KIT.L Regulatory News (KIT)

Keystone Investment Trust Plc - Annual Financial Report

PR Newswire

London, December 4

FINANCIAL INFORMATION AND PERFORMANCE STATISTICS

Performance Statistics

(1) Source: Refinitiv.

(2) Figures with debt at market value.

(3) Alternative Performance Measure (APM). See Glossary of Terms and Alternative Performance Measures on pages 72 to 74 of the financial report for full details of the explanation and reconciliations of APMs.

(4) The benchmark index of the Company.

(5) Comparative restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

(6) The Company moved to a quarterly dividends model in 2019 and, as a consequence of the timing of this decision, the sum of the first and second interim dividends for 2020 compares to the second interim dividend for 2019.

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CHAIRMAN’S STATEMENT

Performance

The share price total return to shareholders over the year to 30 September 2020 was –14.5% (2019: –4.1%), with total return on the underlying net asset value (NAV) per share of –15.0% (2019: +1.1%). The benchmark, the FTSE All-Share Index, posted a total return of –16.6% (2019: +2.7%). At the year end, the share price stood at a discount of 17.3% (2019: 17.3%) to the NAV.

Performance has been significantly impacted by the extreme market turmoil caused by the Covid-19 pandemic. Market sentiment has remained against UK domestic stocks and an investment process anchored in valuation. I wrote last year that the Manager’s contrarian approach to seeking truly undervalued companies in the UK requires patience and he has remained true to his convictions. There are signs that this approach has begun to pay off. Your Company’s NAV per share outperformed the benchmark by 13.7% in the second half of the year under review. The Manager’s Report section of the Strategic Report provides a review of market and portfolio performance during the year and his view of the outlook.

The Board recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced as a result of the Covid-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund to remain invested for the long term enables the Manager to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves.

Discount and Buyback Authority

The weighted average discount of the investment companies in the UK All Companies sector widened further through the year. It was 12.6% at 30 September 2020 compared with 8.3% at 30 September 2019 (source: JP Morgan Cazenove). The average discount at which the Company’s ordinary shares traded relative to their underlying NAV (with debt at market value) over the past year widened to 14.9%, from 12.9% last year.

The Board believes that share buy-backs offer the opportunity to purchase, at a discount, exposure to the Company’s portfolio of quality investments that are themselves undervalued. During the period to the end of September 2020, the Company repurchased into treasury for an aggregate consideration of £16.9 million, the equivalent of 5.35 million ordinary shares of 10p each, representing 7.9% of the issued ordinary share capital at the beginning of the year. These shares were purchased at an average discount of 13.9% to NAV and the enhancement to NAV was approximately £2.7 million, or 1.4% of shareholders’ funds at the year end. The Board continues to monitor the discount level closely, although investment performance is the key contributor in driving demand for shares and narrowing the discount.

Borrowings

The Company redeemed all of its outstanding debenture and bonds on 13 March 2020. The redemption was funded from a new flexible and cost efficient bank facility. The legacy debt securities were redeemed at prices that were close to the fair value of the liabilities, so substantial interest savings were secured at negligible cost to NAV.

The Board is responsible for the Company’s gearing strategy and sets parameters within which the Manager operates. The Board revised these parameters in March 2020 so that no net purchases should be made that would take the level of net gearing above 15% of net assets and that sales be made if, as a result of market movements, net gearing rose higher than 20% (previously 15%) of net assets. This increased flexibility was given to the Manager at a time of extreme volatility in share prices as financial markets reacted to news of the pandemic and the Board did not want the Manager to be forced to sell assets at distressed prices. Net gearing stood at 10.2% at 30 September 2020 compared with 6.1% at 30 September 2019.

Sub-division of the Company’s Share Capital

Following approval by shareholders at the AGM on 11 February 2020, the Company’s shares were sub-divided on a 5 for 1 basis, effective on 13 February 2020. The intention of the share split was to improve market liquidity and to make the Company more attractive to retail investors.

Revenue and Dividends

The revenue return after tax for the year was 7.41p per ordinary share, significantly down from last year’s equivalent of 11.12p(1) per share, reflecting a number of dividend cuts by companies held in the portfolio. Special dividends received from portfolio companies were negligible during the year.

(1) Comparative restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

Since May 2019, the Board has been paying quarterly dividends in order to provide shareholders with a more attractive flow of income. In light of the fall in revenues this year, the Board wishes to make full use of the investment trust structure by using the Company’s reserves such that the total ordinary dividend for the year to 30 September 2020 will support the Company’s record of either increasing or maintaining the level of ordinary dividends each year since 1976. The Board has declared a fourth interim dividend, in lieu of a final, of 4.00p per share, with a significant element funded from the revenue reserve, giving a total ordinary dividend for the year of 11.20p per share (2019: 11.20p, adjusted for the share split). This equates to a yield of 4.4% at 30 September 2020, which was ahead of the UK All Companies sector average of 3.3% (source: JP Morgan Cazenove). The dividend will be paid on 24 December 2020 to shareholders on the register on 4 December 2020.

Following payment of the fourth interim dividend for the year ended 30 September 2020 the Company’s revenue reserve will be £2,369,000, which broadly equates to one third of a year’s dividend payments. Beyond this, the Company has extensive capital reserves from which to fund future dividends if required.

Outlook

The Board has been encouraged by early signs since the year end that the Manager’s differentiated investment approach anchored in value is continuing to pay off. From 1 October to 30 November 2020, the Company delivered a NAV total return of 8.9% compared with a return of 8.4% for the Company’s benchmark, the FTSE All-Share Index, and a share price total return of 12.3%, well in excess of the Company’s benchmark.

However, the longer term outlook for the UK remains uncertain, not least because of Brexit, and this is compounded by the relatively narrow opportunity set that the UK stock market offers. Moreover, many of our traditional shareholders are less inclined to use an investment trust to access listed UK equities and need to be able to deal in ever greater size. In September 2020, the Company appointed Stanhope Consulting to advise the Board on strategic options for the Company. Given a number of challenging structural trends, we concluded that a UK focused equities mandate did not represent the best longer term investment opportunity, nor did it make best use of the unique features of the investment trust structure. Based on our analysis, we believe the best long term opportunities are not geographically constrained and that secular developments in the industry – not least the growing desire among investors for a more responsible and sustainable approach to investment – also pose a threat to the Company’s core position in shareholders’ portfolios. We have concluded that moving to a Global All-Cap approach under new management, with a commitment to achieving positive impact as well as capital growth, would be in the best interests of our shareholders. Accordingly, we will be publishing proposals for shareholder approval in the new year.

AGM

The AGM will be held on 10 February 2021 at 43-45 Portman Square, London W1H 6LY at 12.30pm. At the time of publication, the current Government guidelines stipulate that large gatherings of people are prohibited. These restrictions are likely to remain in place for some time. Accordingly, we feel compelled to plan for the meeting to be held in a different format with attendance limited to the minimum quorum required by the Company’s Articles.

For that reason, this year’s AGM will be restricted to the formal business, set out in the Notice of Meeting on pages 66 to 69. It is recommended that shareholders exercise their votes by means of registering them with the Company’s Registrar ahead of the meeting, online or by completing paper proxy forms, and appoint the Chairman of the meeting as their proxy.

Recognising the potential for shareholders to be unable to attend and ask questions, the Board invites anyone with questions on the business of the meeting, or otherwise, to address them to the Company Secretary in advance of the meeting, by email to investmenttrusts@invesco.com or, by letter, to 43-45 Portman Square, London W1H 6LY. Questions will be relayed to the Board and responses provided. The Board recommends that shareholders vote in favour of all resolutions, as each of the Directors who hold shares intends to do in respect of their own shares.

Karen Brade

Chairman

4 December 2020

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STRATEGIC REPORT

FOR THE YEAR ENDED 30 SEPTEMBER 2020

BUSINESS REVIEW

Purpose, Strategy and Business Model

Keystone Investment Trust plc is an investment company holding investments with a market value in excess of £210 million and its investment objective is set out below. The Company’s purpose is to generate sustainable long term returns for its shareholders through investing predominately in publicly listed companies in the UK.

The strategy the Board follows to achieve the objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below.

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

The principal service provider at present is Invesco Fund Managers Limited (IFML or the Manager). Invesco Asset Management Limited (IAML), an associate company of IFML, currently manages the Company’s investments and acts as company secretary under delegated authority from IFML. References to the Manager in this annual financial report should consequently be considered to include both entities. The Manager provides company secretarial, marketing and general administration services, including accounting, and manages the portfolio in accordance with the Board’s strategy. The portfolio manager responsible for the day-to-day management of the portfolio is James Goldstone.

The Manager has delegated portfolio valuation, fund accounting and administrative services to The Bank of New York Mellon, London Branch. In addition to the management and administrative functions of the Manager, the Company has contractual arrangements with Link Asset Services as registrar and The Bank of New York Mellon (International) Limited (BNYMIL) as depositary and custodian. BNYMIL is also the Company’s bank.

Investment Objective and Policy

Investment Objective

The Company’s objective is to provide shareholders with long-term growth of capital, mainly from UK investments.

Investment Policy and Risk

The portfolio is invested by the Manager so as to maximise exposure to the most attractive sectors and stocks within the UK stock market and, within the limits set out below, internationally. The Manager does not set out to manage the risk characteristics of the portfolio relative to the benchmark index and the investment process will result in potentially very significant over or underweight positions in individual sectors versus the benchmark.

The Manager controls stock-specific and sector risk by ensuring that the portfolio is always appropriately diversified. In depth, continual analysis of the fundamentals of investee companies allows the portfolio manager to assess the financial risks associated with any particular stock. The portfolio is typically made up of 50 to 80 stocks. If a stock is not considered to be a good investment, then the Company will not own it, irrespective of its weight in the index.

Investment Limits

The Board has prescribed the following limits on the investment policy, all of which are at time of investment unless otherwise stated:

– no single equity investment in a UK listed company may exceed 12.5% of gross assets;

– the Company will not invest more than 15% of its assets in other listed investment companies;

– the Company will not invest more than £12 million in bonds, with a maximum of £1.5 million in any issue;

– the Company will not normally invest more than 5% of gross assets in unquoted investments;

– the Company will not normally invest more than 20% (previously 15%)* of its equity investments in companies that are not UK listed and incorporated; and

– borrowing may be used by the Company to create gearing within limits determined by the Board.

*In April, 2020, as a result of strong performance of the Company’s holdings in overseas-listed gold mining companies, the aggregate exposure to overseas securities exceeded the Board’s imposed limit of 15% of net assets. These holdings represent the Portfolio Manager’s highest conviction investments and the Directors approved additional headroom, of up to 20%.

Gearing Policy and Restructuring of Borrowings

The Board is responsible for the Company’s gearing strategy and sets parameters within which the Manager operates. During March 2020 as markets and liquidity fell sharply, the Board revised these parameters so that no net purchases should be made that would take the level of net gearing above 15% of net assets and that sales be made if, as a result of market movements, net gearing rose higher than 20% (previously 15%) of net assets. Net gearing stood at 10.2% at 30 September 2020 compared with 6.1% at 30 September 2019.

To introduce more flexible and lower cost borrowings, the Board made the decision to redeem all of the Company’s outstanding debenture and bonds on 13 March 2020. The redemption was funded from a new bank facility. The legacy debt securities were redeemed at prices that were close to the fair value of the liabilities, so substantial interest savings were secured at negligible cost to NAV with debt at fair value.

Foreign Exchange

The Company has some non-sterling denominated investments and is therefore subject to foreign exchange risk. The Board monitors foreign currency exposure and takes a view, from time to time, on whether foreign currency exposure should be hedged. For some time, the Board has prescribed that all currency exposure should be hedged other than US dollar, Canadian dollar and Swiss franc. Since November 2019, the Board has provided the Manager discretion as to whether to hedge currency exposure to US dollar and Canadian dollar.

Performance

Delivery of shareholder value is achieved through outperformance of the relevant benchmark.

The Board reviews performance by reference to a number of Key Performance Indicators that include the following (all of which, apart from dividends, are Alternative Performance Measures and are defined on pages 72 to 74):

• net asset value (NAV) and share price total return compared with benchmark and peer group performance;

• share price premium/discount relative to the net asset value;

• dividends; and

• ongoing charges.

The Company’s NAV and share price total returns for the year to 30 September 2020 were –15.0% and –14.5% respectively, and although disappointing, both fared marginally better than the total return of the Company’s benchmark, the FTSE All-Share Index, of –16.6%. The Manager’s Report on pages 14 to 17 provides commentary on the reasons for the performance.

Although the total return NAV marginally exceeded the benchmark, the performance fee hurdle was not met and therefore, no performance fee has been earned for the year.

A table of the returns for the last ten years, together with a graph, can be found on page 3.

Peer group performance is monitored by comparing the Company with the 12 investment companies making up the UK All Companies sector. As at 30 September 2020, in NAV total return terms, the Company was ranked 9th in its sector over one and three years and 11th over five years (source: J.P. Morgan Cazenove). The Board also compares the Company to a bespoke list of investment companies which the Board considers to be its nearest peers.

The Board monitors the discount at which the Company’s shares trade in relation to the value of the underlying assets and how this compares to other investment trusts in the AIC All Companies sector. During the year, the Company’s shares traded at a discount relative to NAV (with debt at market value), as shown in the following graph. The discount at the year end was 17.3%. The Company’s shares are likely to trade on a relatively wide discount until there is more certainty around the macro economic backdrop and in particular the UK’s exit from the European Union.

With advice and guidance from the Company’s corporate broker, Numis, the Board continues to consider and implement initiatives that could help to improve the demand for and liquidity of the shares, and hence the discount at which they trade.

Dividends form a key component of the total return to shareholders. The income from the portfolio and potential level of dividend payable is reviewed at every board meeting. The Board moved from semi-annual to quarterly dividends in May 2019 and makes full use of the investment trust structure by using the Company's reserves as required. The Board’s dividend payment policy is for the Directors to declare four dividends in respect of each accounting year, with a payment in each calendar quarter. Additional special dividends may be declared, at the discretion of the Directors.

A first interim dividend of 2.4p (2019: N/A) per share was paid on 13 March 2020, a second interim dividend of 2.4p (2019: 4.8p adjusted for the share split, which reflected payment of two quarters under the new quarterly model) per share was paid on 12 June 2020, a third interim dividend of 2.4p (2019: 2.4p adjusted for the share split) per share was paid on 25 September 2020, and a fourth interim dividend, in lieu of a final dividend, of 4.00p (2019: 4.00p adjusted for the share split) has been declared, which is payable on 24 December 2020 to shareholders on the register at 4 December 2020. These give a total ordinary dividend for the year of 11.20p, which maintains the same level as the previous year (2019: 11.20p, adjusted for the share split). As the Company received negligible special dividends this year, there is no special dividend (2019: 0.734p, adjusted for the share split). Due to lower dividend receipts following the effects of the Covid-19 pandemic, the fourth interim dividend of 4.00p has been mostly funded from revenue reserve. This illustrates the benefit of the investment trust structure in being able to maintain dividend payments in a difficult economic environment. The dividend history of the Company over the last ten years is shown in the table on page 3.

The ongoing charge is the industry measure of the Company’s operating costs as a percentage of average net asset value(1) during the year. The expenses of the Company are reviewed at every board meeting, with the aim of managing costs incurred and their impact on performance. The ongoing charges figure for the past year was 0.55%, compared with 0.54% for the year to 30 September 2019. No performance fee was payable in respect of either year. The ten year record of ongoing charges is shown on page 3 and the calculation is shown in the Glossary of Terms and Alternative Performance Measures on page 73.

Financial Position

At 30 September 2020, the Company’s net assets were valued at £190 million (2019: £258 million). These comprised a portfolio of mainly equity investments and net current assets.

During the year the Company redeemed its outstanding debenture and bonds on 30 March 2020. The redemption was funded by a new £40 million committed revolving credit facility provided by the Bank of New York Mellon, London Branch. The amount of the facility drawn down at the year end was £19.18 million (2019: £nil). The Company also had £0.25 million of 5% cumulative preference shares in issue.

Outlook and Future Trends

The main trends and factors likely to affect the future development, performance and position of the Company’s business can be found in the Manager’s Report section of this Strategic Report. Further details as to the risks affecting the Company are set out below under ‘Principal Risks and Uncertainties’.

Principal Risks and Uncertainties

The Audit Committee regularly undertakes a robust assessment of the principal and emerging risks the Company faces, on behalf of the Board (see Audit Committee Report on pages 23 to 26).

(1) Figures with debt at market value.

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

Investment Objective

There is no guarantee that the Company’s strategy and business model will be successful in achieving its investment objective.

The Board monitors the performance of the Company and has established guidelines to ensure that the approved investment policy is pursued by the Manager.

Market Risk

The majority of the Company’s investments are traded on the London Stock Exchange. The principal risk for investors in the Company is of a significant fall in stock markets and/or a prolonged period of decline in the markets relative to other forms of investment. The value of investments held within the portfolio is influenced by many factors including the general health of the economy, interest rates, inflation, government policies, industry conditions, political events, tax laws, environmental laws and investor sentiment. The portfolio manager has summarised in the Manager’s Report section of this Strategic Report particular factors affecting the performance of markets in the year and his view of those most pertinent to the outlook for the portfolio. Such factors are out of the control of the Board and the Manager and may give rise to high levels of volatility in the prices of investments held by the Company, although the use or elimination of gearing may modify the impact on shareholder return The extreme volatility experienced in March 2020 from the market reaction to the Covid-19 virus exemplifies this risk, which has had a marked effect on both the valuation of the Company’s portfolio of investments and the discount to net asset value at which the Company’s shares trade.

Investment Risk

An inherent risk of investment is that the stocks selected for the portfolio do not perform well.

The investment process employed by the Manager combines top down assessment of economic and market conditions with stock selection. Fundamental analysis forms the basis of the Company’s stock selection process, with an emphasis on sound balance sheets, good cash flows, the ability to pay and sustain dividends, good asset bases and market conditions. The process is complemented by constant assessment of market valuations. It is important to have a sense of a company’s realistic valuation which, to some extent, will be independent of the price at which it trades in the market. Overall, the investment process aims to achieve absolute returns through a genuinely active stock selection approach. This can therefore result in a portfolio which looks substantially different from the benchmark index.

Risk management is an integral part of the investment management process. The Manager effectively controls risk by ensuring that the Company’s portfolio is always appropriately diversified. Continual analysis of all holdings gives the Manager a thorough understanding of financial risks associated with them.

The portfolio of investments held at 30 September 2020 is set out on pages 18 and 19.

Past performance of the Company is not necessarily indicative of future performance.

Share Price and Dividend Risk

Shareholders are exposed to certain risks in addition to risks applying to the Company itself.

The ordinary shares of the Company may trade at a premium or discount to its NAV. The Board monitors the price of the Company’s shares in relation to their NAV and the premium/discount at which they trade. The Company sub-divided each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020 in order to improve the market liquidity and make the Company more attractive to retail investors.

The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested.

While it is the intention of the Directors to pay dividends to ordinary shareholders four times a year, the ability to do so will depend upon the level of income received from securities and the timing of receipt of such income by the Company. Accordingly, the amount of the dividends paid to ordinary shareholders may fluctuate. Any change in the tax or accounting treatment of dividends or other investment income received by the Company may also affect the level of dividend paid.

The Directors seek powers to issue and buy back the Company’s shares each year, which can be used to help manage the liquidity and enhance the NAV for existing shareholders. During the year, the Company repurchased into treasury for aggregate consideration of £16.9 million, including costs, the equivalent of 5.35 million ordinary shares of 10p each, representing 7.9% of the issued ordinary share capital at the beginning of the year. The enhancement to NAV was approximately £2.7 million or 1.4% of shareholders’ funds at the year end. The Board also monitors the level of revenue available for distribution at each Board meeting.

Gearing

Gearing levels may change from time to time in accordance with the Manager’s and the Board’s assessment of risk and reward. Whilst the use of borrowings by the Company should enhance total return where the return on the Company’s underlying securities is rising and exceeds the cost of borrowing, it will have the opposite effect where the underlying return is falling. The Board and the Manager review gearing on a regular basis and will continue to monitor the level closely over the year ahead. The maximum gearing limit currently authorised by the Board is 15% of net assets, with additional headroom of up to 20% of net assets, due to market movements. During the year, the long term debenture stock and bonds were redeemed and this has been replaced with a revolving credit loan facility. As at 30 September 2020, net gearing from borrowings stood at 10.2% (2019: 6.1%) with debt at market value.

Reliance on the Manager and Other 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 pursue its investment policy successfully.

The Company has limited direct exposure to cyber risk. However, the Company’s operations or reputation could be affected if any of its service providers suffered a major cyber security breach. The Board monitors the preparedness of its service providers in this regard, through regular review of their control reports and business continuity plans, and is satisfied that the risk is given due priority. The Manager also provides an annual training day where a presentation on cyber risk is given. The Board is comfortable that the Manager and its service providers have adequate cyber procedures in place.

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 pursue its investment policy successfully. The Board receives regular updates from the Broker on market and shareholder feedback.

The Company’s main service providers are listed on page 71. The Board monitors the services provided to the Company informally at every Board meeting and formally at least annually and by reference to third party independent audited control reports.

Pandemic Risk

The Directors, together with the Manager and third-party service providers, continue to monitor the Covid-19 situation closely. A range of actions have been enacted to ensure that the Company and its service providers are in a good position to continue to run their business even if there is prolonged disruption.

The Manager’s business continuity plans are reviewed on an ongoing basis and the Directors are satisfied that the Manager has in place robust plans and infrastructure to minimise the impact on its operations so that the Company can continue to trade, meet regulatory obligations, report and meet shareholder requirements.

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

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

Regulatory

The Company is subject to various laws and regulations by virtue of its status as a public limited company, as an investment trust and as an alternative investment fund. A loss of investment trust status, under section 1158 of the Corporation Tax Act 2010, could lead to the Company being subject to capital gains tax on the profits arising from the sale of its investments. A serious breach of other regulatory rules might lead to suspension from the Stock Exchange. Other control failures, either by the Manager or another of the Company’s service providers, might 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 tax and other regulatory financial requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all risks, the measures in place to control them and the possibility of any other risks that could arise. The Board ensures that satisfactory assurances are received from service providers. The Manager’s Compliance Officer produces regular reports for review by the Company’s Audit Committee.

In addition to these risks, the outcome and potential impact on the Company of the ongoing Brexit situation remains unclear at the time of writing. The majority of the Company’s assets, liabilities and income are denominated in Sterling and the Company has the ability to hedge non-Sterling positions, should there be sharp movements in exchange rates to the pound. Separately, investor sentiment might lead to increased or reduced demand for the Company’s shares, in the light of continued Brexit uncertainty, which would be reflected in a narrowing or widening of the discount at which the Company’s shares trade relative to their net asset value. Overall, the Board does not expect the Company’s business model, over the longer term, to be affected by Brexit.

Viability Statement

The Company is a collective investment vehicle rather than a commercial business venture and is designed and managed for long term investment. The Company’s investment objective clearly sets this out. Long term for this purpose is considered by the Directors to be at least five years and accordingly they have assessed the Company’s viability over that period. However, the life of the Company is not intended to be limited to that or any other period.

In their assessment of the Company’s viability, the Directors have performed a robust assessment of the emerging and principal risks. The Directors considered the risks to which it is exposed, as set out on pages 9 to 11, together with mitigating factors. Their assessment considered these risks, as well as the Company’s investment objective, investment policy and strategy, the investment capabilities of the manager and the business model of the Company. Their assessment also covered the current outlook for the global economy and equity markets, especially so during the Covid-19 disruption this year; demand for and buybacks of the Company’s shares; the Company’s borrowing structure; the liquidity of the portfolio; and the Company’s future income and annual operating costs. In the short term, it appears that the availability of income continues to be sorely tested, with a large number of companies suspending or substantially reducing dividends. However, the Company’s operating costs are modest. Consideration was given to the borrowing structure, including the amount the NAV could fall without breaching the covenants of the revolving credit facility and the amount of debt cover. The Company was able to renegotiate the credit facility to insure against potential pressure on those covenants. The low point in the Company’s net asset value during the worst of the Covid-19 market disruption was on 19 March 2020 and at that point there was some £19.9 million of headroom above the credit facility total asset value covenant which was then £150 million. At the year end the amount drawn down on the credit facility was £19.2 million and there was £91.4 million headroom over the amended credit facility total asset value covenant of £120 million.

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

Board’s Duty to Promote the Success of the Company

The Directors have a fiduciary duty to act, in good faith, for the benefit of shareholders taken as a whole. Section 172 of the Companies Act 2006 codifies this duty and also widens the responsibility to incorporate the consideration of wider relationships that are necessary for the Company’s sustainability. Using the terminology of the Act, the Directors have a duty to promote the success of the Company, whilst also having regard to certain broader matters, including the need to engage with employees, suppliers, customers and others, and to have regard to their interests. This is reflected in ESG matters on page 13 and in the summary of the Board’s responsibilities on pages 58 and 59.

In fulfilling these duties, and in accordance with the Company’s nature as an investment company with no employees and no customers in the traditional sense, the Board’s principal concern has been, and continues to be, the interests of the Company’s shareholders taken as a whole. Notwithstanding this, the Board has a responsible governance culture and also has due regard for broader matters so far as they apply. In particular, the Board engages with the Manager at every Board meeting and reviews the Company’s relationships with the other service providers, such as the registrar, depositary and custodian, at least annually. The Board continues to be content with the services provided by the Manager and other service providers.

Some of the key decisions taken by the Board during the year were:

• to put a vote to shareholders on the subdivision of the Company’s shares in order to improve the market liquidity and make the Company more attractive to retail investors;

• to commence share buybacks allowing the Company to purchase, at a discount, exposure to the Company’s portfolio of quality investments that were themselves undervalued;

• to redeem the outstanding debenture stock and bonds early and replace them with a more flexible and cost efficient bank facility;

• to promote differentiation by encouraging a more enhanced approach to corporate governance at portfolio construction level.

Shareholder relations are given a high priority by the Board. The prime medium by which the Company communicates with shareholders is through the annual and half-yearly financial reports, which aim to provide shareholders with a full understanding of the Company’s activities and its results. This information is supplemented by the publication of monthly factsheets and the NAV of the Company’s ordinary shares, which is published daily via the London Stock Exchange and on the Company’s section of the current Manager’s website at www.invesco.co.uk/keystone. Other information available on the web page includes pre-investment information, key information document (KID), schedule of matters reserved for the Board, terms of reference of Board Committees, Directors’ letters of appointment and proxy voting results.

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

There is a regular dialogue with individual major shareholders to discuss aspects of investment performance, governance and strategy and to listen to shareholder views in order to develop a balanced understanding of their issues and concerns. The Manager also engages in a series of regional meetings throughout the year to promote the Company to institutional shareholders, analysts and potential investors.

In normal circumstances, shareholders are invited to attend the AGM but this year, as explained in the Chairman’s Statement, it will be in a different format and shareholders should lodge their questions to the Company Secretary as set out below. The Company Secretary will ensure that questions received will be replied to by the appropriate person after the AGM and be made available on the Company’s web page on the Invesco website.

It is the intention of the Board that the annual financial report and the notice of the AGM be issued to shareholders so as to provide twenty working days’ notice of the AGM. Shareholders wishing to lodge questions in advance of the AGM are invited to do so, either on the reverse of the proxy card, via the current Manager’s website (www.invesco.co.uk/keystone) or in writing to the Company Secretary at investmenttrusts@invesco.com or, in hard copy, to 43-45 Portman Square, London W1H 6LY. At other times the Company responds to queries from shareholders on a range of issues.

Board Diversity

The Company’s policy on diversity is set out on page 57. The Nomination Committee considers diversity, including the balance of skills, knowledge, gender and background, amongst other factors, when reviewing the composition of the Board and appointing new directors. Although the Board has not set a specific target or quota in this regard, it has aspired to meet the Hampton Alexander return target of 33% female board representation and has achieved this. At the date of this report, the Board comprises five non-executive directors of whom two, including the Chairman, are women thereby constituting 40% female board representation. Summary biographical details of the Directors are set out on page 20. The Company has no employees.

Environment, Social and Governance (ESG) Matters

As an investment company with no employees, property or activities outside investment, environmental policy has limited direct application. A greenhouse gas emissions statement is included in the Directors’ Report on page 61. In relation to the portfolio, the Company has, for the time being, delegated the management of the Company’s investments to the Manager, who has an ESG Guiding Framework which sets out a number of principles that are intended to be considered in the context of its responsibility to manage investments in the financial interests of shareholders.

The Henley based UK Equities investment team is fully integrated into the Manager’s proprietary approach to ESG, whereby ESG considerations form part of the evaluation of ideas, company dialogue and portfolio monitoring. ESG flags may arise from the team’s proprietary research or from an external ESG rating provider. These flags highlight issues for further analysis and engagement with company management by members of the team independently, or in partnership with the ESG team. Additionally, the Manager’s ESG team provides formalised ESG portfolio monitoring. This is a rigorous semi-annual process where the portfolio is reviewed from an ESG perspective. This ensures a circular process for identifying flags and monitoring of improvements over time.

The Manager is committed to being a responsible investor and became a signatory of the United Nations Principles of Responsible Investment (PRI) in 2013, which demonstrates its extensive efforts in terms of ESG integration, active ownership, investor collaboration and transparency. In addition, the Manager achieved a global ‘A+’ rating for the third consecutive year from the PRI for Strategy and Governance. In 2019, the MSCI upgraded the Manager’s ESG rating from BBB to A and under its membership of the Carbon Disclosure Project it reports annually on its carbon footprint. The Manager is also a signatory to the FRC UK Stewardship Code 2012 and has achieved a Tier 1 Status for its approach to stewardship. Invesco is committed to maintaining its strong approach towards investment stewardship under the revised 2020 UK Stewardship Code which it intends to adhere to and report against going forward.

During the year to 30 September 2020, the Manager engaged with a number of companies in the portfolio to discuss their own sustainable practices. The Manager believes that proxy voting is the hallmark of active ownership and serves as a powerful mechanism to drive responsible investment, engagement and investment stewardship. Reports on proxy voting for the Company’s portfolio, the Manager’s Stewardship Code and the Manager’s Global ESG Stewardship Report can be obtained via the Manager’s website at www.invesco.co.uk.

Modern Slavery Act 2015

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 required to make any slavery or human trafficking statement under the Modern Slavery Act 2015.

MANAGER’S REPORT

Market Review

It has been a volatile 12 months for the UK equity market, dominated by concerns around the outlook for global economic growth, the protracted Brexit negotiations and the UK General Election in December 2019, but these issues have been surpassed for most of 2020 by the impact of Covid-19. The three months to the end of March saw the biggest quarterly fall in equity markets for more than three decades. The social and economic impact has been devastating and will take years to recover from. Additional ongoing issues such as US-China trade relations, Brexit, domestic politics and the US Presidential Election have also added to the background noise in recent months.

The disruption to business activity caused by Covid-19 in the first quarter of 2020 has been extraordinary and the consequent precipitous fall in financial markets was unsurprising as many businesses either stopped trading entirely as a result of the country being locked down, or activity fell to such low levels that they were effectively closed. As a result, many companies announced the suspension or deferral of dividends and others sought to refinance in order to ensure that they had sufficient liquidity to see them through the crisis.

At the end of March, the UK’s biggest banks were instructed by the Prudential Regulation Authority (PRA) to cancel their dividends which, in a number of cases had already been declared, in order to further strengthen their balance sheets. While this was seen as a bold move by the PRA it should be understood in the context of the extensive support they have been given by the authorities around the recognition of impairments as well as the underwriting of so much credit risk by government schemes. The banks had their role to play in supporting lending to households and businesses to help the economy withstand the impact of Covid-19.

The fiscal and monetary stimulus deployed by global governments was on a scale not seen before but was necessary to avert an economic and social catastrophe. As the number of cases of the virus abated throughout the summer and the lockdown eased, we witnessed a recovery in the UK market which delivered its biggest quarterly rise in a decade from the market lows of March. This was encouraging but market commentators were quick to point to the risks of a second wave in the autumn.

The UK equity market traded broadly sideways for most of the summer although it remained volatile. As investor concern grew about a second wave of the virus, the FTSE All-Share Index declined in the third quarter of 2020 as fears of further lockdowns grew and share prices came under pressure. The UK government, meanwhile, made further pledges to spend more money on the post-pandemic recovery. Additional measures including a successor to the furlough scheme were announced in September. This should provide further support to the recovery in the economy which, whilst still heavily burdened, has started to emerge in recent weeks. The challenge for governments is to provide a level of effective support, while at the same time recognising the need to control levels of borrowing. The new measures announced by the Chancellor of the Exchequer will add to government debt, but they were less generous than the previous package. UK government borrowing continued to reach new highs in August.

Towards the end of the twelve month period the FTSE All-Share Index continued to trade below the pre Covid-19 levels of February but above the market low that was witnessed in March. Uncertainty around a national lockdown as a result of a steep rise in Covid-19 infections weighed on share prices into the Autumn, along with concerns around progress in Brexit negotiations. Since the end of the period however, the FTSE All-Share Index has performed strongly as a result of positive news around the successful development of a vaccine. This news has been received extremely positively and expectations are that vaccination programmes will start in the coming weeks. This news bodes well for getting the economy back on track in 2021. At the same time Brexit negotiations continue and, while there remains uncertainty on some key issues, there is room for cautious optimism that a negotiated settlement will be reached with the EU before the end of the year.

Portfolio Review

The prevailing uncertainty in markets as a result of Covid-19 and Brexit make it a difficult task to position the portfolio as not knowing the length of the impact of the virus, or the outcome of the Brexit negotiations, means that it is impossible to have a definitive view on what the future holds. As such I have positioned the portfolio as optimally as I can for the various possible scenarios. Over the twelve month period I sought to reduce exposure to the worst affected sectors of the economy instead favouring those that would prove more resilient while retaining exposure to those companies that I believe would recover strongly on more encouraging news. I have tried to keep a balance in the portfolio of companies I would categorise as more defensive and those that appear more risk exposed.

Considering the market volatility experienced as a result of the impact of Covid-19 it is perhaps no surprise that the Company’s holdings in the gold mining sector have been the best performers in the portfolio. Having modestly outperformed the gold price leading up to the Covid-19 crisis, they briefly mirrored the mid-March weakness in gold before starting to perform very strongly. Since peaking at the beginning of August the gold price and the share prices of the gold mining holdings have edged back slightly but the thesis underpinning their position in the portfolio remains valid.

Media group Future, which specialises in the publication of consumer magazines and websites, was a strong performer over the twelve-month period despite being impacted by the market weakness mid-March. The company released a strong trading statement in July indicating that the business had continued to grow despite the crisis and a further trading statement at the beginning of September has prompted analysts to increase estimates.

CVS, which is involved in veterinary services, updated the market on trading in July. As a resilient business the company had coped relatively well with the crisis and trading began to return to normal in the summer as lockdown eased. The share prices of Next and JD Sports Fashion gained on the strength of their differentiated distribution models coming to the fore as consumption picked up. Next benefitted from an upgrade to annual profit expectations as second quarter results beat analyst estimates. Further news that Next’s online business had returned to full capacity was greeted favourably by the market. Overall, Next’s online business including ‘click and collect’ did particularly well. JD Sports Fashion had resilient sales during the pandemic due to very strong growth in its own online revenues. This switch to online came with additional costs but the share price rose strongly on the news of reinstated guidance for strong full-year profits which, whilst below last year’s, were impressive under the circumstances.

Meanwhile beverages company Fevertree Drinks recently released half year results and announced an increase to its dividend. The company cited strength and confidence in the business together with strong cash generation but did caution that it was not immune to the Covid-19 crisis. Revenues had been impacted by the closure of pubs and restaurants but strength in shops and supermarkets had been encouraging.

A new position in Compass Group was initiated in late May. The company engages in the provision and distribution of food and support services globally, catering for a variety of sectors including industry, healthcare and education. Following the market lows of March, the share price had been weak as lockdowns around the globe impacted the business and a position was purchased in the portfolio. The company has taken measures to cut costs and strengthen its balance sheet by cutting its dividend, putting staff on furlough and reducing boardroom pay. The company is well placed to benefit from the easing of lockdowns. However, third quarter revenues were weaker than expected and the company is predicting a slow recovery. The position contributed positively to relative performance, but has now been sold due to expectations of more muted activity for the time being.

Tesco is a significant overweight in the portfolio and contributed positively on a relative basis despite the share price falling slightly over the period. Tesco is well capitalised with around £2 billion of cash on the balance sheet. The company had to employ a large number of extra staff during lockdown, which added to the £725 million of Covid-19 costs, but these were in part made up for by increased sales. Online orders have more than doubled with customers utilising ‘click and collect’ as well as delivery. The business believes that the current crisis has accelerated the shift to online. Successful application of picking technology and efficient use of urban fulfilment centres will be a key part of Tesco’s success in this area.

Being underweight banks (particularly HSBC which accounts for over half of the UK banking sector) and oil & gas producers was helpful for the portfolio as both sectors came under pressure. Bank share prices are beleaguered as their dividends were halted by the PRA and as a result of falling bond yields. Impairments caused by Covid-19 have yet to be fully quantified and are of concern to the market but the international financial reporting standard - IFRS 9, has forced the front-loading of provisions in advance of borrowers defaulting; actual defaults are yet to be incurred and the adequacy of provisions to date will be key to share prices in the next 6 to 12 months. Oil majors BP and Royal Dutch Shell both cut their dividends early in the crisis and the share prices of both fell on market pessimism that oil demand, and prices, could take a long time to recover.

Weaker performances over the twelve-month period were seen from aerospace and defence company Babcock International. The company cancelled its March and June dividends in order to preserve cash until it had greater certainty around the impact of the pandemic. Revenues and underlying operating profit were impacted and the company attributed much of the loss in profits to a reduction in productivity as working practices were forced to change in light of the virus and to the loss of a large nuclear decommissioning contract. The company has stated that it intends to prioritise strengthening the balance sheet and reducing net debt. A newly appointed CEO has recently joined the business who brings relevant experience from Cobham, which had suffered with its own problems in recent years and where his strategies were successful.

Johnson Service, which provides textile rental services, has been heavily impacted by the crisis as restaurants and hotels closed during the lockdown. Many hotels and restaurants have now reopened but trading will take some time to normalise. The company raised money over the summer and is therefore in a stronger financial position as a result.

Travel and leisure sector businesses easyJet, On The Beach and Hollywood Bowl, have been severely impacted by travel restrictions and the closure of leisure and entertainment establishments. easyJet has recently stated that it will only fly approximately 25% of its schedule through to the end of the year which is a reduction from the 38% figure over the summer months. There is currently no plan for the dividend to be reinstated. The company is focusing on its most profitable routes and is well placed to reopen operations to meet demand should the environment for travel improve. Intermediary holiday company On The Beach is also well placed to benefit from any pick up in travel. It is less asset intensive than other holiday businesses and has been better able to endure the trading conditions caused by the pandemic.

Construction has also been weaker in the last twelve months. Housebuilder Barratt Developments saw its profits halve after construction and home sales were significantly impacted by the pandemic and the business was forced to temporarily shut its building sites in order to protect staff. Despite the profit impact the company stated that it had a resilient balance sheet and would weather the disruption. The company had already communicated earlier in the year that it would not be paying a dividend to shareholders in order to conserve cash and it has also now said that a special dividend due to be paid next year will be cancelled. Going forward however, the outlook appears more promising, sales and completion rates are up more than 20% year on year, the order book remains healthy and the net cash position has improved.

Over the period there were a handful of stocks in the FTSE All-Share Index that performed particularly well but that the portfolio did not hold. These were Unilever, AstraZeneca and Reckitt Benckiser which are in the consumer staples and healthcare sectors. The share prices of these stocks have all performed well for some time as they are considered to be more resilient in volatile market conditions and have been favoured by investors during the pandemic. These companies were already trading on high valuations prior to the pandemic and this trend has continued.

Environmental, Social & Governance (ESG)

ESG factors are increasingly important in assessing the value of a company. Poor ESG credentials for a company can have a significant negative impact on the value of the business and its share price whilst improvements can have a positive effect. ESG considerations and sustainability are therefore central to my investment process and any prospective investment is scrutinised on each of the three factors. This helps me to identify areas of potential risk, but also areas where improvement can be made through engagement and thus real opportunities to create value can be discovered.

I have paid particular attention to the governance factor for some time believing that strong governance can significantly reduce risk to a business. I have examined the code on corporate governance in great detail and have developed a number of good governance criteria to develop a framework where I can judge the qualities, risks and improvement of these criteria for any of the companies I own or might own in the future. This framework draws on multiple third-party sources, significant in-house resource, and also factors in my own engagement with the companies and allows me discretion in determining what is poor, improving, good and sector leading. I am seeking potential for improvement rather than perfection.

Outlook

While recent news of the successful development of a vaccine for Covid-19 is very welcome the UK continues to face some significant headwinds until this is manufactured and distributed at scale. As part of its ongoing efforts to mitigate the impact of the Covid-19 outbreak, the UK government has put in place a series of substantial monetary and fiscal measures to support corporate and household cash flow. Bank of England interest rates remain at historic lows of 0.1%, and are further supported by large scale asset purchases. The strength and depth of the UK’s economic policy response offers us some reassurance. However, I expect markets to be volatile as the pandemic continues to evolve as the vaccine is distributed and as other factors such as Brexit negotiations and a new US President in January will have an effect on global markets.

The after effects of Covid-19 will have significant economic consequences that will extend beyond the short term. The restrictions put in place to limit the further spread of Covid-19 while the vaccine is distributed will naturally have a large impact on a wide range of economic indicators. With significant areas of private sector output currently subject to severe disruption and the exit path from lockdown yet to be determined, the range of possible outcomes for economic activity over the remainder of 2020 and into 2021 is much wider than normal.

Company earnings estimates have been revised down significantly since the start of the pandemic but visibility remains very low and guidance by companies has been in large part withdrawn. As the effects of the virus start to fade, the measures implemented by the government and the Bank of England will, in my view, encourage some degree of stabilisation of economic activity and the resumption of economic growth as we move through 2021.

The environment for gold remains supportive despite the gold price having fallen slightly from its recent high in the summer. The portfolio’s holdings in four North American gold mining companies have performed their protective role admirably during the market volatility and now represent c.15% of the portfolio (end September 2020). At the current gold price their valuations remain extremely attractive and if things develop as I anticipate, gold has further gains to make. I believe that these four companies are best in class and have good sustainability credentials which are increasingly being recognised. Barrick Gold recently won the Capital Finance International award for Best Sustainable Mining Strategy (Africa) as a result of its collaborative local partnerships and shared stakeholder benefits. These stocks continue to play a critical role in the portfolio, and I intend to maintain the position at or around its current weighting for the foreseeable future.

When I took over the management of the Company in April 2017 the portfolio contained a number of legacy holdings where there was either no liquidity in the market to dispose of them, or they were unlisted. This tail of small positions meant that the number of holdings in the portfolio that were being actively managed looked greater than was the reality. Except for a small number of unlisted holdings with negligible value, I have substantially completed the process of disposing of the other illiquid holdings over the 12 month period to the end of September. Having redeployed these proceeds, I now have a more concentrated portfolio that reflects my convictions.

Gearing at the end of September was around 10%. It was slightly lower going into the crisis at around 8% but as the market fell this pushed the gearing higher. The Board also took the decision in February to redeem the Company’s two outstanding debentures that had relatively high interest costs compared to other available sources of borrowing. These debentures were replaced with a more flexible, lower cost, bank facility. At the present time I am comfortable with the level of gearing but remain ready to adjust should the environment change.

James Goldstone, Portfolio Manager

The Strategic Report was approved by the Board of Directors on 4 December 2020.

Invesco Asset Management Limited

Company Secretary

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INVESTMENTS IN ORDER OF VALUATION

AT 30 SEPTEMBER 2020

UK listed ordinary shares unless stated otherwise

AIM: Investments quoted on AIM.

UQ: Unquoted investment.

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

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STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors are responsible for ensuring that the annual financial report is prepared in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare financial statements in accordance with UK Accounting Standards, including FRS 102 ‘The Financial Reporting Standard applicable in 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 net return 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 judgments and accounting estimates that are reasonable and prudent;

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

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

The Directors are responsible for keeping adequate accounting records which 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 company law. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, a Corporate Governance Statement, a Directors’ Remuneration Report and a Directors’ 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 Auditors are 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 Auditors are aware of that information.

The Directors of the Company, whose names are shown on page 20 of this Report, each confirm to the best of their knowledge that:

• the financial statements, prepared in accordance with United Kingdom accounting standards on a going concern basis, give a true and fair view of the assets, liabilities, financial position and net return of the Company;

• the 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; and

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

Karen Brade

Chairman

Signed on behalf of the Board of Directors

4 December 2020

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INCOME STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

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/(expense) and therefore no additional statement of other comprehensive income/(expense) 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

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 SEPTEMBER

The accompanying notes are an integral part of these statements.

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BALANCE SHEET

AT 30 SEPTEMBER

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

The financial statements on pages 37 to 55 were approved and authorised for issue by the Board of Directors on 4 December 2020.

Signed on behalf of the Board of Directors

Karen Brade

Chairman

The accompanying notes are an integral part of these statements.

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CASH FLOW STATEMENT

FOR THE YEAR ENDED 30 SEPTEMBER

The accompanying notes are an integral part of these statements.

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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.

A summary of the principal accounting policies adopted by the Company is set out below. These policies have been consistently applied during the year and the preceding year.

(a) Basis of Preparation

(i) Accounting Standards applied

The financial statements have been prepared on a going concern basis under the historical cost convention, except for the measurement at fair value of investments and derivatives, in accordance with FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’, the Companies Act 2006 and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019 (SORP).

(ii) Going Concern

The Directors performed an assessment of the Company’s ability to meet its liabilities as they fall due. In performing this assessment, the Directors took into consideration the uncertain economic outlook in the wake of the Covid-19 pandemic including:

• the level of borrowings, cash balances and the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments;

• the net current liability position of the Company, driven by the drawn-down borrowings;

• the ability of the Company to meet all of its liabilities and ongoing expenses from its assets;

• revenue and operating cost forecasts for the forthcoming year;

• the ability of third-party service providers to continue to provide services; and

• potential downside scenarios including a fall in the valuation of the investment portfolio or levels of investment income.

Based on this assessment, the Directors are satisfied that the Company has adequate resources to continue in operational existence for at least twelve months after signing the balance sheet and the financial statements have therefore been prepared on a going concern basis.

(iii) Functional and presentation currency

The financial statements are presented in Sterling, which is the Company’s functional and presentation currency and the currency in which the Company’s share capital and expenses, as well as a majority of its assets and liabilities, are denominated.

(iv) Significant Accounting Estimates and Judgements

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

(b) Financial Instruments

The Company has chosen to apply the provisions of sections 11 and 12 of FRS 102 in full in respect of financial instruments.

(i) Recognition of financial assets and financial liabilities

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

(iv) Trade date accounting

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

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

Financial assets

The Company’s investments are classified as held at fair value through profit or loss as the investments are managed and their performance evaluated on a fair value basis in accordance with a documented investment strategy, and this is also the basis on which investment information is provided internally to the Board.

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 as part of gains and losses on investments in the income statement, and are subsequently valued at fair value.

Fair value for investments that are actively traded in organised financial markets is determined by reference to stock exchange quoted bid prices at the balance sheet date. 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 based on recommendations from Invesco’s European Unquoted Pricing Committee, which in turn is guided by the International Private Equity and Venture Capital Valuation Guidelines issued in 2018, using valuation techniques such as earnings multiples, recent arm’s length transactions, net assets and milestones attained.

Financial liabilities

Financial liabilities, 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) Amounts recognised in Capital Reserves

The following are included in the income statement and recognised in capital: realised gains or losses on sales of investments; realised gains or losses on foreign currency and any forward currency contracts; management fees, finance costs and other charges allocated to capital; and unrealised increases or decreases in the valuation of investments at the year end (including the related foreign exchange gains and losses).

(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.

(e) Income

Dividend income arises from equity investments held and is recognised on the date investments are marked ‘ex-dividend’. Where the Company elects to receive dividends in the form of additional shares rather than cash, the equivalent to the cash dividend is recognised as income in the revenue account and any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserve. Special dividends are taken to income unless they arise from a return of capital, when they are allocated to capital in the income statement. Interest income arising from fixed income securities and cash is recognised in the income statement using the effective interest method. Deposit interest and underwriting commission receivable are taken into account on an accruals basis.

(f) Management and Performance-related fees

Investment management fees are recognised on an accruals basis and are charged 75% to capital and 25% to revenue. This is in line with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company.

Performance-related fees are calculated as detailed in the Directors’ Report and are charged wholly to capital as they arise mainly from capital returns on the investment portfolio.

(g) Expenses and Finance costs

Expenses are recognised on an accruals basis and finance costs are recognised using the effective interest method, with the debentures being held at amortised cost. The finance costs of debt are allocated 75% to capital and 25% to revenue for the reasons outlined in (f) above. The 5% cumulative preference shares are classified as a liability and therefore the dividends payable on these shares are classified as finance costs and charged to revenue in the income statement.

(h) Hedging

Forward currency contracts entered into for hedging purposes are valued at the appropriate forward exchange rate ruling at the balance sheet date. Profits or losses on the closure or revaluation of positions are included in capital.

(i) Foreign Currency Translation

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 capital or to revenue, depending on whether the gain or loss is of a capital or revenue nature. All gains and losses are recognised in the income statement.

(j) Taxation

Foreign dividends that suffer withholding tax at source are shown gross, with the corresponding tax charge in the income statement.

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 and losses on loan relationships, as the Company is unlikely to have sufficient future taxable revenue to offset against these.

(k) Dividends Payable

Dividends are not recognised in the financial statements unless there is an obligation to pay at the balance sheet date.

2. Income

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

No special dividends were recognised in capital during the year (2019: £279,000).

3. Investment Management and Performance-related Fees

This note shows the fees paid to the Manager. These are made up of the management fee payable quarterly and a performance-related fee calculated annually. The latter is only payable when the portfolio outperforms the benchmark index plus its hurdle, which is +1.25% per annum, over a three year time frame.

Details of the investment management agreement are given on pages 60 and 61 in the Directors’ Report.

At 30 September 2020, £177,000 (2019: £236,000) was accrued in respect of the investment management fee. There was no performance-related fee provision for the year (2019: £nil).

4. Other Expenses

The other expenses of the Company are presented below.

(i) The Directors’ Remuneration Report provides further information on Directors’ remuneration.

(ii) Auditor’s fees include expenses but excludes VAT. The VAT is included in other expenses.

(iii) Other expenses include:-

– £8,800 (2019: £9,400) of employer’s National Insurance payable on Directors’ remuneration. As at 30 September 2020, the amounts outstanding on payroll tax due and employer’s National Insurance was £11,100 (2019: £9,800); and

– costs charged to capital include legal and professional fees of £133,000 incurred in relation to the early redemption of the debenture stock and bonds, share sub-division and obtaining a new revolving credit facility.

5. Finance Costs

Finance costs arise on any borrowing that the Company has, with the main borrowing being a revolving credit facility (see note 11). During the year, the Company redeemed the debenture stock and bonds.

On 13 March 2020, the Company redeemed all of the outstanding 7.75% Debenture Stock 2020 and all of the outstanding 6.5% Bonds 2023.

The early redemption premium, in accordance with the terms of the trust deed, was £4,868,000 which was charged to capital in the year.

In addition, the Company agreed a £45 million (subsequently reduced to £40 million) committed revolving credit facility, with Bank of New York Mellon, London Branch. Under the terms of this facility, interest is charged at LIBOR plus a margin with a commitment fee of 0.15% on undrawn amounts.

6. Taxation

As an investment trust, the Company pays no tax on capital gains and as the Company principally invests in UK assets, it has little overseas tax. This note shows details of the tax charge and why no deferred tax is required to provide for tax that is expected to arise in the future due to differences in accounting and tax bases.

(a) Current Tax Charge

(c) Factors that may Affect Future Tax Changes

The Company has cumulative excess management expenses of £85,830,000 (2019: £78,482,000) that are available to offset future taxable revenue.

A deferred tax asset of £16,308,000 based on a tax rate of 19% (2019: £13,342,000 based on a tax rate of 17%) has not been recognised in respect of these expenses since tax is recoverable only to the extent that the Company has sufficient future taxable revenue. On 11 March 2020 it was announced (and substantively enacted on 17 March 2020) that the UK corporation tax rate would remain at 19% and not reduce to 17% (the previously enacted rate) from 1 April 2020.

7. Return per Ordinary Share

Basic return per share is the amount of gain (or loss) generated for the financial year divided by the number of ordinary shares in issue. The calculation is based on the weighted average number of shares in issue during the year. During the year, each existing 50p ordinary share was sub-divided into five 10p ordinary shares.

The basic revenue, capital and total return per ordinary share is based on each of the returns after taxation and on 64,983,327 (2019: 67,593,995(1)) ordinary shares, being the weighted average number of ordinary shares in issue throughout the year.

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

8. Dividends

Dividends represent the return of income less expenses to shareholders. Dividends are paid as an amount per ordinary share held. During the year, each existing 50p ordinary share was sub-divided into five 10p ordinary shares.

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

The Company has moved to a quarterly dividends model and will pay four interim dividends this year: March, June, September and December, the fourth interim being in lieu of a final dividend. For the year ended 30 September 2019, the Company paid three interim dividends: June, September and December, the third interim being in lieu of a final dividend.

9. Investments

The portfolio is made up primarily of investments which are listed, i.e. traded on a recognised stock exchange (including AIM), and some unlisted investments. Gains and losses are either:

– realised, usually arising when investments are sold; or

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

(a) Analysis of Investments by Listing Status

(b) Analysis of Investment Gains and Losses

The Company received £101,392,000 (2019: £83,426,000) from investments sold in the year. The book cost of these investments when they were purchased was £123,397,000 (2019: £89,778,000) realising a loss of £22,005,000 (2019: a loss of £6,352,000). These investments have been revalued over time and, until they were sold, any unrealised profits/losses were included in the fair value of the investments.

(c) Transaction Costs

Transaction costs on purchases of £323,000 (2019: £198,000) and on sales of £56,000 (2019: £227,000) are included within gains and losses on investments in the income statement.

10. Debtors

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

11. Creditors: amounts falling due within one year

Creditors are amounts which must be paid by the Company, and include any amounts due to brokers for the purchase of investments or amounts owed to suppliers, such as the Manager and auditors, and bank overdraft.

As part of a restructuring of borrowings, the Company entered into a new £45 million (subsequently reduced to £40 million) committed revolving credit facility provided by The Bank Of New York Mellon, London Branch (‘the facility’). Under the facility covenants, the Company’s financial indebtedness will not exceed 25% of its net assets and that its total assets will exceed £120 million. The next renewal date of the facility is 5 February 2021.

The Company also cancelled its uncommitted overdraft facility prior to its renewal date on 18 September 2020. The overdrawn balance shown above is due to short-term timing difference on the settlement of trades, as permitted under the custodian’s settlement arrangement.

12. Creditors: amounts falling due after more than one year

Long term creditors consist of a small issue of preference shares. The debenture stock and bonds of £32 million, were fully redeemed during the year.

The debenture and bonds were redeemed during the year.

The preference shares dividend is paid bi-annually in March and September.

13. Called up share capital

Ordinary share capital represents the total number of shares in issue, for which dividends accrue. During the year, each existing 50p ordinary share was sub-divided into five 10p ordinary shares.

(a) Allotted, called-up and fully paid

(b) Share movements

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

The Company is limited by shares. The ordinary shares are fully participating and on a poll carry one vote per £1 nominal held.

During the year the Company bought back, into treasury, 5,354,628 ordinary shares at an average price of 313.77p, excluding costs. Since the year end and to the date of this annual financial report, 423,735 shares have been bought back into treasury.

14. Reserves

This note explains the different reserves that have arisen over the years. The aggregate of the reserves and share capital (see previous note) make up total shareholders’ funds.

The share premium account comprises the net proceeds received by the Company following the issue of shares, after deduction of the nominal amount of 10 pence (50p prior to sub-division of shares during 2020) and any applicable issue costs. The capital redemption reserve maintains the equity share capital arising from the buy back and cancellation of shares; it, and the share premium account, are non-distributable.

The capital reserve includes the investment holding gains/(losses), being the difference between cost and market value at the balance sheet date and cumulative realised gains/(losses) on the disposal of investments. Capital investment gains and losses are shown in note 9(b) and form part of the capital reserve. Share buy backs can be funded from the capital reserve and during the year £16,911,000 (2019: none) of share buy backs were funded from capital reserves.

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

15. Net Asset Value

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

The following shows the shareholders’ funds and net asset value (NAV) in pence per share, together with a reconciliation of NAV with debt at par to NAV with debt at market value. The difference in the NAVs arises from the valuation of the preference shares (2019: debenture, bonds and preference shares). The number of shares in issue at the year end is shown in note 13.

(1) Restated following the sub-division of each existing ordinary share of 50p into five ordinary shares of 10p each on 13 February 2020.

Only the basic NAV is shown. There is no dilution in this or the previous year.

16. Financial Instruments

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

The Company’s financial instruments comprise its investment portfolio (as shown on pages 18 and 19), derivatives, cash, borrowings, debtors and creditors that arise directly from its operations such as sales and purchases awaiting settlement and accrued income. The accounting policies in note 1 include criteria for the recognition and the basis of measurement applied for financial instruments. Note 1 also includes the basis on which income and expenses arising from financial assets and liabilities are recognised and measured. The Company did not have any exposure to other derivatives during the year apart from the use of forward currency contracts to hedge the Euro, Canadian Dollar and US Dollar exposure (2019: Euro).

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.

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

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

Risk Management Policies and Procedures

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

An investment company invests in equities and other investments for the long term so as to meet its investment objective and policies. In pursuing its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company’s net assets or a reduction of the profits available for distribution by way of dividends.

The risks applicable to the Company and the policies the Company used to manage these risks for the two years under review follow.

Market risk

The Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed under Board Responsibilities on page 58. No derivatives or hedging instruments are utilised to manage market risk. Borrowings are used to enhance returns, however, this increases the Company’s exposure to market risk and volatility.

Currency risk

The majority of the Company’s assets, liabilities and income are denominated in Sterling. There is some exposure to US dollars, Swiss francs, Canadian dollars and the Euro. The US dollar, Canadian dollar and the Euro have been hedged during the year by the use of forward currency contracts.

Management of the currency risk

The Manager monitors the Company’s exposure to foreign currencies daily and reports to the Board on a regular basis.

Forward currency contracts can be used to limit the Company’s exposure to anticipated future changes in exchange rates which are also used to achieve the portfolio characteristics that assist the Company in meeting its investment objective and policies. All contracts are limited to currencies and amounts commensurate with asset exposure to those currencies.

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

Currency exposure

The fair values of the Company’s monetary items that had currency exposure at 30 September are shown below. Where the Company’s equity investments (which are not monetary items) are priced in a foreign currency, they have been included separately in the analysis so as to show the overall level of exposure.

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

Currency sensitivity

The table below illustrates the sensitivity of net assets and of net return after taxation for the year using the exchange rates shown below. It is based on the Company’s foreign currency financial instruments held at each balance sheet date and takes account of forward foreign exchange contracts that offset the effects of changes in currency exchange rate.

The above percentages have been determined based on the market volatility in the year, using the standard deviation of Sterling’s daily fluctuation to the relevant foreign currencies against the mean during the year.

If Sterling were to weaken against the Canadian dollar, Euro, Swiss franc or US dollar to this extent, this would have the following effect:

If sterling were to strengthen by the same amounts, the effect would be the converse.

In the opinion of the Directors, the above sensitivity analysis is not representative of the year as a whole, since the level of exposure may change frequently as part of the currency risk management process of the Company.

Interest rate risk

Interest rate movements may affect the level of income receivable on cash deposits and the interest payable on the variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate of the custodian. During the year, the Company cancelled its £15 million uncommitted overdraft facility and replaced this with a revolving credit facility as detailed in note 11 and noted below.

At the balance sheet date the Company had structural debt comprising £250,000 of 5% cumulative preference shares. The interest rate on the preference shares is fixed and details are shown in notes 5 and 12.

The Company uses the facility when required at levels approved and monitored by the Board. At the maximum possible draw down of £40 million, the effect of a 1% increase/decrease in the interest rate would result in a decrease/increase to the Company’s total income of £400,000. At the year end, £19,180,000 of the loan facility was drawn down (2019: N/A).

The Company also has available a short term overdraft arrangement with the custodian for settlement purposes only. At the year end the Euro bank account was £650,000 overdrawn (2019: £nil). Interest on the bank overdraft is payable at the custodian’s variable rate.

The Company’s portfolio is substantially invested in equities which are not directly exposed to interest rate risk.

Other price risk

Other price risk (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, and it is the business of the Manager to manage the portfolio to achieve the best returns.

Management of other price risk

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

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

Based on the equity portfolio value of £210,738,000 (2019: £267,380,000), if the value of the portfolio rose or fell by 10% at the balance sheet date, the net return after tax for the year and net assets would increase or decrease by £21.1 million (2019: £26.7 million) respectively; in calculating these amounts no adjustment has been made for other variables including management fees.

Liquidity risk

Liquidity risk is minimised as the majority of the Company’s investments are readily realisable securities which can be sold to meet funding commitments if necessary. In addition, revolving credit facility provides for additional funding flexibility, see note 11 for further details. No special arrangements have been made in connection with the liquidity of any of the Company’s assets.

Liquidity risk exposure

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

The 5% cumulative preference shares do not have a fixed repayment date and are, as a result, not shown in the above table. Details are shown in note 12 of the financial statements.

Credit risk

Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved and appropriately regulated counterparties. During the year cash balances were limited to a maximum of 6% of gross assets with any one deposit taker and 12.5% of gross assets for holdings in the Invesco Liquidity Funds plc, a triple A rated money market fund which invests in high quality sterling denominated money market investments such as commercial paper, certificates of deposit, time deposits and asset-backed commercial paper. Only deposit takers approved by the Board are used.

The portfolio may be adversely affected if the custodian of the Company’s assets suffers insolvency or other financial difficulties. The risk associated with failure of the custodian is mitigated by the appointment of a depositary. The depositary is ultimately responsible for safekeeping of the Company’s assets and is strictly liable for the recovery of financial instruments in the event of loss. As part of the Board’s risk management and control monitoring, the Board reviews the custodian’s annual control report and the Manager’s management of the relationship with the custodian.

17. Fair Value

The fair values of the financial assets and financial liabilities, other than preference shares, are either carried in the balance sheet at their fair value (investments), or the balance sheet amount is a reasonable approximation of fair value (due from brokers, dividends receivable, accrued income, due to brokers, accruals, cash at bank and overdraft).

Fair Value Hierarchy Disclosures

Nearly all of the Company’s portfolio of investments are in the Level 1 category as defined in FRS 102 as amended for fair value hierarchy disclosures. The three levels set out in FRS 102 follow:

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

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

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

Categorisation within the hierarchy is determined on the basis of the lowest level input that is significant to the fair value measurement of each relevant asset/liability. The valuation techniques used by the Company are explained in the accounting policies note.

During the year two of the level 3 investments, Nexeon (2020: £16,000; 2019: £83,000) and Eurovestech (2020: £9,000; 2019: £39,000), decreased in fair value by £97,000. The Motif Bio - ADR warrants 9 Nov 2021 were voluntarily delisted from the NASDAQ Capital Market in December 2019, transferring from level 2 to level 3, their fair value is negligible (2019: £6,000).

With regard to unobservable inputs used in the valuation of unquoted investments, there are no reasonably possible alternative assumptions which would produce a material change to the Company’s net asset value.

The book cost and fair value of the debentures and the preference shares based on the offer value at the balance sheet date follow.

As detailed in an announcement on 16 March 2020, the Company has redeemed all of its outstanding 7.75% Debenture Stock 2020 and all of the outstanding 6.5% Bonds 2023.

18. Capital Management

The Company’s capital, or equity, is represented by its net assets which are managed to achieve the Company’s investment objective set out on page 6.

The Company’s total capital employed at 30 September 2020 was £209,755,000 (2019: £289,677,000) comprising borrowings of £19,430,000 (2019: £32,071,000) and equity share capital and other reserves of £190,325,000 (2019: £257,606,000).

The Company’s total capital employed is managed to achieve the Company’s investment objective and policy as set out on page 6, including that borrowings may be used to provide gearing of the portfolio. At the balance sheet date, net gearing, with debt at fair value was 10.2% (2019: 6.1%). 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 Strategic Report under the ‘Principal Risks and Uncertainties’ section on pages 8 to 11. These also explain that the Company is able to gear and that gearing will amplify the effect on 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 section 1158 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 custodian. The Board regularly monitors, and has complied with, the externally imposed capital requirements. This is unchanged from the prior year.

Borrowings comprise preference shares and a revolving credit facility, details of which are contained in notes 11 and 12.

19. Contingencies, Guarantees and Financial Commitments

Contingencies or guarantees that the Company will or has given would be disclosed in this note if any existed. Likewise any commitments, being those amounts that the Company is contractually required to pay in the future as long as the other party meets their obligations.

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

20. Related Party Transactions and Transactions with the Manager

A related party is a company or individual who has direct or indirect control or 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 28 and 29 with additional disclosure in note 4. No other related parties have been identified.

Details of the Manager's services and fees are disclosed in the Directors' Report on pages 60 and 61 and in note 3.

21. Post Balance Sheet Events

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

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

.

The financial information set out above does not constitute the Company’s statutory accounts for the year ended 30 September 2020. The financial information for the year ended 30 September 2019 is derived from the statutory accounts for 2019, which have been delivered to the Registrar of Companies. The 2019 accounts were audited and 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 30 September 2020 have been finalised and audited but have not yet been delivered to the Registrar of Companies. 

The audited annual financial report will be available to shareholders shortly. Copies may be obtained during normal business hours from the Company’s administration office, 43-45 Portman Square, London W1H 6LY and are available via the Company’s section of the Manager’s website at www.invesco.co.uk/keystone .

The Annual General Meeting will be held on 10 February 2021 at 12.30pm at 43-45 Portman Square, London, W1H 6LY.

.

NOTICE OF ANNUAL GENERAL MEETING

Please note that access to this meeting will be restricted.

Please refer to note 1 to this Notice of Annual General Meeting.

NOTICE IS GIVEN that the Annual General Meeting of Keystone Investment Trust plc will be held at the offices of Invesco at 43-45 Portman Square, London W1H 6LY at 12.30pm on 10 February 2021 for the following purposes:

Ordinary Business

1. To receive the Annual Financial Report for the year ended 30 September 2020.

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

3. To approve the Company’s Dividend Payment Policy to declare four dividends in respect of each accounting year, with one payment in respect of each calendar quarter.

4. To reappoint PricewaterhouseCoopers LLP as auditors to the Company and authorise the Audit Committee to determine their remuneration.

5. To re-elect Mrs Karen Brade a Director of the Company.

6. To re-elect Mr Ian Armfield a Director of the Company.

7. To re-elect Mrs Katrina Hart a Director of the Company.

8. To re-elect Mr William Kendall a Director of the Company.

9. To re-elect Mr John Wood a Director of the Company.

Special Business

To consider and, if thought fit, pass the following resolutions of which Resolution 10 will be proposed as an Ordinary Resolution and Resolutions 11, 12 and 13 will be proposed as Special Resolutions.

10. THAT:

the Directors be generally and unconditionally authorised in accordance with Section 551 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this Resolution (the ‘Act’) to exercise all powers of the Company to allot relevant securities (as defined in that Section) up to an aggregate nominal amount (within the meaning of Sections 551(3) and (6) of the Act) of £2,083,052, such authority to expire at the conclusion of the next AGM of the Company or the date fifteen months after the passing of this Resolution, whichever is the earlier, but so that this authority shall allow the Company to make offers or agreements before the expiry of this authority which would or might require relevant securities to be allotted after such expiry as if the authority conferred by this Resolution had not expired.

11. THAT:

the Directors be and they are hereby empowered, in accordance with Sections 570 and 573 of the Companies Act 2006 as amended from time to time prior to the date of the passing of this Resolution (the ‘Act’) to allot equity securities for cash or (if such allotment constitutes the sale of relevant shares which, immediately before the sale, were held by the Company as treasury shares) otherwise, pursuant to the authority given by Resolution 10 set out above, as if Section 561 of the Act did not apply to any such allotment, provided that this power shall be limited:

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

(b) to the allotment (otherwise than pursuant to a rights issue) of equity securities up to an aggregate nominal amount of £618,156; and

(c) to the allotment of equity securities at a price not less than the net asset value per share calculated with debt at market value and this power shall expire at the conclusion of the next AGM of the Company or the date 15 months after the passing of this Resolution, whichever is the earlier, but so that this power shall allow the Company to make offers or agreements before the expiry of this power which would or might require equity securities to be allotted after such expiry as if the power conferred by this Resolution had not expired; and so that words and expressions defined in or for the purposes of Part 17 of the Act shall bear the same meanings in this Resolution.

12. THAT:

the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with Section 701 of the Companies Act 2006 (‘the Act’) to make market purchases (within the meaning of Section 693(4) of the Act) of its issued ordinary shares (‘Shares’).

PROVIDED ALWAYS THAT:

(a) the maximum number of Shares hereby authorised to be purchased shall be 14.99% of the Company’s issued ordinary shares on 10 February 2021, being the date of the Annual General Meeting (equivalent to 9,266,163 shares at 3 December 2020);

(b) the minimum price which may be paid for a Share shall be its nominal value;

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

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

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

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

to any such contract.

(g) any shares so purchased shall be cancelled or, if the Directors so determine and subject to the provisions of Sections 724 to 731 of the Act and any applicable regulations of the United Kingdom Listing Authority, be held (or otherwise dealt with in accordance with Section 727 or 729 of the Act) as treasury shares.

13. THAT:

the period of notice required for general meetings of the Company (other than AGMs) shall be not less than fourteen clear days.

Please refer to the Directors’ Report on pages 63 to 65 for further explanations of all the Resolutions.

By order of the Board

Invesco Asset Management Limited

4 December 2020

Contact:

Angus Pottinger 0203 753 1000

Shilla Pindoria 0203 753 1000