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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Fidelity Special Values Plc | LSE:FSV | London | Ordinary Share | GB00BWXC7Y93 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.50 | 0.16% | 309.00 | 309.00 | 310.00 | 309.00 | 307.50 | 307.50 | 137,048 | 10:55:38 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | 70.44M | 54.31M | 0.1676 | 18.41 | 999.85M |
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FIDELITY SPECIAL VALUES PLC
Final Results for the year ended 31 August 2021
Financial Highlights:
* The Board of Fidelity Special Values PLC (the "Company") recommends a final
dividend of 4.50 pence which together with the interim dividend payment of
2.17 pence per share (totalling 6.67 pence) represents an increase of 15%
over the dividend of 5.80 pence paid in the prior year.
* The net asset value ("NAV") of the Company increased by +56.2% for the year
ended 31 August 2021, outperforming the Benchmark Index, which returned
+26.9%.
* As a result of the Company's +73.8% share price performance, the level of
discount narrowed from 9.1% at the start of the reporting year to a premium
of 1.2% as at 31 August 2021.
* Performance figures over Alex Wright's tenure as Portfolio Manager are also
strong, with a NAV return of +196.2% and a share price return of +257.1%,
compared to a Benchmark Index return of +90.8%. The strong long term
performance of the Company has enabled it to expand the Shareholder base
through the issuance of a significant number of shares.
* While the UK market has looked cheap over the past five years, the key
differentiator in 2021 compared to prior years is that fundamentals on the
ground look very good.
Contacts
For further information, please contact:
Smita Amin
Company Secretary
01737 836347
FIL Investments International
CHAIRMAN'S STATEMENT
The year under review was an extraordinary one, in terms of the global and
external factors affecting the companies in which we invest, the broader
market, the daily lives of our Shareholders, and their personal investments.
This in turn led to extraordinary changes in investor confidence and sentiment
leading to a remarkable, if uneven, recovery of asset prices.
Last year I wrote of the challenges posed by COVID-19, and it is therefore with
a sense of relief, even hope, that we can reflect on improving prospects for a
global recovery from the virus and its consequential social, economic and
market impacts and how this may play out in the UK.
The Company aims to achieve long term capital growth for Shareholders by
investing in 'special situations' and the last year has resulted in an
abundance of such opportunities. The investment trust is primarily invested in
UK equities, but may invest up to 20% of total net assets outside of UK
companies. The portfolio consists of around 80-120 positions and the Portfolio
Manager's strategy invests across the market capitalisation spectrum, usually
with an overweight to medium sized and smaller companies. It is an actively
managed contrarian strategy that seeks out undervalued opportunities - this
typically means investing in companies that have underperformed and where there
is little or no value ascribed to any recovery potential.
By building a portfolio of stocks that are at different stages of their
recovery process, the intention is to deliver outperformance across different
market environments.
PERFORMANCE
The Company's performance for the reporting year has been extremely pleasing,
with a net asset value ("NAV") return of 56.2% and a share price return of
73.8%, compared to a Benchmark Index return of 26.9%. Performance figures over
Alex's tenure as Portfolio Manager are also strong, with a NAV return of 196.2%
and a share price return of 257.1%, compared to a Benchmark Index return of
90.8%. (All performance data on a total return basis). The strong long term
performance of the Company has enabled us to expand the Shareholder base
through the issuance of a significant number of shares.
OUTLOOK
As set out in his review that follows, Alex Wright, our Portfolio Manager, is
still excited about the UK equity market even after the strong returns seen
over recent months. He believes that the UK market still looks attractive
versus other markets and that there are areas with real potential. It is a
particularly exciting market for investors looking for 'value' opportunities -
the UK is one of the world's cheapest major stock markets.
The improving economic backdrop has been reflected in a slew of positive
earnings news from companies, which are yet to be reflected in valuations and
which Alex believes in many cases may be sustainable trends particularly among
UK consumer-facing and housing-related holdings.
We are likely to see some short term scares relating to both Brexit and
COVID-19, such as the perceived petrol shortages leading to queues at petrol
stations at the end of September. Given the strong performance run of global
indices throughout the last year, we may also see a period of consolidation.
However, longer term, with uncertainty surrounding Brexit reducing and a
successful vaccination program, we expect to see companies and consumers
increase their spending - and the UK and its companies are well placed to
benefit from this.
OTHER MATTERS
REVISED MANAGEMENT FEE
I am very pleased to inform Shareholders that the Board agreed a reduced
management fee with the Manager, FIL Investment Services (UK) Limited, which
was effective from 1 January 2021. The previous tiered fee structure of 0.85%
on the first £700 million of net assets reducing to 0.75% of net assets in
excess of £700 million was replaced by a single fee of 0.60% of net assets. In
addition, the fixed annual fee of £100,000 for services other than portfolio
management was removed.
There is no change in the investment process as a result of the new fee
arrangement.
DISCOUNT/PREMIUM AND SHARE REPURCHASES/ISSUES
Under the Company's discount management policy, the Board seeks to maintain the
discount in single digits in normal market conditions and will repurchase
shares to help stabilise the share price discount.
The Board will approve the issuance of shares if the Company's shares are
trading at a sufficient level of premium to ensure that it adds value for
Shareholders and that the issue of shares is not dilutive. Issuing shares
increases the size of the Company, making it more liquid and allowing costs to
be spread over a larger pool of assets.
Over the reporting year, the Company's shares traded between a premium of 3.1%
and a discount of 12.3%. The level of discount narrowed from 9.1% at the start
of the reporting year to a premium of 1.2% as at 31 August 2021. The peer group
average discount as at the year end was 5.2%.
During September and early October 2020, the Company's discount widened, and in
order to maintain it in single digits, the Board approved the repurchase of
1,025,473 ordinary shares into Treasury. All of these shares were subsequently
re-issued in late November and early December 2020 as the shares moved back to
a premium. Since then and as at the date of this Annual Report, no further
shares have been repurchased into Treasury or for cancellation.
In the reporting year, the Company's shares mostly traded at a premium and in
order to meet demand, the Company issued a total of 24,024,913 ordinary shares
from a combination of shares held in Treasury as above, and its block listing
facilities. Since then and as at the date of this Annual Report, the Company
has issued a further 500,000 shares.
The issuance of shares has been at a rate where, were it to continue, the
remaining authority to issue shares approved by Shareholders at the Annual
General Meeting ("AGM") on 14 December 2020 would be exhausted some time in
advance of the Company's AGM on 14 December 2021. Therefore, the Board held a
General Meeting on 15 September 2021 in order to renew the authority to allot
shares and disapply pre-emption rights to enable the Company to allot up to 10
per cent. of the shares in issue as at 11 August 2021, in addition to the
unused part of the authority granted at the Company's 2020 AGM.
The Board continues to monitor the discount/premium closely and will take
action when it believes that it will be effective and to the benefit of
Shareholders.
GEARING
The Board has agreed with the Portfolio Manager that if he is able to find
attractive opportunities in the market, then the Company's gearing should be
allowed to rise. Combined with Alex's contrarian and value-focused investment
philosophy, and also making good use of the Company's structural advantages
over its open-ended counterparts, this should continue to add value for
Shareholders over the long term.
It is the current intention of the Board that, in normal market conditions, the
Portfolio Manager will maintain net gearing in the range of 0% to 25%. The
Company remained within these levels throughout the reporting year. The maximum
level of gross gearing allowed is 40%.
DIVID
The Board's policy is to pay dividends twice yearly in order to smooth the
dividend payments for the Company's reporting year. The Company's revenue
return for the year to 31 August 2021 was 7.22 pence per share (2020: 4.81p),
and an interim dividend of 2.17 pence per share was paid on 23 June 2021 (2020:
2.10p).
The Board recommends a final dividend of 4.50 pence per share for the year
ended 31 August 2021 (2020: 3.70 pence) for approval by Shareholders at the AGM
on 14 December 2021. The interim and final dividends (total of 6.67 pence)
represent an increase of 0.87 pence (15%) over the 5.80 pence paid for the year
ended 31 August 2020. In the prior year, the dividends of many companies in the
portfolio were under pressure, with dividends either being cut or cancelled,
and the Company therefore utilised revenue reserves built up in previous years
to cover the final dividend. This year the Company has been able to return to
paying dividends entirely from the revenue earned in the reporting year.
The final dividend will be payable on 12 January 2022 to Shareholders on the
register at close of business on 3 December 2021 (ex-dividend date 2 December
2021).
BOARD OF DIRECTORS
Nicky McCabe, having served on the Board as a Non-Executive Director since
December 2004, stepped down from the Board at the conclusion of the AGM on 14 December 2020. Having served on the Board for 11 years, five of which have been as Chairman of the Board, it is my intention not to seek re-election at the AGM in 2022. A recruitment process will be carried out in due course as part of the Board's succession plan. In accordance with the UK Corporate Governance Code for FTSE 350 companies, all Directors are subject to annual re-election at the AGM on 14 December 2021. The Directors' details can be found in the Annual Report, and between them, they have a wide range of appropriate skills and experience to form a balanced Board for the Company. ARTICLES OF ASSOCIATION Among the temporary measures forced upon us by the COVID-19 pandemic was the closed session AGM we held last year. With the intention of providing the very best experience for Shareholders longer term and mindful of potential future restrictions, the Board is proposing amendments to the Articles of Association (the "Articles") to enable the Company to hold 'hybrid' general meetings. Hybrid meetings involve either the physical or electronic attendance and voting by Shareholders. By changing the Company's Articles, the Board will have the ability to determine whether a future AGM or general meeting should be held as a physical meeting or as a hybrid meeting. My fellow Directors and I greatly enjoy the opportunity to meet and exchange views with Shareholders and a physical meeting will remain our preferred format provided Government guidance permits it, but we are keen to provide virtual facilities for future AGMs should it be necessary. We have also taken the opportunity to update certain other provisions within the Articles, including for example, in relation to retirement of Directors, Directors' fees and regulatory restrictions and information. A full tracked version of all the changes proposed to the Articles is available at www.fidelity.co.uk/specialvalues. The principal changes proposed to the Articles are set out in more detail in the Directors' Report in the Annual Report. ANNUAL GENERAL MEETING - TUESDAY, 14 DECEMBER 2021 AT 11.30 AM The AGM of the Company will be held at 11.30 am on Tuesday, 14 December 2021 at Fidelity's offices at 4 Cannon Street, London EC4M 5AB (nearest tube stations are St. Paul's or Mansion House). Full details of the meeting are given in the Notice of Meeting in the Annual Report. Appropriate social distancing and hygiene measures will be in place and under the circumstances it is unlikely that we will be able to offer the usual catering service. As the pandemic continues, we anticipate limited numbers in attendance and guests of Shareholders will not be permitted. For those Shareholders who would prefer not to travel or attend in person, for the first time this year we will live-stream the formal business and presentations of the meeting online. A registration link may be found on the Company's website www.fidelity.co.uk/specialvalues. Investors viewing the AGM online will be able to submit live written questions to the Board and the Portfolio Manager and these will addressed on their behalf at an appropriate juncture during the meeting. It will not be possible for those viewing online to participate in voting on the proposed resolutions this year, pending approval of the changes to the Articles of Association as set out above. Alex Wright, the Portfolio Manager, will be making a presentation to Shareholders highlighting the achievements and challenges of the year past and the prospects for the year to come. He and the Board will be very happy to answer any questions that Shareholders may have. Copies of the Portfolio Manager's presentation can be requested by email at investmenttrusts@fil.com or in writing to the Secretary at FIL Investments International, Beech Gate, Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. Although we intend to resume our normal format for the AGM this year, if anything changes due to the ongoing pandemic, we will advise investors via the Company's website at www.fidelity.co.uk/specialvalues about alternative arrangements for the Portfolio Manager's presentation. The formal business of the meeting will still be carried out in person on 14 December 2021. We urge all Shareholders to vote and make use of the proxy form provided. If you hold shares through the Fidelity Platform, other platforms or a nominee (and not directly in your own name), proxy forms are not provided, and you are advised to contact the company with which you hold your shares in order to lodge your voting instructions. We thank you for your cooperation. ANDY IRVINE Chairman 5 November 2021 PORTFOLIO MANAGER'S REVIEW QUESTION How has the Company performed in the period under review? ANSWER After what proved to be a challenging period last year, we are pleased to report a much-improved performance this financial year. The Company recorded a share price total return of 73.8% and a NAV total return of 56.2% for the reporting year, both of which were meaningfully ahead of the FTSE All-Share Index (Benchmark Index) which returned 26.9%. It has been the best financial year in the Company's history, both in terms of NAV and share price total returns. This handsomely rewarded Shareholders for their patience after the disappointing returns seen last year, and reflects our belief that it is often with the greatest disappointments that come the best investment opportunities, a principle that typically informs our search for new ideas among individual stocks. Over the period, UK equities continued to bounce back amid increasing optimism on the back of an acceleration in vaccination rollouts and the relaxation of restrictions. A sharp pick-up in corporate earnings also boosted investor sentiment, as did a flurry of takeover bids for UK companies, including ten portfolio holdings. Thanks to the strong returns and Shareholders' willingness to back us, the Company is also close to the £1 billion market capitalisation mark for the first time in its history. QUESTION What were the key factors behind the Company's outperformance? ANSWER Stock selection was the primary driver of returns over the year, reflecting the strong underlying earnings picture, particularly at some of our consumer facing businesses. Among the largest contributors, bicycle and motoring retailer Halfords Group reported a big jump in profits after sales of electric bikes and scooters almost doubled over the last year. Car distributor Inchcape and vehicle rental business Redde Northgate also performed strongly benefiting from supply chain shortages affecting new car production. Among our housing related holdings, estate agency and surveying firm LSL Property Services was another leading contributor, as it reported strong trading momentum. Mergers and acquisition (M&A) activity was a key feature over the period and boosted several of our key holdings, notably private healthcare provider Spire Healthcare Group (in this case, we voted against the bid, as we believed that the offer undervalued the business) and UK aerospace equipment supplier Meggitt (which attracted an offer at a 70% premium to the prior closing price). Support services group Mitie Group was another notable contributor, boosted by a major acquisition and refinancing in the year and strong operational performance. Within financials, banking group AIB Group rose on the back of a positive outlook and news of bolt-on acquisitions amid the recently announced withdrawal decisions from a number of competitors in the Irish market. Key detractors were primarily defensive businesses, including support services groups Serco Group and DCC. Serco's share price weakness has been particularly surprising given the business has performed strongly since the onset of the pandemic, resulting in significant earnings upgrades and better long term growth prospects thanks to closer relationships with governments. Similarly, DCC is a long term compounder that is focused on deploying capital in businesses that generate high return on capital and strong cash conversion with low capital intensity. The holding in power generation company ContourGlobal also lagged amidst unfavourable investor sentiment for utilities due to rising bond yields during the period. QUESTION Smaller companies have outperformed large-cap stocks this year - is there still value there? ANSWER While most investors were focusing on the large cap beneficiaries of an eventual market recovery following the COVID-19 dislocation, we have found many opportunities in the smaller companies space. Small-cap stocks are typically under-researched and ignored in periods of uncertainty. Those investors who do focus on the segment tend to favour high growth businesses. Due to a lack of broker coverage, we note that many good quality smaller companies are falling under the radar. While small-cap stocks have bounced back strongly since the beginning of the COVID-19 crisis, and indeed we have taken profits in some holdings, we still see significant value and upside potential available. This value opportunity is reflected in the number of recent takeover bids involving small and mid-cap stocks. QUESTION How do you avoid value traps? ANSWER Although we look for undervalued companies, we are very selective in our approach. We look for two key elements before investing in a stock: downside protection and positive change catalysts. We focus on companies where we believe further downside is limited. These will often be companies that have underperformed, but that have some form of asset or defensive revenue stream which gives their share price downside protection. As well as downside protection, we look for companies with positive change dynamics. This could be external changes expected to benefit the business (such as a change in the competitor landscape or a structural change in market demand), internal changes
(such as a new management team restructuring the business, a new product line or expansion into new areas), or preferably both. In order to assess the prospect of a material change in the earnings power of the business, we undertake thorough due diligence. Not only do we meet with the management team to fully understand their corporate strategy, our analysts will also speak to competitors, customers, suppliers and industry experts to validate the information received from management and build conviction in the anticipated change. Subsequent to this, we closely monitor the company's results and updates as well as industry trends to check whether the investment thesis is playing out. As we gain conviction in the change story, we gradually add to the position until the change starts being recognized by the market by which time we will start reducing the position and recycling the proceeds into new investment opportunities. QUESTION Has the UK's recovery from COVID-19 played out the way that you expected? Is this a risk or an opportunity moving forward? ANSWER The UK economy was one of the worst affected by the pandemic given its dependence on services and face-to-face interaction. The lockdown restrictions caused a very unusual recession whereby companies were unable to operate for varying lengths of time depending on their industries and consumers were not able to spend as much as they normally would, thus leaving them with more disposable income. This has resulted in pent up demand but also supply bottlenecks. Overall, it has translated into very strong corporate fundamentals, as the economy gradually reopened. Through our research and frequent conversations with individual companies, we were able to pick up early on new spending patterns, which favoured areas such as housing, DIY and some specialist retailers, and this benefited performance. Looking ahead, there are risks but also opportunities. Thanks to the swift vaccine rollout, the Government has now lifted the last domestic COVID-19 restrictions, and fortunately hospitalisations have remained relatively low, as vaccines continue to prove effective in reducing the number of individuals needing treatment. Those fully vaccinated are no longer required to self-isolate if they come in contact with someone testing positive for the virus, which should help reduce staff absences highlighted recently. However, many companies are reporting input cost pressures due to supply chain issues and skill shortages, and these are areas that we are carefully monitoring. Conversely, the market has been quick to dismiss some of the corporate results and consumption trends seen recently as being temporary, but we believe some of these will be longer lasting and therefore are yet to be fully reflected in share prices. For instance, we believe the need for more space, hybrid working, lower rate mortgages and an expected pick up in the build-to-rent market will continue to support house builders and building materials suppliers. Public outsourcers such as Serco have performed strongly since the onset of the pandemic, but its shares have underperformed despite winning new long term contracts and coming out of the pandemic much stronger. In fact, across many industries, the pandemic has accelerated restructuring plans, cost cutting and the introduction of new digital/online solutions, as well as significantly shrinking some of the supply in some industries (as companies have ceased trading). As a result, some businesses are emerging from the pandemic in a stronger competitive position. QUESTION There are growing concerns about supply chains - what does this mean for the portfolio? ANSWER As economies have reopened and pent up demand is being released, supply chains shortages have become more apparent and input cost pressures are rising as a result. This is because manufacturers have not recovered the lost COVID-19 shutdown production, and transport disruption and staff shortages have made matters worse. This is something we have been monitoring for a while both as a threat and as an opportunity. Having previously added to our housebuilders and building materials exposure to capitalise on the recovery of the housing market, earlier this year we initiated positions in brick distributor Brickability Group and brick manufacturer Forterra to take advantage of the fact that bricks were in short supply. Both companies have since been reporting very strong demand and their outlook remains robust for the coming year. The supply of new cars has also been severely hindered by semiconductor chip shortages, and we have benefited from this through our holdings in Inchcape, a global retailer of new and used cars, and Redde Northgate, a commercial vehicle rental business. The pent up demand from people who were forced to delay their purchases and the lack of stock is pushing up both new and used car prices, and this should also benefit rentals. Overall, our preference for businesses operating in areas where supply has shrunk should also help, as market leaders typically have more robust supply chains and should more easily be able to pass on input cost pressures and capitalise on limited supply. This is an area we are monitoring closely and is a key focus in our company meetings, concerns over rising margin pressure have led us to sell or trim a couple of holdings recently. QUESTION You publicly rejected a private takeover bid for Spire Healthcare Group this year - what drove the decision? ANSWER We are not against bids if they recognise the true value of individual businesses and pay a fair price. In fact, given our focus on attractively valued companies which are ignored or underappreciated by the market, takeover bids can greatly help speed up the recognition of the value of these businesses and give us a welcome opportunity to recycle the proceeds into new investment opportunities with greater upside potential. However, we are equally happy to take a public stance and vote against a bid if we think the offer undervalues the business, as we recently did with the bid for private hospital group Spire Healthcare. In that case, we felt the offer materially undervalued the business, and the premium failed to recognise the big improvements in clinical quality that the current management team has put in place. This puts them in avery strong position to now benefit from unprecedented waiting lists for elective surgeries post COVID-19 and higher NHS outsourcing to help clear backlogs. QUESTION There is continuing focus on ESG matters. How do you think about ESG? ANSWER Corporate governance has always been a key consideration for me as contrarian investor. I look for unloved companies where things are changing for the better, and therefore how well a company is managed, whether management are likely to deliver on their plans, that they are appropriately incentivised and that their interests are aligned with shareholders. These are absolutely key to the investment thesis. The social and environmental aspects of ESG have been the focus of public attention recently, and these are also factors our analysts take into account in their overall assessment of the business. ESG has been a key focus area at Fidelity, and our research team is about to introduce an enhanced ESG framework which will provide us with more granularity and data points to help monitor the progress companies are making on key indicators. When my Co-Portfolio Manager, Jonathan Winton, and I consider a new investment, it is important for us to have a good understanding of any potential ESG issues that could increase the downside risk on an investment. This will inform us as to whether we are prepared to invest in the company and also the valuation multiple we are looking to achieve from that investment. Rather than excluding companies based on prior ESG records, we consider whether the market's perception is correct or if actions have been taken to address issues that have the potential to lead to a re-rating of the shares. As shareholders, we engage and maintain constructive dialogue with companies' management and directors on ESG matters, make efficient use of proxy voting and shareholder resolutions, and collaborate in coalition with stakeholders for greater impact if required. QUESTION What is your outlook for the next twelve months? ANSWER UK equities remain significantly undervalued compared to global markets, and reasonably valued in absolute terms on 13x 2022 earnings estimates. While the UK market has looked cheap over the past five years, the key differentiator in 2021 compared to prior years is that fundamentals on the ground look very good. This is evidenced by the very strong profit recovery from COVID-19 that we have seen in 2021, with many companies already looking to produce profits in 2021 greater than in 2019. UK equities are well positioned not only to benefit from a recovery from the pandemic, but also from the lifting of the Brexit uncertainty which is starting to translate into companies finally committing to making new investments in the country, but also consumers (now with extra savings) more willing to buy big ticket items. The catch-up opportunity in terms of consumer spending after lockdown restrictions is significant and could be longer lasting than generally anticipated. The removal of the Brexit uncertainty and attractive valuation levels explains the number of M&A bids which we are currently seeing. Private equity groups and other corporates are recognising the value on offer in the UK market. We are likely to see more bids if valuation discounts compared to overseas companies do not close. Given this positive backdrop and the number of opportunities on offer, we have continued to take advantage of the Company's ability to gear. We used the market weakness seen in September to add to some of our most attractively valued holdings, maintaining the gearing level at the upper end of our historic range.
Based on 2022 and 2023 earnings estimates, the Company's portfolio trades on a
10 to 20% discount to the UK market, which as previously mentioned is itself
attractively valued both in relative and absolute terms. We remain comfortable
with how the Company's portfolio looks from a valuation, return on capital and
risk perspective, and continue to see meaningful upside potential for our
holdings.
ALEX WRIGHT
Portfolio Manager
5 November 2021
STRATEGIC REPORT
PRINCIPAL RISKS AND UNCERTAINTIES AND RISK MANAGEMENT
As required by provisions 28 and 29 of the 2018 UK Corporate Governance Code,
the Board has a robust ongoing process for identifying, evaluating and managing
the principal risks and uncertainties faced by the Company, including those
that could threaten its business model, future performance, solvency or
liquidity. The Board, with the assistance of the Alternative Investment Fund
Manager (FIL Investment Services (UK) Limited/ the "Manager"), has developed a
risk matrix which, as part of the risk management and internal controls
process, identifies the key existing and emerging risks and uncertainties that
the Company faces. The Audit Committee continues to identify any new emerging
risks and take any action necessary to mitigate their potential impact. The
risks identified are placed on the Company's risk matrix and graded
appropriately. This process, together with the policies and procedures for the
mitigation of existing and emerging risks, is updated and reviewed regularly in
the form of comprehensive reports considered by the Audit Committee. The Board
determines the nature and extent of any risks it is willing to take in order to
achieve its strategic objectives.
The Manager also has responsibility for risk management for the Company. It
works with the Board to identify and manage the principal and emerging risks
and uncertainties and to ensure that the Board can continue to meet its UK
corporate governance obligations.
The Board considers the following as the principal risks faced by the Company.
EXTERNAL RISKS
Principal Risks Description and Risk Mitigation
Market, Economic The Company's portfolio is mainly made up of listed securities. The
and Political principal risks are therefore market related such as market downturn,
Risks interest rate movements and deflation/inflation. The Company may also
be impacted by concerns over global economic growth and major
political events affecting the UK market and economy and the
consequences of this.
COVID-19 continues to be a global pandemic with severe market and
economic impacts. The risk of the likely effects of COVID-19 on the
markets is discussed in the Chairman's Statement and in the Portfolio
Manager's Review above. These risks are somewhat mitigated by the
Company's investment trust structure which means no forced sales need
to take place to deal with any redemptions. Therefore, investments can
be held over a longer time horizon.
The Board reviews market, economic and political risks and legislative
changes at each Board meeting.
Risks to which the Company is exposed to in the market risk category
are included in Note 18 to the Financial Statements below together
with summaries of the policies for managing these risks.
Cybercrime Risk The operational risk from cybercrime is significant. Cybercrime
threats evolve rapidly and consequently the risk is regularly
re-assessed and the Board receives regular updates from the Manager in
respect of the type and possible scale of cyberattacks. The Manager's
technology team has developed a number of initiatives and controls in
order to provide enhanced mitigating protection to this ever
increasing threat. The risk is frequently re-assessed by Fidelity's
information security teams and has resulted in the implementation of
new tools and processes, including improvements to existing ones.
Fidelity has established a dedicated cybersecurity team which provides
regular awareness updates and best practice guidance.
Risks are increased due to the COVID-19 crisis, primarily related to
phishing, remote access threats, extortion and denial of services
attacks. The Manager has a dedicated detect and respond resource
specifically to monitor the cyber threats associated with COVID-19.
The Company's third party service providers also have similar measures
in place.
Environmental, There is a risk that the value of the assets of the Company are
Social and negatively impacted by ESG related risks, including climate control.
Governance Fidelity International has embedded ESG factors in its investment
("ESG") Risk decision making process. ESG integration is carried out at the
fundamental research analyst level within its investment teams,
primarily through Fidelity's Proprietary Sustainability Rating which
is designed to generate a forward-looking and holistic assessment of a
company's ESG risks and opportunities based on sector-specific key
performance indicators across 99 individual and unique sub-sectors.
The Portfolio Manager is also active in analysing the effects of ESG
when making investment decisions. The Board continues to monitor
developments in this area and reviews the positioning of the portfolio
considering ESG factors.
Further detail on ESG considerations in the investment process and
sustainability investment is in the Annual Report.
Regulatory Risk The Company may be impacted by changes in legislation, taxation or
regulation. These are monitored at each Board meeting and managed
through active engagement with regulators and trade bodies by the
Manager.
Key Person Risk There is a risk that the Manager has an inadequate succession plan for
key individuals. The loss of the Portfolio Manager or key individuals
could lead to potential performance, operational or regulatory issues.
The Manager identifies key dependencies which are then addressed
through succession plans, particularly for portfolio managers.
Discount Control Due to the nature of investment companies, the price of the Company's
Risk shares and its premium or discount to NAV are factors which are not
totally within the Company's control. The Board has a discount
management policy in place and some short term influence over the
discount may be exercised by the use of share repurchases at
acceptable prices within the parameters set by the Board. The demand
for shares can be influenced through good performance and an active
investor relations program.
The Company's share price, NAV and discount volatility are monitored
daily by the Manager and considered by the Board regularly.
Competition Risk Threats facing the Company are loss of Shareholders if the demand for
investment trusts declines, and the demand for passive funds and
active ETFs continue to increase. The Board reviews the strategic
direction of the Company on an ongoing basis to ensure that it offers
a relevant product to Shareholders. It also regularly reviews the
Shareholder profile of the Company with the Company's broker.
Investment The Board relies on the Portfolio Manager's skills and judgement to
Management Risk make investment decisions based on research and analysis of individual
stocks and sectors. The Board reviews the performance of the asset
value of the portfolio against the Company's Benchmark Index and its
competitors and also considers the outlook for the market with the
Portfolio Manager at each Board meeting. The emphasis is on long term
investment performance as there is a risk for the Company of
volatility of performance in the shorter term.
Derivative instruments are used to protect and enhance investment
returns. There is a risk that the use of derivatives may lead to
higher volatility in the NAV and the share price than might otherwise
be the case. The Board has put in place policies and limits to control
the Company's use of derivatives and exposures. Further details on
derivative instruments risk is included in Note 18 to the Financial
Statements below.
The Company gears through the use of long CFDs. The principal risk is
that the Portfolio Manager fails to use gearing effectively, resulting
in a failure to outperform in a rising market or underperform in a
falling market. The Board regularly considers the level of gearing and
gearing risk and sets limits within which the Manager must operate.
Pandemic Risk With the pandemic continuing to evolve and variants of COVID-19
appearing, it is evident that although COVID-19 is being tackled by
the arrival of vaccines, risks remain. The roll-out of vaccines
globally is slow and the effectiveness against the variants is
uncertain. There continues to be increased focus from financial
services regulators around the world on the contingency plans of
regulated financial firms. The Manager follows Government
recommendations and guidance and carries on reviewing its business
continuity plans and operational resilience strategies on an ongoing
basis. The Manager continues to take all reasonable steps in meeting
its regulatory obligations and to assess operational risks, the
ability to continue operating and the steps it needs to take to serve
and support its clients, including the Board. PricewaterhouseCoopers
LLP has also confirmed in the AAF Internal Controls report issued to
Fidelity International that there have not been any significant
changes to Fidelity International's control environment as a result of
COVID-19. Further to this, the Manager has provided the Board with
assurance that the Company has appropriate business continuity plans
in place and the provision of services has continued to be supplied
without interruption during the pandemic.
Investment team key activities, including portfolio managers, analysts
and trading/support functions, are continuing to perform well despite
the operational challenges posed when working from home or when split
team arrangements were in place.
The Company's other third party service providers have also confirmed
the implementation of similar measures to ensure no business
disruption.
Operational Risks The Company relies on a number of third party service providers,
-Service principally the Manager, Registrar, Custodian and Depositary. It is
Providers dependent on the effective operation of the Manager's control systems
and those of its service providers with regard to the security of the
Company's assets, dealing procedures, accounting records and the
maintenance of regulatory and legal requirements. The Registrar,
Custodian and Depositary are all subject to a risk-based program of
internal audits by the Manager. In addition, service providers' own
internal control reports are received by the Board on an annual basis
and any concerns investigated. Risks associated with these services
are generally rated as low, although the financial consequences could
be serious, including reputational damage to the Company.
CONTINUATION VOTE
A continuation vote takes place every three years. There is a risk that
Shareholders do not vote in favour of continuation during periods when
performance of the Company's NAV and share price is poor. At the AGM held on 12
December 2019, 99.90% of Shareholders voted in favour of the continuation of
the Company. The next continuation vote will take place at the AGM in 2022.
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the
Directors have assessed the prospects of the Company over a longer period than
the twelve month period required by the "Going Concern" basis. The Company is
an investment trust with the objective of achieving long term capital growth.
The Board considers long term to be at least five years, and accordingly, the
Directors believe that five years is an appropriate investment horizon to
assess the viability of the Company, although the life of the Company is not
intended to be limited to this or any other period.
In making an assessment on the viability of the Company, the Board has
considered the following:
· The ongoing relevance of the investment objective in prevailing market
conditions;
· The Company's level of gearing;
· The Company's NAV and share price performance;
· The principal and emerging risks and uncertainties facing the Company,
as set out above, and their potential impact;
· The expected future demand for the Company's shares;
· The Company's share price premium/discount to the NAV;
· The liquidity of the Company's portfolio;
· The level of income generated by the Company; and
· Future income and expenditure forecasts.
The Company's performance has been strong over the five year reporting period
to 31 August 2021, with a NAV total return of 56.7% and a share price total
return of 76.5% compared to a Benchmark Index total return of 33.3%. The Board
regularly reviews the investment policy and considers whether it remains
appropriate. The Board has concluded that there is a reasonable expectation
that the Company will be able to continue in operation and meet its liabilities
as they fall due over the next five years based on the following
considerations:
· The Investment Manager's compliance with the Company's investment
objective and policy, its investment strategy and asset allocation;
· The fact that the portfolio comprises sufficient readily realisable
securities which can be sold to meet funding requirements if necessary;
· The Board's discount management policy; and
· The ongoing processes for monitoring operating costs and income which
are considered to be reasonable in comparison to the Company's total assets.
In addition, the Directors' assessment of the Company's ability to operate in
the foreseeable future is included in the Going Concern Statement below.
GOING CONCERN STATEMENT
The Financial Statements of the Company have been prepared on a going concern
basis.
The Directors have considered the Company's investment objective, risk
management policies, liquidity risk, credit risk, capital management policies
and procedures, the nature of its portfolio and its expenditure and cash flow
projections. The Directors, having considered the liquidity of the Company's
portfolio of investments (being mainly securities which are readily realisable)
and the projected income and expenditure, are satisfied that the Company is
financially sound and has adequate resources to meet all of its liabilities and
ongoing expenses and continue in operational existence for the foreseeable
future. The Board has therefore concluded that the Company has adequate
resources to continue to adopt the going concern basis for the period to 30
November 2022 which is at least twelve months from the date of approval of the
Financial Statements. This conclusion also takes into account the Board's
assessment of the ongoing risks from COVID-19 as set out in the Pandemic Risk
above. The prospects of the Company over a period longer than twelve months can
be found in the Viability Statement above.
PROMOTING THE SUCCESS OF THE COMPANY
Under Section 172(1) of the Companies Act 2006, the Directors of a company must
act in a way they consider, in good faith, would be most likely to promote the
success of the Company for the benefit of its members as a whole, and in doing
so have regard (amongst other matters) to the likely consequences of any
decision in the long term; the need to foster relationships with the Company's
suppliers, customers and others; the impact of the company's operations on the
community and the environment; the desirability of the Company maintaining a
reputation for high standards of business conduct; and the need to act fairly
as between members of the company.
As an externally managed Investment Trust the Company has no employees or
physical assets, and a number of the Company's functions are outsourced to
third parties. The key outsourced function is the provision of investment
management services to the Manager, but other professional service providers
support the Company by providing administration, custodial, banking, depositary
and audit services. The Board considers the Company's key stakeholders to be
the existing and potential Shareholders, the external appointed Manager
(Fidelity), and other third party professional service providers. The Board
considers that the interest of these stakeholders are aligned with the
Company's objective of delivering long term capital growth to investors, in
line with the Company's stated investment objective and strategy, while
providing the highest standards of legal, regulatory and commercial conduct.
The Board, with the Portfolio Manager, sets the overall investment strategy and
reviews this at an annual strategy day which is separate from the regular cycle
of board meetings. In order to ensure good governance of the Company, the Board
has set various limits on the investments in the portfolio, whether in the
maximum size of individual holdings, the use of derivatives, the level of
gearing and others. These limits and guidelines are regularly monitored and
reviewed and are set out in the Annual Report.
The Board places great importance on communication with Shareholders. The
Annual General Meeting provides the key forum for the Board and Portfolio
Manager to present to the Shareholders on the Company's performance and future
plans and, in normal circumstances, the Board encourages all Shareholders to
attend, and raise questions and concerns. The Chairman and other Board members
are available to meet Shareholders as appropriate. Shareholders may also
communicate with Board members at any time by writing to them at the Company's
registered office at FIL Investments International, Beech Gate, Millfield Lane,
Tadworth, Surrey KT20 6RP or via the Company Secretary in writing at the same
address or by email at investmenttrusts@fil.com. The Portfolio Manager meets
with major Shareholders, potential investors, stock market analysts,
journalists and other commentators throughout the year. These communication
opportunities help inform the Board in considering how best to promote the
success of the company over the long term.
The Board seeks to engage with the Manager and other service providers and
advisers in a constructive and collaborative way, promoting a culture of strong
governance, while encouraging open and constructive debate, in order to ensure
appropriate and regular challenge and evaluation. This aims to enhance service
levels and strengthen relationships with service providers, with a view to
ensuring Shareholders' interests are best served, by maintaining the highest
standards of commercial conduct while keeping cost levels competitive.
Whilst the Company's direct operations are limited, the Board recognises the
importance of considering the impact of the Company's investment strategy on
the wider community and environment. The Board believes that a proper
consideration of Environmental, Social and Governance ("ESG") issues aligns
with the objective to deliver long term capital growth, and the Board's review
of the Manager includes an assessment of their ESG approach, which is set out
in detail in the Annual Report.
In addition to ensuring that the Company's investment objective was being
pursued, key decisions and actions taken by the Directors during the reporting
year, and up to the date of this report, have included:
- the decision to pay an interim dividend of 2.17 pence per share and a
final dividend of 4.50 pence per share (a total of 6.67 pence per share), to
maintain the 12 year track record of increasing dividends, while retaining
funds for reinvestment, consistent with the objective of long term capital
growth;
- the raising of over £64.8 million from share issuances, at a premium to
net asset value, in order to satisfy investor demand over the year, also
serving the interests of current Shareholders by reducing costs per share and
helping to further improve liquidity;
- the decision to hold a General Meeting on 15 September 2021 in order to
renew the Shareholder authority to issue new shares on a non pre-emptive basis.
The reason for this was because the rate of issuance of shares from the
authority granted at the AGM on 14 December 2020 was such that were it to
continue, the Company was likely to run out of shares granted for issue under
that authority. As a result of the resolutions approved at the General Meeting
on 15 September 2021, the Company was given the authority to issue a further
31,167,880 shares;
- authorising the repurchase of 1,025,473 ordinary shares when the
Company's discount widened into double digits during September and early
October 2020, in line with the Board's long term intention that the share price
should trade at a level close to the underlying net asset value of the shares,
so that Shareholders are seeing the full benefit of the Company's investments;
and
- agreeing a reduction in the management fee with effect from 1 January
2021, thus providing cost savings to the Company and reducing the Ongoing
Charges to help the Company remain competitive. Details of the new fee
arrangement can be found in the Chairman's Statement above.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and 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 Generally Accepted Accounting Practice,
including FRS 102: The Financial Reporting Standard applicable in the UK and
Republic of Ireland. The Financial Statements are required by law to give a
true and fair view of the state of affairs of the Company and of the profit or
loss for the 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 ensuring that adequate accounting records are
kept which disclose with reasonable accuracy at any time the financial position
of the Company and to enable them to ensure that the Financial Statements
comply with the Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
Under applicable law and regulations the Directors are also responsible for
preparing a Strategic Report, a Directors' Report, a Corporate Governance
Statement and a Directors' Remuneration Report which comply with that law and
those regulations.
The Directors have delegated the responsibility for the maintenance and
integrity of the corporate and financial information included on the Company's
pages of the Manager's website at www.fidelity.co.uk/specialvalues to the
Manager. Visitors to the website need to be aware that legislation in the UK
governing the preparation and dissemination of the Financial Statements may
differ from legislation in their jurisdictions.
The Directors confirm that to the best of their knowledge:
· The Financial Statements, prepared in accordance with FRS 102, give a
true and fair view of the assets, liabilities, financial position and profit of
the Company; and
· The Annual Report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties it faces.
The Directors consider that the Annual Report and Financial Statements, taken
as a whole, are fair, balanced and understandable and provide the information
necessary for Shareholders to assess the Company's performance, business model
and strategy.
Approved by the Board on 5 November 2021 and signed on its behalf by:
ANDY IRVINE
Chairman
INCOME STATEMENT for the year ended 31 August 2021
Year ended 31 August 2021 Year ended 31 August 2020
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on 11 - 252,899 252,899 - (131,085) (131,085)
investments
Gains/(losses) on long 12 - 55,323 55,323 - (11,820) (11,820)
CFDs
Losses on short CFDs and 12 - - - - (1,905) (1,905)
futures
Investment and derivative 3 27,890 - 27,890 20,282 - 20,282
income
Other interest 3 257 - 257 789 - 789
Derivative expenses 4 - - - (75) - (75)
Investment management 5 (5,098) - (5,098) (5,627) - (5,627)
fees
Other expenses 6 (669) - (669) (718) - (718)
Foreign exchange losses - (720) (720) - (2,641) (2,641)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on 22,380 307,502 329,882 14,651 (147,451) (132,800)
ordinary activities
before finance costs and
taxation
Finance costs 7 (378) - (378) (530) - (530)
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on 22,002 307,502 329,504 14,121 (147,451) (133,330)
ordinary activities
before taxation
Taxation on return/(loss) 8 (406) - (406) (360) - (360)
on ordinary activities
--------------- --------------- --------------- --------------- --------------- ---------------
Net return/(loss) on 21,596 307,502 329,098 13,761 (147,451) (133,690)
ordinary activities after
taxation for the year
======== ======== ======== ======== ======== ========
Return/(loss) per 9 7.22p 102.74p 109.96p 4.81p (51.59p) (46.78p)
ordinary share
======== ======== ======== ======== ======== ========
The Company does not have any other comprehensive income. Accordingly, the net
return/(loss) on ordinary activities after taxation for the year is also the
total comprehensive income for the year and no separate Statement of
Comprehensive Income has been presented.
The total column of this statement represents the Income Statement of the
Company. The revenue and capital columns are supplementary and presented for
information purposes as recommended by the Statement of Recommended Practice
issued by the AIC.
No operations were acquired or discontinued in the year and all items in the
above statement derive from continuing operations.
The Notes below form an integral part of these Financial Statements.
BALANCE SHEET AS AT 31 AUGUST 2021 COMPANY NUMBER 2972628
2021 2020
Notes £'000 £'000
Fixed assets
Investments 11 886,710 563,763
--------------- ---------------
Current assets
Derivative instruments 12 1,968 7,619
Debtors 13 6,674 3,921
Amounts held at futures clearing houses and brokers 40 860
Cash and cash equivalents 63,780 9,802
--------------- ---------------
72,462 22,202
======== ========
Current liabilities
Derivative instruments 12 (3,161) (1,946)
Other creditors 14 (1,921) (4,514)
--------------- ---------------
(5,082) (6,460)
--------------- ---------------
Net current assets 67,380 15,742
--------------- ---------------
Net assets 954,090 579,505
======== ========
Capital and reserves
Share capital 15 15,651 14,501
Share premium account 16 205,466 144,306
Capital redemption reserve 16 3,256 3,256
Other non-distributable reserve 16 5,152 5,152
Capital reserve 16 702,637 394,572
Revenue reserve 16 21,928 17,718
--------------- ---------------
Total Shareholders' funds 954,090 579,505
======== ========
Net asset value per ordinary share 17 304.79p 199.81p
======== ========
The Financial Statements above and below were approved by the Board of
Directors on 5 November 2021 and were signed on its behalf by:
ANDY IRVINE
Chairman
The Notes below form an integral part of these Financial Statements.
Statement of Changes in Equity for the year ended 31 August 2021
Share Capital Other Total
Share premium redemption non-distributable Capital Revenue Shareholders'
capital account reserve reserve reserve reserve funds
Notes £'000 £'000 £'000 £'000 £'000 £'000 £'000
Total Shareholders' funds at 31 14,501 144,306 3,256 5,152 394,572 17,718 579,505
August 2020
New ordinary shares issued 15 1,150 61,259 - - - - 62,409
Costs associated with the issue - (123) - - - - (123)
of new ordinary shares
Issue of ordinary shares from 15 - 24 - - 2,383 - 2,407
Treasury
Repurchase of ordinary shares 15 - - - - (1,820) - (1,820)
into Treasury
Net return on ordinary - - - - 307,502 21,596 329,098
activities after taxation for
the year
Dividends paid to Shareholders 10 - - - - - (17,386) (17,386)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total Shareholders' funds at 31 15,651 205,466 3,256 5,152 702,637 21,928 954,090
August 2021
======== ======== ======== ======== ======== ======== ========
Total Shareholders' funds at 31 13,808 109,897 3,256 5,152 542,023 24,532 698,668
August 2019
New ordinary shares issued 15 693 34,409 - - - - 35,102
Net (loss)/return on ordinary - - - - (147,451) 13,761 (133,690)
activities after taxation for
the year
Dividends paid to Shareholders 10 - - - - - (20,575) (20,575)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
Total Shareholders' funds at 31 14,501 144,306 3,256 5,152 394,572 17,718 579,505
August 2020
======== ======== ======== ======== ======== ======== ========
The Notes below form an integral part of these Financial Statements.
Cash Flow Statement for the year ended 31 August 2021
Year ended Year ended
31.08.21 31.08.20
Notes £'000 £'000
Operating activities
Investment income received 17,825 18,960
Net derivative income 7,930 4,236
Interest received 24 695
Underwriting commission received 16 -
Investment management fee paid (5,059) (5,714)
Directors' fees paid (163) (179)
Other cash payments (567) (512)
--------------- ---------------
Net cash inflow from operating activities before finance 21 20,006 17,486
costs and taxation
======== ========
Finance costs paid (378) (530)
Overseas taxation suffered (348) (625)
--------------- ---------------
Net cash inflow from operating activities 19,280 16,331
======== ========
Investing activities
Purchases of investments (378,229) (335,753)
Sales of investments 305,611 284,973
Receipts on long CFDs 91,127 9,781
Payments on long CFDs (28,938) (41,630)
Payments on short CFDs and futures - (2,400)
Movement on amounts held at futures clearing houses and 820 17,142
brokers
--------------- ---------------
Net cash outflow from investing activities (9,609) (67,887)
======== ========
Net cash inflow/(outflow) before financing activities 9,671 (51,556)
======== ========
Financing activities
Dividends paid 10 (17,386) (20,575)
Net proceeds from issue of shares 64,356 35,486
Costs associated with the issue of new ordinary shares (123) -
Repurchase of ordinary shares (1,820) -
--------------- ---------------
Net cash inflow from financing activities 45,027 14,911
======== ========
Net increase/(decrease) in cash and cash equivalents 54,698 (36,645)
Cash and cash equivalents at the beginning of the year 9,802 49,088
Effect of movement in foreign exchange (720) (2,641)
Cash and cash equivalents at the end of the year 63,780 9,802
======== ========
Represented by:
Cash at bank 2,000 1,860
Amount held in Fidelity Institutional Liquidity Fund 61,780 7,942
--------------- ---------------
63,780 9,802
======== ========
The Notes below form an integral part of these Financial Statements.
Notes to the Financial Statements
1 PRINCIPAL ACTIVITY
Fidelity Special Values PLC is an Investment Company incorporated in England
and Wales with a premium listing on the London Stock Exchange. The Company's
registration number is 2972628, and its registered office is Beech Gate,
Millfield Lane, Lower Kingswood, Tadworth, Surrey KT20 6RP. The Company has
been approved by HM Revenue & Customs as an Investment Trust under Section 1158
of the Corporation Tax Act 2010 and intends to conduct its affairs so as to
continue to be approved.
2 ACCOUNTING POLICIES
The Company has prepared its Financial Statements in accordance with UK
Generally Accepted Accounting Practice ("UK GAAP"), including FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of Ireland",
issued by the Financial Reporting Council ("FRC"). The Financial Statements
have also been prepared in accordance with the Statement of Recommended
Practice: Financial Statements of Investment Trust Companies and Venture
Capital Trusts ("SORP") issued by the Association of Investment Companies
("AIC") in October 2019.
a) Basis of accounting -The Financial Statements have been prepared on a going
concern basis and under the historical cost convention, except for the
measurement at fair value of investments and derivative instruments. The
Directors have a reasonable expectation that the Company has adequate resources
to continue in operational existence up to 30 November 2022 which is at least
twelve months from the date of approval of these Financial Statements. In
making their assessment the Directors have reviewed income and expense
projections, reviewed the liquidity of the investment portfolio and considered
the Company's ability to meet liabilities as they fall due. This conclusion
also takes into account the Director's assessment of the continuing risks
arising from COVID-19.
The Company's Going Concern Statement above takes account of all events and
conditions up to 30 November 2022 which is at least twelve months from the date
of approval of these Financial Statements.
b) Significant accounting estimates and judgements - The Directors make
judgements and estimates concerning the future. Estimates and judgements are
continually evaluated and are based on historical experience and other factors,
such as expectations of future events, and are believed to be reasonable under
the circumstances. Actual results may differ from these estimates. The
judgements required in order to determine the appropriate valuation methodology
of level 3 financial instruments have a risk of causing an adjustment to the
carrying amounts of assets. These judgements include making assessments of the
possible valuations in the event of a listing or other marketability related
risks.
c) Segmental reporting - The Company is engaged in a single segment business
and, therefore, no segmental reporting is provided.
d) Presentation of the Income Statement - In order to reflect better the
activities of an investment company and in accordance with guidance issued by
the AIC, supplementary information which analyses the Income Statement between
items of a revenue and capital nature has been prepared alongside the Income
Statement. The net revenue return after taxation for the year is the measure
the Directors believe appropriate in assessing the Company's compliance with
certain requirements set out in Section 1159 of the Corporation Tax Act 2010.
e) Income - Income from equity investments is accounted for on the date on
which the right to receive the payment is established, normally the ex-dividend
date. Overseas dividends are accounted for gross of any tax deducted at source.
Amounts are credited to the revenue column of the Income Statement. Where the
Company has elected to receive its dividends in the form of additional shares
rather than cash, the amount of the cash dividend foregone is recognised in the
revenue column of the Income Statement. Any excess in the value of the shares
received over the amount of the cash dividend is recognised in the capital
column of the Income Statement. Special dividends are treated as a revenue
receipt or a capital receipt depending on the facts and circumstances of each
particular case. Debt security interest is accounted for on an accruals basis
and is credited to the revenue column of the Income Statement. Underwriting
commission is recognised when the issue takes place and is credited to the
revenue column of the Income Statement.
Derivative instrument income received from dividends on long contracts for
difference ("CFDs") are accounted for on the date on which the right to receive
the payment is established, normally the ex-dividend date. The amount net of
tax is credited to the revenue column of the Income Statement.
Interest received on CFDs, bank deposits, collateral and money market funds are
accounted for on an accruals basis and credited to the revenue column of the
Income Statement. Interest received on CFDs represent the finance costs
calculated by reference to the notional value of the CFDs.
f) Derivative expenses - Derivative expenses comprises interest paid on short
CFDs, which is accounted for on an accruals basis, and dividends paid on short
CFDs, which are accounted for on the date on which the obligation to incur the
cost is established, normally the ex-dividend date. Derivative expenses are
charged in full to the revenue column of the Income Statement.
g) Investment management fees and other expenses - Investment management fees
and other expenses are accounted for on an accruals basis and are charged as
follows:
· Investment management fees are allocated in full to revenue; and
· All other expenses are allocated in full to revenue with the exception
of those directly attributable to share issues or other capital events.
h) Functional currency and foreign exchange - The functional and reporting
currency of the Company is UK sterling, which is the currency of the primary
economic environment in which the Company operates. Transactions denominated in
foreign currencies are reported in UK sterling at the rate of exchange ruling
at the date of the transaction. Assets and liabilities in foreign currencies
are translated at the rates of exchange ruling at the Balance Sheet date.
Foreign exchange gains and losses arising on translation are recognised in the
Income Statement as a revenue or a capital item depending on the nature of the
underlying item to which they relate.
i) Finance costs - Finance costs comprises interest on bank overdrafts and
collateral, and finance costs paid on CFDs, which are accounted for on an
accruals basis. Finance costs are charged in full to the revenue column of the
Income Statement.
j) Taxation - The taxation charge represents the sum of current taxation and
deferred taxation.
Current taxation is taxation suffered at source on overseas income less amounts
recoverable under taxation treaties. Taxation is charged or credited to the
revenue column of the Income Statement, except where it relates to items of a
capital nature, in which case it is charged or credited to the capital column
of the Income Statement. Where expenses are allocated between revenue and
capital any tax relief in respect of the expenses is allocated between revenue
and capital returns on the marginal basis using the Company's effective rate of
corporation tax for the accounting period. The Company is an approved
Investment Trust under Section 1158 of the Corporation Tax Act 2010 and is not
liable for UK taxation on capital gains.
Deferred taxation is the taxation expected to be payable or recoverable on
timing differences between the treatment of certain items for accounting
purposes and their treatment for the purposes of computing taxable profits.
Deferred taxation is based on tax rates that have been enacted or substantively
enacted when the taxation is expected to be payable or recoverable. Deferred
tax assets are only recognised if it is considered more likely than not that
there will be sufficient future taxable profits to utilise them.
k) Dividend paid - Dividends payable to equity Shareholders are recognised when
the Company's obligation to make payment is established.
l) Investments - The Company's business is investing in financial instruments
with a view to profiting from their total return in the form of income and
capital growth. This portfolio of investments is managed and its performance
evaluated on a fair value basis, in accordance with a documented investment
strategy, and information about the portfolio is provided on that basis to the
Company's Board of Directors. Investments are measured at fair value with
changes in fair value recognised in profit or loss, in accordance with the
provisions of both Section 11 and Section 12 of FRS 102. The fair value of
investments is initially taken to be their cost and is subsequently measured as
follows:
· Listed investments are valued at bid prices, or last market prices,
depending on the convention of the exchange on which they are listed; and
· Unlisted investments which are not quoted, or are not frequently traded,
are stated at the Directors' best estimate of fair value. The Manager's Fair
Value Committee ('FVC'), which is independent of the Portfolio Manager's team,
meets quarterly to determine the fair value of unlisted investments.
The FVC provide a recommendation of fair values to the Board using market-based
approaches such as multiples, industry valuation benchmarks and available
market prices. Consideration is given to the cost of the investment, recent
arm's length transactions in the same or similar investments and the financial
performance of the investment since purchase. This pricing methodology is
subject to a detailed review and appropriate challenge by the Directors.
In accordance with the AIC SORP, the Company includes transaction costs,
incidental to the purchase or sale of investments, within gains/(losses) on
investments in the capital column of the Income Statement and has disclosed
these costs in Note 11 below.
m) Derivative instruments - When appropriate, permitted transactions in
derivative instruments are used. Derivative transactions into which the Company
may enter include long and short CFDs, futures, options and warrants.
Derivatives are classified as other financial instruments and are initially
accounted for and measured at fair value on the date the derivative contract is
entered into and subsequently measured at fair value as follows:
· Long CFDs - the difference between the strike price and the value of the
underlying shares in the contract;
· Futures - the difference between the contract price and the quoted trade
price; and
· Options - valued based on similar instruments or the quoted trade price
for the contract.
Where transactions are used to protect or enhance income, if the circumstances
support this, the income and expenses derived are included in net income in the
revenue column of the Income Statement. Where such transactions are used to
protect or enhance capital, if the circumstances support this, the income and
expenses derived are included: for long CFDs, as gains or losses on long CFDs,
and for short CFDs, futures and options as gains or losses on short CFDs,
futures and options in the capital column of the Income Statement. Any
positions on such transactions open at the year end are reflected on the
Balance Sheet at their fair value within current assets or current liabilities.
n) Debtors - Debtors include securities sold for future settlement, accrued
income, taxation recoverable, amounts receivable for issue of shares and other
debtors and prepayments incurred in the ordinary course of business. If
collection is expected in one year or less (or in the normal operating cycle of
the business, if longer) they are classified as current assets. If not, they
are presented as non- current assets. They are recognised initially at fair
value and, where applicable, subsequently measured at amortised cost using the
effective interest rate method.
o) Amounts held at futures clearing houses and brokers - These are amounts held
in segregated accounts as collateral on behalf of brokers and are carried at
amortised cost.
p) Cash and cash equivalents - Cash and cash equivalents may comprise cash at
bank and money market funds which are short term, highly liquid and are readily
convertible to a known amount of cash. These are subject to an insignificant
risk of changes in value.
q) Other creditors - Other creditors include securities purchased for future
settlement, investment management fees and other creditors and expenses accrued
in the ordinary course of business. If payment is due within one year or less
(or in the normal operating cycle of the business, if longer) they are
classified as current liabilities. If not, they are presented as non-current
liabilities. They are recognised initially at fair value and, where applicable,
subsequently measured at amortised cost using the effective interest rate
method.
r) Capital reserve - The following are accounted for in the capital reserve:
· Gains and losses on the disposal of investments and derivative
instruments;
· Changes in the fair value of investments and derivative instruments held
at the year end;
· Foreign exchange gains and losses of a capital nature;
· Dividends receivable which are capital in nature; and
· Costs of repurchasing or issuing ordinary shares.
Technical guidance issued by the Institute of Chartered Accountants in England
and Wales in TECH 02/17BL, guidance on the determination of realised profits
and losses in the context of distributions under the Companies Act 2006, states
that changes in the fair value of investments which are readily convertible to
cash, without accepting adverse terms at the Balance Sheet date, can be treated
as realised. Capital reserves realised and unrealised are shown in aggregate as
capital reserve in the Statement of Changes in Equity and the Balance Sheet. At
the Balance Sheet date the portfolio of the Company consisted of investments
listed on a recognised stock exchange and derivative instruments contracted
with counterparties having an adequate credit rating, and the portfolio was
considered to be readily convertible to cash, with the exception of the level 3
investments which had unrealised investment holding gains of £181,000 (2020:
gains of £40,000).
3 INCOME
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Investment income
UK dividends 13,392 11,678
Overseas dividends 6,114 3,615
Underwriting commission 16 -
Overseas scrip dividends - 274
Debt security interest - 138
--------------- ---------------
19,522 15,705
======== ========
Derivative income
Dividends received on long CFDs 8,368 4,577
--------------- ---------------
Investment and derivative income 27,890 20,282
======== ========
Other interest
Interest received on long CFDs* 233 94
Interest received on bank deposits, collateral and money market funds 24 695
257 789
--------------- ---------------
Total income 28,147 21,071
======== ========
Special dividends of £1,730,000 (2020: £276,000) have been recognised in
capital.
* Due to negative interest rates during the reporting year, the Company has
received interest on some of its long CFD positions.
4 DERIVATIVE EXPENSES
Year Year
ended ended
31.08.21 31.08.20
£'000 £'000
Dividends paid on short CFDs - 71
Interest paid on short CFDs - 4
- 75
======== ========
5 INVESTMENT MANAGEMENT FEES
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Portfolio management services 5,065 5,527
Non-portfolio management services* 33 100
--------------- ---------------
Investment management fees 5,098 5,627
======== ========
* Includes company secretarial, fund accounting, taxation, promotional and
corporate advisory services.
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management to FIL Investments
International ("FII"). Both companies are Fidelity group companies.
From 1 January 2021, FII charges portfolio management fees at an annual rate of
0.60% of net assets and the fee for non-portfolio management services of £
100,000 per annum is no longer charged. Prior to this date, the portfolio
management fees were charged on a tiered fee basis of 0.85% on the first £700
million of nets assets and 0.75% of net assets in excess of £700 million.
6 Other Expenses
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
AIC fees 21 22
Custody fees 32 20
Depositary fees 56 54
Directors' expenses 2 21
Directors' fees1 162 179
Legal and professional fees 89 48
Marketing expenses 106 175
Printing and publication expenses 94 88
Registrars' fees 57 52
Fees payable to the Company's Independent Auditor for the audit of the 29 34
Financial Statements2
Sundry other expenses 21 25
--------------- ---------------
Other expenses 669 718
======== ========
1 Details of the breakdown of Directors' fees are disclosed in the Directors'
Remuneration Report in the Annual Report.
2 The VAT payable on audit fees is included in sundry other expenses.
7 Finance Costs
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Interest paid on long CFDs 370 525
Interest on bank overdrafts and collateral 8 5
--------------- ---------------
378 530
======== ========
8 Taxation on Return/(Loss) on Ordinary Activities
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
a) Analysis of the taxation charge for the year
Overseas taxation 406 360
--------------- ---------------
Taxation charge for the year (see Note 8b) 406 360
======== ========
b) Factors affecting the taxation charge for the year
The taxation charge for the year is lower than the standard rate of UK
corporation tax for an investment trust company of 19% (2020: 19%). A
reconciliation of the standard rate of UK corporation tax to the taxation
charge for the year is shown below:
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Net return/(loss) on ordinary activities before taxation 329,504 (133,330)
--------------- ---------------
Net return/(loss) on ordinary activities before taxation multiplied by 62,606 (25,333)
the standard rate of UK corporation tax of 19% (2020: 19%)
Effects of:
Capital (gains)/losses not taxable* (58,425) 28,016
Income not taxable (3,657) (2,958)
Excess management expenses (524) 239
Adjustment to brought forward excess management expenses - 36
Overseas taxation 406 360
--------------- ---------------
Total taxation charge for the year (see Note 8a) 406 360
======== ========
* The Company is exempt from UK taxation on capital gains as it meets the HM
Revenue & Customs criteria for an investment company set out in Section 1159 of
the Corporation Tax Act 2010.
c) Deferred taxation
A deferred tax asset of £16,893,000 (2020: £13,362,000), in respect of excess
expenses of £67,571,000 (2020: £70,327,000) available to be set off against
future taxable profits has not been recognised as it is unlikely that there
will be sufficient future taxable profits to utilise these expenses.
In the Spring Budget the Government announced that from 1 April 2023 the
corporation tax rate will increase to 25%. This rate has been substantively
enacted at the balance sheet date and has therefore been applied to calculate
the unrecognised deferred tax asset for the current year (2020: 19%).
9 RETURN/(LOSS) PER ORDINARY SHARE
Year ended Year ended
31.08.21 31.08.20
Revenue return per ordinary share 7.22p 4.81p
Capital return/(loss) per ordinary share 102.74p (51.59p)
--------------- ---------------
Total return/(loss) per ordinary share 109.96p (46.78p)
======== ========
The return/(loss) per ordinary share is based on the net return/(loss) on
ordinary activities after taxation for the year divided by the weighted average
number of ordinary shares held outside Treasury during the year, as shown
below:
£'000 £'000
Net revenue return on ordinary activities after taxation 21,596 13,761
Net capital return/(loss) on ordinary activities after taxation 307,502 (147,451)
--------------- ---------------
Net total return/(loss) on ordinary activities after taxation 329,098 (133,690)
======== ========
Number Number
Weighted average number of ordinary shares held outside Treasury 299,297,599 285,790,149
======== ========
10 DIVIDS PAID TO SHAREHOLDERS
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Dividends paid
Interim dividend of 2.17 pence per ordinary share paid for the year 6,603 -
ended 31 August 2021
Final dividend of 3.70 pence per ordinary share paid for the year 10,783 -
ended 31 August 2020
Interim dividend of 2.10 pence per ordinary share paid for the year - 6,091
ended 31 August 2020
Final dividend of 3.65 pence per ordinary share paid for the year - 10,265
ended 31 August 2019
Special dividend of 1.50 pence per ordinary share paid for the year - 4,219
ended 31 August 2019
--------------- ---------------
17,386 20,575
======== ========
Dividends proposed
Final dividend proposed of 4.50 pence per ordinary share for the year 14,109 -
ended 31 August 2021
Final dividend proposed of 3.70 pence per ordinary share for the year - 10,693
ended 31 August 2020
--------------- ---------------
14,109 10,693
======== ========
The Directors have proposed the payment of a final dividend of 4.50 pence per
ordinary share for the year ended 31 August 2021 which is subject to approval
by Shareholders at the Annual General Meeting on 14 December 2021 and has not
been included as a liability in these Financial Statements. The dividend will
be paid on 12 January 2022 to Shareholders on the register at the close of
business on 3 December 2021 (ex-dividend date 2 December 2021).
11 INVESTMENTS
2021 2020
£'000 £'000
Listed investments 886,438 563,479
Unlisted investments 272 284
------------ ------------
Total investments at fair value 886,710 563,763
======== ========
Opening book cost 635,740 600,132
Opening investment holding (losses)/gains (71,977) 35,407
------------ ------------
Opening fair value 563,763 635,539
------------ ------------
Movements in the year
Purchases at cost 375,614 339,800
Sales - proceeds (305,566) (280,491)
Gains/(losses) on investments 252,899 (131,085)
------------ ------------
Closing fair value 886,710 563,763
------------ ------------
Closing book cost 726,247 635,740
Closing investment holding gains/(losses) 160,463 (71,977)
------------ ------------
Closing fair value 886,710 563,763
======== ========
The Company received £305,566,000 (2020: £280,491,000) from investments sold in
the year. The book cost of these investments when they were purchased was £
285,107,000 (2020: £304,192,000). These investments have been revalued over
time and until they were sold any unrealised gains/losses were included in the
fair value of the investments.
Investment transaction costs
Transaction costs incurred in the acquisition and disposal of investments,
which are included in the gains/(losses) on investments above, were as follows:
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Purchases transaction costs 1,570 1,481
Sales transaction costs 157 153
--------------- ---------------
1,727 1,634
======== ========
The portfolio turnover rate for the year was 45.9% (2020: 52.1%).
12 DERIVATIVE INSTRUMENTS
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Gains/(losses) on long CFDs
Gains/(losses) on long CFD positions closed 62,189 (31,849)
Movement in investment holding (losses)/gains (6,866) 20,029
--------------- ---------------
55,323 (11,820)
======== ========
Losses on short CFDs and futures
Losses on short CFDs positions closed - (305)
Losses on futures contracts closed - (2,095)
Movement in investment holding gains on futures - 495
--------------- ---------------
- (1,905)
======== ========
2021 2020
Fair Fair
value value
£'000 £'000
Derivative instruments recognised on the Balance Sheet
Derivative instrument assets 1,968 7,619
Derivative instrument liabilities (3,161) (1,946)
(1,193) 5,673
======== ========
2021 2020
Asset Asset
Fair exposure Fair exposure
value £'000 value £'000
£'000 £'000
At the year end the Company held the following
derivative
instruments
Long CFDs (1,193) 206,266 5,673 96,890
======== ======== ======== ========
13 DEBTORS
2021 2020
£'000 £'000
Securities sold for future settlement - 41
Accrued income 5,430 3,078
Overseas taxation recoverable 686 744
UK income tax recoverable 37 37
Amounts receivable for issue of shares 460 -
Other debtors and prepayments 61 21
--------------- ---------------
6,674 3,921
======== ========
14 OTHER CREDITORS
2021 2020
£'000 £'000
Securities purchased for future settlement 1,304 3,919
Creditors and accruals 617 595
--------------- ---------------
1,921 4,514
======== ========
15 SHARE CAPITAL
Number of 2021 Number of 2020
shares £'000 shares £'000
Issued, allotted and fully paid ordinary shares of 5
pence each
Held outside Treasury
Beginning of the year 290,029,480 14,501 276,169,480 13,808
Ordinary shares repurchased into Treasury (1,025,473) (51) - -
Ordinary shares issued out of Treasury 1,025,473 51 - -
New ordinary shares issued 22,999,440 1,150 13,860,000 693
--------------- --------------- --------------- ---------------
End of the year 313,028,920 15,651 290,029,480 14,501
======== ======== ======== ========
Held in Treasury*
Beginning of the year - - - -
Ordinary shares repurchased into Treasury 1,025,473 51 - -
Ordinary shares issued out of Treasury (1,025,473) (51) - -
End of the year - - - -
--------------- --------------- --------------- ---------------
Total share capital 313,028,920 15,651 290,029,480 14,501
======== ======== ======== ========
* Ordinary shares held in Treasury carry no rights to vote, to receive a
dividend or to participate in a winding up of the Company.
During the year, 24,024,913 ordinary shares (2020: 13,860,000 shares) were
issued. The premium received in the year on the issue of new ordinary shares of
£61,259,000 (2020: £34,409,000) and on the issue of ordinary shares out of
Treasury of £24,000 (2020: £nil) was credited to the share premium account.
From the issue of ordinary shares out of Treasury, £2,383,000 (2020: £nil) was
credited to the capital reserve.
1,025,473 ordinary shares (2020: nil) were repurchased and held in Treasury.
The cost of repurchasing these shares was £1,820,000 (2020: £nil). This amount
was charged to the capital reserve.
16 CAPITAL AND RESERVES
Share Capital Other Total
Share premium redemption non-distributable Capital Revenue Shareholders'
capital account reserve reserve reserve reserve funds
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 September 2020 14,501 144,306 3,256 5,152 394,572 17,718 579,505
Gains on investments (see - - - - 252,899 - 252,899
Note 11)
Gains on long CFDs (see - - - - 55,323 - 55,323
Note 12)
Foreign exchange losses - - - - (720) - (720)
New ordinary shares issued 1,150 61,259 - - - - 62,409
Costs associated with the - (123) - - - - (123)
issue of new ordinary
shares
Issue of ordinary shares - 24 - - 2,383 - 2,407
from Treasury
Repurchase of ordinary - - - - (1,820) - (1,820)
shares into Treasury
Revenue return on ordinary - - - - - 21,596 21,596
activities after taxation
for the year
Dividends paid to - - - - - (17,386) (17,386)
Shareholders (see Note 10)
--------------- --------------- --------------- --------------- --------------- --------------- ---------------
At 31 August 2021 15,651 205,466 3,256 5,152 702,637 21,928 954,090
========= ========= ========= ========= ========= ========= =========
The capital reserve balance at 31 August 2021 includes investment holding gains
of £160,463,000 (2020: losses of £71,977,000) as detailed in Note 11 above. See
Note 2 (r) above for further details. The revenue and capital reserves are
distributable by way of dividend.
17 NET ASSET VALUE PER ORDINARY SHARE
The calculation of the net asset value per ordinary share is based on the
following:
2021 2020
Total Shareholders' funds £ £
954,090,000 579,505,000
Ordinary shares held outside of Treasury at year end 313,028,920 290,029,480
Net asset value per ordinary share 304.79p 199.81p
========= =========
It is the Company's policy that shares held in Treasury will only be reissued
at net asset value per ordinary share or at a premium to net asset value per
ordinary share and, therefore, shares held in Treasury have no dilutive effect.
18 FINANCIAL INSTRUMENTS
Management of risk
The Company's investing activities in pursuit of its investment objective
involve certain inherent risks. The Board confirms that there is an ongoing
process for identifying, evaluating and managing the risks faced by the
Company. The Board with the assistance of the Manager, has developed a risk
matrix which, as part of the internal control process, identifies the risks
that the Company faces. Principal risks identified are market, economic and
political, cybercrime, environmental, social and governance ("ESG"),
regulatory, key person, discount control, competition, investment management,
pandemic and operational risks. Risks are identified and graded in this
process, together with steps taken in mitigation, and are updated and reviewed
on an ongoing basis. These risks and how they are identified, evaluated and
managed are shown above.
This note refers to the identification, measurement and management of risks
potentially affecting the value of financial instruments. The Company's
financial instruments may comprise:
· Equity shares and bonds held in accordance with the Company's investment
objective and policies;
· Derivative instruments which comprise CFDs, futures and options on
listed stocks and equity indices; and
· Cash, liquid resources and short term debtors and creditors that arise
from its operations.
The risks identified arising from the Company's financial instruments are
market price risk (which comprises interest rate risk, foreign currency risk
and other price risk), liquidity risk, counterparty risk, credit risk and
derivative instrument risk. The Board reviews and agrees policies for managing
each of these risks, which are summarised below. These policies are consistent
with those followed last year.
MARKET PRICE RISK
Interest rate risk
The Company finances its operations through its share capital and reserves. In
addition, the Company has gearing through the use of derivative instruments.
The Board imposes limits to ensure gearing levels are appropriate. The Company
is exposed to a financial risk arising as a result of any increases in interest
rates associated with the funding of the derivative instruments.
INTEREST RATE RISK EXPOSURE
The values of the Company's financial instruments that are exposed to movements
in interest rates are shown below:
2021 2020
£'000 £'000
Exposure to financial instruments that bear interest
Long CFDs - exposure less fair value 207,459 91,217
--------------- ---------------
Exposure to financial instruments that earn interest
Amounts held at futures clearing houses and brokers 40 860
Cash and cash equivalents 63,780 9,802
--------------- ---------------
63,820 10,662
======== ========
Net exposure to financial instruments that bear interest 143,639 80,555
======== ========
Due to negative interest rates during the reporting year, the Company has
received interest on some of its long CFD positions.
FOREIGN CURRENCY RISK
The Company does not carry out currency speculation. The Company's net return/
(loss) on ordinary activities after taxation for the year and its net assets
can be affected by foreign exchange movements because the Company has income
and assets which are denominated in currencies other than the Company's
functional currency which is UK sterling. The Company can also be subject to
short term exposure to exchange rate movements, for example, between the date
when an investment is purchased or sold and the date when settlement of the
transaction occurs.
Three principal areas have been identified where foreign currency risk could
impact the Company:
· Movements in currency exchange rates affecting the value of investments
and derivative instruments;
· Movements in currency exchange rates affecting short term timing
differences; and
· Movements in currency exchange rates affecting income received.
The portfolio management team monitor foreign currency risk but it is not the
Company's policy to hedge against currency risk.
Currency exposure of financial assets
The currency exposure profile of the Company's financial assets is shown below:
2021
Long
Investments exposure to Cash
held at fair derivative and cash
value instruments1 Debtors2 equivalents3 Total
Currency £'000 £'000 £'000 £'000 £'000
Euro 66,994 56,536 76 2 123,608
US dollar 13,088 - 77 13,036 26,201
Swiss franc 21,802 - 275 - 22,077
Swedish krona 14,353 - - - 14,353
Australian dollar 13,967 - - - 13,967
Norwegian krone 4,753 - - - 4,753
South African rand 3,351 84 - - 3,435
Danish krone - - 71 - 71
UK sterling 748,402 149,646 6,215 50,742 955,005
--------------- --------------- --------------- --------------- ---------------
886,710 206,266 6,714 63,780 1,163,470
======== ======== ======== ======== ========
1 The exposure to the market of long CFDs.
2 Debtors include amounts held at futures clearing houses and brokers.
3 Cash and cash equivalents are made up of £2,000,000 cash at bank and £
61,780,000 held in Fidelity Institutional Liquidity Fund.
2020
Investments exposure to Debtors2 Cash
held at fair derivative £'000 and cash
value instruments1 equivalents3 Total
Currency £'000 £'000 £'000 £'000
Euro 32,969 38,212 54 2 71,237
US dollar 26,043 - 11 9,794 35,848
Swiss franc 22,905 - 392 1 23,298
Australian dollar 14,417 - - - 14,417
Swedish krona 9,415 - - - 9,415
Canadian dollar 4,482 - - - 4,482
Norwegian krone 2,122 - - - 2,122
South African rand 1,984 49 - - 2,033
Danish krone - - 74 - 74
UK sterling 449,426 58,629 4,250 5 512,310
--------------- --------------- --------------- --------------- ---------------
563,763 96,890 4,781 9,802 675,236
======== ======== ======== ======== ========
1 The exposure to the market of long CFDs.
2 Debtors include amounts held at futures clearing houses and brokers.
3 Cash and cash equivalents are made up of £1,860,000 cash at bank and £
7,942,000 held in Fidelity Institutional Liquidity Fund.
Currency exposure of financial liabilities
The Company finances its investment activities through its ordinary share
capital and reserves. The Company's financial liabilities comprise other
creditors. The currency profile of these financial liabilities is shown below:
2021
Other
creditors Total
Currency £'000 £'000
Norwegian krone 13 13
UK sterling 1,908 1,908
--------------- ---------------
1,921 1,921
======== ========
2020
Other
creditors Total
Currency £'000 £'000
Norwegian krone 2,126 2,126
UK sterling 2,388 2,388
--------------- ---------------
4,514 4,514
======== ========
Other price risk
Other price risk arises mainly from uncertainty about future prices of
financial instruments used in the Company's business. It represents the
potential loss the Company might suffer through holding market positions in the
face of price movements. The Board meets quarterly to consider the asset
allocation of the portfolio and the risk associated with particular industry
sectors within the parameters of the investment objective. The Portfolio
Manager is responsible for actively monitoring the existing portfolio selected
in accordance with the overall asset allocation parameters described above and
seeks to ensure that individual stocks also meet an acceptable risk/reward
profile. Other price risks arising from derivative positions, mainly due to the
underlying exposures, are estimated using Value at Risk and Stress Tests as set
out in the Company's internal Derivative Risk Measurement and Management
Document.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulties in
meeting obligations associated with financial liabilities. The Company's assets
mainly comprise readily realisable securities and derivative instruments which
can be sold easily to meet funding commitments if necessary. Short term
flexibility is achieved by the use of a bank overdraft, if required.
Liquidity risk exposure
At 31 August 2021, the undiscounted gross cash outflows of the financial
liabilities were all repayable within one year and consisted of derivative
instrument liabilities of £3,161,000 (2020: £1,946,000) and creditors of £
1,921,000 (2020: £4,514,000).
Counterparty risk
Certain derivative instruments in which the Company may invest are not traded
on an exchange but instead will be traded between counterparties based on
contractual relationships, under the terms outlined in the International Swaps
and Derivatives Association's ("ISDA") market standard derivative legal
documentation. These are known as Over the Counter ("OTC") trades. As a result,
the Company is subject to the risk that a counterparty may not perform its
obligations under the related contract. In accordance with the risk management
process which the Investment Manager employs, this risk is minimised by only
entering into transactions with counterparties which are believed to have an
adequate credit rating at the time the transaction is entered into, by ensuring
that formal legal agreements covering the terms of the contract are entered
into in advance, and through adopting a counterparty risk framework which
measures, monitors and manages counterparty risk by the use of internal and
external credit agency ratings and by evaluating derivative instrument credit
risk exposure.
For derivative transactions, collateral is used to reduce the risk of both
parties to the contract. All collateral amounts are held in UK sterling and are
managed on a daily basis for all relevant transactions. At 31st August 2021, £
2,120,000 (2020: £8,590,000) was held by brokers in a segregated collateral
account on behalf of the Company, to reduce the credit risk exposure of the
Company. This collateral comprised: J.P. Morgan Securities plc £1,270,000
(2020: £170,000), HSBC Bank plc £850,000 (2020: £7,775,000) and Morgan Stanley
& Co International plc £nil (2020: £645,000). £40,000 (2020: £860,000), shown
as amounts held at futures clearing houses and brokers on the Balance Sheet was
held by the Company, in a segregated collateral account, on behalf of the
brokers, to reduce the credit risk exposure of the brokers. This collateral
comprised of: UBS AG £40,000 (2020: £840,000) in cash and Goldman Sachs
International Ltd £nil (2020: £20,000) in cash.
Credit risk
Financial instruments may be adversely affected if any of the institutions with
which money is deposited suffer insolvency or other financial difficulties. All
transactions are carried out with brokers that have been approved by the
Manager and are settled on a delivery versus payment basis. Limits are set on
the amount that may be due from any one broker and are kept under review by the
Manager. Exposure to credit risk arises on unsettled security transactions and
derivative instrument contracts and cash at bank.
Derivative instrument risk
The risks and risk management processes which result from the use of derivative
instruments, are set out in a documented Derivative Risk Measurement and
Management Document. Derivative instruments are used by the Manager for the
following purposes:
· To gain unfunded long exposure to equity markets, sectors or single
stocks. Unfunded exposure is exposure gained without an initial flow of
capital;
· To hedge equity market risk using derivatives with the intention of at
least partially mitigating losses in the exposures of the Company's portfolio
as a result of falls in the equity market; and
· To position short exposures in the Company's portfolio. These uncovered
exposures benefit from falls in the prices of shares which the Portfolio
Manager believes to be over-valued. These positions, therefore, distinguish
themselves from other short exposures held for hedging purposes since they are
expected to add risk to the portfolio.
RISK SENSITIVITY ANALYSIS
Interest rate risk sensitivity analysis
Based on the financial instruments held and interest rates at 31 August 2021,
an increase of 0.25% in interest rates throughout the year, with all other
variables held constant, would have decreased the Company's net return on
ordinary activities after taxation for the year and decreased the net assets of
the Company by £359,000 (2020: increased the net loss and decreased the net
assets by £201,000). A decrease of 0.25% in interest rates throughout the year
would have had an equal but opposite effect.
Foreign currency risk sensitivity analysis
Based on the financial instruments held and currency exchange rates at 31
August 2021, a 10% strengthening of the UK sterling exchange rate against
foreign currencies, with all other variables held constant, would have
decreased the Company's net return on ordinary activities after taxation for
the year and decreased the net assets of the Company by £18,950,000 (2020:
increased the net loss and decreased the net assets by £14,618,000). A 10%
weakening of the UK sterling exchange rate against foreign currencies, with all
other variables held constant, would have increased the Company's net return on
ordinary activities after taxation for the year and increased the net assets of
the Company by £23,161,000 (2020: decreased the net loss and increased the net
assets of the Company by £17,867,000).
Other price risk- exposure to investments sensitivity analysis
Based on the listed investments held and share prices at 31 August 2021, an
increase of 10% in share prices, with all other variables held constant, would
have increased the Company's net return on ordinary activities after taxation
for the year and increased the net assets of the Company by £88,644,000 (2020:
decreased the net loss and increased the net assets by £56,348,000). A decrease
of 10% in share prices would have had an equal and opposite effect.
An increase of 10% in the valuation of unlisted investments held at the Balance
Sheet date would have increased the Company's net return on ordinary activities
after taxation for the year and increased the net assets of the Company by £
27,000 (2020: decreased the net loss after taxation and increased the net
assets by £28,000). A decrease of 10% in the valuation would have had an equal
and opposite effect.
Other price risk - net exposure to derivative instruments sensitivity analysis
Based on the derivative instruments held and share prices at 31 August 2021, an
increase of 10% in the share prices underlying the derivative instruments, with
all other variables held constant, would have increased the Company's net
return on ordinary activities after taxation for the year and increased the net
assets of the Company by £20,627,000 (2020: decreased the net loss and
increased the net assets by £9,689,000). A decrease of 10% in share prices
would have had an equal and opposite effect.
Fair Value of Financial Assets and Liabilities
Financial assets and liabilities are stated in the Balance Sheet at values
which are not materially different to their fair values. As explained in Notes
2 (l) and (m) above, investments and derivative instruments are shown at fair
value.
Fair Value Hierarchy
The Company is required to disclose the fair value hierarchy that classifies
its financial instruments measured at fair value at one of three levels,
according to the relative reliability of the inputs used to estimate the fair
values.
Classification Input
Level 1 Valued using quoted prices in active markets for identical
assets
Level 2 Valued by reference to inputs other than quoted prices
included in level 1 that are observable (i.e. developed using
market data) for the asset or liability, either directly or
indirectly.
Level 3 Valued by reference to valuation techniques using inputs that
are not based on observable market data
Categorisation within the hierarchy has been determined on the basis of the
lowest level input that is significant to the fair value measurement of the
relevant asset. The valuation techniques used by the Company are explained in
Notes 2 (l) and (m) above. The table below sets out the Company's fair value
hierarchy:
2021
Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit or £'000 £'000 £'000 £'000
loss
Investments 885,753 - 957 886,710
Derivative instrument assets - 1,968 - 1,968
------------- ------------- ------------- -------------
885,753 1,968 957 888,678
======== ======== ======== ========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities - (3,161) - (3,161)
======== ======== ======== ========
2020
Level 1 Level 2 Level 3 Total
Financial assets at fair value through profit or £'000 £'000 £'000 £'000
loss
Investments 562,866 - 897 563,763
Derivative instrument assets - 7,619 - 7,619
------------- ------------- ------------- -------------
562,866 7,619 897 571,382
======== ======== ======== ========
Financial liabilities at fair value through profit
or loss
Derivative instrument liabilities - (1,946) - (1,946)
======== ======== ======== ========
The table below sets out the movements in level 3 financial instruments during
the year:
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Beginning of the year 897 1,423
Sales - proceeds (95) (462)
Sales - gains/(losses) 14 (81)
Movement in investment holding gains 141 17
------------- -------------
End of the year 957 897
======== ========
Marwyn Value Investors
Investors is a closed-ended fund incorporated in the United Kingdom. The fund
is highly illiquid and the valuation at 31st August 2021 is based on the
indicative bid price in the absence of a last trade price. As at 31 August
2021, its fair value was £685,000 (2020: £613,000).
TVC Holdings
TVC Holdings is an unlisted investment holding company incorporated in Ireland.
The valuation at 31 August 2021 is based on the last trade price. As at 31
August 2021, its fair value was £272,000 (2020: £284,000).
19 CAPITAL RESOURCES AND GEARING
The Company does not have any externally imposed capital requirements. The
financial resources of the Company comprise its share capital and reserves, as
disclosed in the Balance Sheet above and any gearing, which is managed by the
use of derivative instruments. Financial resources are managed in accordance
with the Company's investment policy and in pursuit of its investment
objective, both of which are detailed in the Strategic Report in the Annual
Report. The principal risks and their management are disclosed above and in
Note 18 above.
The Company's gearing at the year end is set out below:
2021 2020
Asset exposure Asset exposure
£'000 %1 £'000 %1
Investments 886,710 93.0 563,763 97.3
Long CFDs 206,266 21.6 96,890 16.7
------------- ------------- ------------- -------------
Total asset exposure 1,092,976 114.6 660,653 114.0
======== ======== ======== ========
Shareholders' funds 954,090 579,505
Gearing2 14.6 14.0
======== ======== ======== ========
1 Asset exposure to the market expressed as a percentage of Shareholders'
funds.
2 Gearing is the amount by which Asset Exposure exceeds Shareholders' funds
expressed as a percentage of Shareholders' funds.
20 TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
FIL Investment Services (UK) Limited is the Company's Alternative Investment
Fund Manager and has delegated portfolio management and the role of company
secretary to FIL Investments International ("FII"). Both companies are Fidelity
group companies.
Details of the current fee arrangements are given in the Directors' Report in
the Annual Report and in Note 5 above. During the year, fees for portfolio
management services of £5,065,000 (2020: £5,527,000), and fees for
non-portfolio management services of £33,000 (2020: £100,000) were payable to
FII. Non-portfolio management fees include company secretarial, fund
accounting, taxation, promotional and corporate advisory services. At the
Balance Sheet date, fees for portfolio management services of £474,000 (2020: £
418,000) and fees for non-portfolio management services of £nil (2020: £17,000)
were accrued and included in other creditors. FII also provides the Company
with marketing services. The total amount payable for these services during the
year was £106,000 (2020: £175,000). At the Balance Sheet date, marketing
services of £13,000 (2020: £20,000) were accrued and included in other
creditors.
Disclosures of the Directors' interests in the ordinary shares of the Company
and Director's fees and taxable expenses relating to reasonable travel expenses
payable to the Directors are given in the Directors' Remuneration Report in the
Annual Report. In addition to the fees and taxable expenses disclosed in the
Directors' Remuneration Report, £16,000 (2020: £19,000) of Employers' National
Insurance contributions were paid by the Company. At the Balance Sheet date,
Directors' fees of £13,000 (2020: £15,000) were accrued and payable.
21 RECONCILIATION OF NET RETURN/(LOSS) ON ORDINARY ACTIVITIES BEFORE FINANCE
COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES BEFORE FINANCE
COSTS AND TAXATION
Year ended Year ended
31.08.21 31.08.20
£'000 £'000
Net total return/(loss) on ordinary activities before finance costs 329,882 (132,800)
and taxation
Net capital (return)/loss on ordinary activities before finance costs (307,502) 147,451
and taxation
------------- -------------
Net revenue return on ordinary activities before finance costs and 22,380 14,651
taxation
======== ========
Scrip dividends - (274)
(Increase)/decrease in debtors (2,392) 3,163
Increase/(decrease) in other creditors 18 (54)
------------- -------------
Net cash inflow from operating activities before finance costs and 20,006 17,486
taxation
======== ========
ALTERNATIVE PERFORMANCE MEASURES
TOTAL RETURN
Total return is considered to be an Alternative Performance Measure. NAV per
ordinary share total return includes reinvestment of the dividend in the NAV of
the Company on the ex-dividend date. Share price total return includes the
reinvestment of the net dividend in the month that the share price goes
ex-dividend.
The tables below provide information relating to the NAVs and share prices of
the Company, the impact of the dividend reinvestments and the total returns for
the years ended 31 August 2021 and 31 August 2020.
Net asset
value per
ordinary Share
2021 share price
31 August 2020 199.81p 181.60p
31 August 2021 304.79p 308.50p
Change in year +52.5% +69.9%
Impact of dividend reinvestment +3.7% +3.9%
------------- -------------
Total return for the year +56.2% +73.8%
======== ========
Net asset
value per
ordinary Share
2020 share price
31 August 2019 252.99p 251.50p
31 August 2020 199.81p 181.60p
Change in year -21.0% -27.8%
Impact of dividend reinvestment +2.5% +2.4%
------------- -------------
Total return for the year -18.5% -25.4%
======== ========
ONGOING CHARGES
Ongoing charges are considered to be an Alternative Performance Measure. The
ongoing charges ratio has been calculated in accordance with guidance issued by
the AIC as the total of investment management fees and other expenses expressed
as a percentage of the average net asset values throughout the year.
2021 2020
Investment management fees (£'000) 5,098 5,627
Other expenses (£'000) 669 718
------------- -------------
Ongoing charges (£'000) 5,767 6,345
Average net assets (£'000) 759,198 649,924
Ongoing charges ratio 0.76% 0.98%
======== ========
GEARING
Gearing is considered to be an Alternative Performance Measure. See Note 19
above for details of the Company's gearing.
DISCOUNT/PREMIUM
The discount/premium is considered to be an Alternative Performance Measure.
Details of the Company's discount/premium are on the Financial Highlights in
the Annual Report.
The Annual Financial Report Announcement is not the Company's statutory
accounts. The above results for the year ended 31 August 2021 are an abridged
version of the Company's full Annual Report and Financial Statements, which
have been approved and audited with an unqualified report. The 2020 and 2021
statutory accounts received unqualified reports from the Company's Auditor and
did not include any reference to matters to which the Auditor drew attention by
way of emphasis without qualifying the reports and did not contain a statement
under s.498 of the Companies Act 2006. The financial information for 2020 is
derived from the statutory accounts for 2020 which have been delivered to the
Registrar of Companies. The 2021 Financial Statements will be filed with the
Registrar of Companies in due course.
A copy of the Annual Report will shortly be submitted to the National Storage
Mechanism and will be available for inspection at: www.morningstar.co.uk/uk/NSM
The Annual Report will be posted to shareholders later this month and
additional copies will be available from the registered office of the Company
and on the Company's website: www.fidelity.co.uk/specialvalues where up to date
information on the Company, including daily NAV and share prices, factsheets
and other information can also be found.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.
ENDS
END
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November 08, 2021 02:00 ET (07:00 GMT)
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