Lowland Inv. Regulatory News (LWI)

HENDERSON INVESTMENT FUNDS LIMITED

LOWLAND INVESTMENT COMPANY PLC

LEGAL ENTITY IDENTIFIER: 2138008RHG5363FEHV19

LOWLAND INVESTMENT COMPANY PLC

ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 30 SEPTEMBER 2019

This announcement contains regulated information

INVESTMENT OBJECTIVE

The Company aims to give shareholders a higher than average return with growth of both capital and income over the medium to long-term by investing in a broad spread of predominantly UK companies. The Company measures its performance against the FTSE All-Share Index Total Return.

INVESTMENT POLICY

Asset Allocation

The Company will invest in a combination of large, medium and smaller companies listed in the UK. We are not constrained by the weightings of any index; we focus instead on controlling absolute risk by diversifying on the basis of underlying company characteristics such as size, industry, economic sensitivity, clients and management. In normal circumstances up to half the portfolio will be invested in FTSE 100 companies; the remainder will be divided between small and medium-sized companies. On occasions the Manager will buy shares listed overseas. The Manager may also invest a maximum of 15% in other listed trusts.

Dividend

The Company aims to provide shareholders with better-than-average dividend growth.

Gearing

The Board believes that debt in a closed-end fund is a valuable source of long-term outperformance, therefore the Company will usually be geared. At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. Borrowing will be a mixture of short and long-dated debt, depending on relative attractiveness of rates.

Key Data as at 30 September 2019

·; Net Asset Value ('NAV') Total Return1 of -9.6%

·; Benchmark Total Return of 2.7%2

·; Dividend growth of 10.2%

·; Dividend for the Year3 of 59.5p

1 NAV per share total return (including dividends reinvested) in the prior year was 2.7%

2 The benchmark is the FTSE All-Share Index. The amount includes dividends reinvested

3 Includes the final dividend of 15.0p per ordinary share for the year ended 30 September 2019 that will be put to shareholders for approval at the Annual General Meeting on Tuesday 28 January 2020

4 Mid-market closing price

5 Based on dividends paid in respect of the previous 12 months and the share price at the year-end

6 Calculated using year-end audited NAVs including current year revenue

Sources: Morningstar for the AIC, Janus Henderson, Refinitiv Datastream

Historical Performance

1 Includes the final dividend of 15.0p per ordinary share for the year ended 30 September 2019 that will be put to the shareholders for approval at the Annual General Meeting on Tuesday 28 January 2020

CHAIRMAN'S STATEMENT

Performance

Lowland has two objectives: to grow capital and to grow income over the medium to long term. In recent years it has fallen short on the first and overshot on the second. In terms of capital, this was a disappointing year for Lowland. Not only did NAV underperform the FTSE All-Share Index, which rose 2.7%, but it declined in absolute terms, by 9.6%. The reasons for the underperformance are set out clearly in the Fund Managers' Report. They are predominantly three-fold. Firstly, Lowland runs a multi-cap portfolio. Its relatively high weighting in small and medium-sized companies, which has served it well over the long-term, has not done so recently, these companies being more exposed to the uncertainties of the UK. Secondly, Lowland's sectoral bias towards Industrials served it poorly. Finally, the focus on investment in shares perceived to be undervalued, as opposed to growth stocks, has been out of favour.

Lowland has now underperformed the benchmark over five years, whilst over ten and twenty years, performance remains robust. The strategy and positioning of the portfolio is always subject to Board discussion and review, but it is fair to say that this discussion is more robust during a period of prolonged difficulty. The Board is firmly of the view that it is important to stick to the investment style which has served shareholders well over the long term. We believe that inconsistency of approach is the enemy of long-term value creation. We also note that the growth in income which the Company has experienced points to fundamental value in the portfolio.

Dividends

The growth in our earnings is in marked contrast with the capital performance. Earnings grew by 16.0% (9.4 pence) to 68 pence, including special dividends received, and by 11.6% (or 6.3 pence) to 61.8 pence excluding them. It should be noted that 6.1 pence of the increase is as a result of the decision to capitalise 50% of management fees and finance costs, in line with our competitors, from the beginning of the financial year.

If shareholders vote at the AGM in favour of the proposed final dividend of 15p, total dividends for the year will amount to 59.5p, 10.2% above the previous year. Dividends will have grown at a compound rate of 10% over seven years. In 2013 we responded to shareholder feedback by introducing a progressive quarterly dividend policy. So far it has been possible to declare dividends exceeding those for the corresponding quarter in the previous year.

Shareholders have benefited from a regular, and thus far, growing source of income. The dividend is well covered by earnings, with £2.3m being transferred to the Revenue Reserve, which at the year end stood at £18.4m.

Barring really adverse circumstances, we are committed to a progressive dividend policy, with each quarterly declaration being no less than the previous equivalent. We aspire to each quarterly dividend exceeding the previous equivalent.

It is noteworthy that our dividend yield, 4.6% based on this year's dividend, has now risen to a level only seen on one previous occasion over the 29 years of James Henderson's involvement with the Company. There may be some comfort in the fact that, on the previous occasion, the spike in yield was followed by significant outperformance in Lowland's share price. Whether or not that history will be repeated, we conclude from the revenue position that there is real value in the portfolio.

Investment Review and Gearing

The level of gearing averaged around 12% during the year, ending at 12.8%. The Board has regarded this a reasonable level as the Fund Managers see considerable value in the underlying portfolio. Gearing has enhanced earnings, the underlying dividend yield of the portfolio being 4.7% compared with a blended cost of borrowing of 2.6%. This year gearing has detracted from capital performance; we expect gearing to enhance capital performance over the long-term.

The weighting of the portfolio in the FTSE 100 component stocks has continued to rise modestly, and was 44% as at the year end (versus 39% at the end of 2018). This has come about predominantly due to purchases that the Fund Managers judge to be good value, the largest of which are RBS and GlaxoSmithKline. There is more detail on both purchases in the Fund Managers' report.

The sector positioning of the portfolio has remained relatively constant; Industrials and Financials are the two largest sectors. In an environment where global economic growth is slowing and bond yields have fallen, the large position in both sectors has detracted from performance this year. If economic conditions stabilise, for example on a resolution to Brexit or to the US/China trade war, the Fund Managers consider the valuation of both sectors to be low and the shares well poised to recover.

Our Fund Managers have long acted as responsible managers, paying attention to environmental, social and governance issues in performing their duties. Reflecting the growing prominence of these issues, our Fund Managers have increased their focus on them as set out for the first time in their report.

Ongoing Charge

The ongoing charge was 0.63% compared with the previous year's 0.57%. The Management Fee amounts to 0.5% on Net Chargeable assets up to £375m and 0.4% thereafter. No performance fee was paid in the year under review.

Share Price Discount

During the year the discount to NAV fluctuated between 1.7% and 9.2% ending the year at 9.1%. The policy on discount is set out in the Annual Report.

Corporate Governance

'Overboarding' is a term and concern which has achieved prominence in the last year or two, and has influenced voting patterns at AGMs. It has long been our practice to ensure that we only recruit directors who are able to devote sufficient time to the job. Directors who have a breadth of activity can bring more to the table than those who do not, but they clearly must have the time to do so.

While there is welcome evidence of some movement in the right direction, I believe that some of the approaches to the 'overboarding' issue are still over-simplistic. Some shareholders and agencies measure commitments to investment companies as if they were operating companies, while at the same time ignoring commitments to private companies and charities, either of which can be very onerous. Ours is a more pragmatic approach. Each Director, actual or prospective, is required to provide to the Nominations Committee an account of time commitments to all his or her professional activities. This procedure is repeated if a Director seeks the Chairman's approval to take up an additional post.

I am quite sure that all Directors have the capacity and inclination to devote such time as may be necessary to Lowland, whether in normal or exceptional circumstances. Equally, the broad range of other activities undertaken by your Directors enriches the contributions each makes.

Tenure of office is also a matter of some concern to shareholders. Lowland has always valued a mix of continuity and refreshment. Over the last few years we have brought more discipline to the process of succession planning. Clearly individual circumstances change and flexibility is required, but we now have a framework within which Directors have an expectation of their likely retirement dates, and when we expect new Directors to be recruited. This aims to provide for one Director to be replaced on average every three years. This brings the benefit of, on the one hand, experience of past vicissitudes and, on the other, fresh thought. It should also facilitate a pool of internal candidates from which the Chair may be chosen. I would add that it would be abundantly clear to anyone who attended one of our board meetings that all Directors are entirely independent.

The Board

As mentioned at the half year stage, we were delighted to welcome Tom Walker to the Board on 1 July. He stands for election at the AGM.

Contact with Shareholders

We are always keen to hear shareholders' views and so I would invite anyone who wishes to contact me to do so at: itsecretariat@janushenderson.com

Annual General Meeting

The AGM of the Company will be held at the offices of Janus Henderson on 28 January 2020 at 12.30 pm. Full details of the business to be conducted at the meeting are set out in the Notice of Meeting.

As usual our Fund Managers will be making a presentation. This is an important opportunity for shareholders to meet the Board and Fund Managers and to ask them questions. We would encourage as many shareholders as possible to attend; we welcome your questions and observations. The AGM will be broadcast live on the internet, so if you are unable to attend the AGM in person you will be able to log on to watch as it happens, by visiting http://www.janushenderson.com/en-gb/investor/investment-trusts-live/.

Outlook

It seems likely that political uncertainty will prevail in the UK for some time to come, whatever the outcome of the General Election. None of the foreseeable results is likely to result in a speedy resolution of the relationship between the UK and the EU. However UK companies continue to show resilience, and are modestly valued by most yardsticks. We see potential for capital growth, with the current level of yield on the UK market unlikely to prevail for long. On balance we feel it will be an increase in valuations rather than reduction in dividends which brings yields towards historic norms.

Robert Robertson

Chairman

9 December 2019

FUND MANAGER'S REPORT

Background

Economic growth slowed during the period, just managing to avoid a quarter of contraction. This happened in spite of very low interest rates and weak sterling. The stimulus of low rates and cheap currency would normally cause growth to accelerate. The domestic impact was offset by the global economy: world growth slowed down as the trade war between the US and China intensified. At home, the looming possibility of a disorderly Brexit and political uncertainty compounded the scarcity of global growth. These factors combined to make companies more risk-averse: they have cut costs, and reduced capital expenditure, which in turn led to a stagnation in productivity growth.

It has been a difficult economic backdrop for many companies with predominantly UK operations. However, company results have been generally satisfactory. This is a testament to those companies who have excellent, differentiated products, a solid business model and good management discipline. When the UK economy picks up, we believe that the companies we hold in the portfolio will be well placed to benefit.

In particular, the cash generation of many of our portfolio companies has been strong despite the economic headwinds. This is evidenced by the decent level of dividend growth our companies have delivered, with investment income growing 4.5% year on year.

Performance Attribution

It was a disappointing year for performance. There are a number of factors which contributed to this underperformance: the positioning of the portfolio in different sizes of companies; our bias in sector exposures; the investment approach; and some company-specific challenges.

The portfolio has always been a blend of large, medium and small companies. Over the long term the best performers have often been small and medium-sized companies. Even in a bad year, as last year was for smaller companies, all of the top five performers at the stock level are listed outside the FTSE 100. While there have been small and medium-sized companies that have performed well this year, in aggregate there has been a pronounced underperformance of small companies relative to large companies and, to a lesser degree, medium-sized companies relative to large companies. Over the financial year to the end of September, the FTSE 100 rose 3.2% while the FTSE Small Cap fell 7.8% and the AIM All-Share Index fell 19.4%. The FTSE Small Cap Index made up 13% of the portfolio, and the AIM All-Share 15% of the portfolio as at the year end. Our weighting to these smaller companies is more than 8x greater than the exposure in the index.

There are two main reasons for the underperformance of smaller companies. Firstly, smaller companies are on average more exposed to the domestic economy. They are at an earlier stage in their lifecycle and tend to address their home market before expanding overseas. For Lowland's portfolio as a whole, approximately 47% of sales derive from the UK versus 27% of the benchmark. Over the long term, companies more exposed to the domestic economy have traded at approximately the same valuation as those more exposed to overseas earnings. This is not currently the case; those more exposed to the UK are trading at a material valuation discount. This 'domestic discount' has therefore damaged smaller companies' share prices more than larger companies' valuations.

Secondly, there is an increasing desire for liquidity when positions are held within open-ended funds; this is particularly pronounced for companies below a market valuation of £250m. This is causing pressure on share prices where some fund managers are, in effect, becoming forced sellers. While this technical factor will gradually pass and shares will find appropriate long-term holders, in the interim stage there is dislocation in share prices.

The portfolio's sector allocation was also a detractor from performance. Our portfolio is particularly overweight in Industrials. It is industrial companies that have suffered most from the trade war between the USA and China, and it makes forecasting even more perilous than usual.

The resulting reduction in visibility in industrial company earnings has led to a de-rating of industrial company valuations. Eventually clarity on sales and earnings growth will emerge, from a low valuation base.

It is important at times of an economic slowdown to reassess the Industrials weighting in the portfolio and decide whether it is appropriate against the current backdrop. The Industrials we own are not producing commoditised components; they are specialist engineers, producing components that are often exported globally, and that would be difficult to substitute for another supplier. The clearest examples would be the aerospace components suppliers we hold, such as Rolls-Royce and Senior, but this would equally apply to companies such as XP Power, which makes components designed for medical equipment, or Avon Rubber, which is producing specialist equipment for use by the US Department of Defense. Industrials are not a homogeneous block of companies that move with the broad economic cycle. They are exposed to a wide variety of end-markets all at different stages in their cycles. For example Somero Enterprises is predominantly exposed to the US construction cycle, while XP Power is exposed to the semiconductor cycle. We have to assess the overall Industrials exposure by considering the exposures to multiple end-markets.

In addition to concerns over a broad economic slowdown, there was also a one-off factor for aerospace components supplier Senior, which is the largest industrial position and made up 2.2% of the portfolio as at the end of September. Senior's largest individual aerospace programme is the Boeing 737 Max where they make, for example, structures for the wing. Their components are unrelated to the two crashes and subsequent grounding of the aircraft but until the aircraft is re-certified, earnings forecasts have been reduced in the short term. Longer term, Senior remains well positioned on new aerospace programmes for both Airbus and Boeing. If the Boeing aircraft were to remain grounded, while it would be temporarily disruptive, over time orders would shift to Airbus where Senior is also well positioned. We have maintained our holding, as the valuation is low relative to the company's potential to grow sales and earnings.

The final factor contributing to underperformance has been our preference for companies with a low valuation (relative to peers or relative to history) where we can see a clear path to earnings recovery. This moderately 'contrarian' or 'value' approach has worked well for the Company historically. However, in recent years the best performers in the market have been more highly valued companies that have delivered consistent earnings growth. As this trend has persisted, valuation levels have become increasingly polarised. This can be seen clearly in the performance of the FTSE All-Share split by valuation bands, with the high valuation sections of the market materially outperforming over the past year. This has been detrimental to portfolio performance, where the average valuation of the portfolio at year end was 11.4x forward earnings.

The top five active contributors to performance (relative to the benchmark), that we own, were:

1. Greene King (a pub and brewer). Cash bid from CK Asset Holdings at a substantial premium to the undisturbed share price.

2. Anexo Group (credit hire and legal services). Encouraging results and strong cash collections coming through.

3. Johnson Service Group (laundry services across hotels, restaurants and workwear). Excellent organic growth being delivered and substantial new hotel linen capacity soon to come on stream in Leeds.

4. Churchill China (crockery for the restaurant industry). Strong organic growth coming from sales to the restaurant industry globally.

5. Avon Rubber (defence and dairy equipment). Excellent acquisition of a division from 3M to expand their defence division.

An encouraging theme this year has been the re-emergence of corporate activity in the portfolio: Greene King has agreed a cash bid from Hong Kong conglomerate CK Asset Holdings, while earlier in the year Manx Telecom agreed a cash bid from private equity and A&J Mucklow agreed to a bid from listed peer LondonMetric.

The top five active detractors from performance (relative to the benchmark), that we own, were:

1. Senior (engineer predominantly for the aerospace industry). Grounding of the Boeing 737 Max has reduced earnings forecasts.

2. Carclo (specialist plastics for medical devices and LED lighting for premium cars). Manufacturing issues in their car lighting division has caused an already stretched balance sheet to become very difficult. The holding has been written down to zero.

3. International Personal Finance (door to door and digital lending in emerging markets). Changing regulatory environment in Poland means there is a lack of earnings visibility.

4. Royal Mail (UK and European letter and parcel delivery). Difficulty reducing costs against a challenging UK backdrop for letters.

5. Stobart Group (a conglomerate; the majority of their earnings are Southend airport and biomass delivery). Corporate governance has been poor and has been discussed with the company and the balance sheet has been highly indebted.

Were there to be a common theme among the detractors from performance, it would be that they have become too highly indebted. This would be the case for Carclo and Stobart, and is to a lesser degree the case for International Personal Finance. There is an increasing aversion to high levels of debt among equity investors given the current uncertain economic outlook. This is causing substantial valuation discounts among those companies that have a high level of debt versus peers. In our view this aversion to debt in the market is a valuation opportunity, as the potential for debt reduction is not being fully appreciated in cash generative companies. However, there is of course a need to be selective and to recognise that we have made mistakes in the past in not fully appreciating the scale of additional debt such as pension deficits.

We have adjusted our investment process to take account of these past mistakes; we shall never stop taking lessons from the judge and jury of share prices.

Portfolio Positioning

The largest sector within the portfolio remains Financials. It is worth noting that while the weighting in the financial sector is high, it is to a degree a 'catch-all' sector. For example real estate investments (such as Land Securities, Hammerson and Helical) fall within financials, as do other investment trusts held (such as Herald).

Within Financials the largest sub-sector remains insurance (13.0% of the portfolio versus 15.0% of the portfolio as at the previous year end). While the overall portfolio weight in insurance has remained broadly flat, the holdings in Sabre Insurance, Direct Line and FBD Holdings have been increased, all of which pay an attractive dividend to shareholders and look good value relative to the returns they are generating. In contrast, the position in Hiscox was modestly reduced on valuation grounds. It continues to grow its retail business successfully and generate strong returns; therefore, we remain happy with the position on a long-term basis.

The portfolio remains more heavily weighted in large companies than the long-term average positioning, which is approximately one-third in large companies, one-third in medium-sized companies and one-third in small companies. This bias in the portfolio has come about primarily from stock-level decisions, as there are valuation opportunities in companies such as RBS and GlaxoSmithKline (both described in more detail in the portfolio activity section). As stated above, many investors have short-term concerns around smaller companies, and we felt it prudent to reduce exposure slightly.

Portfolio Activity

The largest purchase during the year was RBS, which was 1.0% of the portfolio at the year end. As an income portfolio manager, RBS had for a number of years been a relatively easy share to ignore as a result of its historic conduct issues (such as PPI) and lack of dividend. However, PPI claims have this year come to an end and a regular dividend to shareholders has been reinstated, backed by a strong balance sheet versus peers. The key remaining overhang is the government stake, which is still a majority holding. In our view this is more than factored into the current valuation, which at just over half book value implies low returns being generated into perpetuity. Even absent a re-valuation of the shares on the back of, for example, the government reducing their stake or better sentiment towards the domestic UK economy, the shares pay an attractive high-single-digit dividend yield (including recurring special dividends).

We added to the existing position in GlaxoSmithKline following an encouraging meeting with the relatively new Head of Pharmaceuticals, who has joined from AstraZeneca. Back in 2012 under the leadership of the then-new CEO, Pascal Soriot, AstraZeneca dramatically improved its pipeline of drugs with a renewed focus on innovative medicines. It is our view that under a new management team (new CEO, new Head of R&D and new Head of Pharmaceuticals), a similar process is currently underway at GlaxoSmithKline. This will, in all likelihood, be a slow process of reinvigorating research and development at such a large company, but it is not in our view factored into the valuation.

Another sizeable purchase included a new position in XP Power. XP Power makes power converters across a range of industries, the most material of which are healthcare and semiconductors. As the power converters are 'designed in' at an early stage in the product life cycle, and form a very small part of the overall product cost, the margins that XP Power generates are good (over 20% operating margin). Recently the valuation had come down considerably as a result of severe weakness in the semiconductor market and concerns that as a result, XP Power earnings would need to be re-based (a concern that has, at the time of writing, not come to fruition and orders have continued to grow). We purchased the position on the view that it is rare to see a company with good margins, a respected management team and a strong balance sheet trading on a low teens earnings multiple (as at the time of purchase). On any further weakness we will look to add to the position.

Our largest sale was Royal Dutch Shell, which we reduced to 5.6% as at the year end primarily for portfolio balance reasons following a period of strong performance. As at the beginning of December 2018 the position in Shell was 8% of the portfolio before it was reduced.

The largest sale outside of the FTSE 100 was paving stone company Marshalls, which has been sold in its entirety. This had been in the portfolio since 2008, when we purchased the shares between £0.96 and £1.66. The final sales this year were between £4.20 and £6.32. The management have done an excellent job, and the performance of the shares has been driven by both good organic growth and sensible bolt-on acquisitions. The sale of the position was not as a result of concerns around the fundamentals of the business but rather a concern regarding valuation, versus both the building materials peer group and its history.

Also among the largest divestments during the year were the positions in industrial property company A&J Mucklow and Isle of Man telecoms operator Manx Telecom, in both cases following a takeover offer. During the year there has been a notable uptick in bid activity, including Greene King (see performance attribution section), a failed takeover of Provident Financial and two approaches (but deemed by the board to be at an insufficient premium) for office property company, Helical. In our view, this increase in takeover interest shows that UK companies (and it is notable that all the companies mentioned are domestically focused UK companies) are valued too low relative to global peers. Therefore, while there is uncertainty regarding the domestic outlook, the valuation opportunity is such that some companies (whether operating or private equity) are willing to take the risk on exposure to the UK economy.

Lowland responsible investment strategy

Responsible Investment is the term used at Janus Henderson to cover the Manager's work on environmental, social and corporate governance ('ESG') issues in the Company's investee companies. These issues are important not only as a standalone objective in order to allocate the capital of the Company to the companies with the most responsible practices, but are also an integral part of the investment process.

As data quality and availability on ESG is in some cases poor, potential or current investments are not rigidly excluded on quantitative metrics. However, each new position in the portfolio is reviewed for ESG issues and any concerns that the Managers view as material are discussed with company management. In addition the existing portfolio is screened for 'red flags', which are then discussed with management and monitored.

Substantial progress has been made in the governance area in recent years, where information is more easily accessible. As the data on environmental and social issues improves we will expand our engagement in these areas. Engagement takes place at both the Fund Manager level and at the level of the Governance and Responsible Investing team (an independent team within Janus Henderson who work closely alongside the Fund Managers).

For Lowland, responsible investing incorporates:

1. A focus on companies' long-term plans. We are a long-term investor and therefore we should invest in companies that are cognisant of changing standards with regards to, for example, single-use plastic or renewable energy (even before these changing societal standards are fully recognised in legislation). These changing expectations need to be viewed within the context of the investment proposition - for example what valuation multiple should be given to a plastic packaging company?

2. Reacting to evidence of poor corporate governance where identified (whether by screening, external research or internal meetings), engaging with the company involved, and monitoring improvement.

3. Engaging thoughtfully on corporate remuneration. A company's board and senior executive remuneration policy needs to be appropriate relative to both its peers and (increasingly) relative to its broader employee base. There needs to be a defensible logic to how corporate remuneration levels have been set.

We always vote at company AGMs. Where possible, we will seek to engage with companies beforehand, but if agreement cannot be reasonably reached, we will vote against resolutions. The approach to voting is pragmatic - we subscribe to proxy voting agencies such as ISS (Institutional Shareholder Services) and we will carefully study their recommendations; however we do not necessarily follow all recommendations.

Outlook

Companies in aggregate, are reporting results in line with modestly reduced expectations. This suggests the current slowdown in global economic activity is, at least to a degree, reflected in earnings forecasts. The low valuation for much of the portfolio means that where companies are only meeting expectations (rather than surpassing them), shares are broadly responding positively. This backdrop of modest valuations and realistic earnings expectations within the portfolio is encouraging for the year ahead.

The last year has been strong for dividend growth but disappointing for capital growth. This means the dividend yield on the underlying portfolio has reached levels not seen in many years. This dividend yield (currently just under 5%) is particularly stark when viewed in the context of low government bond yields (at the time of writing the UK 10 year gilt yield is 0.75%). This would suggest one of two things is likely to occur: either the dividends being paid by companies are unsustainable and need to be reduced, or there will be a period of valuation 'catch up' (in other words yield compression) in the portfolio. We have begun forecasting dividends for the current financial year ending 30 September 2020 and based on current expectations think a healthy level of dividend growth will be achieved. There will always be isolated dividend cuts, but in aggregate dividend pay-out ratios are modest and balance sheets are conservative. This attractive, and in our view sustainable, dividend yield, in combination with the level of bid interest seen this year, are the clearest indicators to us of the underlying value within the portfolio.

James Henderson and Laura Foll

Fund Managers

9 December 2019

Twenty Largest Holdings as at 30 September 2019

The stocks in the portfolio are a diverse mix of businesses operating in a wide range of end markets.

At 30 September 2019 these investments totalled £188,198,000, or 43.2% of the portfolio.

* Not in the twenty largest investments last year

1 AIM stocks

2 Overseas listed stocks (Ireland)

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, has carried out a robust assessment of the principal risks, and uncertainties, facing the Company that would threaten its business model, future performance, solvency and liquidity. A matrix of these risks has been drawn up and steps taken to mitigate these. The principal risks and mitigating actions are as follows:

Investment Activity and Strategy Risk

An inappropriate investment strategy or poor execution, for example, in terms of asset allocation or level of gearing, may result in underperformance against the Company's benchmark index and the companies in its peer group, and also in the Company's shares trading on a wider discount to the net asset value per share.

The Board manages these risks by ensuring a diversification of investments and a regular review of the extent of borrowings. Janus Henderson operates in accordance with investment limits and restrictions and policy determined by the Board, which includes limits on the extent to which borrowings may be employed.

The Board reviews the investment limits and restrictions on a regular basis and the Manager confirms adherence to them every month. Janus Henderson provides the Board with management information, including performance data and reports and shareholder analyses.

The Board monitors the implementation and results of the investment process with the Fund Managers at each Board meeting and monitor risk factors in respect of the portfolio.

Investment strategy is reviewed at each meeting.

Portfolio and Market Price Risk

Market risk arises from uncertainty about the future prices of the Company's investments. Although the Company invests almost entirely in securities that are listed on recognised markets, share prices may move rapidly. The companies in which investments are made may operate unsuccessfully, or fail entirely.

The Fund Managers seek to maintain a diversified portfolio to mitigate against this risk. The Board regularly reviews the portfolio, activities and performance.

Financial Risk

The financial risks faced by the Company include market price risk, interest rate risk, liquidity risk, currency risk and credit and counterparty risk.

The Company minimises the risk of a counterparty failing to deliver securities or cash by dealing through organisations that have undergone rigorous due diligence by Janus Henderson. The Company holds its liquid funds almost entirely in interest bearing bank accounts in the UK or on short-term deposit. This, together with a diversified portfolio which comprises mainly investments in large and medium-sized companies mitigates the Company's exposure to liquidity risk. Currency risk is mitigated by the low exposure to overseas stocks.

Gearing Risk

At the point of drawing down debt, gearing will never exceed 29.99% of the portfolio valuation. In the event of a significant or prolonged fall in equity markets gearing would exacerbate the effect of the falling market on the Company's NAV per share and, consequently, its share price.

The Company minimises the risk by the regular monitoring of the levels of the Company's borrowings in accordance with the agreed limits. The Company confirms adherence to the covenants of the loan facilities on a monthly basis.

Operational Risk

Disruption to, or the failure of, Janus Henderson's accounting, dealing or payment systems or the custodian's records could prevent the accurate reporting or monitoring of the Company's financial position.

Janus Henderson contracts some of the operational functions (principally those relating to trade processing, investment administration and accounting), to BNP Paribas Securities Services.

Details of how the Board monitors the services provided by Janus Henderson and its other suppliers, including cyber risk, and the key elements designed to provide effective internal control, are explained further in the Internal Controls section of the Corporate Governance Statement in the Annual Report.

Accounting, Legal and Regulatory Risk

In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010. A breach of Section 1158 could result in the Company losing investment trust status and, as a consequence, capital gains realised within the Company's portfolio would be subject to corporation tax.

Compliance with the requirements of Section 1158 is monitored by Janus Henderson and the results are reported at each Board meeting. The Company must comply with the provisions of the Companies Act 2006 and, since its shares are listed on the London Stock Exchange, the FCA's Listing and Disclosure Guidance and Transparency Rules and the Prospectus Rules ('FCA Rules').

A breach of the Companies Act 2006 could result in the Company and/or the Directors being fined or the subject of criminal proceedings. A breach of the Listing Rules could result in the suspension of the Company's shares; which in turn would breach Section 1158.

The Board relies on its Company Secretary and its professional advisers to ensure compliance with the Companies Act 2006 and FCA Rules.

The Board receives internal control reports produced by Janus Henderson on a quarterly basis, which confirm regulatory compliance.

The Board considers these risks to have remained unchanged throughout the year under review.

VIABILITY STATEMENT

The Company is a long-term investor; the Board believes it is appropriate to assess the Company's viability over a five-year period in recognition of our long-term horizon and what we believe to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented above.

The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, materialising in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board has taken into account the liquidity of the portfolio and the gearing in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan facilities and how a breach of the loan facility covenants could impact on the Company's liquidity, net asset value and share price.

The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place. The Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a substantial financial crisis affecting the global economy could have an impact on this assessment.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five-year period. 

RELATED PARTY TRANSACTIONS

The Company's current related parties are its Directors and Janus Henderson. There have been no material transactions between the Company and its Directors during the year. The fees and expenses paid to Directors are set in the Annual Report. There were no outstanding amounts payable at the year end.

In relation to the provision of services by Janus Henderson, other than fees payable by the Company in the ordinary course of business and the provision of sales and marketing services, there have been no material transactions with Janus Henderson affecting the financial position of the Company during the year under review. More details on transactions with Janus Henderson, including amounts outstanding at the year end, are given in the Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

In accordance with Disclosure Guidance and Transparency Rule 4.1.12, each of the Directors confirms that, to the best of his or her knowledge:

• the Company's financial statements, which have been prepared in accordance with UK Accounting Standards and applicable law give a true and fair view of the assets, liabilities, financial position and loss of the Company; and

• the Strategic Report, Report of the Directors and financial statements include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

The directors consider that the Annual 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.

For and on behalf of the Board

Robert Robertson

Chairman

9 December 2019

INCOME STATEMENT

The total columns of this statement represent the Profit and Loss Account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. The Company had no other comprehensive income other than those disclosed in the Income Statement. The net return is both the profit for the year and the total comprehensive income.

STATEMENT OF CHANGES IN EQUITY

STATEMENT OF FINANCIAL POSITION

STATEMENT OF CASH FLOWS

NOTES TO THE FINANCIAL STATEMENTS

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) are incorporated into, or form part of, this announcement.