BoE) and US Federal Reserve raising rates during the twelve months under review. The BoE’s Monetary Policy Committee implemented the first UK interest rate rise in a decade in November, voting to increase the UK interest rate to 0.5%. Speculation around further UK interest rate rises built throughout the first quarter of 2018, before weaker than expected domestic growth figures released in April tempered prospects of a further rise. No further rate rise was implemented during the period under review.

Portfolio Performance

On a total return basis, the Net Asset Value of the UK Equity Shares rose by 1.1% over the 12 months to the end of May 2018, compared to 6.5% by the FTSE All-Share Index.

Portfolio Strategy and Review

The portfolio delivered a positive return over the period, but failed to match the rise of the index. The main drivers of this underperformance were both stock-specific, notably SafeStyle UK, Micro Focus, Acacia Mining and Provident Financial, as well as relative, with a lack of exposure to the strong industrial metals sector and a smaller weighting in the oil and gas sector than that of the index.

Shares in windows and doors company SafeStyle UK fell dramatically following a disappointing trading update released in April – the fifth in less than 12 months – as revenue misses stemming from cyclical weakness were compounded by the formation of a competitor by Safestyle’s founder. Whilst there is ample room for a fourth national player in what remains an extremely fragmented industry, this new business has specifically targeted Safestyle by establishing branches close to their locations, recruiting sales staff and operating under a strikingly similar brand. Safestyle have now hired to rebuild their sales and marketing functions and a legal challenge is underway to protect the brand. This remains a market leading business with the potential to return to winning ways under a new chief executive, pressing home the advantages of its brand and best-in-class cost structure to deliver once again the consistent market share gains enjoyed in recent years. The holding has been maintained in anticipation of this recovery.

The holding in Micro Focus fell very sharply as the company warned in March that revenues were declining more quickly than expected, due to problems stemming from its £6.6 billion acquisition last year of the software arm of Hewlett Packard. The company also announced the departure of its chief executive, just six months after taking the role. Whilst disappointing, the precipitous fall in the share price appears excessive for the problems affecting the company. The position has been retained, in the belief that revenues will stabilise and additional cost savings will be found to steady earnings and see the valuation recover from its currently depressed level.

Acacia Mining, a Tanzania-based gold miner, also detracted from the portfolio’s performance during the period following a dispute with the Tanzanian government, which prevented the export of gold in concentrate from the country. One of the two principal mines has now been mothballed. The government alleges historic underreporting of exports and resultant underpayment of taxes. Barrick Gold, who own 64% of the company, are negotiating on Acacia’s behalf but the outcome remains uncertain. Given the company’s position as the leading miner in Tanzania and the fiscal contribution that entails, I believe that a satisfactory settlement will be reached and that value in the shares will re-emerge. The holding has therefore been maintained.

The portfolio’s holding in Provident Financial (PFG) delivered negative returns over the period in aggregate. In August 2017 the company issued a dramatic profit warning, emanating from its Consumer Credit Division. Additionally, it announced that subsidiary Vanquis Bank was subject to, and co-operating with, an FCA investigation into its Repayment Option Plan ancillary product. The dividend was withdrawn and the hitherto highly regarded chief executive resigned. Prior to the warning the position had been reduced by around half and in the days following, unable to quantify the potential regulatory liability, I took advantage of a rebound in the share price to sell the rest of the position.

In February of this year, earlier than anticipated by the market, PFG reached a settlement in respect of the FCA investigation, announced it was raising £300 million to strengthen the balance sheet (thereby maintaining its investment grade credit rating) and said dividends would restart this year, with a “progressive” dividend policy to be instituted in 2019. Considering the investment case to be de-risked and the valuation on that basis highly attractive, I participated in the capital raise and reintroduced PFG to the portfolio.

The portfolio’s underweight position, compared to the index, within the metals and mining sector provided an additional drag to relative returns as the diversified mining companies delivered strong performance in the first part of the period through to the end of 2017 – the result of a rally in metals prices (notably copper). I remain cautious on the outlook for these companies, principally on concerns as to the sustainability of China’s credit cycle. With the earnings and share prices of mining companies so heavily correlated to commodity prices there is too much uncertainty to warrant investment in the sector at prevailing valuations.

The portfolio’s holdings in the financials sector provided mixed returns over the year. The largest holding, Barclays, was a negative contributor to returns over the period as a whole, despite providing some positive returns in the latter half. The size of the position reflects conviction that the current low valuation of Barclays implies an overly pessimistic assessment of its earnings outlook and capital generation potential – and therefore the prospect of capital being returned to shareholders in the form of increased dividends and potential share buybacks. I remain confident that return targets for 2019 and 2020 appear conservatively struck, on which basis the shares appear to be materially undervalued.

More positively, a number of the portfolio’s holdings performed very strongly over the period, with Tesco, Sigma Capital, Next and Ashtead amongst the largest contributors to performance.

Retail giant Tesco posted strong results for the year 2017/18, including the company’s first annual dividend since 2014, and completed the acquisition of Booker, which has the potential to prove transformational. Trading has now demonstrably turned better, reflecting efforts of the management team over the last three years’ to stabilise the business. Both the core Tesco business and the Booker wholesale business are now seeing accelerating market share gains and sales growth. This is a top-5 holding and looks set to continue to deliver positive performance.

Specialist fund manager Sigma Capital saw its share price rise following a statement that PRS REIT, the residential real estate investment trust that Sigma manages, had successfully raised an additional £250 million via a placing. This will increase the fees that Sigma earns for managing the assets. There is potential for significant further growth of the REIT, in which this Portfolio has also invested. In combination these two companies occupy the market leading position in institutional grade, rented family housing, a sector that enjoys support from both local and central government, who see it as a key plank of the strategy to resolve the historic under-provision of housing in the UK.

Next posted positive returns despite the widespread pessimism affecting the UK high street. The company’s strong online offering, coupled with flexibility in its leasehold property base, leaves the retailer better positioned than many competitors to respond to the changing landscape of clothing retail. Meanwhile, the management’s well established focus on shareholder returns saw the share buyback programme restored and this boosted earnings per share. Despite the significant recovery in share price already witnessed, I believe the current valuation fails to reflect the strength of Next’s business or to distinguish the company from the high street’s weaker general merchandisers. It remains in the top five holdings in the portfolio.

Ashtead continues to consolidate the US market for construction equipment rental. With a strategy of careful organic expansion into attractive regions, exerting the advantages of its scale and high service offering, the market share gains of the last decade show no signs of abating. Underlining the management’s confidence in the outlook and the strength of the balance sheet, the company announced a £1 billion share buyback in December 2017, which has helped to maintain momentum in the share price.

The portfolio also benefited from its holdings in the oil and gas sector. Both BP and Royal Dutch Shell provided significant contributions to returns over the period. The sector’s performance has proven particularly strong in the latter half of the period, further confirmation of successful cost cutting by both businesses. The ongoing capital discipline exhibited across the sector should see increasing value returned to shareholders and valuations in the sector should continue to progress to reflect generous dividend streams that are now entirely cash backed. Whilst the portfolio is less exposed to the sector than the benchmark, these are very significant weightings in absolute terms and both are among the top five holdings.

Outlook

The recent bout of volatility has been followed by a change in leadership in equity markets. By the end of the period the FTSE All-Share Index had recovered over half of the losses sustained in the early February sell-off and the mood in the market now feels quite different: the last few years have seen a dramatic divergence in performance of certain styles and sectors. “Global Value” stocks reached multi-decade relative lows to “Global Growth” stocks and this was compounded in the UK market in the wake of the EU referendum as we witnessed an equally extreme decline in domestically focused stocks relative to exporters.

The global position could be said to have reversed for a number of reasons, but the sharp move higher in US interest rates (both 3 month Libor and 10 year rates are up significantly) and the issues affecting the previously loved US tech sector (President Trump publicly criticising Amazon which may portend government intervention to limit its increasing dominance in numerous markets, the well documented data privacy issues affecting Facebook, production misses at Tesla, amongst others) are the two that stand out as having driven widespread asset class and sector rotation.

At the same time a less antagonistic climate in the Brexit negotiations and the long awaited turning point in UK disposable incomes have combined to strengthen the pound and prompt a reassessment of the UK market.

Whilst it is too early to call a definitive end to such a long-established low growth, low inflation and low interest rate regime and to the equity market phenomena that have followed in its wake, it does not feel a stretch to say that this is the closest markets have been to a turning point since the financial crisis.

The portfolio has been positioned for the anticipated recovery in value stocks, especially in UK domestic cyclicals, and has limited exposure to the parts of the market that have seen valuations expand the most in recent years. I am therefore cautiously optimistic in light of recent developments.

As ever though, risk abounds. The current list of things to worry about includes, but is not limited to: UK political risk with Labour waiting in the wings as the Conservative Party attempts to coalesce around a common vision for Brexit, signs of cyclical weakness in global leading indicators, broad geopolitical uncertainties not least the escalating frictions in global trade, China credit, governments that remain significantly indebted, challenges to the US dollar’s reserve status, the withdrawal and reversal of quantitative easing and of course higher interest rates, which may have unpredictable consequences, particularly in certain emerging markets.

I am watching these issues carefully but I believe that this diversified portfolio of well positioned and attractively valued businesses, with the additional protection afforded by a meaningful allocation to gold-related equities, is well placed to navigate what lies ahead. This confidence is reflected by the portfolio’s gearing which is maintained at just under 20%.

James GoldstonePortfolio Manager30 July 2018

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UK EQUITY SHARE PORTFOLIO

LIST OF INVESTMENTSAT 31 MAY 2018

Ordinary shares listed in the UK unless stated otherwise

† 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.

Market and Economic Review

Global equity markets ended 2017 near all-time highs amid solid corporate earnings and accelerating economic growth. Indeed, former US Federal Reserve chair Janet Yellen told the Joint Economic Committee in November: “The economic expansion is increasingly broad based across (US) sectors as well as across much of the global economy.” Performance in December helped global equity markets achieve their best annual performance since the post financial crisis recovery.

The year 2018 got off to an equally strong start for global equity markets. Strength in corporate earnings, synchronised economic growth and optimism over US tax cuts helped drive up prices in many markets across the world to their highest on record. However, volatility made a return at the beginning of February as fears around inflation fuelled heightened expectations of interest rate hikes in the US, leading Treasury yields higher. Geopolitics, rising trade tensions between the US and China, and a technology-led correction in March rounded off the worst quarter for global equities in more than two years. Attention turned to the corporate earnings season in April and by May easing trade tensions helped restore some confidence. However, the prospect of snap Italian elections – which could have effectively become a referendum on the euro – brought the vulnerability of the European Union back into focus, and financial markets reacted accordingly.

Portfolio Performance

On a total return basis, the Portfolio’s net asset value increased by 7.8% over the year to 31 May 2018, compared to a rise of 8.2% in the MSCI World index (£, total return, net of withholding tax).

Portfolio Strategy and Review

Performance versus the benchmark index was disadvantaged by the portfolio’s underweight position in the Information Technology sector, in particular the e-commerce companies. This was one of the strongest performing sectors over the 12 months. However, these companies pay no dividends and appear expensive on many metrics. The technology-driven market correction in March 2018, sparked by company-specific news from Facebook, did little to dent the sector’s performance. However, our investment process is unchanged and we have not felt compelled to chase after performing, momentum-driven equities, many of which we see as grossly overvalued.

The portfolio’s exposure to the telecoms sector also disappointed, driven by stock-specific news around BT. The company was hit by a range of problems in 2017, including fraud in the Italian business and concerns over its relationship with its government regulator Ofcom, especially regarding its Openreach subsidiary.

The healthcare sector underperformed the broader market. While President Trump unveiled a plan in May 2018 to keep drug prices in check, he stopped short of introducing radical measures that would restrain US pharmaceutical firms’ profits. However, continued worries over pharmaceutical prices and the lack of new product launches led to the sector underperforming the benchmark.

The sectors that delivered positive performance for the Portfolio during the year included energy and consumer staples, the former helped by a sharp rise in the oil price. Moreover, the efforts by companies to reduce costs have borne fruit and the sector once again began to generate free cashflow. The supply/demand balance for oil looks favourable over the coming years. The share prices of Royal Dutch Shell, BP, Chevron and Canadian Natural Resources all benefited as a result.

The consumer staples sector, meanwhile, was weak versus the broader market, as companies struggled to deliver volume growth in the face of growing supermarket ‘own label’ sales and increased fragmentation in consumer tastes. The portfolio’s underweight exposure to the sector was therefore a positive.

Portfolio Changes

Over the period new positions were established in the following stocks: Toyota Motor, which we regard as a high quality automotive business, with a strong balance sheet and good product line up, well positioned in the transition to hybrid and electric vehicles; Next, whose online business is driving growth and market share gains against a tough UK retail backdrop. We favour its solid balance sheet, attractive dividend and on-going share buy-back programme; Telefonica Brasil, which we believe benefits from a well invested network infrastructure, strong 4G spectrum and an over-capitalised balance sheet which can fund higher future dividend payouts; and Sumitomo Mitsui Financial, which is a well-capitalised Japanese bank that we believe will benefit both from rising interest rates globally and a strengthening Japanese economy.

We also introduced a new position in Broadcom, which is a semiconductor company with strong franchise positions within wireless communications, wired infrastructure and enterprise storage. The high margin and strong cash flow generation of this business appears to be under-appreciated by the market, which has been concerned with ongoing acquisition speculation. The recent blocking of their attempted acquisition of Qualcomm frees up substantial cash flows for further accretive M&A activity, while also supporting continued significant dividend growth and the potential for share buybacks.

Two further new holdings were TE Connectivity and Royal Bank of Scotland. TE Connectivity provides connectors and sensors to many industries worldwide. With major exposure to the auto and general industrials sectors, the company is a beneficiary of both the electrification of cars and the automation of factories. The bulk of restructuring work has now been completed at the Royal Bank of Scotland. With the capital position of the bank now very strong, we expect to see significant increases to dividends over the coming years. We also rotated the financials exposure slightly away from the US and more towards Europe with a new position in BNP Paribas. It is a stock we have held in the past and it looked attractive to us at its current valuation. 

We switched out of Honda, selling the position in its entirety, as the share price of Toyota Motor looked cheaper and its prospects for the long term appeared to be better. We sold the position in PNC Financial Services as we felt, following strong share price performance, that the valuation looked expensive compared to peers. In our view the company is still well placed but there were better opportunities elsewhere. We reviewed our investment case for Centrica and decided there was better value elsewhere, so sold the holding. In the case of London Stock Exchange, Deutsche Boerse and Nexion we sold the positions following strong share price performance, believing these companies had become fairly valued.

We sold the long standing position in RELX, the Anglo Dutch professional publisher, as we felt it had become fully valued. Our decision to sell the position in Nordea Bank was based partly on valuation grounds and partly because we believed there to be greater opportunities within other European financial stocks. We also sold the position in BT, discussed above, as we do not see a rapid recovery in the company’s prospects.

Outlook

Tough trade talk is nothing new for 2018, but there is a sense that stress is ratcheting up between the US and its trading partners, particularly China. This could take its toll on markets amid concerns that global trade restrictions could curb global economic growth. Notwithstanding this risk, and whilst there are some warning signs of the potential for more difficult economic conditions ahead (a flattening US yield curve for example), we consider the global economic outlook at present to be relatively benign, with modest economic growth and few signs of significant inflationary pressure.

From a valuation and income perspective we continue to favour Europe and Asia over the US. Nine years into an economic and stock market recovery, it gets harder to find attractively valued companies. We believe some opportunities remain, though these are primarily in the sectors unloved by investors such as energy, telecoms, financials and indeed certain stocks reliant on the UK domestic economy as the Brexit cloud looms larger.

Overall, our strategy remains consistent: to invest in high quality companies at attractive valuations. We view such companies as those that can sustain profit margins and deliver positive returns through the economic cycle. We see growing and sustainable dividends as clear evidence of these sorts of companies. In aggregate, therefore, we target companies that offer attractive yields, dividend growth prospects and capital upside.

Nick MustoePortfolio Manager30 July 2018

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

LIST OF INVESTMENTSAT 31 MAY 2018

Ordinary shares unless stated otherwise.

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

H: H-Shares – shares issued by companies incorporated in the People’s Republic of China (PRC) and listed on the Hong Kong Stock Exchange.

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.

Market and Economic Review

After a mixed start to the Company’s financial year, equities posted positive returns across most markets over the third and fourth quarters of 2017, setting new highs amid low volatility. Commodity markets started the financial year well and posted positive returns in aggregate over the third and fourth quarters of 2017, led by energy and industrial metals. Government bond prices suffered pullbacks through much of 2017 as demand for safe-haven assets fell and fears of central bank tapering took hold, causing yields to rise.

Despite a strong start to 2018, equities ultimately posted negative results over the first quarter of the new calendar year as volatility returned in February and March. In April and May, however, all equity markets in which the strategy invests bounced back, led by UK and US small-cap equities, to finish with positive gains up to the Company’s year end. Performance across government bond markets was mixed from the start of 2018 and ultimately negative in aggregate up to the Company’s year end. Commodities finished the first quarter of 2018 with a small decline as market volatility surged on fears of rising interest rates and a potential trade war with China. Then, up to the end of May, commodity prices largely advanced, with gains across all complexes.

Portfolio Performance

The Balanced Risk Allocation Portfolio posted a positive return for the year of 6.4%, compared with +5.4% for the benchmark, Merrill Lynch 3 month LIBOR plus 5%.

Portfolio Strategy and Update

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 2018 exposure to commodities was the largest positive contributor to performance followed by equities. Bonds were the sole detractor from results from an asset class perspective for the fiscal year.

After a mixed June 2017, with three of the four complexes experiencing declines, commodity markets led results for the fiscal year. Performance was especially positive for energy commodities during the third and fourth quarters of 2017, as crude prices rebounded and as distillates saw prices jump, in part due to the shuttering of refining capabilities in the wake of Hurricane Harvey. Industrial metals prices also posted gains over the same period as robust economic data from China spurred expectations of demand and environmental crack downs in China curtailed production of aluminium. Agricultural commodity prices struggled with oversupply in some markets during the third quarter and then rallied during the fourth quarter due to powerful moves in cotton, sugar and meats. Precious metals prices were mixed; gold posted gains largely on safe-haven demand in response to geopolitical tensions, while silver posted mild losses.

Commodities finished the first quarter of 2018 with a small decline as market volatility surged on fears of rising interest rates and potential trade war with China. Results were mixed across the sub-complexes as agriculture and energy provided gains while industrial metals and precious metals declined. Then, up to the Company’s year end, commodities delivered positive results, mainly driven by positive results in energy and industrial metals. Energy commodities benefited as the US re-imposed economic sanctions on Iran. Industrial metals posted mild gains up to year end as well, as prices for aluminium and copper rose on better-than-expected China manufacturing data and reduced stocks of aluminium. Agriculture commodities delivered mixed results over the last two months of the Company’s fiscal year, with soybeans and soymeal prices retreating the most on lingering China trade war fears, while cotton and wheat prices jumped on drought fears in the US. Precious metals were a detractor in aggregate over the last two months as the price of gold declined on a stronger dollar and rising rate concerns, while silver managed a modest increase.

Equity markets began the fiscal year on a positive but muted note, with slight gains across four of the six markets in which the strategy invests advancing. Equity performance strengthened over the third and fourth quarters of 2017. Asian markets led all regions as both Hong Kong and Japanese equities posted gains. US markets also saw price appreciation with both large- and small-cap equities climbing higher. Results across the European region were positive as well, with UK equities enjoying gains while shares on the continent were more subdued.

2018 began with a bang for equity markets as investor optimism and signs of broad economic growth combined to push index levels higher. Then, through the middle of the first quarter, equities suffered drawdowns amid uncertainty about future central bank actions and protectionist rhetoric from the US leading to fears of a trade war. However, equity markets bounced back in the latter two months of the fiscal year, led by UK and US small-cap equities. UK equities benefited from weakness in sterling while US small-caps rallied to post a new all-time high. Gains across the other international markets were mostly due to central bank actions leaving policy rates unchanged.

Government bonds were the sole detractor from an asset class perspective during the fiscal year. To start the period, bonds suffered pullbacks across the board as all six markets in which the strategy invests declined. This continued through the third quarter of 2017, with Canadian, Australian and UK government bond yields rising. German bund and US Treasuries managed to post gains during the period as demand for safe-havens increased in the face of tensions between North Korea and the rest of the world. In the fourth quarter, government bond exposure helped results, as all five markets in which the strategy was invested saw yields fall over the period. Australian bonds led results as performance strengthened mid-quarter in a response to industrial metals prices falling due to temporary weakening of Chinese economic data. German bunds were the weakest contributor as investors became nervous about the impending start of tapering of quantitative easing and associated bond purchases by the European Central Bank.

Performance across government bond markets during the first quarter of 2018 saw a reversal during the period as early period fears of rising rates and strong equity returns pushed yields higher while the return of volatility in equities had investors scrambling for safe-havens through the latter months. Results across markets were mixed with Australia and Germany providing slight contributions, while the US, UK and Canada ended the quarter with losses. The run up to the Company’s financial year end was slightly better as yields fell in response to flight-to-safety flows. German bunds and UK gilts were the leading markets as European investors sought shelter amid fears of the new Italian government taking actions that would precipitate an exit from the European Union . US, Canadian and Australian bonds finished with negative results.

Outlook

At the date of this report there are two main issues in focus. The first is the impact of higher US interest rate expectations. These have been fuelled by the US Federal Reserve’s (Fed’s) statements, in which officials seem committed to a course of additional rate hikes, and by the ongoing reduction of the Fed balance sheet, which results in quantitative tightening. This combination has caused havoc across several emerging market currency and equity markets, leaving investors on edge. Further compounding the problem is the second issue, which is the ongoing war of words between the Trump administration and multiple trading partners, which seems to be leading inexorably toward one or more trade wars. These fears have already begun to weigh on economic activity, as evidenced by slowing manufacturing purchasing managers’ index data across several regions. An unsatisfactory conclusion to either of these issues could spur a bout of risk-off behaviour among market participants.

From a notional exposure standpoint, tactical positioning continues to overweight all six equity markets and bonds are also being overweighted for all markets, except the US, which is modestly underweight. Japanese bonds continue to be absent from the strategy. Positioning in commodities is decidedly defensive, with underweights to all agricultural commodities and metals, while energy commodities continue to have overweight positions.

Scott WollePortfolio Manager30 July 2018

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF DERIVATIVE INSTRUMENTS

AT 31 MAY 2018

TARGET ANNUALISED RISK

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

BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF INVESTMENTSAT 31 MAY 2018

(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 32.

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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.

Market and Economic Review

Bank of England (BOE) monetary policy was the biggest determinant of sterling short-term interest rates over the year. November 2017 was the first time since July 2007 that the BOE raised the cost of UK borrowing with the Bank Rate hiked from 0.25% to 0.50%. This reversed the cut made in the rate following the European Union referendum vote in 2016.

Strong economic growth at the start of 2018 raised expectations that the rate would be raised again in May and by early April the market viewed a May increase as almost certain. However, a series of weaker economic data releases saw these expectations recede, and by the time of the May meeting, the market’s expectations were aligned with the bank’s eventual decision to keep the rate on hold at 0.50%.

After the November 2017 hike, 3-month LIBOR (the rate at which the largest banks lend to one another) increased to 0.52%. From early February, the speculation that the bank would increase the rate again in May led to a further rise in the LIBOR rate. The rate peaked at 0.79% in April before then receding as the likelihood of a hike diminished.

Portfolio Performance

The Managed Liquidity Portfolio NAV total return for the year ended 31 May 2018 was 0.3%.

Portfolio Strategy and Review

Our investment strategy is achieved by investing in the Invesco Perpetual Money Fund and the Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc, each of which invests in a diversified portfolio of high quality sterling denominated short-term money market instruments.

The Invesco Perpetual Money Fund has positions in a number of government, quasi-government and corporate bonds. In order to limit the exposure to interest rate risk and credit risk (the likelihood of an issuer defaulting), these bonds are both short-dated and of high quality. The fund also has an allocation to floating rate notes. The interest rates on these bonds reset at regular intervals and so can mitigate the effect of rising rates on fund performance.

The Sterling Liquidity Portfolio of Short-Term Investments Company (Global Series) plc invests in high quality sterling denominated money market instruments such as commercial paper, certificates of deposit, floating rate notes, time deposits and asset-backed commercial paper, all with a minimum rating of A-1. At 31 May 2018 the Sterling Liquidity Portfolio was rated AAAm by Standard and Poor's and AAAmmf by Fitch Ratings.

Outlook

The BoE has consistently guided the market that any tightening of monetary policy will be gradual and limited and we anticipate that this approach will continue. However, both investment vehicles hold a number of floating rate notes. They remain invested in a range of short-dated, high quality instruments from the government, quasi-government, banking and corporate sectors.

Stuart EdwardsPortfolio Manager30 July 2018

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MANAGED LIQUIDITY SHARE PORTFOLIO

LIST OF INVESTMENTSAS AT 31 May

* At the year end the Managed Liquidity Share Portfolio held 4.69% (2017: 5.85%) of the outstanding shares in the Invesco Perpetual Money Fund.

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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 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 the services of Invesco Fund Managers Limited (‘IFML’ or the ‘Manager’) to manage 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. BNYMIL became the depositary following novation of the depositary agreement with BNY Mellon Trust & Depositary (UK) Limited on 1 December 2017. The transfer has had no substantive effect on the services received by the Company.

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 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 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 45 and 80 securities.

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 may on occasion exceed twice the neutral weight.

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 in a range of sterling-based or related money market fund assets (which may include transferable securities, money market instruments, warrants, collective investment schemes and deposits), either directly or indirectly through money market funds, including funds managed by Invesco.

The Managed Liquidity Portfolio generally invests in money market 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 money market 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 money market 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.

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 2018 and of relevant benchmark indices were as follows:

Source: Thomson Reuters.

Other performance periods, together with share price total returns, are shown on page 2.

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 Portfolio was 5.49p (2017: 5.38p), based on net revenue for the year of £2,038,000 (2017: £2,102,000), which included receipts of £110,000 (2017: £39,000) of non-recurring special dividends, equivalent to 0.30p (2017: 0.10p).

Dividend Policy:

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. Further, they have implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim 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 target.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2018 totalling 6.45p per UK Equity Share (2017: 6.25p) of which 6.16p was met from revenue earned in the year and revenue reserves brought forward. The aggregate of dividends paid in respect of the year was £2,397,000 (2017: £2,434,000).

A first interim dividend for the year to 31 May 2019 of 1.5p was declared on 18 July 2018, setting the level for the next two dividends, in the absence of unforeseen circumstances.

Global Equity Income Shares

Revenue earnings per Share for the Global Equity Income Portfolio was 6.50p (2017: 5.62p), based on net revenue for the year of £2,149,000 (2017: £1,839,000), which included £14,000 (2017: nil) of special dividends.

Dividend Policy:

The Directors have set a target of at least maintaining, in the absence of unforeseen circumstances, the level of annual Global Equity Income dividends per share from year to year. Further, they have implemented a model of declaring (with payment in the month following) three equal interim dividends in July, October and January with a ‘wrap-up’ fourth interim 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 target.

Dividends Declared:

The Directors have declared and paid four interim dividends for the year ended 31 May 2018 totalling 6.7p (2017: 6.4p) per Global Equity Income Share, all of which was met from revenue earned in the year and revenue reserves brought forward. The aggregate of dividends paid in respect of the year was £2,211,000 (2017: £2,092,000).

A first interim dividend for the year to 31 May 2019 of 1.5p was declared on 18 July 2018, setting the level for the next two dividends, in the absence of unforeseen circumstances.

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.

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 Portfolio when the level of income available allows. The Managed Liquidity Portfolio recorded a net revenue profit for the year, but with interest rates continuing to be very low it was quite small, at £12,000 (2017: £2,000 loss). In view of the administrative costs involved, no interim dividend was declared on the Managed Liquidity Shares for the year ended 31 May 2018 (2017: nil).

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 36. At 31 May 2018, the share prices, net asset values (NAV) and the discounts of the four Share classes were as follows:

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, excluding any performance fees, were as follows:

UK Equity and Global Income ongoing charges reduced in the current year as a result of the management fee rates being reduced from 1 June 2017.

During the past year neither the UK Equity nor Global Equity Income Portfolios outperformed their benchmarks. In addition, the UK Equity Portfolio wrote back £4,000 (2017: £280,000) of performance fee previously provided, and the impact follows:

Financial Position

Assets and Liabilities

The Company’s balance sheet on page 69 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 83, with interest paid (finance costs) in note 5.

Due 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 1p per Share.

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

Since the year end another 450,000 UK Equity Shares, 566,000 Global Equity Income Shares and 248,000 Balanced Risk Allocation Shares have been bought into treasury at prices of 184.9p, 202.0p and 139.0p, respectively.

Further details on net changes in issued share capital are set out in note 14 to the financial statements on pages 83 and 84. 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 portfolio managers’ reports and 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, on behalf of the Board (see Audit Committee Report on pages 45 to 47).

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 17 to the financial statements.

Investment Objectives

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.

The Board monitors the performance of the Company and each Portfolio and has established 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 39.

The performance of the Manager is carefully monitored by the Board, and 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 7.

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 specified target levels (see pages 4 and 5).

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 any dividends in circumstances where the Company’s assets represent less than one and a half times the aggregate of its liabilities. 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 £25 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.

The Balanced Risk Allocation Portfolio may also be geared (by up to 250%, according to the investment policy set out on page 32) 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 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 17 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.

Viability Statement

The Directors’ view of the Company’s viability has not changed since last year. 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 37 to 40, 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. 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.

Corporate Governance

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 44.

Audit Committee Report

The extended audit committee report required by the UK Corporate Governance Code is set out on pages 45 to 47. There are no areas of concern in relation to the financial statements to bring to the attention of shareholders.

Board Diversity

The Company’s policy on diversity is set out on page 50. At the year end the Board comprised four male and one female non-executive Directors resulting in female representation of 20%. Although the number of male Board members increased by one on 1 June 2018 the year end proportion remains representative, since the Board normally comprises five Directors and one of the other male Directors will not be continuing after the AGM. Summary biographical details of all the Directors are set out on pages 41 and 42. The Company has no employees.

Social and Environmental Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited application. The Manager considers various factors when evaluating potential investments. While a company’s policy towards the environment and social responsibility, including with regard to human rights, is considered as part of the overall assessment of risk and suitability for the portfolio, the Manager does not make investment decisions on environmental and social grounds alone. The Manager applies the United Nations Principles for Responsible Investment.

Modern Slavery Act

The Company is an investment vehicle and does not provide goods or services in the normal course of its business, or 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 30 July 2018.

Invesco Asset Management LimitedCompany Secretary

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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

Patrick GiffordChairman30 July 2018

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INCOME STATEMENTFOR THE YEAR ENDED 31 MAY

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 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 12, 19, 26 and 29 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios respectively.

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STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 MAY

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BALANCE SHEETAS AT 31 MAY 2018

These financial statements were approved and authorised for issue by the Board of Directors on 30 July 2018.

Signed on behalf of the Board of DirectorsPatrick GiffordChairman

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BALANCE SHEETAS AT 31 MAY 2017

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CASH FLOW STATEMENTFOR THE YEAR ENDED 31 MAY

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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 FRS102 ‘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 November 2014 (SORP) as updated in February 2018. The financial statements are issued on a going concern basis as disclosed on page 51.

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 financial statements for the Company comprise the income statement, reconciliation of movements in shareholders’ funds, the total column of the balance sheet and the company totals shown in the notes to the financial statements.

The UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios’ income statements and summaries of net assets do not represent statutory accounts, are not required under UK Generally Accepted Accounting Practice and are not audited. 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 Financial Statements are presented in sterling, which is the Company’s functional and presentation currency and is the currency of the Company’s share capital and the predominant currency in which the Company’s shareholders operate. This is also the currency in which these accounts are prepared.

(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.

(b) Financial instruments

The Company has chosen to apply the provisions of Sections 11 and 12 of FRS102 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 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 Short Term Investments Company (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:

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

Special dividends of £455,000 in respect of the UK Equity Portfolio and £2,000 in respect of the Global Equity Income Portfolio were recognised in capital during the year (2017: £699,000 in respect of the UK Equity Portfolio and £nil in respect of the Global Equity Income 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.

Details of the investment management agreement are given on page 52 in the Directors’ Report. As explained in the Chairman's Statement, the Managed Liquidity Portfolio did not receive some rebates it was due in respect of underlying management fees. To correct this the Manager has offered, with which the Company has agreed, to reimburse affected shareholders directly, including interest thereon. Accordingly, no adjustments have been required to the management fees recognised in these financial statements.

The performance fee written back is solely in respect of the UK Equity Portfolio. No performance fees were earned on the UK Equity or Global Equity Income Portfolios for the current or previous year. Any underperformance must be fully offset by overperformance before any performance fee can be paid. Movements in the UK Equity and Global Equity Income Portfolios’ overperformance and underperformance follow:

4. Other expenses

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

(i) The Directors’ Remuneration Report provides information on Directors’ fees. Included within other expenses is £13,000 (2017: £11,000) of employer's national insurance payable on Directors’ remuneration. As at 31 May 2018, the amounts outstanding on Directors’ fees and employer’s national insurance was £23,000 (2017: £24,000).

(ii) Auditor’s fees are shown excluding 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 are the cost of borrowing facilities. These are made up of costs incurred to have the facility in place and any interest charged when the facility is used.

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

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

(b) Reconciliation of tax charge

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 £12,311,000 (2017: £11,018,000) that are available to offset future taxable revenue. A deferred tax asset of £2,093,000 (2017: £1,873,000), measured at the standard corporation tax substantively enacted rate of 17% (2017: 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.

7. Basic return per Ordinary Share

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

Basic 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:

8. Dividends

Dividends represent distributions of income less expenses to shareholders. Dividends are paid as an amount per share held.

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

No dividends have been paid to Balanced Risk Allocation and Managed Liquidity shareholders during the year (2017: nil).

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

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

(i) Includes the Short-Term Investments Company (Global Series) plc positions held by the Balanced Risk Allocation Portfolio of £2,273,000 (2017: £2,440,000) and Managed Liquidity Portfolio of £48,000 (2017: £548,000).

(b) Analysis of investment gains

(c) Transaction costs

Transaction costs were £138,000 (2017: £110,000) on purchases and £37,000 (2017: £55,000) 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.

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 24.

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.

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.

12(b). Bank overdraft and loans

At the year end the Company had a maximum uncommitted overdraft facility of 10% of net assets available for settlement purposes; and a £25 million (2017: £25 million) committed 364 day multicurrency revolving credit facility, which is due for renewal on 17 May 2019 (2017: 18 May 2018). Both facilities are with The Bank of New York Mellon and the interest payable on the credit facility is based on LIBOR +0.85% on amounts drawndown.

13. Provision

The provision arises from the UK Equity Portfolio’s performance fee. The movements in the performance fee provision are as follows:

14. Share capital

Share capital represents the total number of shares in issue.

All shares have a nominal value of 1 penny.

(a) Movements in Share Capital during the Year

Issued and fully paid:

The total cost of share buy backs was £3,838,000 (2017: £4,126,000). As part of the conversion process 400,431 (2017: 256,895) 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 (2017: nil).

(b) Movements in Share Capital after the Year End

Since the year end, 450,000 UK Equity Shares were bought back at a price of 184.9p; 566,000 Global Equity Income Shares were bought back at a price of 202.0p; and 248,000 Balanced Risk Allocation Shares were bought back at a price of 139.0p. All were bought back into treasury.

(c) Voting Rights

Rights attaching to the Shares are described in the Directors’ Report on page 53.

(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 103.

15. 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.

16. 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:

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.

17. 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 11, 18, 24, 25 and 29.

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 37 to 40. 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 30 to 33. The management process is subject to risk controls, which the Audit Committee reviews on behalf of the Board, as described on pages 45 and 46.

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.

17.1 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 (17.1.1), interest rate risk (17.1.2) and other price risk (17.1.3).

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 48. 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.

17.1.1 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:

GLOBAL EQUITY INCOME PORTFOLIO:

BALANCED RISK ALLOCATION PORTFOLIO:

* 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:

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:

GLOBAL EQUITY INCOME PORTFOLIO:

BALANCED RISK ALLOCATION PORTFOLIO:

If sterling had weakened against the currencies shown, the effect would have been the converse.

17.1.2 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 £25 million (2017: £25 million), 364 day multicurrency revolving credit facility which is due for renewal on 17 May 2019. 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:

(1) Comprises holdings in Short-Term Investments (Global Series) and Invesco Perpetual Money Fund.

The income on the Invesco Perpetual Money Fund and Short Term Investments Company (Global Series) 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 of £25 million (2017: £25 million), the effect over one year of a 0.5% movement in interest rates would result in a £125,000 (2017: £125,000) maximum movement in the Company’s income and net assets.

The effect over one year of a 1% movement in the interest rates on fixed interest investments held at fair value through profit or loss would result in a £19,000 (2017: £28,000) maximum 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.

17.1.3 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 result of the Manager’s investment processes and as a result are not wholly correlated with the individual Portfolios’ benchmarks or the markets in which the Portfolios invest. The value of the investment portfolios will not move in line with the markets but will move as a result of the performance of the shares held within the investment portfolios.

If the 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:

17.2 Liquidity Risk

Management of liquidity risk

Liquidity risk is minimised as the investments held by the Company’s four portfolios are diversified and the majority are 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 to realise 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:

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:

(1) Comprises holdings in the Short-Term Investments Company (Global Series).

(2) Cash collateral pledged for futures contracts of £223,000 is included in debtors (2017: £444,000).

18. 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 (March 2016) 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 (ie developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (ie 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, the UK Equity Portfolio’s holdings of Barclays Bank Nuclear Power Notes, 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.

A reconciliation of the fair value movement in Level 3 is set out below.

19. 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 2018 was £168,792,000 (2017: £168,630,000) comprising borrowings of £17,576,000 (2017: £15,200,000) and equity share capital and other reserves of £151,216,000 (2017: £153,430,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on pages 30 to 33, 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 gross gearing was 17.3% (2017: 16.3%). 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 37 to 40. These also explain that the Company has borrowing facilities which can be used in accordance with each Portfolio's investment objective and policy and that this will amplify the effect on equity of changes in the value of the 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 the 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.

20. 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 (2017: £nil).

21. 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 57 to 59 with additional disclosures in note 4. No other related parties have been identified.

Details of the Manager’s services and fees are disclosed in the Directors’ Report on page 52 and note 3.

22. 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.

.

The financial information set out above does not constitute the Company’s statutory accounts for the year ended 31 May 2018. The financial information for 2017 is derived from the statutory accounts for the year ended 31 May 2017, which have been delivered to the Registrar of Companies. The auditor has reported on the 2017 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 2018 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, 6th Floor, 125 London Wall, London EC2Y 5AS, and via the web pages of all of the Share classes on the Manager’s website at www.invescoperpetual.co.uk/investmenttrusts .

The Annual General Meeting will be held on 4 October 2018 at 11.30am at 43-45 Portman Square, London W1H 6LY.

By order of the BoardInvesco Asset Management Limited30 July 2018

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