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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| North American Income Trust (the) Plc | LSE:NAIT | London | Ordinary Share | GB00BJ00Z303 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.00 | 0.36% | 280.00 | 281.00 | 282.00 | 281.00 | 278.00 | 278.00 | 351,285 | 16:35:26 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | 51.13M | 41.82M | 0.3000 | 9.37 | 391.65M |
From Apr 2019 to Apr 2024
TIDMNAIT
RNS Number : 3856A
North American Income Trust (The)
24 March 2017
THE NORTH AMERICAN INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEARED 31 JANUARY 2017
INVESTMENT OBJECTIVE
To provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities.
STRATEGIC REPORT
1. FINANCIAL RESULTS
Financial Highlights and Summary
Hot Features
Premium
Net asset value total Share price total return
return 2017 +45.8% 2017 +56.3%
2016 +3.2% 2016 -2.0%
Revenue return per share
2017 39.92p Dividend per share 2017 36.00p
2016 35.74p 2016 33.00p
Dividend yield{A} 2.9%
2016 4.0%
{A}Based on year end share price
31 January 2017 31 January 2016 % change
Total assets GBP419,674,000 GBP323,679,000 +29.7
Equity shareholders' funds GBP379,101,000 GBP280,644,000 +35.1
Share price (mid market) 1232.00p 815.00p +51.2
Net asset value per share{A} 1323.45p 935.55p +41.5
Discount (difference between
share price and net asset
value) 6.9% 12.9%
Net gearing{B} 7.4% 11.2%
Dividends and earnings
Revenue return per share 39.92p 35.74p +11.7
Dividends per share (including
proposed final dividend) 36.00p 33.00p +9.1
Dividend yield (based on year
end share price) 2.9% 4.0%
Dividend cover 1.11 1.08
Revenue reserves per share
Prior to payment of third
interim dividend declared
and proposed final dividend 43.17p 35.84p
After payment of third interim
dividend declared and proposed
final dividend 21.17p 15.84p
Operating costs
Ongoing charges{C} 1.05% 1.03%
{A} Including undistributed revenue.
{B} Calculated in accordance with AIC guidance "Gearing Disclosures
post RDR" (see definition of "Net Gearing" on page 63 of the published
2017 Annual Report).
{C} The ongoing charges ratio has been calculated in accordance
with guidance issued by the AIC as the total of investment management
fees and administrative expenses divided by the average cum income
net asset value throughout the year.
PERFORMANCE
1 year 3 year 5 year
return return{A} return{A}
Total return (Capital return plus dividends % % %
reinvested)
Share price +56.3 +76.9 +118.7
Net asset value per share +45.8 +78.9 +119.5
S&P 500 Index (in sterling terms) +35.3 +77.9 +142.4
Russell 1000 Value Index (in sterling
terms) +40.5 +74.6 +142.7
{A} Cumulative return
The Company's investment objective changed on 29 May 2012 from
a S&P 500 index-tracker trust to being actively managed. The five
year performance figures shown reflect periods of time when the
Company ran with these two different objectives.
DIVIDS
Rate xd date Record date Payment date
1st Interim dividend 7.00p 14 July 2016 15 July 2016 5 August 2016
2017
2nd Interim dividend 7.00p 13 October 14 October 31 October
2017 2016 2016 2016
3rd Interim dividend 7.50p January 2017 20 January 17 February
2017 2017 2017
Proposed final dividend 14.50p 18 May 2017 19 May 2017 16 June 2017
2017
_______
Total dividends 2017 36.00p
_______
1st Interim dividend 6.50p 2 July 2015 3 July 2015 31 July 2015
2016
2nd Interim dividend 6.50p 1 October 2015 2 October 2015 30 October
2016 2015
3rd Interim dividend 7.00p 21 January 22 January 19 February
2016 2016 2016 2016
Final dividend 2016 13.00p 12 May 2016 13 May 2016 7 June 2016
_______
Total dividends 2016 33.00p
_______
2. CHAIRMAN'S STATEMENT
It is very pleasing to report that The North American Income Trust has produced a strong performance over the last year in both capital and revenue terms, on an absolute and relative basis. The Company's net asset value per share rose by 45.8% on a total return basis, in sterling terms, and compares favourably with our reference benchmarks, the S&P 500 and Russell 1000 Value, which rose 35.3% and 40.5% respectively in sterling terms.
The Company has also performed strongly since the change in its mandate to active management in 2013. For the three year period to 31 January 2017 the cumulative NAV return was 78.9% compared to 77.9% and 74.6% from the S&P 500 Index and Russell 1000 indices respectively and the Trust was ranked first in its AIC peer group over 1 and 3 years.
Dividend
For the year to 31 January 2017, the revenue per Ordinary share rose by 11.7% from 35.74p to 39.92p. The Board is recommending a final dividend per Ordinary share of 14.5p, making total dividends for the year of 36.0p (2016 - 33.0p), an increase of 9.1%. The total dividend represents a yield of 2.9%, using the share price of GBP12.32 at the year-end, compared to the 2.1% yield from the S&P 500 Index at that date
This leaves a balance of GBP1.2 million (equivalent to 4.3p per Ordinary share), which will be added to the revenue reserve, making a further increase in our reserve, providing the Company with added flexibility for future years. Since 2012, the dividend has increased by over 280% from 9.4p and the revenue reserves have risen significantly from 5.5p per share to 21.17p.
The proposed final dividend will be payable on 16 June 2017, to shareholders on the register on 19 May 2017. The quarterly dividends are paid in August, November, February and June each year.
Portfolio
As of 31 January 2017, our portfolio had holdings in 46 equities with 3.3% of total assets in corporate bonds- the lowest level since the Company's change of investment objective - and which provide 5.8% of our total income earned (2016 - 7.3%).
Total revenue from equity holdings in the portfolio over the financial year was GBP11.6 million (2016 - GBP11.0 million). Most of the Trust's equity holdings continued their established record of dividend growth. Approximately 80% of the equity holdings raised their dividends over the past year, with a weighted average increase of approximately 8.2%. Further details of the portfolio's equity income are provided in the Manager's Review.
During the year, the Company received gross premiums totalling GBP3.0 million (2016 - GBP2.8 million) in exchange for entering into listed stock option transactions. This option income, the generation of which remains consistent with the Manager's company-focused investment process, represents 19.2% of total income (2016 - 18.8%). Bond income and option premiums will remain secondary sources of income for us in the belief that equity dividends should remain the overwhelming source of income available for distribution. Further details of the portfolio are shown below.
Discount
The Company's share price rose by 51.2% over the financial year to GBP12.32. The Board seeks to manage the level of discount at which the shares trade and will exercise its discretion to repurchase shares. During the year, 1.35 million shares were repurchased at a cost of GBP12.2 million. Over the course of the last six months, the discount to net asset value narrowed and ended the year at a 6.9% compared with 12.9% at the end of the 2016 financial year.
Gearing
The Company continued to make use of its capacity to gear through the $71.0 million facility provided by State Street, of which $51.0 million is fixed and fully drawn down and $20 million is floating. During the second half of the year, the amount drawn down under the uncommitted facility was repaid and the Company's gearing was GBP40.6 million at 31 January 2017 (31 January 2016 - GBP43.0 million), representing net gearing of 7.4%. Over the coming months, the Board will undertake a review of the Company's gearing policy prior to the expiry of the current facility in July 2017 and seek competitive quotes from a range of banks.
Market & Economic Review
The major North American equity market indices moved sharply higher over the 12-month period ended 31 January 2017, while the US dollar strengthened. This result was not without volatility and occurred as a result of Britain's vote to leave the European Union in June, and the unexpected victory of Donald Trump in the US presidential election in November.
All sectors within the US broader-market S&P 500 and Russell 1000 Values indices recorded double-digit gains for the reporting period. Unsurprisingly, financials and materials companies led the market higher amid prospects for higher interest rates and greater public and private capital investment.
Much of the Trust's price increase came in the latter months of the Trust's fiscal year, and centred squarely on the new administration's potential actions on corporate taxation, fiscal spending on infrastructure, and relaxation of regulations - all meant to stimulate the economy. While there remains much uncertainty around timing and implementation of each campaign promise, investors have certainly welcomed the prospects.
In contrast, the economy slowed modestly with 1.6% GDP growth for the 2016 calendar year-a percentage point below the 2.6% growth rate recorded in 2015, due to declines in private inventory investment and consumer spending. The Federal Reserve, however, still sees a tightening labour market and inflation on the horizon, which led the central bank to raise its benchmark interest rate by 0.25% to a range of 0.50% to 0.75% following its meeting in mid-December 2016-its first increase in a year-and subsequently left the rate unchanged in a statement issued on 1 February 2017.
Further details can be found in the Manager's Review.
Investment Manager
Shareholders will be aware of the proposals by Aberdeen Asset Management and Standard Life to bring together their investment businesses through an all-share merger. This will be subject to the usual shareholder and regulatory approvals. The Board will keep under review the effects of such a merger, if any, on the Trust and, in particular, the investment team which is based in Aberdeen's Philadelphia office. Their approach, with a strong emphasis on the fundamentals of individual companies, has served our Company well.
Promotional Activity
The Board continues to promote the Company through the Manager's initiative which provides a series of savings schemes through which savers can invest in the Company in a low-cost and convenient manner (see page 59 of the published 2017 Annual Report).
Up-to-date information about the Company, including monthly factsheets, interviews with the Manager and the latest net asset value and price of the Ordinary shares, may be found on the Company's website at www.northamericanincome.co.uk.
Board
We are aware of the importance of the future composition of the Board and are currently in the process of establishing a plan for succession.
Outlook
Making predictions for 2017 is more difficult than usual, given the change in administration and the uncertainty surrounding the implementation of President Trump's policies and therefore some volatility is expected during the course of the year as these policies take shape. On the positive side, corporate earnings continue to progress, with companies delivering positive sales and earnings growth. Macro indicators also continue to improve and the economy currently remains relatively healthy.
We remain content with the Trust's revenue account, which has continued its strong record of growth. As the Manager forecast last year, we have witnessed the pace of dividend growth moderating, although companies are still showing strong cash-flow generation and remain focused on dividend growth. Our Manager remains focused on investing in those companies which have disciplined and balanced capital allocation policies and good prospects for sustainable dividend growth.
Annual General Meeting ("AGM")
The Company's AGM will be held at 2.00 pm on 12 June 2017, at 40 Princes Street, Edinburgh. I hope that we shall see as many shareholders as possible on the day.
James Ferguson
Chairman
23 March 2017
3. INVESTMENT MANAGER'S REVIEW
Market review
Despite several bouts of volatility, major North American equity indices moved sharply higher in both sterling and US dollar terms during the 12-month period ended 31 January 2017, bolstered by generally positive economic data and corporate earnings reports. US large-cap stocks, as measured by the broader-market S&P 500 Index, climbed 35.3% in sterling terms over the period, with all 10 sectors garnering double-digit gains. The strongest performers within the index included materials, financials and industrials, as investors favoured sectors that may potentially benefit from the policies of the administration of Donald Trump, who rode a wave of populism to an unexpected US presidential election victory in November 2016. Soon after his inauguration on 20 January 2017, Trump issued a number of executive orders loosening government regulations for several major industries, including coal mining and financial services. The more interest rate-sensitive, relatively higher-dividend-paying consumer staples sector recorded the lowest return in the S&P 500 as US yields rose over the period. The healthcare sector also underperformed the overall market, held back by uncertainty regarding the status of the Affordable Care Act, a major healthcare program created under the administration of former President Barack Obama. Trump and the Republican-controlled US Congress are seeking to fulfill an election campaign pledge to repeal the law and replace it with a new healthcare plan.
The rising interest-rate environment had a negative impact on US Treasury securities, as yields climbed across the Treasury curve during the reporting period, particularly following the US presidential election. Yields on the two-, five- and ten-year notes rose by corresponding margins of 43, 57 and 51 basis points (bps) to 1.19%, 1.90% and 2.45%, respectively. Consequently, the two- to ten-year yield spread widened just 8 bps, ending the period at 126 bps.
Nonetheless, the overall US fixed-income market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, recorded a positive return for the reporting period. Investment-grade corporate bonds gained ground and significantly outperformed comparable-duration Treasuries for the period amid the risk-on market environment.
Regarding US monetary policy, the Federal Reserve raised its benchmark interest rate by 25 bps to a range of 0.50% to 0.75% following its meeting in mid-December 2016-its first increase in a year-and subsequently left the rate unchanged in a statement issued on 1 February 2017. On the economic front, fourth-quarter 2016 US GDP grew at an annualised rate of 1.9%, down sharply from the 3.5% acceleration in the third quarter. The slowdown was attributable to a reduction in exports and an increase in imports. The economy expanded by 1.6% year-over-year in 2016, a percentage point below the 2.6% growth rate recorded a year earlier, due to declines in private inventory investment and consumer spending. According to the Department of Commerce, US payrolls expanded by an average of roughly 195,000 per month over the 12-month reporting period, with the unemployment rate falling just 0.1 percentage point to 4.8% as more jobseekers entered the market. Average hourly earnings increased 2.5% year-over-year in January 2017, unchanged from the wage growth rate recorded in the previous 12-month period.
Performance
The Company's equity portfolio significantly outperformed the US broader-market S&P 500 Index over the reporting period. The equity portfolio gained 44.2% on a gross basis before expenses (in sterling terms) against the S&P 500's 35.3% return for the 12-month period ended 31 January 2017. Additionally, the revenue account remained in good shape, building upon the record established in prior years.
We are providing commentary on the Trust's equity portfolio performance relative to the Russell 1000 Value Index as a suitable reference benchmark. This reference benchmark more appropriately reflects the objectives of the Company and more closely aligns it with the index to which many of our peer funds are compared.
The Company's equity portfolio outperformed the Russell 1000 Value Index by 364 bps for the 12-month reporting period. The portfolio's relative performance was enhanced mainly by an overweight allocation to the strong-performing materials sector, overall positioning in financials, as well as stock selection in the consumer discretionary sector. The primary contributors among individual holdings included regional bank Regions Financial Corp., industrial automation power company Rockwell Automation, and diversified chemicals producer Dow Chemical Co.
Regions Financial Corp.'s stock price rallied along with those of its peers amid investors' optimism about higher interest rates and speculation that the Trump administration and the Republican-controlled U.S. Congress will loosen regulation of the financials sector. Additionally, the company benefited from strong consumer loan growth and effective cost controls over the reporting period. While Rockwell Automation posted generally mixed results over the reporting period, there was strong organic growth in its architecture and software segment, and some heavy industry markets appear to be stabilizing. Furthermore, the company increased its quarterly dividend by nearly 5% to US$0.76 per share. Dow Chemical benefited over the period from the continued restructuring of its portfolio of assets, as well as good operational performance. There was particular strength in Dow Chemical's agricultural science and consumer solutions segments for much of the reporting period.
Conversely, stock selection in materials and an overweight to the consumer discretionary sector weighed on the relative performance. The Trust's cash position also weighed on performance amid the strength in the US equity market over the reporting period. The largest individual stock detractors were oil and gas company National Oilwell Varco, pharmaceutical firm Pfizer, and diversified financial services company Wells Fargo & Co. We sold the holding in National Oilwell Varco in February 2016. Consequently, the portfolio's lack of exposure to the company hindered the relative performance as the stock price later rose along with the rally in oil prices for much of the 2016 calendar year. The significant overweight position in Pfizer had a negative impact on the portfolio's relative performance, as the company's shares underperformed those of its peers for the period. In April 2016, Pfizer's board voted to terminate its US$160 billion merger with Irish pharmaceutical Allergan following the US government's crackdown on tax-inversion deals. Pfizer subsequently paid Allergan a US$150 million breakup fee. The stock was also pressured by potential changes to healthcare regulations following the election. Wells Fargo's stock price declined sharply following allegations of deceptive sales practices by the company's employees. Wells Fargo agreed to pay the US government $185 million in fines to settle the charges. We exited the Trust's position in the company in November 2016.
Portfolio activity
Equity investments remained consistent with our bottom-up, management-focused stock selection process. We initiated equity positions in energy services provider Schlumberger; Canadian Western Bank; diversified healthcare company Abbott Laboratories; jeweller and specialty retailer Tiffany & Co.; North Carolina-based commercial bank BB&T Corp.; Coach Inc., a maker of luxury apparel accessories; multi-lines insurer American International Group; Montana-based Glacier Bancorp and biopharmaceutical firm Gilead Sciences. We introduced diversified financial services company M&T Bank Corp., and later sold the shares in an effort to consolidate the portfolio's holdings in the banking sector and seek higher-yielding opportunities elsewhere. In addition to the sales of National Oilwell Varco and Wells Fargo as previously noted, we exited the position in packaged foods distributor Sysco Corp. as its valuation had expanded following a run-up in the share price.
A sector analysis chart of the portfolio can be found on page 21 of the published 2017 Annual Report.
Within the Trust's corporate bond portfolio, we purchased Calpine Corp. 7.875% 15/01/23 and Northgroup Preferred Capital Corp. 6.378% FRN PERP. While both bonds are expected to be called in the near term, they currently provide the portfolio with attractive carry income relative to a limited degree of risk. We sold the holding in Seagate HDD Cayman 4.75% 01/06/23 for valuation reasons and reinvested the sales proceeds into Western Digital Corp. 7.375% 01/04/23, as we believe the company has solid fundamentals. We exited the position in Corrections Corp. of America 4.625% 01/05/23 given our credit concerns and sold the holding in OneMain Financial 6.75% 15/12/19 for valuation reasons. Finally, we exited the position in TransDigm Group 6.5% 15/07/24.
At the end of the reporting period on 31 January 2017, the bond portfolio's average credit quality was BBB-. The average current yield stood at 6.5%, with duration moving down from 4.3 to 4.0 years. The portfolio's allocation to corporate bonds declined from roughly 4.5% to 3.3% of total assets over the 12-month period, as we presently continue to favour a low allocation to bonds. We are working closely with Aberdeen's fixed income specialists to monitor credits and market conditions.
Dividend growth
The Trust's equity holdings continued to build upon an established track record of dividend growth over the reporting period. Approximately 80% of the holdings raised their dividends over the past year, with a weighted average increase of roughly 8.2%. There were noteworthy double-digit dividend increases among the portfolio's holdings. Included in this group were semiconductor manufacturer Texas Instruments, which boosted its payout by nearly 32% to US$0.50 per share, equivalent to an annualised yield of 2.6% at the stock's closing price at the end of the reporting period. Networking equipment maker Cisco Systems raised its dividend by nearly 24% as part of its goal to return 50% of free cash-flow to shareholders annually. Defence contractor Lockheed Martin Corp. increased its payment by 10.3% to US$1.82 per share-the fourteenth consecutive year that the defence contractor has provided a double-digit increase. Freight railroad operator Union Pacific Corp. raised its dividend by 10%, bringing the stock's annualised yield to 2.3% at its closing price on 31 January 2017. Among other notable dividend actions, asset manager BlackRock increased its quarterly payout by 9.2% to US$2.50 per share-equivalent to an annualised yield of 2.7% at the stock's closing price at the end of January. Microsoft Corp. announced an 8.3% hike in its dividend to US$0.39 per share, representing a 2.4% yield at its closing stock price on 31 January. Finally, Michigan-based utility company CMS Energy raised its dividend from US$0.31 to US$0.333, representing a 3.1% annualised yield at its share price at the end of the reporting period.
Outlook
President Trump's first several weeks in office were both busy and eventful, though his actions thus far have largely been in line with rhetoric and pledges from the campaign trail. The administration's initial moves have sought to ease the regulation across various industries, retool the Affordable Care Act, enhance border security, and revamp trade deals. Perhaps the biggest focus and question mark of investors remains the evolution and timing of a shift in tax policy.
Stepping back, while we indeed see many of the policies being as focused on accelerating GDP growth, the economy currently remains relatively healthy with regard to both employment and recent wage growth. Consumer spending remains the main driver of the domestic economy and, consequently, we have seen improved consumer confidence amid these improvements in labour markets. We expect that the economy will further strengthen over the balance of the year, with the Federal Reserve noting the tightening in labour markets and burgeoning inflation, which is likely to cause the central bank to react with more hawkish interest-rate policy. A potential consequence of this may be a strengthening US dollar, and the Fed will have to take this into consideration during the subsequent period of tightening.
There has been much discussion about the valuations of the US equity market. The forward P/E multiple of the S&P 500 Index sits higher than its historic averages. Nonetheless, we believe that current multiples reflect both an expectation that corporate earnings will accelerate over the next several years due to a combination of an improving economic backdrop with fewer burdensome regulations, as well as the likelihood of shifts to a more competitive tax policy, which will lead to higher after-tax profits and cash flows. More broadly, however, when looking at the earnings yields of the S&P 500 and Russell 1000 Value indices, we feel that absolute valuations remain supportive in contrast to 10-year US Treasury yields and other investment alternatives.
One of the risks of managing an equity-dominated income portfolio remains the path and pace of interest-rate shifts in what appears to be a rising-rate environment. We will continue to focus on selecting the most appropriate best ideas portfolio of high-quality, cash-generative companies that have pricing power and the ability to pass through inflation over the long run. We remain vigilant in looking for value while adhering to our investment process, which is unwavering in its focus on investing in and finding quality businesses, and we continue to believe that we are well-positioned to create value for shareholders.
Aberdeen Asset Managers Inc.*
23 March 2017
*on behalf of Aberdeen Fund Managers Limited. Both companies are subsidiaries of Aberdeen Asset Management PLC
Aberdeen's Investment Team Senior Managers
Ralph Bassett Fran Radano
Head of North American Equities Senior Investment Manager - North
Graduated with a BS in Finance, American Equities
with honors, from Villanova Graduated with a BA in Economics
University and is a CFA(R) Charterholder. from Dickinson College and an
Joined Aberdeen in 2006 from MBA in Finance from Villanova
Navigant Consulting and is Aberdeen's University and is a CFA(R) Charterholder.
Deputy Head of North American Joined Aberdeen in 2007 following
Equity. the acquisition of Nationwide
Financial Services. Previously
worked at Salomon Smith Barney
and SEI Investments.
Doug Burtnick Charles Tan
Deputy Head of North American Head of North American Fixed
Equities Graduated with a BS Income
from Cornell University and Graduated with a BA from University
is a CFA(R) Charterholder. Joined of International Business and
Aberdeen in 2007 following the Economics, Beijing and an MBA
acquisition of Nationwide Financial from Bucknell University, Pennsylvania.
Services. Previously worked Joined Aberdeen in 2005 from
at Brown Brothers Harriman & Moody's Investor Services where
Barra, Inc. he was a senior analyst covering
US high yield industrial companies
as well as Asian financial institutions.
Previously worked for First Commercial
Bank of Philadelphia as a credit
officer. Head of Aberdeen's Corporate
Portfolios on the North American
Fixed Income team.
4. OVERVIEW OF STRATEGY
Introduction
The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long term private and institutional investors wanting to benefit from the income and growth prospects of North American companies.
The Directors do not envisage any change in the Company's activity in the foreseeable future.
Investment Objective
To provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities.
Reference Index
The Board reviews performance against relevant factors, including the S&P 500 Index (in sterling terms) and the Russell Value Index 1000 (in sterling terms) as well as peer group comparisons. The aim is to provide investors with above average dividend income from predominantly US equities which means that investment performance can diverge, possibly quite materially in either direction, from these indices.
Investment Policy
The Company invests in a portfolio predominantly comprised of S&P 500 constituents. The Company may also invest in Canadian stocks and US mid and small capitalisation companies to provide for diversified sources of income. The Company may invest up to 20% of its gross assets in fixed income investments, which may include non-investment grade debt. The Company's investment policy is flexible, enabling it to invest in all types of securities, including (but not limited to) equities, preference shares, debt, convertible securities, warrants, depositary receipts and other equity-related securities.
The maximum single investment will not exceed 10% of gross assets at the time of investment and it is expected that the portfolio will contain around 50 holdings (including fixed income investments), with an absolute minimum of 35 holdings. The composition of the Company's portfolio is not restricted by minimum or maximum market capitalisation, sector or country weightings.
The Company may borrow up to an amount equal to 20% of its net assets.
Subject to the prior approval of the Board, the Company may also use derivative instruments for efficient portfolio management, hedging and investment purposes. The Company's aggregate exposure to such instruments for investment purposes (excluding collateral held in respect of any such derivatives) will not exceed 20% of the Company's net assets at the time of the relevant acquisition, trade or borrowing.
The Company does not generally intend to hedge its exposure to foreign currency.
The Company will not acquire securities that are unlisted or unquoted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be listed or quoted, if appropriate.
The Company may participate in the underwriting or sub-underwriting of investments where appropriate to do so.
The Company may invest in open-ended collective investment schemes and closed-ended funds that invest
in the North American region. However, the Company will not invest more than 10%, in aggregate, of the value of its gross assets in other listed investment companies (including listed investment trusts), provided that this restriction does not apply to investments in any such investment companies which themselves have stated investment policies to invest no more than 15% of their gross assets in other listed investment companies.
The Company will normally be substantially fully invested in accordance with its investment objective but, during periods in which changes in economic conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash and money market instruments.
Management
The Board has appointed Aberdeen Fund Managers Limited ("AFML" or "Manager") to act as the alternative investment fund manager ("AIFM").
The Directors are responsible for determining the investment policy and the investment objective of the Company. The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Inc. ("AAMI" or "Investment Manager") by way of a delegation agreement in place between AFML and AAMI.
The Investment Manager invests in a range of North American companies, following a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value, concentrating on quality first, then price. Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:
KPI Description
Net asset value and share The Board reviews the Company's NAV and
price performance against share price total return performance against
the reference indices the reference indices, the S&P 500 and
the Russell 1000 Value (both in sterling
terms). Performance graphs and tables are
provided on pages 11 to 12 of the published
2017 Annual Report. The Board also reviews
the performance of the Company against
its peer group of investment trusts with
similar investment objectives.
Revenue return and dividend The Board monitors the Company's net revenue
yield return and dividend yield through the receipt
of detailed income forecasts. A graph showing
the dividends and yields over 5 years is
provided on page 12 of the published 2017
Annual Report.
Discount/premium to net The discount/premium relative to the net
asset value asset value per share is closely monitored
by the Board. A graph showing the share
price discount/premium relative to the
net asset value is shown on page 12 of
the published 2017 Annual Report.
Ongoing charges The Company's ongoing charges ratio (OCR)
is provided above. The Board reviews the
OCR against its peer group of investment
trusts with similar investment objectives.
Principal Risks and Uncertainties
There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company at the current time in the table below together with a description of the mitigating actions it has taken. The Board has carried out a robust assessment of these risks, which includes those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly in the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website. The risks and uncertainties faced by the Company are reviewed annually by the Audit Committee in the form of a risk matrix and heat map and a summary of the principal risks is set out below.
Description Mitigating Action Market risk The risks facing the Company The day-to-day management of the Company's relate to the Company's assets has been delegated to the Manager investment activities under investment guidelines determined and include market risk by the Board. The Board monitors these (comprising interest rate guidelines and receives regular reports risk and other price risk), from the Manager which include performance liquidity risk and credit reporting. The Board regularly reviews risk. The Company is exposed these guidelines to ensure they remain to the effect of variations appropriate. in share prices and movements in the US$/GBP exchange Details on financial risks, including market rate due to the nature price, liquidity and foreign currency risks of its business. A fall and the controls in place to manage these in the market value of risks are provided in note 17 to the financial its portfolio would have statements. an adverse effect on shareholders'
funds. Any debt securities
that may be held by the
Company will be affected
by general changes in
interest rates that will
in turn result in increases
or decreases in the market
value of those instruments.
Gearing Risk
Gearing is used to leverage In order to manage the level of gearing,
the Company's portfolio the Board has set a maximum gearing ratio
in order to enhance returns of 20% of net assets. The Board receives
where and to the extent regular updates from the Manager on the
this is considered appropriate actual gearing levels the Company has reached
to do so. Gearing has together with the assets and liabilities
the effect of accentuating of the Company, and reviews these as well
market falls and market as compliance with the principal loan covenants
gains. The ability of at each Board meeting. As at 31 January
the Company to meet its 2017 the Company had GBP40.6 million of
financial obligations, borrowings.
or an increase in the
level of gearing, could In addition, AFML, as alternative investment
result in the Company fund manager, has set an overall leverage
becoming over-geared or limit of 2.0 X on a commitment basis (2.5
unable to take advantage X on a gross notional basis) and includes
of potential opportunities updates in its reports to the Board.
and result in a loss of
value to the Company's
shares.
Discount volatility
Investment company shares In order to seek to minimise the impact
can trade at discounts of share price volatility, where the shares
to their underlying net are trading at a significant discount,
asset values, although the Company has operated a share
they can also trade at buy-back programme for a number of years.
premia. The Board monitors the discount level of
the Company's shares and will exercise
discretion to undertake shares buybacks.
Income and Dividend Risk
The ability of the Company The Board monitors this risk through the
to pay dividends and any regular review of detailed revenue forecasts
future dividend growth and considers the level of income at each
will depend primarily meeting.
on the level of income
received from its investments
(which may be affected
by currency movements,
exchange controls or withholding
taxes imposed by jurisdictions
in which the Company invests)
and the timing of receipt
of such income by the
Company. Accordingly,
there is no guarantee
that the Company's dividend
income objective will
continue to be met and
the amount of the dividends
paid to Ordinary Shareholders
may fluctuate and may
go down as well as up.
Regulatory risk
The Company operates in The Manager has implemented procedures
a complex regulatory environment to ensure that the provisions of the Corporation
and faces a number of Tax Act 2010 are not breached and the results
regulatory risks. Breaches are reported to the Board.
of regulations, such as
Section 1158 of the Corporation The Manager provides six-monthly reports
Tax Act 2010, the UKLA to the Audit Committee on its internal
Listing Rules, Companies control systems, which monitors compliance
Act 2006 and the Alternative with relevant regulations. In addition,
Investment Fund Managers the Board, when necessary will use the
Directive, could lead services of its professional advisers to
to a number of detrimental monitor compliance with regulatory requirements.
outcomes and reputational
damage. The Manager and depositary provide reports
to the Audit Committee on their operations
to ensure that the regulations under the
AIFM are complied with.
Derivatives
The Company uses derivatives The risks associated with derivatives contracts
primarily to enhance the are managed within guidelines set by the
income generation of the Board.
Company.
Promoting the Company
The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group. The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.
The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns.
Duration
The Company does not have a fixed winding-up date, but shareholders are given the opportunity to vote on the continuation of the Company every three years at the Annual General Meeting. The next continuation vote will be at the AGM in 2018.
Board Diversity
The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfil its obligations. At 31 January 2017 the Board consisted of three males and one female.
Environmental, Social and Human Rights Issues
The Company has no employees as the Board has delegated day to day management and administrative functions to Aberdeen Fund Managers Limited. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined below.
Socially Responsible Investment Policy
The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a socially responsible manner and has noted the Aberdeen Group's policy on social responsibility. The Investment Manager considers social, environmental and ethical factors which may affect the performance or value of the Company's investments as part of its investment process. In particular, the Investment Manager encourages companies in which investments are made to adhere to best practice in the area of corporate governance. It believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in this area. The Company's ultimate objective, however, is to deliver long term growth on its investments for its shareholders. Accordingly, whilst the Investment Manager will seek to favour companies which pursue best practice in the above areas, this must not be to the detriment of the return on the investment portfolio.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.
Viability Statement
The Company does not have a formal fixed period strategic plan but the Board does formally consider risks and strategy on at least an annual basis. The Board considers the Company to be a long term investment vehicle but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.
In assessing the viability of the Company over the review period the Directors have focused upon the following factors:
- The principal risks detailed in the strategic report and the steps taken to mitigate these risks.
- The ongoing relevance of the Company's investment objective in the current environment. - The Company is invested in readily realisable listed securities.
- The level of revenue surplus generated by the Company and its ability to achieve the dividend policy. The Company has continued to deliver dividend growth whilst building up revenue reserves which can be used to top up the dividend in tougher times.
- The level of gearing is closely monitored. The Company has the ability to renew or repay its loan facility.
Accordingly, taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future.
Future
Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK. These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included above.
James Ferguson
Chairman
23 March 2017
PORTFOLIO INVESTMENTS
Investment Portfolio - Ten Largest Equity Investments
As at 31 January 2017
Valuation Total Valuation
2017 assets 2016
Company Industry classification GBP'000 % GBP'000
Pfizer
Pfizer Inc. discovers,
develops, manufactures,
and sells healthcare
products worldwide. Pharmaceuticals 16,393 3.9 8,598
BB&T
BB&T is a full service
bank that operates in
the Southeast and Mid-Atlantic
regions of the United
States. Banks 16,154 3.9 -
Dow Chemical
The Dow Chemical Company
is a diversified chemical
company that provides
chemical, plastic, and
agricultural products
and services to various
consumer markets. Chemicals 16,115 3.8 10,067
Chevron
Chevron is an integrated
energy company. The company
has operations drilling
for crude oil and natural Oil, Gas &
gas as well as refining Consumable
and selling it. Fuels 15,931 3.8 8,059
CME Group
CME Group Inc. operates
a derivatives exchange
that trades futures contracts
and options on futures,
interest rates, stock
indexes, foreign exchange Diversified
and commodities. Financial Services 14,436 3.4 10,768
Microsoft
Microsoft manufactures
and licenses software
products for operating
systems, applications,
software development
and internet services. Software 12,847 3.1 10,884
Regions Financial
Regions Financial is
a full service bank that
operates in the Southern
portion of the United
States. Banks 12,599 3.0 5,724
Verizon Communications
Verizon Communications
Inc., through its subsidiaries,
provides communications,
information, and entertainment
products and services
to consumers, businesses, Diversified
and governmental agencies Telecommunication
worldwide. Services 11,687 2.8 10,568
Philip Morris
Philip Morris International
Inc., through its subsidiaries,
manufactures and sells
cigarettes and other
tobacco products. Tobacco 11,079 2.6 12,691
Telus
Telus provides communication Diversified
services to businesses Telecommunication
and consumers in Canada. Services 10,594 2.5 7,887
Ten largest equity investments 137,835 32.8
Investment Portfolio - Other Equity Investments
As at 31 January 2017
Valuation Total Valuation
2017 assets 2016
Company Industry classification GBP'000 % GBP'000
Communications
Cisco Systems Equipment 10,378 2.5 5,753
Semiconductors
& Semiconductor
Intel Equipment 10,243 2.4 7,253
Johnson & Johnson Pharmaceuticals 9,902 2.4 6,847
Glacier Bancorp Banks 9,884 2.4 -
Molson Coors Brewing Beverages 9,590 2.3 14,033
Oil, Gas &
Consumable
TransCanada Fuels 9,357 2.2 6,580
Semiconductors
& Semiconductor
Texas Instruments Equipment 9,006 2.2 5,164
Royal Bank of Canada Banks 8,556 2.0 4,797
Union Pacific Road & Rail 8,472 2.0 4,568
Real Estate
Investment
Ventas Trusts (REITs) 8,333 2.0 6,825
Twenty largest equity
investments 231,556 55.2 178,479
Pepsico Beverages 8,249 2.0 9,801
Canadian Western Bank Banks 8,118 1.9 -
Coach Personal Goods 7,867 1.9 -
Oil, Gas &
Consumable
ConocoPhillips Fuels 7,751 1.8 5,930
American International Nonlife Insurance 7,662 1.8 -
Containers
Sonoco Products & Packaging 7,644 1.8 6,202
Blackrock Capital Markets 7,431 1.8 5,539
Paychex IT Services 7,188 1.7 5,365
WEC Energy Multi-Utilities 7,040 1.7 6,584
Procter & Gamble Household Products 6,963 1.7 4,319
Thirty largest equity
investments 307,469 73.3 240,747
Meredith Media 6,821 1.625 2,983
Potash Corporation of
Saskatchewan Chemicals 6,653 1.585 6,895
Abbott Laboratories Pharmaceuticals 6,640 1.582 -
Oil Equipment,
Services &
Schlumberger Distribution 6,321 1.506 -
Genuine Parts Distributors 6,156 1.467 4,738
CMS Energy Multi-Utilities 6,095 1.352 6,852
Aerospace &
Lockheed Martin Defense 5,993 1.428 -
Real Estate
Investment
Digital Realty Trust Trusts (REITs) 5,989 1.427 5,645
Target Multiline Retail 5,894 1.404 7,570
Gilead Sciences Pharmaceuticals 5,759 1.372 -
Forty largest equity
investments 369,790 88.1 291,147
Commercial
Services &
Republic Services Supplies 5,701 1.4 6,701
Staples Specialty Retail 4,753 1.1 4,223
Nucor Metals & Mining 4,617 1.1 6,886
Electrical
Rockwell Automation Equipment 4,117 1.0 10,106
M&T Bank Banks 3,877 0.9 7,379
Tiffany & Co Specialty Retail 3,754 0.9 -
Total equity investments 396,609 94.5 298,353
Investment Portfolio - Other Investments
As at 31 January 2017
Valuation Total Valuation
2017 assets 2016
Company Industry classification GBP'000 % GBP'000
Qwest 7.25% 15/10/35 Telecommunications 2,867 0.7 2,550
Diversified
HSBC Finance 6.676% 15/01/21 Financial Services 2,418 0.6 2,149
International Lease Finance Diversified
Corp 6.25% 15/05/19 Financial Services 2,062 0.5 1,777
Western Digital Corp Computer Hardware
7.375% 01/04/23 and Storage 1,753 0.4 -
Northgroup PFD Cap Corp
6.378% FRN Perp Banks 1,590 0.4 -
HCA 5.875% 15/02/26 Healthcare Services 1,243 0.3 1,081
Diversified
Nationstar 6.5% 01/06/22 Financial Services 798 0.2 609
Calpine Corp 7.875 15/01/23 Utilities 653 0.1 -
First Data 6.75% 01/11/20 Software 351 0.1 1,117
Total other investments 13,735 3.3
Total equity investments 396,609 94.5
Total investments 410,344 97.8
Net current assets{A} 9,330 2.2
Total assets{A} 419,674 100.0
{A} Excluding bank loans of GBP40,573,000.
Geographical Analysis
As at 31 January 2017
Equity Fixed interest Total
Country % % %
Canada 8.0 0.4 8.4
USA 88.7 2.9 91.6
________ ________ ________
96.7 3.3 100.0
________ ________ ________
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing these financial statements, the directors are required to:
- select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent;
- state whether applicable 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 that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company taken as a whole; and
- the Strategic Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.
We consider the annual report and accounts, 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 The North American Income Trust plc
James Ferguson
Chairman
23 March 2017
GOING CONCERN
The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Company has a credit facility in place which is available until July 2017. The Board considers that the Company has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME
Year ended 31 January Year ended 31 January
2017 2016
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net gains/(losses) on investments 11 - 115,514 115,514 - (2,201) (2,201)
Net currency losses 3 - (4,359) (4,359) - (1,515) (1,515)
Income 4 15,563 - 15,563 14,902 - 14,902
Investment management fee 5 (819) (1,910) (2,729) (687) (1,603) (2,290)
Administrative expenses 7 (725) - (725) (671) - (671)
______ ______ _____ ______ ______ _____
Return on ordinary activties
before finance costs and
taxation 14,019 109,245 123,264 13,544 (5,319) 8,225
Finance costs 6 (295) (688) (983) (256) (598) (854)
______ ______ _____ ______ ______ _____
Return on ordinary activities
before taxation 13,724 108,557 122,281 13,288 (5,917) 7,371
Taxation 8 (2,173) 520 (1,653) (2,058) 440 (1,618)
______ ______ _____ ______ ______ _____
Return on ordinary activities
after taxation 11,551 109,077 120,628 11,230 (5,477) 5,753
______ ______ _____ ______ ______ _____
Return per share (pence) 10 39.92 376.92 416.84 35.74 (17.43) 18.31
______ ______ _____ ______ ______ _____
The total column of this statement represents the profit and loss account
of the Company.
All revenue and capital items in the above statement derive from continuing
operations.
The accompanying notes are an integral part of the financial statements.
Proposed final dividend
The Board is proposing a final dividend of 14.50p per share (GBP4,154,000),
making a total dividend of 36.00p per share (GBP10,327,000) for the
year to 31 January 2017 which, if approved, will be payable on 16 June
2017 (see note 9).
For the year ended 31 January 2016, the final dividend was 13.00p per
share (GBP3,789,000) making a total dividend of 33.00p per share (GBP9,982,000).
STATEMENT OF FINANCIAL POSITION
As at As at
31 January 31 January
2017 2016
Notes GBP'000 GBP'000
Fixed assets
Investments at fair value through
profit or loss 11 410,344 312,983
________ ________
Current assets
Debtors and prepayments 12 3,940 743
Cash and short term deposits 12,609 11,685
________ ________
16,549 12,428
________ ________
Creditors: amounts falling due within
one year
Other payables 13 (7,219) (1,732)
Bank loan 14 (40,573) (7,050)
________ ________
(47,792) (7,050)
________ ________
Net current (liabilities)/assets (31,243) 5,378
________ ________
Total assets less current liabilities 379,101 318,361
Creditors: amounts falling due after more
than one year
Bank loan 14 - (35,985)
________ ________
Net assets 379,101 282,376
________ ________
Capital and reserves
Called-up share capital 15 7,161 7,499
Share premium account 48,467 48,467
Capital redemption reserve 15,399 15,061
Capital reserve 295,709 198,866
Revenue reserve 12,365 10,751
________ ________
Equity shareholders' funds 379,101 280,644
________ ________
Net asset value per share (pence) 16 1,323.45 935.55
________ ________
STATEMENT OF CHANGES IN EQUITY
For the year ended 31 January
2017
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 31 January 2016 7,499 48,467 15,061 198,866 10,751 280,644
Buyback of Ordinary shares (338) - 338 (12,234) - (12,234)
Return on ordinary activities
after taxation - - - 109,077 11,551 120,628
Dividends paid (see note
9) - - - - (9,937) (9,937)
_____ ______ ______ ______ ______ ______
Balance at 31 January 2017 7,161 48,467 15,399 295,709 12,365 379,101
_____ ______ ______ ______ ______ ______
For the year ended 31 January
2016
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Balance at 31 January 2015 8,235 48,467 14,325 228,822 9,424 309,273
Buyback of Ordinary shares (736) - 736 (24,479) - (24,479)
Return on ordinary activities
after taxation - - - (5,477) 11,230 5,753
Dividends paid (see note
9) - - - - (9,903) (9,903)
_____ ______ ______ ______ ______ ______
Balance at 31 January 2016 7,499 48,467 15,061 198,866 10,751 280,644
_____ ______ ______ ______ ______ ______
The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
STATEMENT OF CASHFLOWS
Year ended Year ended
31 January 2017 31 January 2016
Notes GBP'000 GBP'000
Operating activities
Net return before finance
costs and taxation 123,264 8,225
Adjustments for:
Net (gains)/losses on investments (115,514) 2,201
Net losses on foreign exchange
transactions 4,359 1,515
Decrease/(increase) in dividend
income receivable 58 (34)
(Increase) in deposit interest
income receivable - (1)
Increase in fixed interest (5) -
income receivable
(Decrease)/increase in derivatives (36) 6
Decrease/(increase) in other
debtors 7 (9)
Increase/(decrease) in other
creditors 84 (148)
Tax on overseas income (1,655) (1,611)
Amortisation of fixed income
book cost 54 49
______ ______
Net cash flow from operating
activities 10,616 10,193
Investing activities
Purchases of investments (123,367) (109,335)
Sales of investments 144,469 136,824
______ ______
Net cash flow from investing
activities 21,102 27,489
Financing activities
Interest paid (986) (1,037)
Equity dividends paid 9 (9,937) (9,903)
Buyback of Ordinary shares (13,050) (23,663)
Repayment of loan (8,133) (1,500)
______ ______
Net cash used in financing
activities (32,106) (36,103)
______ ______
(Decrease)/increase in cash
and cash equivalents (388) 1,579
______ ______
Analysis of changes in cash and cash
equivalents during the year
Opening balance 11,685 9,231
Effect of exchange rate fluctuation
on cash held 1,312 875
(Decrease)/increase in cash
as above (388) 1,579
______ ______
Closing balance 12,609 11,685
______ ______
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 January 2017
1. Principal activity
The Company is a closed-end investment company, registered
in Scotland No SC005218, with its Ordinary shares being listed
on the London Stock Exchange.
2. Accounting policies
A summary of the principal accounting policies, all of which,
unless otherwise stated, have been consistently applied throughout
the year and the preceding year is set out below.
(a) Basis of preparation and going concern
The financial statements have been prepared in accordance
with Financial Reporting Standard 102 and with the Statement
of Recommended Practice 'Financial Statements of Investment
Trust Companies and Venture Capital Trusts'. The financial
statements are prepared in sterling which is the functional
currency of the Company and rounded to the nearest GBP'000.
They have also been prepared on a going concern basis
and on the assumption that approval as an investment trust
will continue to be granted.
The Directors have, at the time of approving the financial
statements, a reasonable expectation that the Company
have adequate resources to continue in operational existence
for the foreseeable future. Thus they continue to adopt
the going concern basis of accounting in preparing the
financial statements. Further detail is included in the
Directors' Report (unaudited) on page 26 of the published
2017 Annual Report.
(b) Income
Income from investments, including taxes deducted at source,
is included in revenue by reference to the date on which
the investment is quoted ex dividend. Special dividends
are credited to capital or revenue, according to the circumstances.
Fixed returns on debt securities are recognised on a time
apportionment basis so as to reflect the effective yield
on the debt securities.
Interest receivable from cash and short-term deposits
and interest payable is accrued to the end of the year.
(c) Expenses
All expenses are accounted for on an accruals basis and
are charged to the Statement of Comprehensive Income.
Expenses are charged against revenue except as follows:
transaction costs on the acquisition or disposal of investments
are charged to the capital account in the Statement of
Comprehensive Income;
expenses are charged to realised capital reserves where
a connection with the maintenance or enhancement of the
value of the investments can be demonstrated. In this
respect, the investment management fee is allocated 30%
to revenue and 70% to realised capital reserves to reflect
the Company's investment policy and prospective income
and capital growth.
(d) Taxation
The tax payable is based on the taxable profit for the
year. Taxable profit differs from net profit as reported
in the Statement of Comprehensive Income because it excludes
items of income or expenditure that are taxable or deductible
in other years and it further excludes items that are
never taxable or deductible (see note 8 for a more detailed
explanation). The Company has no liability for current
tax.
Deferred taxation is provided on 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 or a right to pay less tax in future have
occurred at the Balance Sheet date, measured on an undiscounted
basis and based on enacted tax rates. This is subject
to deferred tax assets only being recognised if it is
considered more likely than not that there will be suitable
profits from which the future reversal of the underlying
timing differences can be deducted. Timing differences
are differences arising between the Company's taxable
profits and its results as stated in the accounts which
are capable of reversal in one or more subsequent periods.
Due to the Company's status as an investment trust company,
and the intention to continue to meet the conditions required
to obtain approval for the foreseeable future, the Company
has not provided deferred tax on any capital gains and
losses arising on the revaluation or disposal of investments.
(e) Investments
All purchases and sales of investments are recognised
on the trade date, being the date the Company commits
to purchase or sell the investment. Investments are initially
recognised and subsequently re-measured at fair value
in the Income Statement. Transaction costs on purchases
and sales are expensed through the Statement of Comprehensive
Income.
(f) Borrowings
Monies borrowed to finance the investment objectives of
the Company are stated at the amount of the net proceeds
immediately after issue plus cumulative finance costs
less cumulative payments made in respect of the debt.
The finance costs of such borrowings are accounted for
on an accruals basis using the effective interest rate
method and are charged 30% to revenue and 70% to realised
capital reserves to reflect the Company's investment policy
and prospective income and capital growth.
(g) Dividends payable
Interim and final dividends are recognised in the period
in which they are paid.
(h) Nature and purpose of reserves
Share premium account
The balance classified as share premium includes the premium
above nominal value from the proceeds on issue of any
equity capital comprising ordinary shares of 25p.
Capital redemption reserve
The capital redemption reserve is used to record the amount
equivalent to the nominal value of any of the Company's
own shares purchased and cancelled in order to maintain
the Company's capital.
Capital reserve
This reserve reflects any gains or losses on realisation
of investments in the period along with any changes in
fair values of investments held that have been recognised
in the Statement of Comprehensive Income. The costs of
share buybacks are also deducted from this reserve.
Revenue reserve
This reserve reflects all income and costs which are recognised
in the revenue column of the Statement of Comprehensive
Income. The revenue reserve represents the amount of the
Company's reserves distributable by way of dividend.
(i) Foreign currency
Assets and liabilities in foreign currencies are translated
at the rates of exchange ruling on the Balance Sheet date.
Transactions involving foreign currencies are converted
at the rate ruling on the date of the transaction. Gains
and losses on the realisation of foreign currencies are
recognised in the Statement of Comprehensive Income and
are then transferred to the capital reserve.
(j) Traded options
The Company may enter into certain derivatives (e.g. options).
Option contracts are accounted for as separate derivative
contracts and are therefore shown in other assets or other
liabilities at their fair value. The initial fair value
is based on the initial premium, which is recognised upfront.
The premium received and fair value changes in the open
position which occur due to the movement in underlying
securities are recognised in the revenue column, losses
realised on the exercise of the contracts are recorded
in the capital column of the Statement of Comprehensive
Income as they arise.
In addition, the Company may enter into derivative contracts
to manage market risk and gains or losses arising on such
contracts are recorded in the capital column of the Statement
of Comprehensive Income.
2017 2016
3. Net currency losses GBP'000 GBP'000
Gains on cash held 1,312 875
Losses on bank loans (5,671) (2,390)
______ ______
(4,359) (1,515)
______ ______
2017 2016
4. Income GBP'000 GBP'000
Income from overseas listed investments
Dividend income 11,086 10,327
REIT income 575 680
Interest income from investments 902 1,093
______ ______
12,563 12,100
______ ______
Other income from investment activity
Traded option premiums 2,981 2,800
Deposit interest 19 2
______ ______
3,000 2,802
______ ______
Total income 15,563 14,902
______ ______
During the year, the Company was entitled to premiums totalling
GBP2,981,000 (2016 - GBP2,800,000) in exchange for entering
into derivative transactions. This figure includes a mark to
market on derivative contracts open at each year end. At the
year end there was 1 open position, valued at a liability of
GBP30,000 (2016 - liability of GBP66,000) as disclosed in note
13. Losses realised on the exercise of derivative transactions
are disclosed in note 11.
2017 2016
Revenue Capital Total Revenue Capital Total
5. Investment management GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
fee
Investment management
fee 819 1,910 2,729 687 1,603 2,290
______ ______ ______ ______ ______ ______
For the year ended 31 January 2017 management services were
provided by Aberdeen Fund Managers Limited ("AFML"). The fee
is at an annual rate of 0.8% of gross assets after deducting
current liabilities and borrowings and excluding commonly managed
funds, payable quarterly. The balance due at the year end was
GBP762,000 (2016 - GBP566,000). The fee is allocated 30% (2016
- 30%) to revenue and 70% (2016 - 70%) to capital.
The management agreement between the Company and Aberdeen is
terminable by either party on three months' notice. In the
event of a resolution being passed at the AGM to wind up the
Company the Manager shall be entitled to three months' notice
from the date the resolution was passed. In the event of termination
on not less than the agreed notice period, compensation is
payable in lieu of the unexpired notice period.
2017 2016
Revenue Capital Total Revenue Capital Total
6. Finance costs GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Bank loans 295 688 983 256 598 854
______ ______ ______ ______ ______ ______
2017 2016
7. Administrative expenses GBP'000 GBP'000
Directors' fees 84 78
Registrar's fees 60 54
Custody and bank charges 31 29
Secretarial fees 105 104
Auditor's remuneration (excl. irrecoverable
VAT):
fees payable to the Company's auditor for
the audit of the annual accounts 16 16
Contribution to the Investment Trust Initiative 213 212
Printing, postage and stationery 29 25
Fees, subscriptions and publications 43 43
Professional fees 60 52
Depositary charges 44 38
Other expenses 40 20
______ ______
725 671
______ ______
For the year ended 31 January 2017 secretarial and administration
services were provided by Aberdeen Fund Managers Limited ("AFML").
The fee is payable monthly in advance and based on an index-linked
annual amount of GBP105,000 (2016 - GBP104,000) and there was
an accrual of GBP18,000 (2016 - GBP17,000) at the year end.
the agreement is terminable on three months' notice.
During the year GBP213,000 (2016 - GBP212,000) was paid to
AFML in respect of promotional activities for the Company through
Aberdeen's Investment Trust Initiative and the balance due
at the year end was GBP18,000 (2016 - GBP71,000).
2017 2016
Revenue Capital Total Revenue Capital Total
8. Taxation GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
(a) Analysis of charge
for the year
UK corporation
tax 520 (520) - 676 (444) 232
Overseas tax suffered 1,653 - 1,653 1,382 4 1,386
______ ______ ______ ______ ______ ______
Current tax charge
for the year 2,173 (520) 1,653 2,058 (440) 1,618
Deferred taxation - - - - - -
______ ______ ______ ______ ______ ______
Total tax 2,173 (520) 1,653 2,058 (440) 1,618
______ ______ ______ ______ ______ ______
(b) Factors affecting the tax charge for the year
The UK corporation tax rate was 20% from 1 April 2015
giving an effective rate of 20.0% (2016 - effective rate
of 20.17% - corporation tax rate was 21% until 31 March
2015). The tax assessed for the year is lower than the
rate of corporation tax. The differences are explained
below:
2017 2016
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Net profit on
ordinary activities
before taxation 13,724 108,557 122,281 13,288 (5,917) 7,371
______ ______ ______ ______ ______ ______
Corporation tax
at 20.0% (2016
- 20.17%) 2,745 21,711 24,456 2,680 (1,194) 1,486
Effects of:
Non taxable overseas
dividends (2,225) - (2,225) (2,004) - (2,004)
Irrecoverable
overseas withholding
tax 1,653 - 1,653 1,382 - 1,382
Capital gains/(losses)
not taxable - (23,103) (23,103) - 449 449
Non-taxable exchange
losses - 872 872 - 305 305
______ ______ ______ ______ ______ ______
Current tax charge 2,173 (520) 1,653 2,058 (440) 1,618
______ ______ ______ ______ ______ ______
(c) Provision for deferred taxation
No provision for deferred taxation has been made in the
current year due to the Company fully utilising the losses
brought forward from the previous year (2016 - GBPnil).
The Company has not provided for deferred tax on capital
gains or losses arising on the revaluation or disposal
of investments as it is exempt from tax on these items
because of its status as an investment trust company.
2017 2016
9. Dividends GBP'000 GBP'000
Amounts recognised as distributions to equity
holders in the year:
3rd interim dividend for 2016 7.0p per share
(2015 - 6.5p) 2,114 2,141
Final dividend for 2016 - 13.0p per share
(2015 - 11.5p) 3,789 3,679
1st interim dividend for 2017 - 7.0p per share
(2016 - 6.5p) 2,023 2,058
2nd interim dividend for 2017 - 7.0p per share
(2016 - 6.5p) 2,002 2,025
Dividend refunds written off 9 -
______ ______
9,937 9,903
______ ______
The proposed third interim dividend was unpaid at the year
end and the final dividend for 2017 is subject to approval
by shareholders at the Annual General Meeting. Accordingly,
neither has been included as a liability in these financial
statements.
The table below sets out the total dividends paid and proposed
in respect of the financial year, which is the basis on which
the requirements of Sections 1158-1159 of the Corporation Tax
Act 2010 are considered. The revenue available for distribution
by way of dividend for the year is GBP11,551,000 (2016 - GBP11,230,000).
2017 2016
GBP'000 GBP'000
1st interim dividend for 2017 - 7.0p per share
(2016 - 6.5p) 2,023 2,058
2nd interim dividend for 2017 - 7.0p per share
(2016 - 6.5p) 2,002 2,025
3rd interim dividend for 2017 - 7.5p per share
(2016 - 7.0p) 2,148 2,110
Proposed final dividend for 2017 - 14.5p per
share (2016 - 13.0p) 4,154 3,789
______ ______
10,327 9,982
______ ______
The cost of the proposed final dividend for 2017 is based on
28,645,004 Ordinary shares in issue, being the number of Ordinary
shares in issue at the date of this report.
2017 2016
10. Return per Ordinary share GBP'000 p GBP'000 p
Based on the following
figures:
Revenue return 11,551 39.92 11,230 35.74
Capital return 109,077 376.92 (5,477) (17.43)
______ ______ ______ ______
Total return 120,628 416.84 5,753 18.31
______ ______ ______ ______
Weighted average number
of Ordinary shares in
issue 28,938,839 31,424,506
__________ __________
2017 2016
11. Investments GBP'000 GBP'000
Fair value through profit or loss:
Opening fair value 312,983 342,722
Opening investment holdings gains (50,718) (65,139)
______ ______
Opening book cost 262,265 277,583
Purchases at cost 129,625 109,335
Sales - proceeds (147,724) (136,824)
Sales - realised gains{A} 34,223 12,220
Amortisation of fixed income book cost (54) (49)
______ ______
Closing book cost 278,335 262,265
Closing investment holdings gains 132,009 50,718
______ ______
Closing fair value 410,344 312,983
______ ______
Listed on overseas stock exchanges 410,344 312,983
______ ______
2017 2016
Gains/(losses) on investments GBP'000 GBP'000
Realised gains on sales{A} 34,223 12,220
Movement in investment holdings gains 81,291 (14,421)
______ ______
115,514 (2,201)
______ ______
{A} Includes losses realised on the exercise of traded options
of GBP873,000 (2016 - GBP2,319,000). Premiums received from
traded options totalled GBP2,981,000 (2016 - GBP2,800,000)
per note 4.
Transaction costs
During the year expenses were incurred in acquiring or disposing
of investments classified as fair value through profit or loss.
These have been expensed through capital and are included within
gains on investments in the Income Statement. The total costs
were as follows:
2017 2016
GBP'000 GBP'000
Purchases 123 107
Sales 165 171
______ ______
288 278
______ ______
2017 2016
12. Debtors: amounts falling due within one year GBP'000 GBP'000
Amount due from brokers 3,255 -
Dividends receivable 416 474
Interest receivable 214 209
Taxation recoverable 6 4
Other debtors and prepayments 49 39
Overpayment of dividend - 17
______ ______
3,940 743
______ ______
2017 2016
13. Creditors GBP'000 GBP'000
Amounts falling due within one year:
Investment management fee payable 762 566
Interest payable 40 43
Traded option contracts 30 66
Amounts due to brokers 6,258 -
Amounts due to brokers relating to share buybacks - 816
UK corporation tax payable - 55
Other creditors 129 186
______ ______
7,219 1,732
______ ______
2017 2016
14. Bank loans GBP'000 GBP'000
Repayable within one year:
- Uncommitted facility - 7,050
- Fixed facility of US$51,045,000 40,573 -
Repayable in more than one year but no more
than five years
- Fixed facility of US$51,045,000 - 35,985
______ ______
Total 40,573 43,035
______ ______
The Company agreed a three year loan facility with State Street
on 17 July 2014. The amount of the total facility was $71.0
million, of which $51.0 million was at a fixed rate of 2.18%
and fully drawn down. The remaining $20.0 million balance of
the facility is uncommitted of which $nil was drawn down at
the year end (2016 - $10.0 million).
The terms of the loan facility contain covenants that gross
borrowings should not exceed 25% of net assets and should not
exceed 30% of adjusted assets.
2017 2016
15. Called-up share capital GBP'000 GBP'000
Allotted, called-up and fully paid:
Opening balance 7,499 8,235
Shares bought back during the year (338) (736)
______ ______
28,645,004 (2016 - 29,997,734) Ordinary shares
of 25p each 7,161 7,499
______ ______
During the year the Company bought back 1,352,730 (2016 - bought
back 2,941,348) Ordinary shares of 25p each for a total cost
of GBP12,234,000 (2016 - total cost of GBP24,479,000).
16. Net asset value per equity share
The net asset value per share and the net assets attributable
to the Ordinary shareholders at the year end were as follows:
2017 2016
Net assets attributable GBP379,101,000 GBP280,644,000
Number of Ordinary shares in issue 28,645,004 29,997,734
Net asset value per share 1,323.45p 935.55p
17. Financial instruments and risk management
The Company's investment activities expose it to various types
of financial risk associated with the financial instruments
and markets in which it invests. The Company's financial instruments,
other than derivatives, comprise securities and other investments,
cash balances, loans and debtors and creditors that arise directly
from its operations; for example, in respect of sales and purchases
awaiting settlement, and debtors for accrued income.
Subject to Board approval, the Company also has the ability
to enter into derivative transactions, in the form of traded
options, for the purpose of enhancing income returns and portfolio
management. During the year, the Company entered into certain
derivative contracts. As disclosed in note 4, the premium received
and fair value changes in respect of options written in the
year was GBP2,981,000 (2016 - GBP2,800,000). Positions closed
during the year realised a loss of GBP873,000 (2016 - GBP2,319,000).
The largest position in derivative contracts held during the
year at any given time was GBP758,000 (2016 - GBP456,000).
The Company had 1 (2016 - 2) open position in derivative contracts
at 31 January 2017 valued at a liability of GBP30,000 (2016
- GBP66,000) as disclosed in note 13.
The Board has delegated the risk management function to the
Manager under the terms of its management agreement with AFML
(further details which are included under note 5). The Board
regularly reviews and agrees policies for managing each of
the key financial risks identified with the Manager. The types
of risk and the manager's approach to the management of each
type of risk, are summarised below. Such an approach has been
applied throughout the year and has not changed since the previous
accounting period. The numerical disclosures exclude short-term
debtors and creditors.
Risk management framework
The directors of AFML collectively assume responsibility for
AFML's obligations under the AIFMD including reviewing investment
performance and monitoring the Company's risk profile during
the year.
AFML is a fully integrated member of the Aberdeen Asset Management
PLC ("Aberdeen") group of companies (referred to as "the Group"),
which provides a variety of services and support to AFML in
the conduct of its business activities, including in the oversight
off the risk management framework for the Company. The AIFM
has delegated the day to day administration of the investment
policy to AAML, which is responsible for ensuring the Company
is managed within the terms of its investment guidelines and
the limits set out in FUND 3.2.2R (details of which can be
found on the Company's website). The AIFM has retained responsibility
for monitoring and oversight of investment performance, product
risk and regulatory and operational risk for the company.
The Manager conducts its risk oversight function through the
operation of the Group's risk management processes and systems
which are embedded within the Group's operations. The Group's
Risk Division supports management in the identification and
mitigation of risks and provides independent monitoring of
the business. The Division includes Compliance, Business Risk,
Market Risk, Risk Management and Legal. The team is headed
up by the Group's Head of Risk, who reports to the Chief Executive
Officer of the Group. The Risk Division achieves its objective
through embedding the Risk management Framework throughout
the organisation using the Group's operational risk management
system ("SWORD").
The Group's Internal Audit Department is independent of the
Risk Division and reports directly to the Group CEO and the
Audit Committee of the Group's Board of Directors. The Internal
Audit Department is responsible for providing an independent
assessment of the Group's control environment.
The Group's corporate governance structure is supported by
several committees to assist the board of directors of Aberdeen,
its subsidiaries and the Company to fulfil their roles and
responsibilities. The Group's Risk Division is represented
on all committees, with the exception of those committees that
deal with investment recommendations. The specific goals and
guidelines on the functioning of those committees are described
on the committees' terms of reference.
Risk management
The main risks the Company faces from its financial instruments
are (i) market risk (comprising interest rate risk, currency
risk and price risk), (ii) liquidity risk and (iii) credit
risk.
The Board regularly reviews and agrees policies for managing
each of these risks. The Manager's policies for managing these
risks are summarised below and have been applied throughout
the year. The numerical disclosures exclude short-term debtors
and creditors, other than for currency disclosures.
(i) Market risk
The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in
market prices. This market risk comprises three elements
- interest rate risk, currency risk and other price risk.
Interest rate risk
Interest rate movements may affect:
the fair value of the investments in fixed interest rate
securities;
the level of income receivable on cash deposits;
interest payable on the Company's variable rate borrowings.
Management of the risk
The possible effects on fair value and cash flows that
could arise as a result of changes in interest rates are
taken into account when making investment and borrowing
decisions.
The Board reviews on a regular basis the values of the
fixed interest rate securities.
The Board imposes borrowing limits to ensure gearing levels
are appropriate to market conditions and reviews these
on a regular basis. Borrowings comprise fixed rate, revolving,
and uncommitted facilities. Details of borrowings at 31
January 2017 are shown in note 14.
Interest risk profile
The interest rate risk profile of the portfolio of financial
instruments at the Balance Sheet date was as follows:
Weighted
average
period for Weighted Non-
which average Fixed Floating interest
rate is interest rate rate bearing
fixed rate
At 31 January Years % GBP'000 GBP'000 GBP'000
2017
Assets
Sterling - - - 132 -
US Dollar 5.74 3.55 12,145 12,374 363,925
Canadian Dollar - - 1,590 103 32,684
______ ______ ______
Total assets 13,735 12,609 396,609
______ ______ ______
Liabilities
Bank loan -
US$51,045,000 0.46 2.18 (40,573) - -
______ ______ ______
Total liabilities (40,573) - -
______ ______ ______
Weighted
average
period for Weighted Non-
which average Fixed Floating interest
rate is interest rate rate bearing
fixed rate
At 31 January Years % GBP'000 GBP'000 GBP'000
2016
Assets
Sterling - 0.20 - 2 -
US Dollar 4.36 3.71 14,630 11,616 279,089
Canadian Dollar - - - 67 19,624
______ ______ ______
Total assets 14,630 11,685 298,713
______ ______ ______
Liabilities
Bank loan -
US$10,000,000 0.07 1.33 (7,050) - -
Bank loan -
US$51,045,000 1.46 2.18 (35,985) - -
______ ______ ______
Total liabilities (43,035) - -
______ ______ ______
The weighted average interest rate is based on the current
yield of each asset, weighted by its market value. The
weighted average interest rate on bank loans is based on
the interest rate payable, weighted by the total value
of the loans. The maturity date of the Company's loan is
disclosed in note 14.
The floating rate assets consist of cash deposits at prevailing
market rates.
The non-interest bearing assets represent the equity element
of the portfolio.
Short-term debtors and creditors have been excluded from
the above tables.
Interest rate sensitivity
The sensitivity analyses below have been determined based
on the exposure to interest rates for both derivative and
non-derivative instruments at the Statement of Financial
Position date and the stipulated change taking place at
the beginning of the financial year and held constant throughout
the reporting period in the case of instruments that have
floating rates.
The rate of interest on the loan is the percentage rate
per annum which is the aggregate of the applicable margin,
adjusted LIBOR Offered Rate and mandatory cost if any.
If interest rates had been 100 basis points higher or lower
(based on current parameter used by Manager's Investment
Risk Department on risk assessment) and all other variables
were held constant, the Company's revenue return for the
year ended 31 January 2017 would increase/decrease by GBP126,000
(2016 - increase/decrease by GBP117,000). This is mainly
attributable to the Company's exposure to interest rates
on its floating rate cash balances. These figures have
been calculated based on cash positions at each year end.
In the opinion of the Directors, the above sensitivity
analyses are not representative of the year as a whole,
since the level of exposure changes frequently as part
of the interest rate risk management process used to meet
the Company's objectives. The risk parameters used will
also fluctuate depending on the current market perception.
Foreign currency risk
The Company's portfolio is invested mainly in US quoted
securities and the Statement of Financial Position can
be significantly affected by movements in foreign exchange
rates.
Management of the risk
It is not the Company's policy to hedge this risk on a
continuing basis but the Company may, from time to time,
match specific overseas investment with foreign currency
borrowings. A significant proportion of the Company's borrowings,
as detailed in note 14, are denominated in foreign currency.
Foreign currency risk exposure by currency denomination
is detailed under Interest Risk Profile.
The revenue account is subject to currency fluctuation
arising on overseas income. The Company does not hedge
this currency risk.
Foreign currency sensitivity
There is no sensitivity analysis included as the Company's
significant foreign currency financial instruments are
in the form of equity investments, and they have been included
within the other price risk sensitivity analysis so as
to show the overall level of exposure.
Price risk
Price risks (ie changes in market prices other than those
arising from interest rate or currency risk) may affect
the value of the quoted investments.
Management of the risk
It is the Board's policy to hold an appropriate spread
of investments in the portfolio in order to reduce the
risk arising from factors specific to a particular country
or sector. The allocation of assets to international markets
and the stock selection process, as detailed on page 60
of the published 2017 Annual Report, both act to reduce
market risk. The Manager actively monitors market prices
throughout the year and reports to the Board, which meets
regularly in order to review investment strategy. The investments
held by the Company are listed on various stock exchanges.
Price risk sensitivity
If market prices at the Statement of Financial Position
date had been 10% higher or lower while all other variables
remained constant, the return attributable to Ordinary
shareholders for the year ended 31 January 2017 would have
increased/decreased by GBP41,034,000 (2016 - increase/decrease
of GBP31,298,000) and equity reserves would have increased/decreased
by the same amount.
(ii) Liquidity risk
This is the risk that the Company will encounter difficulty
in meeting obligations associated with financial liabilities.
Management of the risk
Liquidity risk is not considered to be significant as the
Company's assets comprise mainly readily realisable securities,
which can be sold to meet funding commitments if necessary.
Short-term flexibility is achieved through the use of the
loan facility (note 14).
(iii) Credit risk
This is failure of the counterparty to a transaction to
discharge its obligations under that transaction that could
result in the Company suffering a loss.
Management of the risk
where the Manager makes an investment in a bond, corporate
or otherwise, the credit ratings of the issuer are taken
into account so as to manage the risk to the Company of
default;
investments in quoted bonds are made across a variety of
industry sectors so as to avoid concentrations of credit
risk;
transactions involving derivatives are entered into only
with investment banks, the credit rating of which is taken
into account so as to minimise the risk to the Company
of default;
investment transactions are carried out with a number of
brokers, whose credit-standing is reviewed periodically
by the Manager, and limits are set on the amount that may
be due from any one broker;
the risk of counterparty exposure due to failed trades
causing a loss to the Company is mitigated by the review
of failed trade reports on a daily basis. In addition,
both stock and cash reconciliations to the custodian's
records are performed on a daily basis to ensure discrepancies
are investigated on a timely basis. The Manager's Compliance
department carries out periodic reviews of the custodian's
operations and reports its finding to the Manager's Risk
Management Committee;
cash is held only with reputable banks with acceptable
credit quality. It is the Manager's policy to trade only
with A- and above (Long Term rated) and A-1/P-1 (Short
Term rated) counterparties.
Credit risk exposure
In summary, compared to the amounts in the Balance Sheet,
the exposure to credit risk at 31 January 2017 was as follows:
2017 2016
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
GBP'000 GBP'000 GBP'000 GBP'000
Debtors 3,891 3,891 704 704
Cash and short term
deposits 12,609 12,609 11,685 11,685
______ ______ ______ ______
16,500 16,500 12,389 12,389
______ ______ ______ ______
18. Capital management policies and procedures
The capital of the Company consists of equity, comprising issued
capital, reserves and retained earnings. The Board monitors
and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes the impact of share
buybacks and the extent to which revenue should be retained.
The Company is not subject to any externally imposed capital
requirements.
19. Fair value hierarchy
FRS 102 requires an entity to classify fair value measurements
using a fair value hierarchy that reflects the significance
of the inputs used in making the measurements. The Company
has early adopted Amendments to FRS 102 - Fair value hierarchy
disclosures issued by the Financial Reporting Council in March
2016. This has not resulted in any reclassifications in levelling
and the prior year comparative has been disclosed under the
new hierarchy. The fair value hierarchy has the following classifications:
Level 1: unadjusted quoted prices in an active market for identical
assets or liabilities that the entity can access at the measurement
date.
Level 2: inputs other than quoted prices included within Level
1 that are observable (ie developed using market data) for
the asset or liability, either directly or indirectly.
Level 3: inputs are unobservable (ie for which market data
is unavailable) for the asset or liability.
The financial assets and liabilities measured at fair value
in the Statement of Financial Position are grouped into the
fair value hierarchy at the reporting date as follows:
Level Level Level Total
1 2 3
As at 31 January 2017 Note GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at fair value
through profit or loss
Quoted equities a) 396,609 - - 396,609
Quoted bonds b) - 13,735 - 13,735
396,609 13,735 - 410,344
Financial liabilities at fair
value through profit or loss
Derivatives c) - (30) - (30)
______ ______ ______ ______
- 13,705 - (30)
______ ______ ______ ______
Level Level Level Total
1 2 3
As at 31 January 2016 Note GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at fair value
through profit or loss
Quoted equities a) 298,353 - - 298,353
Quoted bonds b) - 14,630 - 14,630
298,353 14,630 - 312,983
Financial liabilities at fair
value through profit or loss
Derivatives c) (66) - - (66)
______ ______ ______ ______
(66) 14,630 - (66)
______ ______ ______ ______
a) Quoted equities and preference shares
The fair value of the Company's investments in quoted
equities and preference shares has been determined by
reference to their quoted bid prices at the reporting
date. Quoted equities and preference shares included in
Fair Value Level 1 are actively traded on recognised stock
exchanges.
b) Quoted bonds
The fair value of the Company's investments in quoted
bonds has been determined by reference to their quoted
bid prices at the reporting date. Investments categorised
as Level 2 are not considered to trade in active markets.
c) Derivatives
The Company's investment in over the counter options at
31 January 2017 has been fair valued using a marked-to-market
model and has been classed as Level 2. At 31 January 2016
the Company held exchange traded options which were determined
using quoted prices on an exchange traded basis and were
therefore classed as Level 1.
20. Related party transactions
Directors' fees and interests
Fees payable during the year to the Directors and their interests
in shares of the Company are disclosed within the Directors'
Remuneration Report on page 33 of the published 2017 Annual
Report.
Transactions with the Manager
The Company has agreements with the Manager for the provision
of investment management, secretarial, accounting and administration
and promotional activity services.
The management fee is calculated at a rate of 0.8% per annum
of the total assets of the Company, after deducting current
liabilities and borrowings and excluding the value of any commonly
managed funds, payable quarterly. The balance due at the year
end was GBP762,000 (2016 - GBP566,000). The fee is allocated
30% (2016 - 30%) to revenue and 70% (2016 - 70%) to capital.
The management agreement between the Company and AFML is terminable
by either party on three months' notice. In the event of a resolution
being passed at the AGM to wind up the Company the Manager shall
be entitled to three months' notice from the date the resolution
was passed. In the event of termination on not less than the
agreed notice period, compensation is payable in lieu of the
unexpired notice period.
The fee for secretarial and administrative services is payable
monthly in advance and is based on an index-linked annual amount
of GBP105,000 (2016 - GBP104,000) and there was a accrual of
GBP18,000 (2016 - GBP17,000) at the year end.
During the year GBP213,000 (2016 - GBP212,000) was paid to AMFL
in respect of promotional activites for the Company through
Aberdeen's Investment Trust Initiative and the balance due at
the year end was GBP18,000 (2016 - GBP71,000).
ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT
This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 January 2017. The statutory accounts for the year ended 31 January 2017 received an audit report which was unqualified.
The statutory accounts for the financial year ended 31 January 2017 were approved by the Directors on 23 March 2017 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 2.00 pm on 12 June 2017 at 40 Princes Street, Edinburgh EH2 2BY.
The Annual Report will be posted to shareholders in April 2017 and additional copies will be available from the Manager (Investor Helpline - Tel. 0808 00 0040) or by download from the Company's webpage (www.northamericanincome.co.uk)
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
For The North American Income Trust plc
Aberdeen Asset Management PLC, Secretaries
This information is provided by RNS
The company news service from the London Stock Exchange
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March 24, 2017 03:30 ET (07:30 GMT)
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