The Company's current investment objective is, over the medium term (5 to 7 years), to aim to preserve capital in real terms and to grow the dividend at least in line with inflation. The Company will target a total portfolio return of UK Consumer Price Index ("CPI") plus 4 per cent. per annum (before ongoing charges) over a 5 to 7 year cycle.
Shareholders should note that on 30 November 2016 the Board announced proposals in relation to a change in theinvestment objective and policy, fund management arrangements and a proposed merger with Aberdeen UK Tracker Trust plc. A copy of that announcement is set out on pages 2 to 5 of the Annual Report and Financial Statements. A circular in relation to these proposals is expected to be published in early March 2017.
BlackRock Income Strategies Trust plc
Annual Results Announcement
for the year ended 30 September 2016
Financial Highlights
| 30September 2016 | 30September 2015 | Change % | |
| Net Assets (£'000)1,3 | 351,521 | 374,832 | -6.21,3 |
| Net Asset value per share (debt at market value) | 123.62p | 131.00p | -5.6 |
| - with income reinvested | 136.75p | 137.28p | -0.42 |
| Ordinary share price | 111.00p | 130.50p | -14.9 |
| - with income reinvested | 123.20p | 137.21p | -10.22 |
| (Discount)/premium to net asset value4 | -9.0% | 0.9% | |
| ======== | ======== | ======== |
1 Net Assets at 30 September 2016 are before provision for the third interim dividend of 1.635p per share, paid on 10 October 2016; Net Assets at 30 September 2015 are before provision for the third interim dividend of 1.67p per share, paid on 9 October 2015.
2 Assumes that dividends are reinvested at the relevant share price or NAV prevailing at the ex-dividend date for NAV and share price return calculations respectively.
3 The change in net assets reflects market movements during the year and share buy backs.
4 The premium and discount to NAV in the table above have been calculated based on the ex-dividend NAV of 121.99 pence per share and 129.33 pence per share as at 30 September 2016 and 2015 respectively, and not the Company's NAV per share as disclosed on the Company's balance sheet and in the table above. This is because accounting standards do not permit interim quarterly dividends to be reflected in the accounts until they have been paid. As the third quarterly dividends for 2016 and 2015 respectively had gone ex-dividend in the Company's share price at 30 September as disclosed in the table above, any share rating calculated based on this ex-dividend price also needs to be calculated using an ex-dividend NAV.
| Yearended 30September 2016 | Yearended 30September 2015 | Change % | |
| Net revenue return after taxation (£'000) | 20,602 | 20,163 | 2.2 |
| Revenue return per share | 7.56p | 7.07p | 6.9 |
| Dividends: | |||
| First quarterly dividend | 1.635p | 1.500p | 9.0 |
| Second quarterly dividend | 1.635p | 1.670p | -2.1 |
| Third quarterly dividend | 1.635p | 1.670p | -2.1 |
| Fourth quarterly dividend | 1.635p | 1.700p | -3.8 |
| -------- | -------- | -------- | |
| Total dividends | 6.540p | 6.540p | 0.0 |
| ======== | ======== | ======== |
Chairman's statement for the year ended 30 September 2016
OVERVIEW
2016 was a challenging and very disappointing year for your Company.
Two years ago, on 26 February 2015, shareholders overwhelmingly approved a new investment objective and policy for the Company. The core components of this new investment objective and policy were capital preservation and dividend growth in line with inflation. This was, in part, designed to generate demand from investors as a result of the changes in the UK savings and pensions market and also because we believed that the changes would be attractive for all of our shareholders. We appointed BlackRock Fund Managers Limited as the Alternative Investment Fund Manager ('AIFM') at that time.
In July 2016 your Board became increasingly concerned about the Company's investment performance, the ability to achieve the investment objective and policy (with an acceptable level of risk) and the maintenance of the dividend. This followed a sharp fall in the NAV (cum income, debt at fair value) of the Company in June 2016 by 5.3% (4.0% with dividends reinvested). In addition there was an increasing dependency on derivative income to service both the interest payments on our Bonds and the Company's dividend. Throughout July 2016 the Board undertook a detailed review and analysis of the portfolio and its performance as well as the cost of our Bonds and the dividend. We focused, in particular, on the income generation capacity of the portfolio and also, looking forward, what it would take for BlackRock to deliver the investment objective and dividend.
This analysis, undertaken with our advisers and BlackRock, culminated in our announcement on 1 August 2016 of a review of our investment objective and policy and a subsequent announcement on 28 September 2016 that we were inviting fund management groups, with both established multi-asset management credentials and experience of managing listed closed-end funds, to present proposals to the Board.
On 30 November 2016, we announced, as set out on pages 2 to 5 of the Annual Report and Financial Statements, the outcome of a comprehensive strategic review, which comprises a number of very significant actual and proposed changes, including the appointment of Aberdeen Asset Management as the new investment manager. Although it is extremely unusual to change an investment manager, and indeed investment objective and policy, so soon after appointment and adoption, we are confident that this is the right course of action and in our shareholders' best interests.
In early March 2017, subject to regulatory approval, shareholders should expect to receive a circular which will contain details of the various recommended proposals that require shareholder approval. However, in advance of that circular being sent to you I thought it would be helpful to summarise below the outcomes of the strategic review and to do so by highlighting to shareholders where we are making or proposing changes and what will continue unchanged.
What we are changing or proposing to shareholders that we change:
We will:
Appoint Aberdeen's Diversified Multi-Asset team, with Mike Brooks and Tony Foster as new lead portfolio managers, and then rename the Company Aberdeen Diversified Income and Growth Trust plc ("ADIGT");
Propose to change the investment objective to target returns of LIBOR+5.5% per annum (net of fees) over rolling five-year periods;
Propose a merger with Aberdeen UK Tracker Trust plc ("AUKT") thereby significantly increasing the size of the Company;
Revise the dividend policy to include a reduction in the current annual dividend level by approximately 20% (in recognition of the current low yield environment); and
Replace the nil discount policy with a more flexible approach that recognises the constraints imposed by gearing and by the more illiquid nature of the investment portfolio.
As part of the overall changes, we will also be proposing a cash exit for all eligible shareholders via a tender offer for up to 20% of the shares in issue at a tender price equal to NAV (cum income, debt at fair value) less 4% and the costs and expenses of the tender offer. This tender offer will be subject to shareholder approval and inter-conditional on shareholders approving the above changes in the investment objective and policy, and the merger.
What is unchanged:
We will:
Retain our commitment to, and confidence in, the ability of a multi-asset strategy to deliver returns that are attractive to shareholders and investors;
Retain our commitment to generating an attractive income for our shareholders, even after the reduction of the dividend by approximately 20%;
Retain our commitment to manage the supply/demand balance of our shares. We will seek to renew the Company's existing 14.99% buy-back authority at the forthcoming Annual General Meeting ("AGM"); and
Retain our existing gearing.
PERFORMANCE
We are very disappointed by the performance that all shareholders have had to endure under the current investment objective and policy that has been pursued since February 2015, and hence our intervention with the strategic review.
Whilst we have declared attractive quarterly dividends totalling 11.58 pence per share since the current investment objective and policy was adopted, the NAV (cum income, debt at fair value without income reinvested) has declined by a clearly unacceptable 15.9% over the period from 27 February 2015 to 30 September 2016, contrary to our capital preservation objective.
In the 12 months to 30 September 2016, the Company's NAV (cum income, debt at fair value without income reinvested) fell by 5.6%. The share price over the same period fell by 14.9% as the discount to NAV widened to 9.0%.
EARNINGS AND DIVIDENDS
The Company's revenue return for the year to 30 September 2016 amounted to 7.56 pence per share, compared to 7.07 pence per share for 2015, an increase of 6.9%. The increase is primarily due to a higher level of derivative income, which generated 40.4% of the income in the year ended 30 September 2016 as compared to 26.9% in the year to 30 September 2015.
We paid total dividends for the year of 6.54 pence per share in equal quarterly instalments, in line with total dividends of 6.54 pence per share paid in respect of the year to 30 September 2015.
Since the implementation of the current objective and policy in February 2015, there has been an overall decline in the yield of many investments in the market. In view of the changes and having considered the increase in risk to capital of continuing the current dividend, the Board proposes to adopt a new dividend policy outlined below.
Our intention is to pay an interim dividend of at least 1.635 pence in respect of the first quarter ending 31 December 2016 (a dividend of 1.635 pence was paid for the quarter ended 31 December 2015). In addition, the Board intends to declare a further dividend for the period from 1 January 2017 to the date of the implementation of the merger with AUKT and thereafter to reduce the subsequent quarterly dividends by an amount equivalent to an annualised reduction in the current dividend level of approximately 20%.
The proposed revision to the investment objective and policy, together with the rebasing of the dividend, will allow the Company to continue to pay an attractive quarterly dividend. The Board believes that the new dividend policy, together with the aim to target total returns with lower volatility, will continue to be appealing to existing shareholders, the shareholders of AUKT and future investors.
In line with good corporate governance the Board will put the Company's dividend policy forward for shareholder approval at its AGM.
GEARING
As part of its review, the Board considered the balance sheet and, in particular, the cost and effect of the £60 million 6.25% Bonds due 2031 (the 'Bonds'), and the merits of early repayment to reduce the level of gearing and interest costs payable by the Company. The terms of these Bonds require a repayment value priced with reference to UK Government Bonds ('Gilts'). At the time of our analysis in September 2016, Gilts were trading at the lowest yields experienced in their 300 year history, and as a result any early repayment would have been very expensive to shareholders. We therefore concluded that retaining the existing Bonds was in shareholders' best interests.
One of the benefits of the proposed merger is that it will bring greater strength to our balance sheet, reducing the Company's gearing ratio.
DISCOUNT CONTROL
Prior to the strategic review, the Board had been implementing a nil discount policy through share issuance and buy-backs at, or close to, NAV. In the year ended 30 September 2016 the Company purchased 7.6 million shares pursuant to this policy at a cost of £8.9 million (excluding stamp duty). In the same period, 200,000 shares were issued at a premium to NAV for total proceeds of £271,200, before the deduction of issue costs.
Having reviewed the investment objective and policy and as part of its overall strategic review, the Board has decided not to continue with a nil discount policy. The Board will consider implementing share buybacks to provide liquidity to shareholders from time to time and other forms of discount control deemed to be appropriate at that time.
The Board will therefore seek to renew the Company's existing 14.99% share buyback authority at the forthcoming AGM in 2017.
BOARD COMPOSITION
All the Directors will stand for re-election at the AGM, although Lynn Ruddick and Jimmy West will then retire from the Board if shareholders of both AUKT and the Company approve the proposed merger.
Assuming the merger becomes effective then Kevin Ingram, Paul Yates and Tom Challenor, each Directors of AUKT, will join the Board of ADIGT.
SAVINGS PLAN HOLDERS
Given the proposed changes to the Company and irrespective of the outcome of the vote to change the investment policy the Board will appoint Aberdeen Asset Management as its investment manager and, as a consequence, the Company's shares will cease to qualify for inclusion within the BlackRock Savings plan with effect from 13 February 2017. A letter from BlackRock to all its plan holders will be mailed in due course, setting out the available options for your shareholding in the Company.
SHAREHOLDER CIRCULAR
We recommend that shareholders read the circular which we expect to be published in early March 2017 in relation to the proposed changes. Resolutions relating to the proposed changes will be put to shareholders at a separate general meeting expected to be held on the same date as the AGM.
AGM
The AGM will be held on 30 March 2017 to be held at Drapers' Hall, Throgmorton Avenue, London EC2N 2DQ. Shareholders should expect a notice of this AGM together with Forms of Proxy to be sent to you separately in early March 2017.
OUTLOOK
As I said at the outset of this statement, this has been a challenging and very disappointing year for the Company.
Looking forward, however, we believe that the combined set of changes, some of which require shareholder approval, will reposition us to be an attractive proposition for investors and a company which can successfully seize the opportunities created by the changing UK savings and pensions market. Importantly, our repositioning recognises the reality of the current macro-economic environment and, in particular, the low yield environment.
We remain steadfastly resolved and committed to generating the performance that you rightly expect and to drive the growth and success of Aberdeen Diversified Income and Growth Trust.
JAMES M LONG
Chairman
26 January 2017
Strategic Report
The Directors present the Strategic Report of the Company for the year ended 30 September 2016.
INTRODUCTION
The Company carries on business as an investment trust. Its Ordinary Shares are traded on the main market of the London Stock Exchange. The Board of Directors is responsible for the overall stewardship of the Company, including investment and dividend policies, corporate and gearing strategy, corporate governance procedures and risk management. Biographical details of the Directors, all of whom are non-executive, can be found on page 27 of the Annual Report and Financial Statements.
Change of Manager
Throughout the year under review, the Company's AIFM was BlackRock Fund Managers Limited ('BFM') ('the Manager'). A summary of the terms of the management agreement is contained in note 4 on page 57 of the Annual Report and Financial Statements.
As set out in the Chairman's Statement, the Board has resolved to appoint Aberdeen Fund Managers Limited ('AFML' or 'Aberdeen'), a subsidiary of Aberdeen Asset Management plc as the Company's AIFM to provide it with discretionary portfolio management and risk management services with effect from 11 February 2017.
Aberdeen will be paid an annual management fee of 0.5% of net assets up to £300 million and 0.45% on the net assets above £300 million. This contrasts with the existing annual management fee of 0.4%, payable on gross assets.
Aberdeen has also agreed to make a contribution towards the costs of the proposals incurred by the Company. Any investments made in Aberdeen funds investing directly in alternative assets including, but not limited to infrastructure and property, will be charged at Aberdeen's lowest institutional rate. To avoid double charging these investments will be excluded from the calculation of the overall base management fee described above.
Under the terms of the existing investment management agreement, BlackRock is entitled to six months' notice. Protective notice to terminate the existing investment management agreement was served on BlackRock on 4 October 2016 and Aberdeen has agreed with the Company to meet any compensation payable to BlackRock in respect of the balance of its notice period, subject to Aberdeen being appointed as the Company's AIFM.
The Company will retain the right to terminate the new investment management agreements with Aberdeen on six months' notice, subject to an initial period of two years.
Additional details on the changes to the Company's investment objective and policy and other proposals will be set out in the circular which shareholders should expect to receive in early March 2017.
Current Investment Strategy
The Company's current investment strategy is set out in its objective and investment policy as set out below.
Current Objective
The Company's investment objective is, over the medium term (5 to 7 years), to aim to preserve capital in real terms and grow the dividend in line with inflation. The Company targets a total portfolio return of UK Consumer Price Index ('CPI') plus 4% per annum (before ongoing charges), over a five to seven year cycle.
Current Investment Policy
The Company invests globally using a flexible multi-asset approach. The Company has not set maximum or minimum exposures for any geographical regions or sectors and will achieve an appropriate spread of risk by investing in a diversified portfolio of securities and other assets. It is the current intention that approximately 40% of the portfolio will be invested in UK equity income stocks and the balance of the portfolio will be invested on a tactical asset allocation basis, including in pooled investment funds, but these allocations may change significantly over time.
No individual company exposure in the portfolio may exceed 10% of the Company's total assets at the time of investment, other than in money market funds, treasuries and gilts. No more than 15% of the Company's total assets, at the time of investment, may be invested in aggregate in unlisted alternative assets (including direct lending, commercial property, and renewable energy and mortgage strategies). The Company will not normally invest more than 2% of its total assets in the unlisted securities issued by any individual company at the time of investment, with the exception of pooled investment funds. The Company may invest in exchange-traded funds provided they are listed on a recognised investment exchange.
No more than 10% of the Company's total assets may be invested in aggregate in other listed closed-ended investment companies unless such investment companies themselves have published investment policies to invest no more than 15% of their total assets in other closed-ended investment companies, in which case the limit is 15%. The Company may use derivatives to enhance portfolio returns (of a capital or income nature) and efficient portfolio management, that is, to reduce, transfer or eliminate risk in its investments, including protection against currency risks, or to gain exposure to a specific market. The Company uses gearing, through borrowings and derivatives, to enhance income and capital returns over the long term. The borrowings may be in sterling or other currencies. The Company's articles of association contain a borrowing limit equal to the value of its adjusted total of capital and reserves. However, borrowings would not normally be expected to exceed 20% of shareholders' funds. Total gearing, including net derivative exposure, would not normally be expected to result in a net economic equity exposure in excess of 120%.
The Company may invest from time to time in funds managed by BlackRock. To the extent that management or performance fees are charged in respect of these holdings, the Company will be rebated these fees on a regular basis to ensure that no double charging occurs.
No material change will be made to the Company's investment policy without shareholder approval.
Current Investment Strategy
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long term success of the Company and is its governing body. There is a clear division of responsibility between the Board and the Manager. Matters for the Board include setting the Company's strategy, including its investment objective and policy, setting limits on gearing (both borrowings and the effect of derivatives), capital structure, governance, and appointing and monitoring of the performance of service providers, including the Manager.
Investment of Assets
The Board considers compliance with the Company's investment policy and other investment restrictions on a regular basis. An analysis of the portfolio at 30 September 2016 is set out in the Investment Manager's Report.
Proposed Changes to Investment Objective and Policy
The proposed changes to the Company's investment objective and policy, as outlined in the announcement on pages 2 to 5 of the Annual Report and Financial Statements, will be set out in more detail in the circular which shareholders should expect to receive in early March 2017.
Proposed Merger with Aberdeen UK Tracker Trust plc
As set out in the announcement on pages 2 to 5 of the Annual Report and Financial Statements, the Board has entered into a 'heads of terms' agreement with Aberdeen and the Board of AUKT in relation to the future merger of AUKT.
The merger is conditional on regulatory and tax approvals being obtained and will be subject to approval by both BIST shareholders and AUKT shareholders.
The Company and AUKT will each pay for its own costs of implementing the merger. Aberdeen has agreed to make a contribution to BIST in relation to its costs of implementing the merger, thereby reducing the costs for existing BIST shareholders.
More information will be included in the circular that shareholders should expect to receive in early March 2017.
Dividend Policy
Details of the Company's dividend policy are set out in the Chairman's Statement.
Tender Offer
Prior to the date on which the merger becomes effective, the Company will propose a tender offer for up to 20% of its ordinary shares in issue (excluding any shares in treasury) at a tender price equal to NAV (cum income, debt at market value) less 4% and the costs and expenses of the tender offer. More details will be included in the circular that shareholders should expect to receive in early March 2017.
Discount Control Policy
Prior to the strategic review, the Board had been implementing a nil discount control policy through share buybacks at a discount to NAV. In the year ended 30 September 2016 the Company purchased 7.6 million shares pursuant to this policy at a cost of £8.9 million (excluding stamp duty). In the same period, 200,000 shares were issued at a premium to NAV for total proceeds of £271,200, before the deduction of issue costs.
Having reviewed the investment objective and policy and as part of its overall strategic review, the Board has decided not to continue with a nil discount policy. Where appropriate the Board will consider implementing share buybacks to provide liquidity to shareholders from time to time and other forms of discount control deemed to be appropriate at that time, taking into account the more illiquid underlying portfolio mix.
Full details of the proposed discount control policy will be set out in the circular that shareholders should expect to receive in early March 2017.
PERFORMANCE
Details of the Company's performance for the year are given in the Performance Record on page 7 of the Annual Report and Financial Statements. The Investment Manager's Report includes information on investment activity within the Company's portfolio during the year.
RESULTS AND DIVIDENDS
The Company's revenue return for the year amounted to 7.56 pence per share (2015: 7.07 pence per share) an increase of 6.9%.
The Company's ongoing charges for the year were 0.6% of shareholders' funds (2015: 0.7%).
A first quarterly dividend of 1.635 pence per share was paid on 8 April 2016 to shareholders on the register on 11 March 2016; the second and third interim quarterly dividends of 1.635 pence per share were paid on 22 July 2016 and 10 October 2016 respectively. The fourth quarterly dividend of 1.635p per share was declared on 29 September 2016 and will be paid to shareholders on 27 January 2017. This brings the total dividends for the year to 6.54 pence per share, in line with total dividends of 6.54p per share paid in respect of the year to 30 September 2015.
KEY PERFORMANCE INDICATORS
The key performance indicators ("KPIs") used by the Directors to measure the progress and performance of the Company over time are set out below.
Comparative performance
The Board reviews the performance of the portfolio as well as the net asset value and share price for the Company over a range of time periods and compares this to the return on the Company's target of CPI plus 4%. The Board also reviews NAV and share price performance in comparison to the performance of other competitors in the Company's peer group, the Association of Investment Companies' Flexible Investment sector, and to a range of other opportunity sets in the marketplace to assess how the Company's performance compares in the shorter term, given the limited relevance of the target index over shorter periods. These opportunity sets include (but are not limited to) UK Equities, Global Equities, Gold, Commodities, Gilts, Index Linked Gilts, US 10 year Treasury Stock, German 10 year Bunds, UK Corporate Bonds, Global Corporate Bonds, Global High Yield Bonds, Emerging Market Debt, Real Estate Investment Trusts and Cash.
The Board also monitors the Company's yield and compares this to the yield generated by competitors in the Company's peer group and to the yield that investors can obtain from the opportunity set asset classes listed above. The Board reviews the sustainability of the Company's dividend policy and regularly reviews revenue forecasts and analysis provided by the Manager on the sources of portfolio income in order to monitor the extent to which dividends are covered by revenue.
The Company's performance has been as follows:
Year to 30Sep 2016 | Period from 27Febto 30Sep 2015 | Period from 1Octto 26Feb 2015 | |
| Manager | BlackRock | BlackRock | F&C |
| Change in NAV1 | -5.6% | -10.9% | 1.3% |
| Change in NAV (with income reinvested)1,2 | -0.4% | -7.7% | 3.7% |
| CPI plus 4%/change in target index3 | 4.9% | 2.9% | 7.6% |
| ======== | ======== | ======== |
1 Calculations based on NAV with debt at market value.
2 With income reinvested.
3 The Company's benchmark prior to 27 February 2015 was a composite index of 80% FTSE All-Share Index and 20% FTSE World ex UK Index. With effect from 27 February 2015, the Company's objective is to return, on a NAV less costs basis, CPI plus 4% over a 5 to 7 year cycle.
Source: BlackRock and F&C.
Portfolio Risk
Risk analysis for a multi-asset portfolio is more complex due to the need to ensure that correlation of risk is appropriate across the various portfolio strategies as well as within individual portfolios. The Board reviews portfolio risk to ensure that the risks being taken within the portfolio are appropriately diversified and relevant to the Company's portfolio objective and market conditions.
The Portfolio Risk statistics, which the Board monitors, estimate the level of return above or below the return on cash (which is measured by the ML GBP 3 Month cash index) that the Company is expected to deliver in two out of any three years. For example, a Portfolio Risk percentage of 10.0% means that the Company's portfolio would be expected to deliver returns of up to 10.0% above or below the return that would be generated from cash (as measured by the ML GBP 3 Month cash index) two years out of three, or with a 2/3 probability. The Company's Portfolio Beta and Portfolio Risk statistics are set out in the table below.
| Asat 30Sep 2016 | Asat 30Sep 2015 | |
| Portfolio Beta (vs MSCI World Index) | 0.5 | 0.7 |
| Portfolio Risk | 10.0% | 8.2% |
| ======== | ======== |
Source: BlackRock.
The Board monitors the portfolio Beta relative to the MSCI World Index. As at 30 September 2016, the Company's portfolio had a Beta of 0.5 (30 September 2015: 0.7), meaning that for a movement of 1% in the MSCI World Index, the NAV of the Company would be expected to move in the same direction by 0.5%.
The Board also reviews portfolio attribution data to understand the impact on the Company's relative performance of the various components such as asset allocation, stock selection and gearing.
Premium/discount to net asset value ('NAV')
The Board monitors the level of the Company's premium or discount to NAV and considers strategies for managing this. Prior to the strategic review, the Board had been implementing a nil discount control policy through share buybacks at a discount to NAV. In the year ended 30 September 2016 the Company purchased 7.6 million shares pursuant to this policy at a cost of £8,934,698 (excluding stamp duty). These shares were bought back at an average discount of 4.2% per share (based on the latest published NAV at the time of purchase).
In the same period, 200,000 shares were issued at a premium to NAV for total proceeds of £271,200, before the deduction of issue costs. The shares were allotted to Cenkos Securities (the Company's brokers). Having reviewed the investment objective and policy and as part of its overall strategic review, the Board has decided not to continue with a nil discount policy. Further details of the Company's proposed discount control policy will be included in the circular that shareholders should expect to receive in early March 2017.
Information regarding the Company's share rating is set out in the table below.
| Asat 30Sep 2016 | Asat 30Sep 2015 | Asat 26Feb 2015 | Asat 30Sep 2014 | |
| (Discount)/premium to NAV (debt at market value) | (9.0%) | 0.9% | (6.6%) | (5.5%) |
| ======== | ======== | ======== | ======== |
Source: BlackRock.
Ongoing charges
The ongoing charges ratio reflects those expenses which are likely to recur in the foreseeable future, whether charged to capital or revenue, and which relate to the operation of the investment company as a collective investment fund, excluding the costs of acquisition or disposal of investments, financing charges and gains or losses arising on investments. The ongoing charges are based on actual costs incurred in the year as being the best estimate of future costs. The Board reviews the ongoing charges and monitors the expenses incurred by the Company. The Company's ongoing charges for the year to 30 September 2016 were 0.6% of net assets (2015: 0.7%).
PRINCIPAL RISKS
The key risks faced by the Company are set out below. The Board has in place a robust process to assess and monitor the principal risks of the Company. A core element of this is the Company's risk register, which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk, and the quality of the controls operating to mitigate the risk. A residual risk rating is then calculated for each risk based on the outcome of this assessment. This approach allows the effect of any mitigating procedures to be reflected in the final assessment.
The register, its method of preparation and the operation of the key controls in the Manager's and third party service providers systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of the Manager's and other third party service providers' risk management processes, and how these apply to the Company's business, BlackRock's internal audit department provided an annual presentation to the Audit Committee Chairman setting out the results of testing performed in relation to BlackRock's internal control processes. The Audit Committee also periodically receives presentations from BlackRock's Risk & Quantitative Analysis teams, and reviews Service Organisation Control (SOC 1) reports from BlackRock and from the Company's custodian (Bank of New York Mellon (International) Limited). The custodian is appointed by the Company's Depositary and does not have a direct contractual relationship with the Company.
The Board is confident that the procedures that the Company has in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the year ended 30 September 2016.
The principal risks and uncertainties faced by the Company in the year ended 30 September 2016, together with the potential effects, controls and mitigating factors, are set out below.
Performance risk - The Board is responsible for determining the investment policy to fulfil the Company's objectives and for monitoring the performance of the Company's investment manager ("Investment Manager") and the strategy adopted. An inappropriate policy or strategy may lead to poor performance, dissatisfied shareholders and a widening discount. The Company may invest in unlisted alternative investments (such as direct lending, commercial property, renewable power or mortgage strategies). These types of investments are expected to have a different risk and return profile to the rest of the Company's investment portfolio. They may be relatively illiquid and it may be difficult for the Company to realise these investments over a short time period, which may have a negative impact on performance. The Company may also use derivative instruments for the purposes of efficient portfolio management and/or to hedge market and currency risk. In addition, the Company may use complex derivative strategies in pursuit of the proposed investment policy including the creation of synthetic short positions to take advantage of negative investment views, using synthetic long positions to gain market exposure or a combination of long and short strategies to implement investment views in respect of one or more issuers, whilst neutralising market exposure within the transaction.
To manage these risks the Board regularly reviews the Company's investment mandate and long term strategy, and has put in place appropriate limits over levels of unlisted alternative assets, gearing and the use of derivatives. No more than 15% of the Company's total assets, at the time of investment, may be invested in aggregate in unlisted alternative assets. Total gearing, including net derivative exposure, would not normally be expected to result in net economic equity exposure in excess of 120%. Derivative strategies are only undertaken within guidelines established by the Board.
Levels of portfolio exposure through derivatives, including the extent to which the portfolio is geared in this manner and the value of any short positions, are reported regularly to the Board and monitored. The Board also reviews the controls put in place by the Investment Manager to monitor and to minimise counterparty exposure, which include intraday monitoring of exposures to ensure these are within set limits. The Investment Manager provides an explanation of significant stock selection decisions, the rationale for the composition of the investment portfolio and movements in the level of gearing. The Board monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the Company's investment policy.
Gearing risk - The Company has the authority to borrow money or increase levels of market exposure through the use of derivatives (gearing) and does so when the Investment Manager is confident that market conditions and opportunities exist to enhance investment returns. However, if the investments fall in value, any borrowings will magnify the extent of this loss. In addition, the Company has in place fixed borrowings in the form of a £60 million 6.25% Bond 2031. All borrowings require the approval of the Board and gearing levels are reviewed regularly by the Board and the Investment Manager. Borrowings (including the Bond) would not normally be expected to exceed 20% of shareholders' funds. Total gearing, including net derivative exposure, would not normally be expected to result in net economic equity exposure in excess of 120%.
Income/dividend risk - The amount of dividends will depend on the Company's underlying portfolio. Any change in the tax treatment of the dividends or interest received by the Company (including as a result of withholding taxes or exchange controls imposed by jurisdictions in which the Company invests) may reduce the level of dividends received by shareholders. The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting. To the extent that underlying dividend income is insufficient to meet the Company's dividend policy, the Company has the ability to generate revenue through option writing. This may result in a reduction in capital return and the Board monitors the level of option writing and the total returns generated from option contracts to ensure that the level of option writing is appropriate and in line with the Company's investment objective and dividend policy.
Regulatory risk - The Company operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments. The Investment Manager monitors investment movements, the level and type of forecast income and expenditure and the amount of proposed dividends, if any, to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached and the results are reported to the Board at each meeting. Following authorisation under the Alternative Investment Fund Managers Directive (AIFMD), the Company and its appointed Alternative Investment Fund Manager (AIFM) are subject to the risk that the requirements of this Directive are not correctly complied with. The Board and the AIFM also monitor changes in government policy and legislation which may have an impact on the Company.
Operational risk - In common with most other investment trust companies, the Company has no employees. The Company therefore relies upon the services provided by third parties and is dependent on the control systems of the Manager, BNY Mellon Trust & Depositary (UK) Limited (the Depositary) and the Bank of New York Mellon (International) Limited, who maintain the Company's accounting records. The security of the Company's assets, dealing procedures, accounting records and maintenance of regulatory and legal requirements, depend on the effective operation of these systems. These have been regularly tested and monitored throughout the year which is evidenced through their SOC 1 reports to provide assurance regarding the effective operation of internal controls which are reported on by their reporting accountants and give assurance regarding the effective operation of controls. The Board also considers succession arrangements for key employees of the Investment Manager and the business continuity arrangements for the Company's key service providers.
Market Risk - Market risk arises from volatility in the prices of the Company's investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Company invests in global equities across a range of countries, and changes in general economic and market conditions in certain countries, such as interest rates, exchange rates, rates of inflation, industry conditions, competition, political events and trends, tax laws, national and international conflicts, economic sanctions and other factors can also substantially and adversely affect the securities and, as a consequence, the Company's prospects and share price. The Board considers the diversification of the portfolio, the portfolio risk and portfolio beta, asset allocation, stock selection, unquoted investments and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager. The Board monitors the implementation and results of the investment process with the Investment Manager.
Financial risks - The Company's investment activities expose it to a variety of financial risks which include foreign currency risk and interest rate risk. Further details are disclosed in note 17 to the financial statements, together with a summary of the policies for managing these risks.
VIABILITY STATEMENT
In accordance with provision C.2.2 of the 2016 Code on UK Corporate Governance, the Directors have assessed the prospects of the Company over a longer period than the 12 months required by the "Going Concern" provision. The Board conducted this review for the period up to the AGM in 2022, being a five year period from the date that this Annual Report is due to be approved by shareholders. The five year review period was selected because it is aligned with the medium term performance period of five to seven years over which the Company is assessed in its objective of targeting a total portfolio return of CPI plus 4%. It is also aligned to the proposed new investment objective, which is to target returns of LIBOR +5.5% per annum (net of fees) over rolling five-year periods.
In making this assessment the Board has considered the following factors:
- The Company's principal risks as set out above;
- The relevance and attractiveness to existing shareholders and potential new investors of the proposed changes to the Company's investment policy, which targets a truly diversified multi-asset approach to generate highly attractive long-term income and capital returns;
- The strength and experience of the new investment management team at Aberdeen; and
- The level of demand for the Company's shares.
The Board has also considered a number of financial metrics, including:
- The level of current and historic ongoing charges incurred by the Company;
- The premium or discount to NAV;
- The level of income generated by the Company;
- Future income forecasts; and
- The liquidity of the Company's portfolio.
As an investment Company with a relatively liquid portfolio and largely fixed overheads which comprise a very small percentage of net assets (0.6%), the Board has concluded that, even in exceptionally stressed operating conditions, the Company would be able to meet its ongoing operating costs as they fall due.
However, investment companies may face other challenges, such as a significant decrease in size through tenders or share buy-back activity resulting in the company no longer being of sufficient market capitalisation to represent a viable investment proposition and to continue in operation. The Board is proposing to offer a tender of up to 20% of the Company's share capital. In addition, the Company has in place the authority to buy back up to 14.99% of issued share capital. The Board has considered the potential impact of operating both of these discount control mechanisms on the Company's market capitalisation over the five year time horizon under review, and in particular has noted the following:
- The Company's proposed new investment policy (which offers both risk diversification through the use of a multi asset portfolio and an attractive dividend yield);
- The enhanced liquidity that is expected to be generated by the increase to the size of the Company's asset base as a result of the merger with the Aberdeen UK Tracker Trust plc;
- The enhanced liquidity and anticipated demand for the Company's shares on the secondary market as a result of the increased size of the Company post the merger; and
- The decision to replace the current nil discount policy with a more flexible approach.
The Board is confident that the proposed discount control mechanisms that the Company will have in place will not have a detrimental impact on the Company's viability. Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.
FUTURE PROSPECTS
Subject to Shareholder approval in March 2017, the Board's main focus will be on the delivery of the new investment objective to target returns of LIBOR +5.5% per annum (net of fees) over rolling five-year periods and maintaining a steady dividend at an attractive but realistic yield (after reducing the current dividend payment by approximately 20%). The future of the Company is dependent upon the success of the investment strategy. The outlook for the Company is discussed in the Chairman's Statement.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company's supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in shareholders' interests to consider environmental, social and governance factors and human rights issues when selecting and retaining investments. Details of the Company's policy on socially responsible investment are set out on page 38 of the Annual Report and Financial Statements.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 30 September 2016, all of whom held office throughout the year, are set out in the Directors' biographies on page 27 of the Annual Report and Financial Statements. The Board consists of five men and one woman. The Company does not have any employees.
By order of the Board
BlackRock Investment Management (UK) Limited
Company Secretary
26 January 2017
Statement of Directors' Responsibilities in respect of the Annual Report and Financial Statements
The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the Financial Statements in accordance with applicable United Kingdom law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the financial statements under UK Generally Accepted Accounting Practice (UK Accounting Standards and Applicable Law).
Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
present fairly the financial position, financial performance and cash flows of the Company;
select suitable accounting policies and then apply them consistently;
present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
make judgements and estimates that are reasonable and prudent;
state whether the financial statements have been prepared in accordance with UK Accounting Standards, subject to any material departures disclosed and explained in the financial statements;
prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They 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.
The Directors are also responsible for preparing the Strategic Report, the Directors' Report, the Directors' Remuneration Report and the Corporate Governance Statement in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure and Transparency Rules. The Directors have delegated responsibility to the Investment Manager and the AIFM for the maintenance and integrity of the Company's corporate and financial information included on BlackRock's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors confirm to the best of their knowledge that:
the financial statements, which have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position, net return and cash flows of the Company; and
the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
The 2014 UK Corporate Governance Code also requires Directors to ensure that the Annual Report and Accounts are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Accounts fulfils these requirements. The process by which the Audit Committee has reached these conclusions is set out in the Audit Committee's report on pages 40 to 43 of the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report for the year ended 30 September 2016, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.
For and on behalf of the Board
JAMES M LONG
Chairman
26 January 2017
Investment manager's report - BlackRock Investment Management (UK) Limited
This report covers the year ended 30 September 2016.
Performance
| Yearto 30September 2016 | 27February- 30September 2015 | |
| NAV1 | -0.4% | -7.7% |
| -------- | -------- | |
| Share price1 | -10.2% | -0.2% |
| -------- | -------- | |
| CPI + 4%2 | +4.9% | +2.9% |
| -------- | -------- | |
| Dividends paid | 6.54p | 6.54p |
| ======== | ======== |
| Asat 30September 2016 | Asat 30September 2015 | |
| NAV3 | 121.99p | 129.30p |
| -------- | -------- | |
| Share price | 111.00p | 130.50p |
| -------- | -------- | |
| (Discount)/Premium | (9.0%) | 0.9% |
| -------- | -------- | |
| Yield4 | 5.9% | 5.0% |
| ======== | ======== |
1 Performance calculations are based on the Company's NAV with debt at market value. Both NAV and share price performance calculations assume that dividends are reinvested on the ex-dividend date.
2 The Company's investment objective is, over the medium term (5 to 7 years), to aim to preserve capital in real terms and to grow the dividend at least in line with inflation. The Company targets a total portfolio return of UK Consumer Price Index ("CPI") plus 4% per annum.
3 Cum income NAV with debt at market value adjusted to reflect the fact that the Q3 dividends for 2015 and 2016 had gone ex-dividend prior to 30 September.
4 Yield calculations are based on dividends announced in the last 12 months as at the date of release of this announcement.
The Company's performance for the year ended 30 September 2016, details of which are summarised in the table above, has been disappointing, impacted by the challenges of navigating the various periods of heightened volatility that have characterised markets through the course of the year. As well as falling short on an absolute basis, the Company's multi-asset strategy has also lagged an investment in the stock market, justifiably adding to shareholder frustrations given the relatively recent change in approach with the transition of management from F&C to BlackRock in February 2015.
Although the portfolio return was negative in absolute terms, the revenue return of 7.56 pence per share delivered on the income objective of the Company. Revenues were comprised of approximately 40.4% option premium income (2015: 26.9%), and 44.6% dividend income (2015: 61.2%) with the balance relating mainly to fixed interest income. The increased focus on option premium income partly reflects the fact that for 2015 the Company's portfolio was managed under the previous investment objective for the first five months of the year, which had a heavier weighting to dividend income and no multi-asset component.
The market environment has been challenging for the portfolio's dynamic asset allocation strategy. During the year there have been several periods of short and sharp sell-offs followed by rapid recoveries. For example, in the first three months of 2016, markets were dominated by concerns around China, volatile oil price movements and greater divergence in central bank monetary policy. This resulted in a notable sell-off in equities and negative excess returns from credit as investors sought out more traditional 'safe-haven' assets such as developed market government bonds and precious metals. Risk sentiment remained fragile into February as concerns about negative interest rate policy (in Japan and Europe specifically) weighed heavily on financials. However, concerns abated somewhat in March as central banks vocalised a more accommodative stance towards monetary policy. This contributed to weakness in the US Dollar, a lift in the price of commodities, reduced liquidity concerns in China and ultimately an improvement in the performance of risk assets through March. In the summer months, we observed a similar dynamic around the period that markets began to focus on Brexit. In these two episodes of gyrating markets, our investment stance was to reduce equity exposure, fearing a larger correction due to increased political and economic uncertainty. This meant that the portfolio missed out on much of the subsequent strong equity and credit rallies that followed the sell-off.
We can identify three key drivers of our investment results over the past year. Firstly, the fall in interest rates to historic lows caused a significant hit to NAV from the Company's 6.25% 30 year Bonds ('the Bond'). The price of these reacts to movements in gilt yields and 2016 has seen a significant fall in these. Yields in the UK bond market have fallen due to large demand for the relative safety of government bonds, the resumption of a Bank of England bond buying programme and the Bank's decision to cut interest rates after the results of the EU referendum. The investment portfolio was not positioned for such a severe fall in bond yields; this meant that our fixed income holdings did not provide a sufficient 'hedge' and the Company's Bond hurt performance.
Secondly, in a period of strong returns from the domestic and global stock markets, our cautious positioning, which was largely expressed through equity market hedges, weighed on performance. The portfolio was positioned for a normalisation in monetary policy and a reduction in the extreme quantitative easing (QE) measures adopted by the Federal Reserve and the Bank of England. As this support was withdrawn, we expected a correction in equity markets. We also expected interest rates to rise as inflationary pressure increased. Our cautious equity allocations generated reasonable returns, but we undoubtedly gained less than a more aggressively positioned portfolio. Our currency hedging policy has also prevented the Company from enjoying some of the extraordinary performance experienced by Sterling-based investors who elected to leave their overseas holdings exposed to fluctuations in the currency. Our policy is to hedge the currency risk associated with overseas exposures back to Sterling by default and then take active currency positions in markets that are backed by our asset allocation views. As such, we hedged the vast majority of our overseas assets back to Sterling and did not benefit from the large falls in the value of the pound.
Finally, several of our asset allocation views have simply not paid off. In currencies, for instance, being long of the US Dollar versus the Euro, Japanese Yen and emerging market currencies was a source of negative performance. This view was based on the US Dollar's status as a safe haven currency, loose monetary policy in Europe and Japan, slowing emerging market growth and the likelihood of rising rates in the US at a time when other large economies would be easing policy. However, the continued weakness of the US Dollar driven by ongoing expectations of unusually slow monetary tightening caused these positions to underperform and this was a meaningful detractor from portfolio returns. In equities, our exposure to European markets has hurt performance as well as our position in stocks that we expected to benefit from a weaker oil price. Our Portuguese government bond holdings were also negatively impacted by some of the volatility experienced in the early months of the year.
In summary, it should be noted that there have been a number of positive asset allocation views, such as the decision to buy gold related investments and our exposure to inflation linked bonds in the US. However, our asset allocation decisions overall have dampened the return potential of some of our longer-term income and growth holdings in UK equities and credit markets.
Portfolio Composition1
| 2016 % | 2015 % | |
| UK Equity | 29.8 | 42.9 |
| Overseas Developed Market Equities | 13.0 | 12.2 |
| Emerging Market Equities | 2.7 | 2.8 |
| Volatility Strategies | 5.4 | 11.8 |
| Fixed Income | 41.5 | 25.3 |
| Alternatives | 13.0 | 4.0 |
| Commodities | 7.6 | - |
| Cash | -13.0 | 1.0 |
| ======== | ======== |
1 All percentages reflect the value of each sector as a percentage of total investments as adjusted for the gross market exposure of derivative positions held to hedge each strategy.
UK Equities 29.8%
The UK equity portfolio, managed by BlackRock specialist Mark Wharrier, was the largest single contributor to overall total returns, and also a meaningful contributor to portfolio income. However, whilst the total return from the UK equity portfolio has been strongly positive, it has lagged behind the FTSE All-Share Index. At the sector level, the strong performance of the mining sector acted as a drag on relative performance given our low exposure to the sector. On the positive side, several of our positions performed very strongly, including ARM Holdings, Rentokil Initial and John Laing Group. We reduced exposure to financial stocks by selling Aviva, Legal & General Group and Barclays, reflecting the more challenging operating environment they face. Brexit created market volatility which we used as an opportunity to add to positions in ITV, BT Group and Sky at levels that we believed were pricing in a significant UK recession, which we felt to be an unlikely outcome.
Overseas Developed Market Equities 13.0%
Our globally diversified equity fund exposures were positive contributors to performance, driven predominantly by an improving American economy and the low interest rate environment. The portfolio also benefitted from our decision to increase US exposure over the period as we became more positive on the outlook for the economy and corporate earnings, especially relative to Europe and the UK. Our Japanese equity exposure was removed after experiencing some losses during the first quarter, and our decision to hedge global industrial equities also hurt performance as this sector outperformed broader developed market equities during the market rebound in February and March 2016.
Emerging Market Equities 2.7%
Our holdings in emerging market income stocks benefitted from the low yield environment as well as the strong performance of emerging market equities. Exposure was kept at low levels due to our caution around the long-term outlook for Chinese growth.
Volatility Strategies 5.4%
Over the year under review, total return swaps (TRS) were used within this category to express views on market volatility. TRS offer low transaction costs and high liquidity, and therefore are an efficient way to gain portfolio exposure. The view that oil prices would remain low was implemented through taking out TRS on a basket of global equities which were expected to benefit from structurally lower global oil prices; unfortunately this view did not play out and the position generated losses of approximately £1 million. In addition, TRS were used to implement a systematic volatility strategy designed to exploit the difference between implied volatility in US and European equity indices; this also generated losses for the portfolio of £2 million. Other TRS exploiting volatility pricing differentials and harvesting returns from the commodities futures market were more successful.
Fixed Income 41.5%
Our fixed income exposure reflected our preference for corporate bonds (both high yield and investment grade) with limited UK Gilts held within the portfolio. We began to build some exposure to emerging market debt towards the end of the summer as we expected investors to begin to search further afield for income. Within credit markets, our European credit index strategy benefitted from the European Central Bank's efforts to lower borrowing costs for European companies. Our actively managed high yield credit portfolio benefitted from exposure to high yield bonds and some modest additional performance generated from exposure to financial credit and asset-backed securities. The largest detractor during the period by a large margin was exposure to Novo Banco, after the Portuguese central bank decided to impose losses on the securities in December 2015. BlackRock is leading a group of Novo Banco bondholders suing the Bank of Portugal and has chosen to participate in this suit in the best interests of our clients. We added some exposure to UK corporate bonds, which help manage some of the risks associated with the Company's 6.25% Bonds as well as being supported by the Bank of England's purchasing programme.
Alternatives 13.0%
Our portfolio of alternative assets broadly performed strongly over the year. Funding Circle SME Income Fund and Bluefield Solar Income Fund both produced strong returns, as well as a meaningful contribution to income. We began the process of increasing our exposure to long-term, unlisted alternative assets over the year and early signs are encouraging, with particularly strong returns coming from our small investment in the Forward Partners early-stage venture capital fund. We also added exposure to UK mortgages over the period, although at this early stage returns are minimal. The one significant detractor was our small position in the Woodford Patient Capital Trust, which struggled as share prices in the biotech sector fell.
Commodities 7.6%
Our exposure to commodities is predominantly through a holding in the iShares Gold Trust, a vehicle that tracks the price of gold. We added a significant exposure early in 2016, noting that the diversification and growth potential would be supported in a period of uncertainty around the impact of negative rates on the banking sector, near term political risks and volatile investor sentiment. Gold has been a successful position over this period, contributing positively to performance.
Negative Cash after adjusting for derivative exposures -13.0%
The Company had a small overdraft representing approximately 1% of net assets as at 30 September 2016. In addition, the Company had a range of derivative instruments which, to the extent that the Company had gained similar levels of market exposure through direct investment instead, would have resulted in physical cash balances being lower by approximately 12% and the Company being geared through the use of derivatives and negative cash balances by approximately 13%.
Adam Ryan
BlackRock Investment Management (UK) Limited
26 January 2017
Ten largest equity investments as at 30 September 2016
iShares Gold Trust1: 6.3% (2015: Nil) is an exchange traded fund that seeks to reflect generally the performance of the price of gold. The fund is managed by BlackRock.
BlackRock Impact World Equity Fund1: 3.9% (2015: Nil) seeks to achieve exposure to equity securities with a measurable positive societal impact. The fund will seek to achieve this investment objective by taking long and synthetic long exposures. The fund will seek to gain at least 80% of its investment exposure directly through equities and equity-related securities (including derivatives) of, or giving exposure to, companies domiciled in or exercising the predominant part of their economic activity in developed markets. The fund is managed by BlackRock.
BlackRock Throgmorton Trust plc1: 2.5% (2015: 2.6%) is an investment trust company with an investment objective to provide shareholders with capital growth and an attractive total return by investing primarily in UK smaller companies and mid-capitalisation companies listed on the main market of the London Stock Exchange. The company's benchmark is the Numis Smaller Companies excluding AIM (excluding Investment Companies) Index. The fund is managed by BlackRock.
Funding Circle SME Income Fund: 2.2% (2015: Nil) seeks to generate income through investments in UK residential mortgages.
BGF Emerging Markets Equity Income Fund1: 2.1% (2015:1.6%) is a diversified portfolio of predominantly emerging market equities selected for their ability to generate income from dividends. The fund can also hold developed market securities that have significant business operations in emerging markets. The fund is managed by BlackRock.
MAS Mortgage Holdings1, 2: 2.1% (2015: Nil) is a holding company set up to hold investments in UK buy-to-let mortgages, which are managed by BlackRock's in-house mortgage team. These investments are designed and managed to provide a high and sustainable level of income with conservative levels of capital risk.
British American Tobacco: 2.0% (2015: 2.5%) is one of the world's leading tobacco groups, with more than 200 brands in the portfolio selling in approximately 180 markets worldwide.
Unilever: 1.7% (2015: 1.3%) is a global consumer products group with strong market positions in emerging markets and a growing bias towards personal care.
AstraZeneca: 1.7% (2015: 2.5%) is a global pharmaceutical company, operating in the research, development, manufacture and marketing of pharmaceutical products.
Scottish Mortgage Investment Trust: 1.5% (2015: 1.1%) is an investment trust company with an investment objective to invest in a high conviction global portfolio of companies with the aim of maximising its total return over the long term. The managers look for strong businesses with above-average returns and aim to achieve a greater return than the FTSE All-World Index (in sterling terms) over a five year rolling period.
Largest fixed income investments (included within top ten overall portfolio holdings)
iShares Core GBP Corporate Bond Fund1: 7.0% (2015:Nil) is an exchange traded fund that seeks to track the performance of an index composed of Sterling denominated investment grade corporate bonds. The fund is managed by BlackRock.
BGF Global Corporate Bond Fund1: 6.2% (2015: 5.8%) aims to maximise returns through a combination of capital growth and income from the fund's assets. The fund invests globally, and at least 70% of its total assets are held in fixed income securities. These include bonds and money market instruments. At least 70% of the fund's total assets will be issued by companies and will be investment grade at the time of purchase. The fund is managed by BlackRock.
US Treasury 0.375% 15 July 2025: 4.1% (2015: Nil) is a debt security issued by the United States of America Government, used to access US government bonds.
Turkey 10.7% 17 February 2021: 2.8% (2015: Nil) is a debt security issued by the Turkish Government, used to access Turkish government bonds.
BlackStone GSO Loan Financing: 2.7% (2015: 2.4%) is a United Kingdom-based closed-ended investment company. The company's investment objective is to provide shareholders with stable and growing income returns, and to grow the capital value of the investment portfolio by exposure predominately to floating rate senior secured loans directly and indirectly through collateralized loan obligation income notes. The company invests in sectors, such as healthcare and pharma; business services; chemical, plastic and rubber; capital equipment; construction and building; broadcast and subscription; retail; beverage, food and tobacco; hotel, gaming and leisure, and banking and finance.
UK Government 2% 7 September 2025: 2.2% (2015: Nil) is a debt security issued by the United Kingdom Government, used to access UK government bonds.
1 Denotes BlackRock managed products
2 Unquoted holding
All percentages reflect the value of the holding as a percentage of total investments. Percentages in brackets represent the value of the holding as at 30 September 2015. Together, the ten largest investments represent 26.1% of the Company's portfolio (ten largest investments at 30 September 2015: 24.5%).
Portfolio valuation as at 30 September 2016
| Company | Sector | Marketvalue £'000 | Marketvalue asa%of netassets | Grossmarket exposure1 £'000 |
| Equities | ||||
| UK Equities | ||||
| BlackRock Throgmorton Trust* | Financials | 10,456 | 3.0 | 10,456 |
| British American Tobacco | Consumer Goods | 8,515 | 2.4 | 8,515 |
| Unilever | Consumer Goods | 7,296 | 2.1 | 7,296 |
| AstraZeneca | Health Care | 7,258 | 2.1 | 7,258 |
| BT Group | Telecommunications | 5,614 | 1.6 | 5,614 |
| John Laing Group | Financials | 5,245 | 1.5 | 5,245 |
| Vodafone | Telecommunications | 5,221 | 1.5 | 5,221 |
| Sky | Consumer Services | 5,095 | 1.4 | 5,095 |
| RELX | Consumer Services | 4,799 | 1.4 | 4,799 |
| Royal Dutch Shell 'B' | Oil & Gas | 4,671 | 1.3 | 4,671 |
| GlaxoSmithKline | Health Care | 4,569 | 1.3 | 4,569 |
| Lloyds Banking Group | Financials | 4,450 | 1.3 | 4,450 |
| HSBC Holdings | Financials | 3,995 | 1.1 | 3,995 |
| Rentokil Initial | Industrials | 3,619 | 1.0 | 3,619 |
| Carnival | Consumer Services | 3,472 | 1.0 | 3,472 |
| Wolseley | Industrials | 3,449 | 1.0 | 3,449 |
| BP Group | Oil & Gas | 3,432 | 1.0 | 3,432 |
| Altria Group | Consumer Goods | 3,430 | 1.0 | 3,430 |
| Intercontinental Hotels Group | Consumer Services | 3,155 | 0.9 | 3,155 |
| Inchcape | Consumer Services | 3,127 | 0.9 | 3,127 |
| Tesco | Consumer Services | 3,079 | 0.9 | 3,079 |
| Imperial Brands | Consumer Goods | 3,023 | 0.8 | 3,023 |
| BAE Systems | Industrials | 2,987 | 0.8 | 2,987 |
| Stagecoach Group | Consumer Services | 2,969 | 0.8 | 2,969 |
| RPC Group | Industrials | 2,813 | 0.8 | 2,813 |
| Hays | Industrials | 2,693 | 0.7 | 2,693 |
| Shire | Health Care | 2,534 | 0.7 | 2,534 |
| Admiral Group | Financials | 2,494 | 0.7 | 2,494 |
| Smith (DS) | Industrials | 2,455 | 0.7 | 2,455 |
| Provident Financial | Financials | 2,361 | 0.7 | 2,361 |
| ITV | Consumer Services | 2,095 | 0.6 | 2,095 |
| Hargreaves Lansdown | Financials | 2,075 | 0.6 | 2,075 |
| Kier Group | Industrials | 2,075 | 0.6 | 2,075 |
| Direct Line Insurance | Financials | 2,061 | 0.6 | 2,061 |
| Dixons Carphone | Consumer Services | 2,010 | 0.6 | 2,010 |
| Cineworld Group | Consumer Services | 1,894 | 0.5 | 1,894 |
| Compagnie Financiere Richemont | Consumer Goods | 1,645 | 0.5 | 1,645 |
| Next | Consumer Services | 1,314 | 0.4 | 1,314 |
| Foxtons Group | Financials | 1,093 | 0.3 | 1,093 |
| Elementis | Basic Materials | 1,058 | 0.3 | 1,058 |
| -------- | -------- | -------- | ||
| Total | 145,596 | 41.4 | 145,596 | |
| ======== | ======== | ======== | ||
| UK Equity Hedges | (618) | (0.2) | (23,239) | |
| ======== | ======== | ======== | ||
| Total | 144,978 | 41.2 | 122,357 | |
| ======== | ======== | ======== |
| Company | Sector | Marketvalue £'000 | Marketvalue asa%of net assets | Grossmarket exposure1 £'000 |
| Overseas Developed Market Equities | ||||
| BlackRock Impact World Equity Fund* | Financials | 16,386 | 4.7 | 16,386 |
| Scottish Mortgage Investment Trust | Financials | 6,168 | 1.8 | 6,168 |
| Goodyear Tire & Rubber | Consumer Goods | 524 | 0.2 | 524 |
| Amazon.com | Consumer Services | 513 | 0.2 | 513 |
| Accenture 'A' | Industrials | 506 | 0.2 | 506 |
| Edwards Lifesciences | Health Care | 501 | 0.2 | 501 |
| MasterCard 'A' | Financials | 498 | 0.2 | 498 |
| Varian Medical Systems | Health Care | 498 | 0.2 | 498 |
| CBS Corporation 'B' | Consumer Services | 496 | 0.2 | 496 |
| S&P Global | Financials | 495 | 0.2 | 495 |
| Fedex | Industrials | 490 | 0.2 | 490 |
| Facebook 'A' | Technology | 487 | 0.2 | 487 |
| Equifax | Financials | 485 | 0.2 | 485 |
| Verisign | Technology | 482 | 0.2 | 482 |
| International Paper | Basic Materials | 482 | 0.2 | 482 |
| Tripadvisor | Consumer Services | 477 | 0.2 | 477 |
| General Dynamics | Industrials | 477 | 0.2 | 477 |
| Harris Corporation | Technology | 477 | 0.2 | 477 |
| L-3 Communications | Industrials | 476 | 0.1 | 476 |
| FMC | Basic Materials | 476 | 0.1 | 476 |
| Yum! Brands | Consumer Services | 474 | 0.1 | 474 |
| Cummins | Industrials | 473 | 0.1 | 473 |
| Motorola Solutions | Technology | 473 | 0.1 | 473 |
| Southern Company | Utilities | 471 | 0.1 | 471 |
| Texas Instruments | Technology | 471 | 0.1 | 471 |
| Eli Lilly | Health Care | 471 | 0.1 | 471 |
| Alaska Air Group | Consumer Services | 467 | 0.1 | 467 |
| American Airlines | Consumer Services | 466 | 0.1 | 466 |
| United Parcel Service | Industrials | 466 | 0.1 | 466 |
| Fluor | Industrials | 465 | 0.1 | 465 |
| Dow Chemical | Basic Materials | 463 | 0.1 | 463 |
| Total System Services | Industrials | 463 | 0.1 | 463 |
| Textron | Industrials | 463 | 0.1 | 463 |
| Northrop Grumman | Industrials | 462 | 0.1 | 462 |
| Du Pont (E.I) De Nemours | Basic Materials | 461 | 0.1 | 461 |
| Pitney Bowes | Technology | 459 | 0.1 | 459 |
| Intuit | Technology | 458 | 0.1 | 458 |
| Philip Morris | Consumer Goods | 457 | 0.1 | 457 |
| Boeing | Industrials | 457 | 0.1 | 457 |
| Monsanto | Consumer Goods | 454 | 0.1 | 454 |
| Davita Healthcare | Health Care | 453 | 0.1 | 453 |
| Raytheon | Industrials | 451 | 0.1 | 451 |
| Occidental Petroleum | Oil & Gas | 449 | 0.1 | 449 |
| Brown-Forman 'B' | Consumer Goods | 446 | 0.1 | 446 |
| 21st Century Fox | Consumer Services | 445 | 0.1 | 445 |
| Block (H&R) | Consumer Services | 444 | 0.1 | 444 |
| Lockheed Martin | Industrials | 437 | 0.1 | 437 |
| Viacom 'B' | Consumer Services | 416 | 0.1 | 416 |
| Mallinckrodt | Health Care | 412 | 0.1 | 412 |
| Vertex Pharmaceuticals | Health Care | 408 | 0.1 | 408 |
| Hershey | Consumer Goods | 402 | 0.1 | 402 |
| Overseas Developed Market Hedges | (5,566) | (1.6) | (23,753) | |
| -------- | -------- | -------- | ||
| Total | 39,885 | 11.4 | 21,698 | |
| ======== | ======== | ======== | ||
| Emerging Market Equities | ||||
| BGF Emerging Markets Equity Income Fund* | 8,785 | 2.5 | 8,785 | |
| BGF ASEAN Leaders Fund* | 2,553 | 0.7 | 2,553 | |
| -------- | -------- | -------- | ||
| Total | 11,338 | 3.2 | 11,338 | |
| ======== | ======== | ======== | ||
| Total Equities | 196,201 | 55.8 | 155,393 | |
| ======== | ======== | ======== |
Marketvalue £'000 | Marketvalue asa%of netassets | Grossmarket exposure1 £'000 | |
| Volatility Strategies | |||
| Commodity Strategies | |||
| TRS - MLBX Commodity Volatility Carry Total Return | (82) | 0.0 | 1,469 |
| TRS - MLBX Commodity Volatility Carry Total Return | (237) | (0.1) | 5,073 |
| TRS - GS Vol of Vol Carry Excess Return Strategy | (805) | (0.2) | 3,789 |
| Other | |||
| TRS - BAML Vortex Strategy | 715 | 0.2 | 11,345 |
| USD MXN Put Option | 56 | 0.0 | 46 |
| USD MXN Put Option | 54 | 0.0 | 45 |
| FX Volatility Swap EUR USD @ 10.15 | (17) | 0.0 | - |
| FX Volatility Swap EUR USD @ 10.1 | (18) | 0.0 | - |
| FX Volatility Swap GBP USD @ 12.5 | (19) | 0.0 | - |
| FX Volatility Swap GBP USD @ 11.1 | (42) | 0.0 | - |
| -------- | -------- | -------- | |
| Total Volatility Strategies | (395) | (0.1) | 21,767 |
| ======== | ======== | ======== |
Marketvalue £'000 | Marketvalue asa%of netassets | Grossmarket exposure1 £'000 | |
| Fixed Income | |||
| International Government Bonds | |||
| US Treasury 0.375% 15 Jul 2025 | 17,029 | 4.8 | 17,029 |
| Turkey 10.7% 17 Feb 2021 | 11,579 | 3.3 | 11,579 |
| Mexico 10% 05 Dec 2024 | 7,889 | 2.2 | 7,889 |
| Poland 2.5% 25 Jul 2026 | 4,854 | 1.4 | 4,854 |
| Mexico 8% 11 Jun 2020 | 3,859 | 1.2 | 3,859 |
| US Treasury 0.625% 15 Jan 2026 | 2,607 | 0.7 | 2,607 |
| Ireland 7.375% 29 Dec 2049 | 165 | 0.0 | 165 |
| International Government Bond Hedges | (69) | 0.0 | 7,945 |
| -------- | -------- | -------- | |
| Total | 47,913 | 13.6 | 55,927 |
| ======== | ======== | ======== | |
| UK Government Bonds | |||
| UK Government 2% 7 Sep 2025 | 9,259 | 2.6 | 9,259 |
| -------- | -------- | -------- | |
| Total | 9,259 | 2.6 | 9,259 |
| -------- | -------- | -------- | |
| Investment Grade Corporate Bonds | |||
| BGF Global Corporate Bond Fund* | 25,844 | 7.4 | 25,844 |
| Fiat Finance 5.625% 12 Jun 2017 | 30 | 0.0 | 30 |
| -------- | -------- | -------- | |
| iShares Core GBP Corporate Bond Fund* | 29,264 | 8.3 | 29,264 |
| -------- | -------- | -------- | |
| Total | 55,138 | 15.7 | 55,138 |
| ======== | ======== | ======== | |
| High Yield Bonds | |||
| Aroundtown Property 3% 05 May 2020 | 462 | 0.1 | 462 |
| Orange 5.875% 28 Feb 2049 | 406 | 0.1 | 406 |
| Telefonica 5.875% 31 Mar 2049 | 374 | 0.1 | 374 |
| Allied Irish Banks 4.125% 26 Nov 2025 | 333 | 0.1 | 333 |
| Matterhorn Telecom 3.875% 01 May 2022 | 321 | 0.1 | 321 |
| BBVA 6.75% Perpetual | 321 | 0.1 | 321 |
| Ibercaja Banco 5% 28 Jul 2025 | 317 | 0.1 | 317 |
| UPCB Finance 4% 15 Jan 2027 | 317 | 0.1 | 317 |
| Trinseo 6.375% 01 May 2022 | 316 | 0.1 | 316 |
| Progroup 5.125% 01 May 2022 | 312 | 0.1 | 312 |
| Softbank 4.75% 30 Jul 2025 | 307 | 0.1 | 307 |
| Belden 5.5% 15 Apr 2023 | 305 | 0.1 | 305 |
| Altice 7.25% 15 May 2022 | 305 | 0.1 | 305 |
| SGD 5.625% 15 May 2019 | 303 | 0.1 | 303 |
| LGE Holdco 7.125% 15 May 2024 | 302 | 0.1 | 302 |
| Telecom Italia Finance 7.75% 24 Jan 2033 | 296 | 0.1 | 296 |
| UBS 7% Perpetual | 295 | 0.1 | 295 |
| Pfleiderer 7.875% 01 Aug 2019 | 293 | 0.1 | 293 |
| Wind Acquisition Finance 7% 23 Apr 2021 | 280 | 0.1 | 280 |
| PSPC Escrow 6% 01 Feb 2023 | 275 | 0.1 | 275 |
| Virgin Media 5.5% 15 Sep 2024 | 274 | 0.1 | 274 |
| BNP Paribas 7.375% Perpetual | 269 | 0.1 | 269 |
| Swissport 6.75% 15 Dec 2021 | 268 | 0.1 | 268 |
| Banco Popular Espanol 11.5% convertible bond | 265 | 0.1 | 265 |
| Bankia 4% 22 May 2024 | 258 | 0.1 | 258 |
| Cadogan FRN 25 May 2029 | 256 | 0.1 | 256 |
| Unicredit 6.95% 31 Oct 2022 | 255 | 0.1 | 255 |
| Unique Pub Finance 6.464% 30 Mar 2032 | 255 | 0.1 | 255 |
| Veritas 7.5% 01 Feb 2023 | 245 | 0.1 | 245 |
| AA Bond 5.5% 31 Jul 2043 | 243 | 0.1 | 243 |
| Enel Spa 6.625% 15 Sep 2076 | 241 | 0.1 | 241 |
| International Game Technology 4.75% 15 Feb 2023 | 235 | 0.1 | 235 |
| Verisure 6% 01 Nov 2022 | 233 | 0.1 | 233 |
| Banco Santander 6.25% Perpetual | 232 | 0.1 | 232 |
| Voyage Care Bond Co 6.5% 01 Aug 2018 | 231 | 0.1 | 231 |
| Logistics FRN 20 Aug 2025 | 230 | 0.1 | 230 |
| Annington Finance 13% 15 Jan 2023 | 228 | 0.1 | 228 |
| United Group 7.875% 15 Nov 2020 | 225 | 0.1 | 225 |
| Ineos Finance 4% 01 May 2023 | 224 | 0.1 | 224 |
| Numericable 5.625% 15 May 2024 | 212 | 0.1 | 212 |
| Unitymedia KabelBW 4% 15 Jan 2025 | 211 | 0.1 | 211 |
| Cognita 7.75% 15 Aug 2021 | 210 | 0.1 | 210 |
| Senvion 6.625% 15 Nov 2020 | 209 | 0.1 | 209 |
| Virgin Media 5.125% 15 Jan 2025 | 205 | 0.1 | 205 |
| Harvest CLO FRN 15 Oct 2029 | 198 | 0.1 | 198 |
| Telenet Finance 6.75% 15 Aug 2024 | 190 | 0.1 | 190 |
| BHP Billiton 4.75% 22 Apr 2076 | 187 | 0.1 | 187 |
| JH-Holding Finance 8.25% 01 Dec 2022 | 186 | 0.1 | 186 |
| Tullow Oil 6.625% 12 Jul 2021 | 184 | 0.1 | 184 |
| Origin Energy 7.875% 16 Jun 2071 | 183 | 0.1 | 183 |
| Rabobank - Cooperatieve 6.625% Perpetual | 182 | 0.1 | 182 |
| Portaventura Entertainment 7.25% 01 Dec 2020 | 180 | 0.1 | 180 |
| XPO Logistics 5.75% 15 Jun 2021 | 176 | 0.1 | 176 |
| Areva 4.875% 23 Sep 2024 | 175 | 0.1 | 175 |
| OTE 3.5% 9 Jun 2020 | 175 | 0.1 | 175 |
| Punch Taverns 5.267% 30 Mar 2024 | 175 | 0.0 | 175 |
| Bilbao 10.5% 01 Dec 2018 | 172 | 0.0 | 172 |
| Anglo American 2.5% 29 Apr 2021 | 172 | 0.0 | 172 |
| Carlyle FRN 21 Sep 2029 | 172 | 0.0 | 172 |
| WFS Global Holdings 9.5% 15 Jul 2022 | 171 | 0.0 | 171 |
| Credit Agricole 4.5% 31 Oct 2049 | 171 | 0.0 | 171 |
| Avis Budget 4.125% 15 Nov 2024 | 169 | 0.0 | 169 |
| Avoca Clothing FRN 15 Jan 2029 | 163 | 0.0 | 163 |
| Gates Global LLC 5.75% 15 Jul 2022 | 160 | 0.0 | 160 |
| Intesa Sanpaolo 7% 29 Dec 2049 | 159 | 0.0 | 159 |
| CPUK Finance 7% 28 Feb 2042 | 158 | 0.0 | 158 |
| Assicurazioni Generali Spa 6.416% Perpetual | 152 | 0.0 | 152 |
| Novafives 4.5% 30 Jun 2021 | 151 | 0.0 | 151 |
| Ardagh Packaging Finance 4.25% 15 Jan 2022 | 151 | 0.0 | 151 |
| Société Générale 7.375% 29 Dec 2049 | 151 | 0.0 | 151 |
| Onorato Armatori 7.75% 15 Feb 2023 | 150 | 0.0 | 150 |
| Jerrold Finco 6.25% 15 Sep 2021 | 150 | 0.0 | 150 |
| Arbour CLO FRN 15 Jan 2030 | 149 | 0.0 | 149 |
| Norske Skogindustrier 11.75% 15 Dec 2019 | 146 | 0.0 | 146 |
| Credit Suisse 6.25% 29 Dec 2049 | 146 | 0.0 | 146 |
| Adagio CLO FRN 15 Oct 2029 | 139 | 0.0 | 139 |
| Tullow Oil 6% 01 Nov 2020 | 139 | 0.0 | 139 |
| Ardagh Packaging Finance 6.75% 15 May 2024 | 136 | 0.0 | 136 |
| Intesa Sanpaolo 7.7% Perpetual | 135 | 0.0 | 135 |
| Schaeffler 3.25% 15 Sep 2023 | 129 | 0.0 | 129 |
| Cirsa Funding Luxembourg 5.875% 15 May 2023 | 119 | 0.0 | 119 |
| Schaeffler 2.75% 15 Sep 2021 | 108 | 0.0 | 108 |
| Schaeffler 3.75% 15 Sep 2026 | 108 | 0.0 | 108 |
| Vougeot Bidco 7.875% 15 Jul 2020 | 104 | 0.0 | 104 |
| Garfunkel 8.5% 01 Nov 2022 | 102 | 0.0 | 102 |
| Virgin Media Secured Finance 4.875% 15 Jan 2027 | 100 | 0.0 | 100 |
| Repsol International Finance 4.5% 25 Mar 2075 | 100 | 0.0 | 100 |
| Enel Spa 5.625% 12 Jan 2075 | 92 | 0.0 | 92 |
| Telefonica 5% 31 Mar 2049 | 90 | 0.0 | 90 |
| Euro Gala FRN 10 Nov 2030 | 85 | 0.0 | 85 |
| HBOS Capital Funding 6.85% 29 Mar 2049 | 78 | 0.0 | 78 |
| Banco Espirito Santo 4% 21 Jan 2019 | 76 | 0.0 | 76 |
| Banco Espirito Santo 4.75% 15 Jan 2018 | 57 | 0.0 | 57 |
| Gemgarto FRN 16 Feb 2054 | 46 | 0.0 | 46 |
| iTraxx Xover Super Senior Tranche CDS | (90) | 0.0 | 30,092 |
| -------- | -------- | -------- | |
| Total | 19,211 | 5.5 | 49,393 |
| ======== | ======== | ======== | |
| Total Fixed Income | 131,521 | 37.4 | 169,717 |
| ======== | ======== | ======== |
Marketvalue £'000 | Marketvalue asa%of netassets | Grossmarket exposure1 £'000 | |
| Alternatives | |||
| Listed Alternatives | |||
| Blackstone GSO Loan Financing | 11,409 | 3.2 | 11,409 |
| Funding Circle SME Income Fund | 9,307 | 2.6 | 9,307 |
| Foresight Solar Fund | 4,916 | 1.4 | 4,916 |
| iShares UK Property* | 4,354 | 1.2 | 4,354 |
| JP Morgan Global Convertibles Income Fund | 3,686 | 1.1 | 3,686 |
| NB Distressed Debt Investment Fund | 3,489 | 1.0 | 3,489 |
| Woodford Patient Capital Trust | 3,001 | 0.9 | 3,001 |
| -------- | -------- | -------- | |
| Total | 40,162 | 11.4 | 40,162 |
| ======== | ======== | ======== | |
| Unlisted Alternatives | |||
| MAS Mortgage Holdings* | 8,721 | 2.5 | 8,721 |
| Forward Partners 1 | 4,400 | 1.2 | 4,400 |
| -------- | -------- | -------- | |
| Total | 13,121 | 3.7 | 13,121 |
| ======== | ======== | ======== | |
| Total Alternatives | 53,283 | 15.1 | 53,283 |
| ======== | ======== | ======== |
Marketvalue £'000 | Marketvalue asa%of netassets | Grossmarket exposure1 £'000 | |
| Commodities | |||
| iShares Gold Trust* | 26,658 | 7.6 | 26,658 |
| iShares Physical Gold* | 4,874 | 1.4 | 4,874 |
| -------- | -------- | -------- | |
| Total Commodities | 31,532 | 9.0 | 31,532 |
| ======== | ======== | ======== |
Marketvalue £'000 | Marketvalue asa%of netassets | |
| Total Forward Currency Contracts | (368) | (0.1) |
| -------- | -------- | |
| BlackRock's Institutional Cash Series plc - Sterling Liquidity Fund* | 1,248 | 0.4 |
| Add: Derivatives | 6,738 | 1.9 |
| Add: Forward Currency Contracts | 368 | 0.1 |
| -------- | -------- | |
| Total investments | 420,128 | 119.5 |
| ======== | ======== | |
| Cash and cash equivalents | (15,881) | (4.5) |
| Net other liabilities | (52,726) | (15.0) |
| ======== | ======== | |
| Net assets | 351,521 | 100.0 |
| ======== | ======== |
1Gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract.
*Denotes BlackRock managed products.
Income statement for the year ended 30 September 2016
Notes | Revenue 2016 £'000 | Revenue 2015 £'000 | Capital 2016 £'000 | Capital 2015 £'000 | Total 2016 £'000 | Total 2015 £'000 | |
| Gains/(losses) on investments held at fair value through profit or loss | - | - | 11,623 | (35,518) | 11,623 | (35,518) | |
| (Losses)/gains on foreign exchange | - | - | (25,019) | 6,444 | (25,019) | 6,444 | |
| Income from investments held at fair value through profit or loss | 3 | 23,198 | 23,024 | - | - | 23,198 | 23,024 |
| Other income | 3 | 67 | 96 | - | - | 67 | 96 |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Total income | 23,265 | 23,120 | (13,396) | (29,074) | 9,869 | (5,954) | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Expenses | |||||||
| Investment management fees | 4 | (486) | (624) | (902) | (1,159) | (1,388) | (1,783) |
| Operating expenses | 5 | (758) | (957) | (209) | (24) | (967) | (981) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Total operating expenses | (1,244) | (1,581) | (1,111) | (1,183) | (2,355) | (2,764) | |
| ======== | ======== | ======== | ======== | ======== | ======== | ||
| Net profit/(loss) on ordinary activities before finance costs and taxation | 22,021 | 21,539 | (14,507) | (30,257) | 7,514 | (8,718) | |
| Finance costs | 6 | (1,346) | (1,410) | (2,492) | (2,616) | (3,838) | (4,026) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net profit/(loss) on ordinary activities before taxation | 20,675 | 20,129 | (16,999) | (32,873) | 3,676 | (12,744) | |
| Taxation | (73) | 34 | - | - | (73) | 34 | |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Net profit/(loss) on ordinary activities after taxation | 8 | 20,602 | 20,163 | (16,999) | (32,873) | 3,603 | (12,710) |
| -------- | -------- | -------- | -------- | -------- | -------- | ||
| Earnings/(loss) per ordinary share | 8 | 7.56p | 7.07p | (6.24)p | (11.52)p | 1.32p | (4.45)p |
| ======== | ======== | ======== | ======== | ======== | ======== |
The total column of this statement represents the profit or loss of the Company.
The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations and no operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.
The net profit for the year disclosed above represents the Company's total comprehensive income.
Statement of changes in equity for the year ended 30 September 2016
Note | Calledup sharecapital £'000 | Capital redemption reserve £'000 | Capital reserves £'000 | Revenue reserve £'000 | Total £'000 | |
| For the year ended 30 September 2016 | ||||||
| At 30 September 2015 | 72,778 | 15,563 | 249,811 | 36,680 | 374,832 | |
| Total comprehensive income: | ||||||
| (Loss)/profit for the year | - | - | (16,999) | 20,602 | 3,603 | |
| Transactions with owners, recorded directly to equity: | ||||||
| Ordinary shares purchased into treasury | - | - | (9,003) | - | (9,003) | |
| Ordinary shares issued from treasury | - | - | 270 | - | 270 | |
| Tender offer costs | - | - | (8) | - | (8) | |
| Dividends paid (a) | 7 | - | - | - | (18,173) | (18,173) |
| -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2016 | 72,778 | 15,563 | 224,071 | 39,109 | 351,521 | |
| -------- | -------- | -------- | -------- | -------- | ||
| For the year ended 30 September 2015 | ||||||
| At 30 September 2014 | 72,778 | 15,563 | 302,990 | 35,534 | 426,865 | |
| Total comprehensive income: | ||||||
| (Loss)/profit for the year | - | - | (32,873) | 20,163 | (12,710) | |
| Transactions with owners, recorded directly to equity: | ||||||
| Ordinary shares purchased into treasury | - | - | (20,256) | - | (20,256) | |
| Tender offer costs | - | - | (50) | - | (50) | |
| Dividends paid (b) | 7 | - | - | - | (19,017) | (19,017) |
| -------- | -------- | -------- | -------- | -------- | ||
| At 30 September 2015 | 72,778 | 15,563 | 249,811 | 36,680 | 374,832 | |
| ======== | ======== | ======== | ======== | ======== |
(a) Third quarterly interim dividend of 1.67p per share for the year ended 30 September 2015, paid on 9 October 2015. Final dividend of 1.70p per share for the year ended 30 September 2015, paid on 29 January 2016. First quarterly interim dividend of 1.635p per share for the year ended 30 September 2016, paid on 8 April 2016. Second quarterly interim dividend of 1.635p per share for the year ended 30 September 2016, paid on 22 July 2016.
(b) Third quarterly interim dividend of 1.53p per share for the year ended 30 September 2014, paid on 10 October 2014. Final dividend of 1.895p per share for the year ended 30 September 2014, paid on 30 January 2015. First quarterly interim dividend of 1.50p per share for the year ended 30 September 2015, paid on 10April 2015. Second quarterly interim dividend of 1.67p per share for the year ended 30 September 2015, paid on 10 July 2015.
Balance sheet as at 30 September 2016
Notes | 30September 2016 £'000 | 30September 2015 £'000 | |
| Fixed assets | |||
| Investments held at fair value through profit or loss | 420,128 | 411,230 | |
| -------- | -------- | ||
| Current assets | |||
| Debtors | 6,347 | 4,128 | |
| Derivative financial instruments | 2,652 | 3,792 | |
| Collateral pledged with brokers | 11,497 | 17,524 | |
| Cash & cash equivalents | 2,203 | 14,678 | |
| -------- | -------- | ||
| 22,699 | 40,122 | ||
| -------- | -------- | ||
| Creditors - amounts falling due within one year | |||
| Bank overdraft | (18,084) | - | |
| Collateral received from brokers | (770) | (884) | |
| Derivative financial instruments | (9,758) | (12,157) | |
| Other creditors | (3,088) | (3,900) | |
| -------- | -------- | ||
| (31,700) | (16,941) | ||
| -------- | -------- | ||
| Net current (liabilities)/assets | (9,001) | 23,181 | |
| -------- | -------- | ||
| Total assets less current liabilities | 411,127 | 434,411 | |
| Creditors - amounts falling due after more than one year | (59,606) | (59,579) | |
| -------- | -------- | ||
| Net assets | 351,521 | 374,832 | |
| -------- | -------- | ||
| Capital and reserves | |||
| Called up share capital | 9 | 72,778 | 72,778 |
| Capital redemption reserve | 15,563 | 15,563 | |
| Capital reserves | 224,071 | 249,811 | |
| Revenue reserve | 39,109 | 36,680 | |
| -------- | -------- | ||
| Total shareholders' funds | 8 | 351,521 | 374,832 |
| -------- | -------- | ||
| Net asset value per ordinary share (bonds at par value) | 8 | 131.64p | 136.58p |
| ======== | ======== | ||
| Net asset value per ordinary share (bonds at market value) | 8 | 123.62p | 131.00p |
| ======== | ======== |
Statement of cash flows for the year ended 30 September 2016
Notes | Year ended 30September 2016 £'000 | Year ended 30September 2015 £'000 | |
| Operating activities | |||
| Net profit/(loss) before taxation | 3,676 | (12,744) | |
| Interest expense | 3,838 | 4,026 | |
| (Gains)/losses on investments held at fair value through profit or loss | (11,623) | 33,380 | |
| Net losses/(gains) on foreign exchange | (1,860) | (4,320) | |
| Sales of investments held at fair value through profit or loss | 408,256 | 602,681 | |
| Purchase of investments held at fair value through profit or loss | (408,381) | (550,639) | |
| (Increase)/decrease in debtors | (434) | 387 | |
| Increase in other creditors | 814 | 585 | |
| Movement in forward currency contracts | (1,802) | 2,138 | |
| Tax on investment income | (62) | - | |
| Net movement in collateral balances | 5,913 | (16,640) | |
| -------- | -------- | ||
| Net cash (expended)/generated from operating activities | (1,665) | 58,854 | |
| -------- | -------- | ||
| Financing activities | |||
| Shares purchased to be held in treasury | (9,003) | (20,256) | |
| Tender offer costs paid | (8) | (50) | |
| Proceeds from share issue | 270 | - | |
| Interest paid | (3,840) | (3,987) | |
| Repayment of loan | - | (19,962) | |
| Dividends paid | 7 | (18,173) | (19,017) |
| -------- | -------- | ||
| Net cash used in financing activities | (30,754) | (63,272) | |
| -------- | -------- | ||
| Decrease in cash and cash equivalents | (32,419) | (4,418) | |
| -------- | -------- | ||
| Cash and cash equivalents at the start of the year | 14,678 | 14,790 | |
| Effect of foreign exchange rate changes | 1,860 | 4,306 | |
| -------- | -------- | ||
| Cash and cash equivalents at the end of the year | (15,881) | 14,678 | |
| -------- | -------- | ||
| Comprised of: | |||
| Bank overdraft | (18,084) | - | |
| Cash at bank | 2,203 | 14,678 | |
| -------- | -------- | ||
| (15,881) | 14,678 | ||
| ======== | ======== |
Dividends and interest received in the year amounted to £10,429,000 and £3,012,000 (2015: £9,497,000 and £1,755,000) respectively.
Notes to the financial statements
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.
2. ACCOUNTING POLICIES
(a) Basis of preparation
This is the first year that the Company has presented its results and financial position under FRS 102, 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS 102), which forms part of revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013 and which came into effect for accounting periods beginning on or after 1 January 2015. The last financial statements prepared under the previous UK GAAP were for the year ended 30 September 2015.
The financial statements have been prepared on a going concern basis in accordance with FRS 102 and the revised Statement of Recommended Practice - 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (SORP) issued by the Association of Investment Companies (AIC) in November 2014.
As a result of the first time adoption of New UK GAAP and the revised SORP, comparative amounts and presentation formats have been amended where required. The changes to accounting policies relate to the composition of cash and cash equivalents and the change in the presentation of cash flows (see below). There were no adjustments to the Company's Income Statement for the financial year ended 30 September 2015 and the total equity as at 1October 2014 and 30 September 2015 between UK GAAP as previously reported and FRS 102 as a result of changes to accounting policies.
The Company's Statement of Cash Flows reflects the presentation requirements of FRS 102, which are different to that prepared under previous UK GAAP. In addition, the Statement of Cash Flows reconciles to cash and cash equivalents, whereas under previous UK GAAP the Statement of Cash Flows reconciled to cash. Cash and cash equivalents are defined in FRS 102 as 'cash in hand and demand deposits, bank overdrafts repayable on demand and short term highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value' whereas cash is defined in previous UK GAAP as 'cash in hand and deposits repayable on demand with any qualifying institution, less overdrafts from any qualifying institution repayable on demand'. The Company's investment in BlackRock's Institutional Cash Series plc - Sterling Liquidity Fund of £1,248,000 (2015: £57,637,000) is managed as part of the Company's investment management policy and, accordingly, this investment along with purchases and sales of this investment has been classified in the Balance Sheet as an investment and not as a cash equivalent as defined under FRS 102. As a result of this policy there is no change to the Statement of Cash Flows.
Expenses which are allocated to capital are available to reduce the Company's liability to corporation tax. The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue. This is known as the 'marginal method' of allocating tax relief between capital and revenue. The Company does not adopt the marginal method for two reasons. Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders' funds. Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future. Had this allocation been made, the chargeto revenue and corresponding credit to capital for the year ended 30 September 2015 would have been £2,249,000 (2015:£1,403,000).
The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, the policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company's operations are of a continuing nature.
The Company's financial statements are presented in sterling, which is the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand pounds (£'000) except where otherwise stated.
(b) Presentation of Income Statement
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of a revenue and a capital nature has been presented alongside the Income Statement.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are treated as revenue for the year on an ex-dividend basis. Fixed returns on non equity securities are recognised on a time apportionment basis. Interest income is accounted for on an accruals basis.
Special dividends are recognised on an ex-dividend basis and are treated as capital or revenue items depending on the facts or circumstances of each dividend.
Dividends are accounted for in accordance with Section 29 of FRS 102 on the basis of income actually receivable, without adjustment for tax credits attaching to the dividend. Dividends from overseas companies continue to be shown gross of withholding tax.
Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares over the amount of the cash dividend is recognised in capital reserves.
Options may be written over securities held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. Where the purpose of the option is the maintenance of capital, the premium is treated as a capital item. The value of the option is subsequently marked to market to reflect the fair value of the option based on traded prices.
Option premium income is recognised as revenue evenly over the life of the option contract and included in the revenue column of the Income Statement unless the option has been written for the maintenance and enhancement of the Company's investment portfolio and represents an incidental part of a larger capital transaction, in which case any premia arising are allocated to the capital column of the Income Statement. Where the premium is taken to revenue, an appropriate amount is shown as capital return such that the total return reflects the overall change in the fair value of the option. When an option is closed out or exercised the gain or loss is accounted for as capital and any unamortised premium is also retained in capital.
Credit Default Swaps (CDS) may be held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the CDS is the generation of income (i.e. sell protection), the premium received is treated as a revenue item. Where the purpose of the CDS is the maintenance of capital (buy protection), the premium paid is treated as a capital item. The value of the CDS is subsequently modelled to reflect the fair value of the CDS option based on available financial sources.
CDS premium income is recognised as revenue evenly over the life of the CDS contract and included in the revenue column of the Income Statement unless the CDS has been written for the maintenance and enhancement of the Company's investment portfolio, in which case any premia arising are allocated to the capital column of the Income Statement. When a CDS is closed out the gain or loss is accounted for as capital.
Collateralized Loan Obligations (CLO) may be held in the portfolio for generating or maintaining revenue returns. The income stream is treated as a revenue item and is recognised evenly over the life of the instrument and is included in the revenue column of the Income Statement. The value of the CLO is subsequently marked to market to reflect the fair value of the CLO based on traded prices.
Total Return Swaps (TRS) may be held in the portfolio for generating or protecting capital returns, or potentially for generating or maintaining revenue returns. Where the purpose of the TRS is the generation of income, the premium received is treated as a revenue item. Where the purpose of the TRS is the maintenance of capital, the premium paid is treated as a capital item. The value of the TRS is subsequently marked to market to reflect the fair value of the TRS based on traded prices.
The Company also invests in Equity Index Futures and Forward Currency Contracts but no income component can be derived in these instruments and, as such, they are marked to market to reflect their fair value with the gains and losses taken to the capital column of the Income Statement as per policy (h).
Deposit interest receivable is accounted for on an accruals basis. Underwriting commission is recognised when the issue underwritten closes.
(e) Expenses
All expenses are accounted for on an accruals basis. Expenses have been treated as revenue except as follows:
expenses which are incidental to the acquisition or disposal of an investment are treated as capital. Details of transaction costs on the purchases and sales of investments are disclosed in note 11, on page 61 of the Annual Report and Financial Statements;
the investment management fee has been allocated 65% to the capital column and 35% to the revenue column of the Income Statement in line with the Board's expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.
(f) Borrowings and finance costs
Borrowings are measured initially at the fair value of proceeds received less transaction costs and subsequently at amortised cost using the effective interest rate. Finance costs are accounted for on an accruals basis. Finance costs are allocated, insofar as they relate to the financing of the Company's investments, 65% to the capital column and 35% to the revenue column of the Income Statement, in line with the Board's expected long term split of returns, in the form of capital gains and income respectively, from the investment portfolio.
(g) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. Any tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that were applicable at the balance sheet date.
Deferred taxation is recognised in respect of all temporary differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. Deferred tax is measured on a non-discounted basis, at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. This is subject to deferred taxation assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted.
(h) Investments designated as held at fair value through profit or loss
The Company's investments are classified as held at fair value through profit or loss in accordance with Section 11 and 12 of FRS102 and are managed and evaluated on a fair value basis in accordance with its investment strategy.
All investments are designated upon initial recognition as held at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales are recognised at the trade date of the disposal and the proceeds are measured at fair value, which is regarded as the proceeds of the sale less any transaction costs.
The fair value of the financial investments is based on their quoted bid price at the balance sheet date on the exchange on which the investment is quoted, without deduction for the estimated future selling costs. Unquoted investments are valued by the Directors at fair value using International Private Equity and Venture Capital Valuation Guidelines. This policy applies to all current and non current asset investments of the Company.
Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as 'Gains on investments held at fair value through profit or loss'. Also included within this heading are transaction costs in relation to the purchase or sale of investments.
Amendments to FRS 102 - Fair value hierarchy disclosures amends paragraphs 34.22 and 34.42 of FRS 102, revising the disclosure requirements for financial instruments held at fair value and aligning the disclosures with those required by EU?adopted IFRS. The Company has chosen to early adopt these amendments to FRS 102: however, there were no changes to the classification within the fair value hierarchy. There are no accounting policy or disclosure changes as a result of this adoption.
The fair value hierarchy consists of the following three levels:
Level 1 - Quoted market price for identical instruments in active markets
Level 2 - Valuation techniques using observable inputs
Level 3 - Valuation techniques using significant unobservable inputs
(i) Valuation of derivative financial instruments
Derivatives are initially accounted and measured at fair value on the date the derivative contract is entered into and subsequently measured at fair value. The gain or loss on re-measurement is taken to the Income Statement. The sources of the return under the derivative contract (e.g. notional dividends, financing costs, interest returns and capital charges) are allocated to the revenue and capital columns of the Income Statement in alignment with the nature of the underlying source of income and in accordance with the guidance given in the AIC SORP.
(j) Dividends payable
Under Section 32 of FRS 102, final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date.
Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they have been approved by shareholders and have become a liability of the Company. Interim dividends are only recognised in the financial statements in the period in which they are paid.
(k) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency, being the currency in which the Company predominantly operates. The functional and reporting currency is sterling, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated into sterling at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into sterling at the rates of exchange ruling at the Balance Sheet date. Profits and losses of a capital nature are recognised in the capital column of the Income Statement and taken to the capital reserve. Profits and losses of an income nature are recognised in the revenue column of the Income Statement and taken to the revenue reserve.
(l) Shares repurchased and held in treasury
The full cost of shares repurchased and held in treasury is charged to capital reserves. Where treasury shares are subsequently reissued, any surplus is taken to the share premium account.
(m) Debtors
Debtors include sales for future settlement, other debtors and pre-payments and accrued income 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. Debtors are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
(n) Creditors
Creditors include purchases for future settlements, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors are classified as creditors - amounts due within one year if payment is due within one year or less. If not, they are presented as creditors - amounts falling due after more than one year. Creditors are recognised initially at fair value and, where applicable, subsequently measured at amortised cost using the effective interest rate method.
(o) Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash equivalents includes bank overdrafts repayable on demand and short term, highly liquid investments, that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
3. INCOME
| 2016 £'000 | 2015 £'000 | |
| Investment Income: | ||
| UK listed dividends | 6,461 | 10,619 |
| Overseas listed dividends | 3,911 | 3,522 |
| Fixed interest income | 2,871 | 2,566 |
| Derivative income | 9,955 | 6,317 |
| -------- | -------- | |
| 23,198 | 23,024 | |
| -------- | -------- | |
| Other income: | ||
| -------- | -------- | |
| Deposit interest | 25 | 77 |
| Underwriting commission | 42 | 19 |
| ======== | ======== | |
| 67 | 96 | |
| ======== | ======== | |
| Total | 23,265 | 23,120 |
| ======== | ======== |
Special dividends of £642,000 have been recognised in capital and deducted from investment cost (2015: £364,000).
4. INVESTMENT MANAGEMENT FEES
| 2016 | 2015 | |||||
| Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | |
| Investment management fee - F&C | - | - | - | 287 | 523 | 810 |
| Investment management fee - BlackRock | 486 | 902 | 1,388 | 337 | 636 | 973 |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| Total | 486 | 902 | 1,388 | 624 | 1,159 | 1,783 |
| ======== | ======== | ======== | ======== | ======== | ======== |
The investment management fee is levied at a rate of 0.4% per annum of the Company's total assets less current liabilities (excluding loans) and is allocated 65% to the capital column and 35% to the revenue column of the income statement.
BlackRock waived the management fees payable to the Company up to the level of transition and restructuring costs, which were estimated to be in the region of £762,000 for the year ended 30 September 2015. The fees in the above table that are shown as accrued to BlackRock have been credited to a payables account on the Company's balance sheet, offsetting amounts debited to the same account in respect of transition costs. As at 30 September 2016, £28,000 of transition costs were still outstanding. Adjustments to the waived total costs of £762,000 will be made as and when these accruals are cleared.
The Company has incurred legal and advisory costs in relation to the review of the Company's investment objective and policy (asannounced on 1 August 2016), which included consideration of a number of factors including the performance of the investment portfolio, the optimal structure of the Company, the cost of the Company's debt, the cost of paying the dividend and its discount management policy. These costs amounted to approximately £193,750 (excluding VAT). BlackRock has agreed to contribute to these costs to the sum of £83,000 by way of a fee waiver which has been applied to the management fees invoiced for the year to 30 September 2016 in the same way as set out above. In addition, the Company's broker (Cenkos Securities) have agreed to waive the corporate broking fee of £17,500 for the six months to 30 September 2016 (excluding VAT).
The Company also receives a rebate on the management fees levied on its underlying investments in other BlackRock managed funds in the normal course of business to ensure that no double counting occurs. These are recognised on an accruals basis and are treated as reduction in management fee expense and allocated between revenue and capital in accordance with the Company's policy for allocation of management fees. Additional information is given in note 18 in the Annual Report and Financial Statements.
5. OPERATING EXPENSES
| 2016 £'000 | 2015 £'000 | |
| Taken to revenue: | ||
| Custody fee | 26 | 12 |
| Auditor's remuneration: | ||
| - statutory audit | 44 | 34 |
| - taxation compliance services | 6 | 1 |
| - other audit services: | ||
| Review of Bond compliance certificate | 1 | 1 |
| Review of transition | - | 5 |
| Review of interim report | 7 | 7 |
| Depositary fees | 50 | 47 |
| Registrar's fees | 82 | 98 |
| Marketing fees | 94 | 107 |
| Directors' emoluments | 182 | 232 |
| Other administrative costs | 266 | 413 |
| -------- | -------- | |
| 758 | 957 | |
| -------- | -------- | |
| Taken to capital: | ||
| Transaction costs | 32 | 24 |
| Other costs | 177 | - |
| -------- | -------- | |
| 967 | 981 | |
| -------- | -------- | |
| The Company's ongoing charges - calculated as a percentage of average shareholders' funds and including management fees, operating expenses, finance costs and taxation were: | 0.62% | 0.68% |
| -------- | -------- |
6. FINANCE COSTS
| 2016 | 2015 | |||||
| Revenue £'000 | Capital £'000 | Total £'000 | Revenue £'000 | Capital £'000 | Total £'000 | |
| Debt repayable within 5 years | ||||||
| - Revolving advance facility | - | - | - | 80 | 148 | 228 |
| - Overdraft interest | 21 | 31 | 52 | 8 | 14 | 22 |
| Debt repayable in more than 5 years | ||||||
| - 6.25% Bonds 2031 | 1,325 | 2,461 | 3,786 | 1,322 | 2,454 | 3,776 |
| -------- | -------- | -------- | -------- | -------- | -------- | |
| 1,346 | 2,492 | 3,838 | 1,410 | 2,616 | 4,026 | |
| ======== | ======== | ======== | ======== | ======== | ======== |
Finance costs have been allocated in the ratio 35% to revenue and 65% to capital.
7. DIVIDENDS
Dividends paid on equity shares | Recorddate | Paymentdate | 2016 £'000 | 2015 £'000 |
| - third quarterly dividend of 1.67p (2014: 1.53p) | 10 September 2015 | 9 October 2015 | 4,583 | 4,428 |
| - fourth quarterly dividend of 1.70p (2014: 1.895p) | 31 December 2015 | 29 January 2016 | 4,669 | 5,465 |
| - first quarterly dividend of 1.635p (2015: 1.50p) | 11 March 2016 | 8 April 2016 | 4,478 | 4,326 |
| - second quarterly dividend of 1.635p (2015: 1.67p) | 24 June 2016 | 22 July 2016 | 4,443 | 4,817 |
| - unclaimed dividends from previous years | - | (19) | ||
| 18,173 | 19,017 | |||
| ======== | ======== | ======== | ======== |
The total dividends payable in respect of the year which form the basis of determining retained income for the purposes of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amounts proposed meet the relevant requirements as set out in this legislation.
| Dividends paid or proposed on equity shares in respect of the financial year to 30 September 2016: | 2016 £'000 | 2015 £'000 |
| First quarterly dividend of 1.635p (2015: 1.50p) | 4,478 | 4,326 |
| Second quarterly dividend of 1.635p (2015: 1.67p) | 4,443 | 4,817 |
| Third quarterly dividend of 1.635p (2015: 1.67p) | 4,366 | 4,583 |
| Fourth quarterly dividend of 1.635p* (2015: 1.70p) | 4,366 | 4,669 |
| -------- | -------- | |
| 17,653 | 18,395 | |
| ======== | ======== |
*Based upon 267,037,282 ordinary shares (excluding treasury shares) in issue on 30 September 2016.
8. EARNINGS AND NET ASSET VALUE PER ORDINARY SHARE
Revenue and capital earnings per share are shown below and have been calculated using the following:
| 2016 | 2015 | |
| Net revenue profit attributable to ordinary shareholders (£'000) | 20,602 | 20,163 |
| Net capital loss attributable to ordinary shareholders (£'000) | (16,999) | (32,873) |
| -------- | -------- | |
| Total profit attributable to ordinary shareholders return (£'000) | 3,603 | (12,710) |
| -------- | -------- | |
| Equity shareholders' funds (£'000) | 351,521 | 374,832 |
| -------- | -------- | |
| The weighted average number of ordinary shares in issue during the year, on which the earnings per ordinary share was calculated, was: | 272,290,493 | 285,283,310 |
| -------- | -------- | |
| The actual number of ordinary shares in issue at the year end, on which the net asset value per ordinary share was calculated, was: | 267,037,282 | 274,437,282 |
| -------- | -------- | |
| The number of ordinary shares in issue, including treasury shares, at the year end, was: | 291,112,282 | 291,112,282 |
| -------- | -------- |
| 2016 | 2015 | |||||
| Revenue pence | Capital pence | Total pence | Revenue pence | Capital pence | Total pence | |
| Earnings per share | ||||||
| Calculated on weighted average number of ordinary shares | 7.56 | (6.24) | 1.32 | 7.07 | (11.52) | (4.45) |
| Calculated on actual number of ordinary shares at 30 September | 7.72 | (6.37) | 1.35 | 7.35 | (11.98) | (4.63) |
| Net asset value per share (Bonds at par value) | 131.64 | 136.58 | ||||
| ======== | ======== | ======== | ======== | ======== | ======== | |
| Net asset value per share (Bonds at market value)* | 123.62 | 131.00 | ||||
| ======== | ======== | ======== | ======== | ======== | ======== |
*The fair value of the 6.25% Bond using the last available quoted offer price from the London Stock Exchange as at 30 September 2016 was 135.02p per bond, a total of £81,010,000 (30 September 2015: 124.84p, a total of £74,904,000).
9. CALLED UP SHARE CAPITAL
| Ordinary shares (number) | Treasury shares (number) | Total shares (number) | £'000 | |
| Allotted, called up and fully paid share capital comprised: | ||||
| Ordinary shares of 25p each | ||||
| -------- | -------- | -------- | -------- | |
| At 30 September 2015 | 274,437,282 | 16,675,000 | 291,112,282 | 72,778 |
| -------- | -------- | -------- | -------- | |
| Shares purchased and held in treasury | (7,600,000) | 7,600,000 | - | - |
| Shares issued from treasury | 200,000 | (200,000) | - | - |
| -------- | -------- | -------- | -------- | |
| At 30 September 2016 | 267,037,282 | 24,075,000 | 291,112,282 | 72,778 |
| ======== | ======== | ======== | ======== |
During the year 7,600,000 ordinary shares were purchased and held in treasury (2015: 14,975,000) for a consideration of £8,934,698 (excluding stamp duty). 200,000 shares were re-issued from treasury (2015: nil) for a consideration of £271,200. The number of ordinary shares issued at the year end, excluding treasury shares, was 267,037,282.
The ordinary shares (excluding any shares held in treasury) carry the right to receive any dividends and have one voting right per ordinary share. There are no restrictions on the voting rights of the ordinary shares or on the transfer of ordinary shares.
10. TRANSACTIONS WITH THE INVESTMENT MANAGER AND AIFM
BlackRock Fund Managers Limited (BFM) was appointed as the Company's AIFM with effect from 27 February 2015. BFM provides management and administrative services to the Company under a contract which is terminable on six months notice. BFM has (with the Company's consent) delegated certain portfolio and risk management services and other ancillary services, to BlackRock Investment Management (UK) limited (BIM (UK)). Further details of the investment management contract are disclosed in the Directors' Report on pages 29 and 30 of the Annual Report and Financial Statements.
The management fee for the year was £1,388,000 (2015: £1,783,000 of which £810,000 was recognised as earned by F&C), as disclosed in note 4 to the Financial Statements on page 57 of the Annual Report and Financial Statements. At the year end, an amount of £656,000 was outstanding in respect of these fees (2015: £227,000).
In addition to the above services, BlackRock has provided the Company with marketing services. The total fees paid or payable for these services for the year ended 30 September 2016 amounted to £94,000 including VAT (2015: £107,000) of which £86,000 was outstanding at year end (2015: £107,000).
The Company also has investments in several funds managed by BlackRock and details of the amounts invested as at 30 September 2016 are set out in the table below. As disclosed in note 4 on page 57 of the Annual Report and Financial Statements, management fees may be levied on some of these investments. To the extent that any such management fees have been charged in respect of these holdings, the Company is rebated these management fees on a regular basis to ensure that no double charging occurs. For the year to 30 September 2016, fees of £289,000 were levied in respect of these funds and were rebated in full to the Company (2015: £180,000).
| Valueat | ||
| Fund | 30September 2016 £'000 | 30September 2015 £'000 |
| iShares Core GBP Corporate Bond Fund | 29,264 | 4,997 |
| iShares Gold Trust | 26,658 | - |
| BGF Global Corporate Bond Fund | 25,844 | 23,782 |
| BlackRock Impact World Equity Fund | 16,386 | 22,881 |
| BlackRock Throgmorton Trust | 10,456 | 10,315 |
| BGF Emerging Markets Equity Income Fund | 8,785 | 6,372 |
| MAS Mortgage Holdings | 8,721 | - |
| iShares Physical Gold | 4,874 | - |
| iShares UK Property | 4,354 | - |
| BGF ASEAN Leaders Fund | 2,553 | 1,760 |
| BlackRock's Institutional Cash Series plc - Sterling Liquidity Fund | 1,248 | 57,637 |
| BGF Asian Dragon Fund | - | 4,076 |
| -------- | -------- | |
| Total | 139,143 | 131,820 |
| ======== | ======== |
11. RELATED PARTIES DISCLOSURES
Disclosures of the Directors' interests in the ordinary shares of the Company and fees and expenses payable to the Directors are given in the Directors' Remuneration Report on pages 33 and 34 of the Annual Report and Financial Statements.
DIRECTORS' REMUNERATION IMPLEMENTATION REPORT
A single figure for total remuneration of each Director is set out in the table below for the year ended 30 September 2016:
| Year ended 30 September 2016 | Year ended 30 September 2015 | ||||||
Base Salary £ | Taxable Benefits1 £ | Total £ | Base Salary £ | Paymentsfor additional transition work £ | Taxable Benefits1 £ | Total £ | |
| James Long (Chairman)2 | 41,250 | - | 41,250 | 35,188 | 13,875 | 713 | 49,776 |
| Ian Russell2 | 28,250 | 7,177 | 35,427 | 26,083 | 11,875 | 8,523 | 46,481 |
| Jimmy West | 26,250 | 1,380 | 27,630 | 25,750 | 12,875 | 1,356 | 39,981 |
| Lynn Ruddick3 | 24,250 | 4,532 | 28,782 | 30,729 | 20,250 | 4,452 | 55,431 |
| Jim Grover | 24,250 | - | 24,250 | 23,750 | 11,875 | - | 35,625 |
| Julian Sinclair4 | 24,250 | 38 | 24,288 | 4,620 | - | - | 4,620 |
| -------- | -------- | -------- | -------- | -------- | -------- | -------- | |
| Total | 168, 500 | 13,127 | 181,627 | 146,120 | 70,750 | 15,044 | 231,914 |
| ======== | ======== | ======== | ======== | ======== | ======== | ======== | |
1 Taxable benefits relate to travel and subsistence costs.
2 James Long was Audit Committee Chairman up until 26 February 2015, when he was appointed Chairman of the Company. Ian Russell took over the role of Audit Committee Chairman on 27 February 2015.
3 Lynn Ruddick stood down as Chairman of the Company on 26 February 2015.
4Appointed a non-executive Director on 21 July 2015.
The information in the above table has been audited. The amounts paid by the Company to the Directors were for services as non-executive Directors.
At 30 September 2016, fees of £Nil (2015: £14,000) were outstanding to Directors in respect of their annual fees.
DIRECTORS' SHAREHOLDINGS
The interests of the Directors in the ordinary shares of the Company at 30 September 2016 are set out in the table below. None of the Directors has an interest in any share options in the Company.
| 2016 | 2015 | |
| James Long (Chairman)1 | 38,914 | 29,802 |
| Ian Russell2 | 27,500 | 27,500 |
| Jimmy West | 63,400 | 63,400 |
| Lynn Ruddick3 - beneficial | 165,598 | 165,482 |
| - non-beneficial | 7,041 | 6,874 |
| Jim Grover | 27,500 | 27,500 |
| Julian Sinclair4 | 36,200 | 36,200 |
| ======== | ======== |
1 Appointed Chairman with effect from 27 February 2015; previously Audit Committee Chairman.
2 Appointed Chairman of the Audit Committee with effect from 27 February 2015.
3 Ms Ruddick was Chairman up to 26 February 2015. Her holding includes 63,290 shares held by Ms Ruddick's husband, Mr Dewar.
4Appointed a non-executive Director on 21 July 2015.
The information in the table above has been audited. The amounts paid by the Company to the Directors were for services as non-executive Directors.
Subsequent to the year end, Mr Long purchased an additional 562 shares (as part of a dividend reinvestment plan), bringing his total holding to 39,476 shares. Ms Ruddick purchased an additional 103 shares (as part of a dividend reinvestment plan), bringing her total beneficial holding to 165,598 shares and non-beneficial holding to 7,144 shares.
All of the holdings of the Directors are beneficial unless otherwise disclosed. No changes to these holdings have been notified up to the date of this report.
No Director had an interest in the Company's 6.25% Bonds 2031 during the year ended 30 September 2016 or has acquired an interest since the year end.
12. COMMITMENTS AND CONTINGENT LIABILITIES
At 30 September 2016, the Company had commitments of £21,500,000 of which £18,006,000 remained outstanding (2015: nil). Further details are given below. There were no contingent liabilities as at 30 September 2016 (2015: Nil).
The Company had a commitment of £4,500,000 in respect of an investment in Forward Partners 1, of which £3,494,000 was drawn down as at 30 September 2016. A further £47,000 has subsequently been drawn down since the year end, leaving a further liability of £959,000 outstanding.
The Company had a commitment of £8,500,000 in respect of an investment in BlackRock Infrastructure Funds plc - Renewable Income UK Sub Fund, of which £nil was drawn down as at 30 September 2016. Since the year end, £3,211,000 has been drawn down, leaving a further liability of £5,289,000 outstanding.
The Company had a commitment of £8,500,000 in respect of an investment in Cheyne Social Property Impact Holdings LP, of which £nil was drawn down as at 30 September 2016 and to date, leaving a liability of £8,500,000 outstanding.
13. PUBLICATION OF NON STATUTORY ACCOUNTS
The financial information contained in this announcement does not constitute statutory accounts as defined in the Companies Act 2006. The Annual Report and Financial Statements for the year ended 30 September 2016 will be filed with the Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditor, whose report for the year ended 30 September 2016 contains no qualification or statement under section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of BlackRock Income Strategies Trust plc for the year ended 30 September 2015, which have been filed with the Registrar of Companies. The report of the auditor on those financial statements contained no qualification or statement under section 498 of the Companies Act 2006.
14. ANNUAL REPORT AND FINANCIAL STATEMENTS
Copies of the Annual Report and Financial Statements will be published shortly and will be available from the Company Secretary, BlackRock Income Strategies Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
15. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at Drapers' Hall, Throgmorton Avenue, London EC2N 2DQ on Thursday, 30 March 2017.
ENDS
The Annual Report and Financial Statements will also be available on the BlackRock website at www.blackrock.co.uk/bist. Neither the contents of the Manager's website nor the contents of any website accessible from hyperlinks on the Manager's website (or any other website) is incorporated into, or forms part of, this announcement.
For further information, please contact:
Mark Johnson, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2300
Adam Ryan, BlackRock Investment Management (UK) Limited
Tel: 020 7743 2761
Press enquiries:
Lucy Horne, Lansons Communications - Tel: 020 7294 3689
E-mail: lucyh@lansons.com
26 January 2017
12 Throgmorton Avenue
London EC2N 2DL
