Finsbury Growth & Income Trust Plc - Final Results
PR Newswire
LONDON, United Kingdom, December 07
7 December 2023
Finsbury Growth & Income Trust PLC
(the "Company")
This announcement contains regulated information
Annual Financial Report for the year ended 30 September 2023
COMPANY SUMMARY
Finsbury Growth & Income Trust PLC is a listed investment company and a constituent of the FTSE 250. The Company is a member of the Association of Investment Companies ("AIC").
OBJECTIVES AND PERFORMANCE MEASUREMENT
The Company aims to achieve capital and income growth and to provide shareholders with a total return in excess of that of the FTSE All-Share Index (the Company's benchmark).
The Company's net assets as at 30 September 2023 were £1,822.7 million (2022: £1,830.4 million) and the market capitalisation was £1,742.5 million (2022: £1,725.9 million).
The net asset value per share increased by 7.2% during the financial year to 30 September 2023 on a total return basis (2022: -5.8%).
DIVIDENDS
A first interim dividend of 8.5p per share was paid on 19 May 2023 to shareholders registered at close of business on 11 April 2023. The associated ex-dividend date was 6 April 2023.
A second interim dividend of 10.5p per share was paid on 10 November 2023 to shareholders registered at close of business on 6 October 2023. The associated ex-dividend date was 5 October 2023.
The total dividend declared for the year was therefore 19.0p per share (2022: 18.1p per share), an increase of 5.0%.
KEY FACTS
891.2p
Net asset value per share
2022: 848.4p (change: +5.0%)
852.0p
Share price
2022: 800.0p (change: +6.5%)
4.4%
Discount of share price to net asset value per share^
2022: 5.7%
61.4p
Return/(loss) per share†
2022: (53.4)p
85.3%
Active Share*^
2022: 84.8%
19.0p
Total dividends per share for the year†
2022: 18.1p (change: +5.0%)
FIVE YEAR PERFORMANCE SUMMARY
AS AT 30 SEPTEMBER | 2019 | 2020 | 2021 | 2022 | 2023 |
Share price | 942.0p | 840.0p | 876.0p | 800.0p | 852.0p |
Net asset value per share | 935.6p | 846.2p | 917.7p | 848.4p | 891.2p |
Premium/(discount) of Share price to net asset value per share | 0.7% | (0.7)% | (4.5)% | (5.7)% | (4.4)% |
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YEAR ENDED 30 SEPTEMBER | 2019 | 2020 | 2021 | 2022 | 2023 |
Share price total return* ^ | +17.4% | (9.0)% | +6.3% | (5.6)% | +7.5% |
Net asset value per share total return* ^ | +17.4% | (7.7)% | +10.6% | (5.8)% | +7.2% |
FTSE All-Share Index total return** # | +2.7% | (16.6)% | +27.9% | (4.0)% | +13.8% |
Total return/(loss) per share† | 143.8p | (67.1)p | 88.0p | (53.4)p | 61.4p |
Dividends per share† | 16.6p | 16.6p | 17.1p | 18.1p | 19.0p |
* Source: Morningstar
** Source: FTSE International Limited ("FTSE") © FTSE, 2023
# See glossary of terms and alternative performance measures)
^ Alternative Performance Measure ("APM") (see glossary)
† UK GAAP Measure
7.2% Net asset value per share total return*, ^ 2022: -5.8% | 7.5% Share price total return*, ^ 2022: -5.6% |
£1.823bn Shareholders' funds† 2022: £1.830bn (change: -0.4%) | 204,519,434 (excluding 20,471,869 shares held in Treasury) Number of shares in issue 2022: 215,737,992 (Treasury shares 2022: 9,253,311) (change: -5.2%) |
0.61% Ongoing charges^ 2022: 0.60%
| 0.8% Gearing^ 2022: 1.2%
|
* Source - Morningstar
^ Alternative Performance Measure
† UK GAAP Measure
The Company was incorporated in Scotland on 15 January 1926. Lindsell Train Limited ("Lindsell Train") was appointed as Portfolio Manager in December 2000. The total return of the Company's share price over the ten years to 30 September 2023 has been 118.9%, equivalent to a compound annual return of 8.2%. This compares with a total return of 71.8%* from the Company's benchmark, equivalent to a compound annual return of 5.6%*.
* Source: Morningstar, FTSE International Limited ("FTSE") © FTSE2023
KEY PERFORMANCE INDICATORS ("KPIs")
The Board uses certain financial and non-financial KPIs to monitor and assess the performance of the Company in achieving its strategic aims.
The Board reviews the performance of the portfolio in detail and hears the views of the Portfolio Manager at each meeting.
Information on the Company's performance is provided in the Chairman's Statement and the Portfolio Manager's Review.
This performance is assessed against the following KPIs which are unchanged from last year.
Alternative Performance Measures ("APM")
The Board believes that each of the APMs, which are typically used within the investment company sector, provides additional useful information to Shareholders in order to assess the Company's performance between reporting periods and against its peer group. The APMs used for the year under review are unchanged from last year. Further information on each of the APMs can be found in the glossary.
7.2%
NET ASSET VALUE TOTAL RETURN^*
This reflects the change in the Company's net asset value including the impact of reinvested dividends.
During the year under review the Company's net asset value per share total return was 7.2% (2022: -5.8%).
19.0p
DIVIDENDS PER SHARE†
The total dividend declared for the year was 19.0 pence per share (2022: 18.1 pence per share), an increase of 5.0%.
61.4p
RETURN/(LOSS) PER SHARE†
The total return per share for the year was 61.4 pence per share (2022: loss of 53.4 pence per share).
Over five years, the Company earned a total of 172.7 pence per share.
7.5%
SHARE PRICE TOTAL RETURN^*
This reflects the change in the value of the Company's share price including the impact of reinvested dividends.
During the year under review the Company's share price total return was 7.5% (2022: -5.6%).
(6.3)%
RELATIVE PERFORMANCE TO BENCHMARK AND PEER GROUP
The Company's benchmark is the FTSE All-Share Index (total return) which delivered a return of 13.8% (2022: -4.0%) over the year. This compares with the Company's share price total return of 7.5% (2022: -5.6%) resulting in a 6.3% underperformance against the benchmark.
The Board also monitors the Company's share price return* against its AIC peer group^. As at 30 September 2023 the Company's ranking against its peer group of UK Equity income sector was:
| Rank out of 23 | |
Period | 2023 | 2022 |
1 yr | 14 | 5 |
3 yr | 22 | 20 |
5 yr | 9 | 4 |
10 yr | 2 | 2 |
(4.4)%
SHARE PRICE DISCOUNT/PREMIUM TO NET ASSET VALUE PER SHARE^
The Board reviews the level of discount/ premium to net asset value per share at every Board meeting and consideration is given to ways in which the share price performance may be enhanced, including the effectiveness of marketing, share issuance and buy-backs, where appropriate. Details of how the Company's share buy-back and issuance policy works can be found in the Statutory Documentation section on the Company's website.
No shares were issued by the Company during the year (2022: Nil). At 30 September 2023 the Company's share price stood at a 4.4% discount to the Company's net asset value per share (2022: 5.7% discount).
During the year, the Company bought back 11,218,558 shares into Treasury (2022: 9,253,311) at an average price of 870.6 pence and an average discount of 4.8%.
Since the year end to 5 December 2023 the Company has purchased a further 5,045,317 shares to be held in Treasury.
^ Alternative Performance Measure (see glossary)
* Source: Morningstar
CHAIRMAN'S STATEMENT
PERFORMANCE
It is disappointing to report that while the Company's net asset value per share has showed a positive return, this is the third consecutive year of underperformance relative to its benchmark, the FTSE All-Share Index.
This marks the longest such period for the Company since Lindsell Train was appointed as the Company's Portfolio Manager in December 2000. It means that while shareholders have benefited from a strong long-term performance record, this is not the case for more recent investors, who will have experienced weak relative returns.
The Company's net asset value per share returned 7.2% (2022: -5.8%) over the course of the year, compared with its benchmark which over the period generated a return of 13.8% (2022: -4.0%). The share price total return over the same period was 7.5% (2022: -5.6%).
As the primary purpose of any investment company must be to produce attractive returns for investors, the recent track record is concerning and has been the focus of your Board's attention. Our role on behalf of shareholders is to hold the Portfolio Manager to account and to challenge constructively, a process which Nick Train fully embraces, I am pleased to say.
The Board will continue to monitor performance closely. While investors' attention is inevitably drawn to shorter-term macroeconomic and geopolitical news, we encourage the Portfolio Manager to continue to focus on delivery over the long term.
We remain supportive of Lindsell Train's investment approach, namely running a highly concentrated portfolio of high quality businesses with high returns on equity, and believe that ultimately this will be reflected in the share prices of the companies we own and hence in the performance of the Company.
Importantly, there has been a consistency in the stated investment philosophy and that is reflected in the portfolio's constituents. At the same time, there is room for some portfolio evolution, as Nick Train points out in his report, with an increasing role within the portfolio for data, analytics and software companies.
As it is always important to point out, a highly concentrated portfolio means higher risk, particularly in the short-term. At 30 September 2023, the Company's Active Share - a measure of how much it varies from the FTSE All-Share Index benchmark - was 85.3% (2022: 84.8%). Such an uncorrelated portfolio will inevitably perform very differently from the wider market, whether positively or negatively.
I urge you to read Nick Train's very helpful review where he discusses candidly the reasons for the relative underperformance and describes in detail the portfolio's composition and why he believes it offers the possibility of better future returns.
SHARE BUY-BACKS
The Board keeps the Company's discount under close review and is committed to buying back its own shares at or near the 5% level, in accordance with its policy.
While share buy-backs will not necessarily prevent the discount from widening further, particularly in times of market volatility, they may, to a limited extent, mitigate a widening trend. In addition, buy-backs enhance the net asset value per share for remaining shareholders, provide some additional liquidity and help to dampen discount volatility which can damage shareholder returns.
Discounts are affected by many factors outside the Company's control but where it is in Shareholders' interests (taking account of market conditions), the Company remains committed to buying back shares at a discount to NAV, as demonstrated over the past year.
As at 30 September 2023 the discount was 4.4% compared with a closing discount at the last year end of 5.7%. During the year under review the Company bought back a total of 11,218,558 shares (5.5% of the shares in issue) into Treasury at a cost of approximately £97.7 million and at an average discount of 4.8%. Over the course of the year the Company's discount averaged 4.5%.
As at the close of the UK market on 5 December 2023, the discount was 6.4%. Since the year end, a further 5,045,317 shares were bought back into Treasury at a cost of £41.5 million. As at 5 December 2023, the Company had 199,474,117 shares in issue (excluding 25,517,186 shares held in Treasury).
RETURN AND DIVIDEND
The Income Statement shows a total return of 61.4p per share (2022: loss of 53.4p) consisting of a revenue return per share of 20.0p (2022: 20.6p) and a capital return per share of 41.4p (2022: loss of 74.0p).
Your Board has declared two interim dividends for the year totalling 19.0p per share (2022: 18.1p), an increase of 5%. In order to facilitate dividend payments on a timely and cost-effective basis, your Board continues to elect to distribute the Company's income to Shareholders by means of two interim dividends rather than wait several months to secure shareholder approval to pay a final dividend at the Annual General Meeting. This dividend policy will again be proposed for approval at the forthcoming Annual General Meeting (AGM).
LOAN FACILITY
As at 30 September 2023 a total of £36.7 million (2022: £36.7 million) was drawn down under our £60 million facility.
Further details can be found within the Report of the Directors and note 12 to the Financial Statements.
INCREASE TO DIRECTORS' FEES CAP
The Board of Directors is proposing to increase the maximum aggregate amount potentially payable to Directors by way of fees for their services as Directors under Article 122 from £200,000 to £300,000 in any financial year.
This proposed limit increase is not due to any unusual rises in Directors' fees, which are expected to be approximately £192,000 in the current financial year.
An ordinary resolution will be put to Shareholders at the AGM to increase this limit to £300,000. Further details can be found in the Report of the Directors and in the Directors' Remuneration Report.
CANCELLATION OF SHARE PREMIUM ACCOUNT
The Company has built up a substantial share premium account owing to historic high levels of share issuance. A special resolution will be put to Shareholders at the AGM to cancel the amount standing to the credit of the Company's share premium account, following which an application will be made to the Scottish Court of Session to obtain its approval to the cancellation and the creation of an equivalent distributable reserve.
AUDIT TENDER
The Audit Committee is in the process of conducting an audit tender which is due to be completed in early 2024. Accordingly, the Board has not proposed the re-election of the current auditor, PricewaterhouseCoopers LLP, at the forthcoming AGM. The Board will appoint the successful audit firm to carry out the audit for the year ending 30 September 2024 and will recommend their appointment (or re-appointment) to Shareholders at the AGM held in 2025.
ANNUAL GENERAL MEETING
The AGM of the Company this year will again be held at Guildhall, City of London EC2V 7HH (please use the Basinghall Street Entrance) on Tuesday, 23 January 2024 at 12 noon, and we hope as many Shareholders as possible will attend. This will be an opportunity to meet the Board and to receive a presentation from our Portfolio Manager.
The Board strongly encourages all Shareholders to exercise their votes in respect of the meeting in advance. Details of how Shareholders can vote, whether holding their shares directly or on retail platforms, is set out in the Notice of Meeting. Any Shareholder who requires a hard copy form of proxy may request one from the Registrar, Link Group.
OUTLOOK
Your Board continues to support fully the Portfolio Manager's disciplined strategy of investing in high quality companies that own both durable and cash generative franchises. It has delivered attractive returns over the longer term and we firmly believe that this will continue to deliver strong investment returns to shareholders in the future.
Our belief is clearly shared with our Portfolio Manager who has continued to buy shares in the Company. From 1 October 2022 to the date of this Report, Nick Train has acquired 659,604 shares and currently speaks for 2.6% of the equity of the Company (December 2022: 2.2%).
Simon Hayes
Chairman
6 December 2023
INVESTMENT PORTFOLIO
PORTFOLIO SECTOR WEIGHTINGS+
| 2023 | 2022 |
Consumer Staples ("CS") | 38.0% | 43.4% |
Consumer Discretionary ("CD") | 23.4% | 22.1% |
Financials ("F") | 22.3% | 22.2% |
Technology ("T") | 8.4% | 6.2% |
Industrials ("I") | 7.9% | 6.1% |
Source: Frostrow Capital LLP
+ FTSE Industrial Classification Benchmark ("ICB") sectors.
GEOGRAPHICAL ALLOCATION†
| 2023 | 2022 |
United Kingdom | 84.2% | 80.8% |
United States of America | 7.3% | 8.2% |
Netherlands | 4.8% | 5.2% |
France | 3.7% | 5.8% |
Source: Frostrow Capital LLP
† The Company's investment policy attributes geographical location based on where companies are listed or otherwise incorporated, domiciled or having significant business operations.
INVESTMENTS AS AT 30 SEPTEMBER 2023
SECTOR | INVESTMENTS | FAIR VALUE 1 OCTOBER 2022 £'000 | NET INVEST-MENTS £'000 | CAPITAL APPRE-CIATION/ (DEPRE-CIATION) £'000 | FAIR VALUE 30 SEPT-EMBER 2023 £'000 | % OF INVEST-MENTS | TOTAL RETURN £'000 | CONTRI-BUTION PER SHARE (PENCE) | |
CD | RELX | 221,773 | (47,831) | 53,886 | 227,828 | 12.4 | 59,085 | 28.2 | |
F | London Stock Exchange Group | 197,375 | (109) | 15,696 | 212,962 | 11.6 | 18,576 | 8.9 | |
CS | Diageo | 229,472 | (1,089) | (45,888) | 182,495 | 9.9 | (41,075) | (19.6) | |
CS | Unilever | 171,560 | (12,108) | 4,247 | 163,699 | 8.9 | 10,550 | 5.0 | |
T | Sage | 114,658 | (7,098) | 46,506 | 154,066 | 8.4 | 49,531 | 23.6 | |
CD | Burberry | 147,049 | (10,205) | 10,301 | 147,145 | 8.0 | 15,117 | 7.2 | |
I | Experian | 112,265 | 32,413 | 125 | 144,803 | 7.9 | 2,146 | 1.0 | |
CS | Mondelez International# | 152,381 | (40,477) | 22,052 | 133,956 | 7.3 | 24,717 | 11.8 | |
F | Schroders | 108,821 | (14,182) | 6,674 | 101,313 | 5.5 | 12,288 | 5.9 | |
CS | Heineken† | 96,516 | (8,262) | 315 | 88,569 | 4.8 | 2,576 | 1.2 | |
| Top 10 Investments |
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| 1,556,836 | 84.7 |
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CS | Remy Cointreau^ | 107,384 | (4,940) | (34,276) | 68,168 | 3.7 | (32,892) | (15.6) | |
F | Hargreaves Lansdown | 67,279 | (1,691) | (7,254) | 58,334 | 3.2 | (6,275) | (3.0) | |
CS | Fever-Tree | 26,713 | 2,231 | 11,964 | 40,908 | 2.2 | 12,521 | 6.0 | |
CD | Manchester United# | 27,243 | 176 | 9,915 | 37,334 | 2.0 | 9,915 | 4.7 | |
F | Rathbone Brothers | 22,989 | (1,138) | 1,447 | 23,298 | 1.3 | 3,096 | 1.5 | |
CS | A.G. Barr | 20,145 | (36) | 1,593 | 21,702 | 1.2 | 2,173 | 1.0 | |
F | The Lindsell Train Investment Trust plc | 9,720 | - | (960) | 8,760 | 0.5 | (445) | (0.2) | |
CD | Young & Co's Brewery (non-voting) | 6,191 | (509) | 1,426 | 7,108 | 0.4 | 1,636 | 0.8 | |
CD | Rightmove |
| 4,823 | (2) | 4,821 | 0.3 | 27 | 0.0 | |
CD | Celtic* | 3,754 | - | 577 | 4,331 | 0.2 | 584 | 0.3 | |
F | Frostrow Capital LLP?** | 4,725 | - | (1,000) | 3,725 | 0.2 | (557) | (0.3) | |
CD | Fuller Smith & Turner | 2,565 | (1,773) | 464 | 1,256 | 0.1 | 514 | 0.2 | |
CD | Cazoo# | 1,500 | - | (1,421) | 79 | 0.0 | (1,421) | (0.7) | |
| Total Investments | 1,852,078 | (111,805) | 96,387 | 1,836,660 | 100.0 |
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| Bank interest and miscellaneous income |
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| 205 | 0.0 | |
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| Total Contributions to Total Return |
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| 142,592 | 67.9 |
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| Expenses, Currency Translations and Finance Charges |
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| (13,734) | (6.5) |
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| Return on Ordinary Activities after Taxation |
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| 128,858 | 61.4 |
# Listed in the United States
† Listed in Netherlands
^ Listed in France
? Unquoted
* Includes Frostrow Capital LLP AIFM Investment, fair value £125,000 (2022: £125,000)
** Includes Celtic 6% cumulative convertible preference shares, fair value £267,000 (2022: £242,000)
PORTFOLIO MANAGER'S REVIEW
PERFORMANCE
Three years is a meaningful period to review the performance of a portfolio manager, particularly one like Lindsell Train Limited ("Lindsell Train") which takes greater investment risk than the typical manager and therefore should generate superior returns. It is, therefore, disappointing for me to report on the Company's performance over the last three years, to 30 September 2023. This shows a net asset value ("NAV") per share total return of 11.8% that is well adrift of the Company's benchmark (the FTSE All-Share's) gain of 39.8%. There have been three consecutive financial years of underperformance, with the most recent 12 months showing a NAV per share total return of 7.2%, compared with the benchmark 13.8%.
I assure you that at Lindsell Train we are not complacent about underperformance and have continued to think hard about all the holdings within the portfolio and to consider whether our previously successful investment approach remains relevant in the third decade of the 21st Century.
Below, I review reasons for the underperformance and then discuss aspects of the portfolio's construction and composition that offer the possibility of better future returns.
UNDERPERFORMANCE
There are three main factors that combined explain the poor relative performance.
First, in the financial year ending 30 September 2020, not holding oils, metals and banks during the Covid-19 crisis had been a boost to relative performance; one that reinforced my longstanding aversion to investing in those sectors. Since then, however, it has been the economically sensitive, more cyclical sectors that have rallied most in the UK stock market. For example, the share price of the Company's big holding in "defensive" Unilever is little changed over the last three years. Meanwhile on a total return basis Shell has risen by 203%, BP +173%, Glencore +255%, Rio Tinto +48% and HSBC +145%. These are all major FTSE All-Share constituents and it has hurt the Company not to own them. Indeed, we calculate that not owning those five companies has contributed to over two thirds of my underperformance over the past three years.
I am not saying I wish I had purchased a basket of commodity and bank shares in late 2020, because that would have run counter to Lindsell Train's, I hope, clearly stated investment approach. But I do wish the portfolio had benefited more from the end-of-Covid-19 bounce.
Next, I must acknowledge that some of my highest conviction and longstanding holdings performed poorly over the period, exacerbating the impact of not participating in the cyclical upswing. London Stock Exchange Group ("LSEG"), Hargreaves Lansdown ("HL") and even the more recently purchased Fever-Tree are examples.
Finally, and in my view even more significant than the above, at least for future performance, I underestimated the significance of technology change. There has been, obviously, a huge bull market in companies that are beneficiaries of technology change, and it is clear Covid-19 acted as an accelerant for industry, consumer and stock market trends that had already been gathering momentum in the second decade of the 21st Century. Finding UK-listed data, analytics and software companies that are beneficiaries of technology change has been and remains a priority for me and in RELX and Sage, for instance, there has been some success. In hindsight, at the start of the recent three-year period, I wish I had even more exposure to digital winners.
In my detailed discussion of portfolio holdings below I hope it will be apparent how I have responded to these challenges.
INVESTMENT APPROACH
Shareholders will not be surprised to read that I reaffirm the tenets of Lindsell Train's investment approach, as being the best way, for us at least, to deliver on my aspiration to deliver exceptional investment returns.
Lindsell Train runs concentrated portfolios of what we believe to be excellent businesses. We hope and expect the value being created inside these companies, as measured by their sustainable Returns on Equity ("RoE"), will create wealth for our investors over time. The average weighted RoE for the Company's portfolio as at 30 September 2023 was 26%. We know what the effects can be of owning fine businesses in size over long periods, because we have already done so for the Company since Lindsell Train's appointment. Over 20 years Diageo's share price total return is up over sevenfold, LSEG thirty fivefold, RELX ninefold and even Unilever is up sixfold. Concentration can cut both ways, as the Company's shareholders have experienced over the last three years, but if we can continue to hold and find new positions that can do for us what these have done over the next 20 years, then the Company certainly offers a differentiated and potentially rewarding portfolio and investment approach.
The Company's portfolio is indeed concentrated, with only 16 major holdings above 1% of NAV. I exclude holdings of below 1%, because they are insignificant in the affairs of the Company and are either being gradually disposed of or accumulated (combined holdings less than 1% of NAV, amount to 1.4% of the portfolio). The top ten holdings account for circa 85% of the total and the top 5 for circa 51%.
Confirmation that the portfolio is invested in profitable and growing businesses can be found in the fact that 91% of the portfolio holdings above 1.0% of NAV have increased their dividend this year (the exceptions are Manchester United and Schroders). Meanwhile more than 75% of the portfolio by value is either buying back shares or has paid a special dividend in 2023.
In the Annual Report you can see a chart showing the progress of the Company's dividend payments since Lindsell Train's appointment as Portfolio Manager and, alongside it, the dividend growth of individual portfolio holdings above 1% of NAV over that same period. As you can see, the dividend growth varies from the pedestrian - A.G. Barr (its dividend was suspended during Covid-19) - to the spectacular London Stock Exchange Group ("LSEG"). Generally, though, I think shareholders should be encouraged by the dividend histories of our big holdings. If their dividend growth continues, their share prices will follow.
Portfolio dividend increases 2001 - 2023
A.G. Barr | 3.7x |
Burberry | 20.3x |
Diageo | 3.7x |
Experian | 3.2x |
Fever-Tree | 15.2x |
Hargreaves Lansdown | 7.6x |
Heineken | 6.0x |
London Stock Exchange Group | 36.5x |
Manchester United | not paying a dividend |
Mondelez | 2.8x |
Rathbones Group | 3.4x |
RELX | 5.6x |
Remy Cointreau | 3.3x |
Sage | 46.7x |
Schroders | 6.8x |
Unilever | 5.1x |
Note: The following holdings only started paying a dividend in the years as indicated.
Experian from 2007; Fever-Tree from 2015; Hargreaves Lansdown from 2008; and, Burberry from 2002. Data provided for Mondelez from 2002 (first full year of distributions).
PORTFOLIO CONSTRUCTION AND CONSTITUENTS
The best way to convey our investment approach and my optimism for the Company's prospects is to discuss the investment case for each of our holdings and show how its presence in the portfolio is consistent with our strategic outlook. Therefore, I propose to do so in this report.
First, I will make a broad statement about that strategic outlook. We expect there will be an acceleration in technology innovation in coming decades. The result will be great new investment value created by companies that can take advantage of the new technologies. In addition, technology change can be expected to generate productivity-driven wealth for the world's population, albeit unequally distributed.
Given that outlook, a question is begged. Can a portfolio whose performance is measured against the FTSE All-Share Index, like the Company's, and that invests very predominantly in UK companies, be expected to deliver attractive investment returns? In my opinion the answer to that question is yes. Although that may surprise some, I hope shareholders will agree after reading this report that the Company's portfolio is comprised of companies that are well placed to participate in global growth.
The best way to review the Company's portfolio is to consider the four industry categories it is built around. These are, in order of size, as this report is written:
Data, Analytics and Software | 44% |
Luxury and Premium Consumer Brands | 31% |
Mass Market Consumer Brands | 18% |
UK Fund Management | 7% |
Source: Lindsell Train Limited.
DATA, ANALYTICS AND SOFTWARE
This is the biggest category in the Company's portfolio, deliberately so, and it continues to grow as the constituent shares go up and because we have added new holdings here over the last three years. All the companies in this segment provide services, often to global customers, that are critical to their customers' ability to conduct their business or personal affairs. It is, in our opinion, also important to note that all these companies already use Artificial Intelligence ("AI")-enhanced tools to improve the value of their services. Indeed, we believe it is possible to argue that these UK-listed companies are as well positioned to take advantage of AI as most to be found quoted on other stock markets. If that proposition is correct, there could be significant scope for share price gains, because their valuations are often lower than for global peers. I discuss in order of position size.
RELX
The Company's biggest holding has recently hit an all-time high and is one of the best performers in the portfolio in 2023. It is the 11th biggest company in the FTSE 100 and its success and size is based on the importance of the data services it provides to professionals in the global scientific, legal and insurance industries. CEO, Erik Engstrom, has been in that role since 2009 (RELX shares are up nearly sevenfold since his appointment), but, meeting him again recently, it is clear that the company's strategic advantages and its growth opportunities are better than ever.
The chart in the Annual Report shows RELX's total share price return since the start of the current century, compared with that of the US NASDAQ Composite, expressed in Sterling. Even now, some of our clients are surprised to see how well RELX has done, even compared with the "home" of technology, the NASDAQ. We believe there are other UK-listed data and software companies that can perform as well in the future as we hope RELX will continue to do.
"Our ability to identify and leverage (AI Technology) ahead of others is a competitive advantage…this is the main driver in our growth rate and increasing value-add."
NICK LUFF, FD, RELX
LSEG
London Stock Exchange Group ("LSEG") is the Company's second largest holding, in part because in 2023 its shares have, at last, shown a double-digit gain. Nonetheless, LSEG's shares are still below levels reached in 2021 and, as a result, have been a detractor to the Company's performance since then. After the acquisition of data company, Refinitiv, LSEG is now the world's leading provider of real-time financial data. The shares have had to contend with investor scepticism about the success of this acquisition and with a sizeable overhang of LSEG shares that the vendors of Refinitiv have signalled they intend to sell. To date, trading updates from the combined group have been encouraging and two thirds of the stock overhang has been placed. More important, in our opinion, is the joint venture that LSEG entered into with Microsoft, announced in December 2022. This joint venture, which involved Microsoft becoming a top ten shareholder in LSEG, is designed to accelerate LSEG's growth as a leading provider of data services to global financial institutions. Microsoft's CEO specifically cited the opportunity to use Microsoft's cloud-computing and AI capabilities to enhance LSEG's comprehensive data services.
Experian
This is a relatively new holding for the Company, initiated in 2020, specifically because I wanted to increase portfolio exposure to globally significant data and analytics companies. The shares are effectively unchanged since we began to buy and I have taken advantage of this period of underperformance to grow the position into one of the biggest in the Company's portfolio - 7.9%, as I write this report. Experian is the world's biggest credit bureau by revenues and, as a result, has more information about consumers and businesses than its peers and can offer a wider range of data products and software services too. If, as people argue, "Data is the new Oil", Experian owns and can access deep wells of the stuff, that others can't. The business has grown steadily since it listed in 2007, with earnings up nearly fourfold since then. Tools to extract value from data are becoming more powerful and we believe this will result in Experian's services becoming more valuable too.
Sage
Another strong share price performer for the Company in 2023, Sage shares are being rerated, as investors come to recognise the business success the company is enjoying after a period of necessary investment in its core accounting software services. At its recent Innovation & Product webinar, Sage's Chief Technology Officer announced the development of an AI-powered accounting assistant, a product created in partnership with Microsoft and soon to be tested with customers. While I have no particular insight into how important "Sage Assistant" could turn out to be, I am sure that five years ago most investors would have doubted Sage had the expertise or even ambition to develop such a tool. Sage is another UK-listed software/data company with a global business (the US is its biggest market and forecast to grow at 16% this year) that is not, or only recently, recognised by global investors.
Hargreaves Lansdown
I include HL in this category, because it is best analysed as a technology platform business, an exceptionally profitable one - a 50% RoE for instance - with the leading share in its market (Direct to Consumer platforms) and that itself a market with multi-year growth ahead of it. Perhaps the clearest corroboration of this perspective on the company is the fact that its new CEO, appointed in August 2023, is the former Chief Technology Officer of Elsevier (RELX's scientific publishing division). Dan Olley has been appointed to accelerate growth at HL and it is clear the board believes one way to do this will be to take advantage of the data HL generates, by dint of having more customers and more customer interactions than any of its peers. We wish the new CEO well, because, I must admit, HL has been the biggest detractor from the Company's performance over the last three years. Cautious investors believe competition will dent HL's profitability and reduce its market share. With profits and client numbers at record highs in 2023 the pessimists' case is not yet proven.
Rightmove
This is the Company's newest recent holding, started in September 2023. It is still a small commitment, well below 1%, but one we expect to grow. It is another FTSE 100 company, as are all the others in this section of the Company's portfolio, with an opportunity to take advantage of its proprietary data and create more value for its customers.
LUXURY & PREMIUM CONSUMER BRANDS
This is another area of the Company's portfolio that I have deliberately expanded in recent years, by directing cash flows to existing holdings and, in one case, adding a new name, albeit back in 2020. We expect investing in the shares of the owners of unique, premium brands will deliver proxy participation in the wealth being created by technology innovation.
Diageo
The Company's third biggest holding, Diageo, is the 6th largest company in the FTSE 100 and the #1 alcoholic beverage business in the world. A clear majority of its revenues derive from its premium brands. Back in 2019/2020 Diageo CEO Sir Ivan Menezes, very sadly no longer with us, told us he had set a stretch goal for the company, of taking its share of the global total beverage alcohol ("TBA") market from 4% in 2020 to 6% in 2030. That would be a 50% increase in share in a growing industry and struck us as a worthwhile, if ambitious, target. Particularly if it could be achieved without impairing Diageo's existing high rates of return (RoE 48%). We were impressed, therefore, to hear recently from his successor, Debra Crew, that by the close of its fiscal year 2022/2023, as announced in its annual results in August, its share of global TBA had increased from 4% to 4.7%; well on the way to achieving the 2030 objective.
The fascinating graph below, showing the price of a pint of Guinness (one of Diageo's biggest brands) compared with the gold price is an important reminder of how a great brand can protect its owners against the malign effects of inflation over time.
I still think that the answer to the hypothetical question - What is the one share you would own if you had to invest all your savings into it and couldn't sell for 20 years? - is Diageo. And it gives me a warm feeling to see that Berkshire Hathaway, Warren Buffett's company of course, has become a top ten shareholder in Diageo.
Frustratingly, Diageo has had a weak share price in 2023, as it negotiates a slowdown in the consumption of premium spirits in the Americas. But this means the shares now trade on a valuation of under 20 times earnings, or an earnings yield of over 5%. On these terms, we have been adding to the holding whenever we can.
Burberry
This is the UK's only substantive luxury brand and a FTSE 100 constituent. When the shares listed, back in 2002, revenues were circa £500m. This year they have hit a record of £3bn, thereby sextupling over 20 years. Over the same period its shares have done even better and are up eight-fold. The company has outlined plans to take revenues to £5bn per annum in the longer term and, if achieved, this would almost certainly drive the share price higher. Currently investors are fretting about elevated interest rates and Burberry's exposure to Asian consumers, but we are happy that its iconic trench coat remains such a successful brand in that dynamic region. Interest rates will stabilise in due course and consumer confidence revive. In addition, as you can see in the accompanying image, Burberry is a luxury brand that has protected its owners against the effects of inflation over the past century.
Remy Cointreau & Heineken
Diageo is a nearly perfect alcoholic beverage company, but it does not own a premium cognac, nor a premium light beer brand. We have chosen to rectify those minor blemishes by holding Remy Cointreau and Heineken in the Company's portfolio. As at 31 December 1999 their respective share prices were €20 and €30. As at 30 September 2023, they traded at €115 and €84. That is indicative of the kind of steady returns that can be made by investing long term in beverage brands as durable and aspirational as Remy Martin and Heineken, as we have.
Fever-Tree
We started this holding in 2020, in hindsight prematurely. A difficult period for Fever-Tree's profitability has hit its shares but through it we have been able to build a substantial stake in the company. The investment proposition remains unchanged. Fever-Tree has effectively created a new consumer category - premium mixers. It dominates its domestic market; indeed, its share of the entire UK mixer category hit an all-time high over the last six months, 45%. But the crux of the case is whether that domestic success can be exported. Can Fever-Tree become a global brand? If it can, then, in our opinion, the current market capitalisation of the company is far too low. We were encouraged, therefore, by its recent half year results, which showed Fever-Tree's US revenues grew 32% and, in the process, the US became its biggest market. There ought to be much more to go for in the US and the rest of the world.
Manchester United
I must admit I did not expect to be commenting on this holding in December 2023, the asset having been put up for sale over 12 months ago. However, as I am sure you are aware, the process has been protracted and the resolution still unclear. All one can say for sure is that Manchester United is confirmed to be one of the most prestigious "trophy assets" in the world, as evidenced by the interest in it of a pair of seriously wealthy individuals.
MASS-MARKET CONSUMER BRANDS
We have three long-term holdings in this category. They have been successful over time, and we expect to retain our holdings and perhaps to add to them. Although their brands may not have the allure or exclusivity of, a Burberry or, say, Johnnie Walker Blue, they are often beloved by their consumers, or at least purchased regularly because of their value for money and reliability. The combination of the affection consumers feel for the brands and their regular replenishment makes them valuable for investors. It is wise, or we think so, to have a part of your portfolio invested in companies that produce predictable cash flows, as do these three holdings.
Unilever
It is noteworthy that Unilever has a new Chair, CEO and CFO. And perhaps investors should welcome a fresh set of perspectives on the business. It is not contentious to claim Unilever owns a collection of beloved and/or ubiquitous household brands - Dove, Hellmann's, Knorr, Magnum, Dirt is Good. But like many investors and, we are sure, officers of the company, we are disappointed that recent business growth has turned out to be so pedestrian. Earnings for 2023 are forecast to be little more than 10% higher than those from five years ago. We know the new CEO sees opportunities to reignite growth across the brand portfolio and we hope he can capitalise on them. People have been writing off Unilever as "too boring" for as long as I can remember. But it should not be overlooked that this "boring" business has delivered a near quadrupling of its share price since the start of this century.
Mondelez
Chocolate, snacks and confectionery have been great consumer categories for decades and with, for instance, Cadbury, Oreos and Halls, Mondelez owns some great brands within those categories. And these brands have driven steady earnings growth - forecast to be up over 35% over the last five years. Mondelez shares are up 2.4 times since it demerged from Kraft in October 2012. Look again in another 11 years, we'd expect them to be usefully higher still.
A.G. Barr
In 2004 Mr Roger White was appointed CEO of A.G. Barr, the Irn-Bru company. That year the company had annual revenues of £125m and earnings of £0.09 a share. He has recently announced he will step down some time over the next 12 months. For 2023, A.G. Barr is forecast to generate revenues of circa £585m and to earn £0.32. The company has net cash on its balance sheet of nearly £50m - indicative of the canny conservatism with which it has been run. No one should expect to get rich quick owning a business like A.G. Barr, but since Roger's appointment the share price is up from just over £1.00 to just under £5.00 today. Shareholders are grateful for his stewardship and look forward to the next phase of the company's history.
UK FUND MANAGEMENT
Schroders & Rathbones
It has been my contention that UK fund management companies, particularly those engaged in the provision of private wealth investment services, operate in a growth industry, where scale and trusted brands confer lasting advantages. In addition, if one is bullish about global stock markets, as I always am, you might think fund management companies would do well. I must acknowledge that the share prices of the two longstanding holdings we have built to capture this idea - Rathbones and Schroders - say that I am wrong. Rathbones shares peaked as long ago as 2017, at around £28.00, and were priced at little more than £17.00 as at 30 September 2023. Schroders' shares hit a high of circa £6.40 in 2021 but have subsided to circa £4.00 today. We support the strategies of both companies and congratulate Rathbones for successfully closing its biggest ever merger in September 2023. It may well require an improvement in UK investor confidence and an earnestly to be hoped for bull market in UK equities before these businesses and share prices perform again.
BORROWINGS, OVERSEAS EXPOSURE AND SKIN IN THE GAME
The Company has relatively modest amounts of borrowing - circa £37m, to give a net gearing of 0.8% on its net assets. We would borrow more if we saw a specific opportunity that merited the risk of taking on more debt. Debt is always risky.
But that reluctance to run higher levels of gearing should not be construed as caution on my part about the portfolio or the UK stock market. We are more than fully invested and believe the highly concentrated structure of the portfolio offers plenty of upside, assuming the companies we have chosen to commit to prosper over time. As I have argued above - we own some big positions in some outstanding companies, by global, not just domestic UK, standards.
The Company has the power to invest a proportion of its assets outside its benchmark index, the UK FTSE All-Share Index and we have taken advantage of that flexibility. I should signal, though, that the long underperformance of the UK stock market has resulted in what seems to us anomalously low valuations for some of the world class companies that are still listed on the London market. Diageo is the world #1 alcoholic beverage business, Experian is the world's #1 credit bureau, LSEG is the world #1 provider of real-time financial data. Our most recent new holdings are from the UK and our team is working on other apparently highly attractive ideas in the UK market. In short, I think it likely that the Company's UK exposure will go up over the next financial year.
It is a privilege for me to be responsible for the Company's investment portfolio, comprised of the precious savings of so many investors. As co-founder of what has been a successful fund management company, I am also in the privileged and lucky position of being able to afford to continue to add to my own holding in the Company, as is evidenced in this Annual Report and Financial Statements. For this reason, the Company's disappointing share price performance frustrates me both professionally and personally. Skin in the game is no guarantee of superior investment performance, as the Company's recent record displays. But I assure fellow shareholders, what happens next for the Company's share price really matters to me and my family.
Nick Train
Director, Lindsell Train Limited
Portfolio Manager
6 December 2023
BUSINESS REVIEW
The Strategic Report provides a review of the Company's policies and business model, together with an analysis of its performance during the financial year and its future developments.
The Strategic Report has been prepared for Shareholders to assess how the Directors have performed their duty to promote the success of the Company. It also considers the principal risks and uncertainties facing the Company.
Information on how the Directors have discharged their duty under Section 172 of the Companies Act 2006 can be found within the Strategic Report.
The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
As an externally managed investment company there are no executive directors, employees or internal operations. The Company delegates its day-to-day management to third parties. The principal service providers to the Company are Frostrow Capital LLP ("Frostrow") which acts as AIFM, company secretary and administrator; and Lindsell Train Limited ("Lindsell Train") which acts as Portfolio Manager. The Bank of New York Mellon (International) Limited is the Company's Depositary.
The Board is responsible for all aspects of the Company's affairs, including the setting of parameters for and the monitoring of the investment strategy as well as the review of investment performance and policy. It also has responsibility for all strategic issues, the dividend policy, the share issuance and buy-back policy, gearing, share price and discount/ premium monitoring as well as corporate governance matters.
STRATEGY FOR THE YEAR ENDED 30 SEPTEMBER 2023
Throughout the year under review, the Company continued to operate as an approved investment company, following its investment objective to achieve capital and income growth and to provide shareholders with a total return in excess of that of the FTSE All-Share Index. The Company's performance is discussed in the Chairman's Statement and the Portfolio Manager's Review.
During the year, the Board, AIFM and the Portfolio Manager undertook all ESG, strategic and administrative activities.
The Board is aware of the continued emphasis on ESG matters in recent years. The Portfolio Manager engages with all the companies in the portfolio to understand their ESG approach and has developed its own methodology to assess the carbon impact of the portfolio. Lindsell Train became a signatory of the Net Zero Asset Managers initiative ("NZAM") in December 2021. This reflects Lindsell Train's enhanced efforts as a firm to support the goal of net zero greenhouse gas emissions by 2050.
PORTFOLIO STRUCTURE
84.2% | 15.8% | 91.9%
|
84.7% | 0.8%^ | 85.3%^ |
^ Please see Glossary of Terms and Alternative Performance Measures.
INVESTMENT POLICY
The Company's investment policy is to invest principally in the securities of companies either listed in the UK or otherwise incorporated, domiciled or having significant business operations within the UK. Up to a maximum of 20% of the Company's portfolio, at the time of acquisition, can be invested in companies not meeting these criteria.
The portfolio will normally comprise up to 30 investments. This level of concentration is likely to lead to an investment return which is materially different from the Company's benchmark index and is likely to be more volatile and carry more risk.
Unless driven by market movements, securities in FTSE 100 companies and comparable companies listed on an overseas stock exchange will normally represent between 50% and 100% of the portfolio; securities in FTSE 350 companies and comparable companies listed on overseas stock exchanges will normally represent at least 70% of the portfolio.
The Company will not invest more than 15% of the Company's net assets, at the time of acquisition, in the securities of any single issuer. For the purposes of this limit only, net assets shall exclude the value of the Company's investment in Frostrow Capital LLP.
The Company does not and will not invest more than 15%, in aggregate, of the value of the gross assets of the Company in other listed closed ended investment companies. Further, the Company does not and will not invest more than 10%, in aggregate, of the value of its gross assets in other listed closed ended investment companies except where the investment companies themselves have stated investment policies to invest no more than 15% of their gross assets in other listed closed ended investment companies.
The Company has the ability to invest up to 25% of its gross assets in preference shares, bonds and other debt instruments, although no more than 10% of any one issue may be held.
In addition, a maximum of 10% of the Company's gross assets can be held in cash, where the Portfolio Manager believes market or economic conditions make equity investment unattractive or while seeking appropriate investment opportunities or to maintain liquidity.
The Company's gearing policy is that gearing will not exceed 25% of the Company's net assets.
No investment will be made in any fund or investment company managed by Lindsell Train Limited without the prior approval of the Board.
In accordance with the Listing Rules of the Financial Conduct Authority ("FCA"), the Company can only make a material change to its investment policies with the approval of its Shareholders.
DIVIDEND POLICY
The Company's aim is to increase or at least maintain the total dividend each year. A first interim dividend is typically paid in May and a second interim in November in lieu of a final dividend.
The level of dividend growth is dependent upon the growth and performance of the companies within the investment portfolio. The decision as to the level of dividend paid takes into account the income forecasts maintained by the Company's AIFM and Portfolio Manager as well as the level of revenue reserves. These forecasts consider dividends earned from the portfolio together with predicted future earnings and are regularly reviewed by the Board.
All dividends have been distributed from current year income and revenue reserves.
PERFORMANCE
Whilst the Board is disappointed that the Company has underperformed in the short term, the Portfolio Manager's report explains why he believes that the Company's portfolio remains appropriate. The Board fully supports the Portfolio Manager's view. Please refer to the Chairman's Statement for further information.
Whilst performance is measured against the FTSE All-Share Index, the Company's portfolio is constructed and managed without reference to a stock market index with the Portfolio Manager selecting investments based on their assessment of their long-term value.
NAV PER SHARE RECONCILIATION
The chart in the Annual Report shows the contribution (in pence per share) attributable to the various components of investment performance and costs, which together demonstrate the increase from the starting NAV for the year of 848.4 pence to the year-end NAV of 891.2 pence, after the payment of dividends to Shareholders.
PROSPECTS
The Board continues to fully support the Portfolio Manager's strategy of investing in high quality companies that own both durable and cash generative brands. The Board firmly believes that this strategy will continue to deliver strong investment returns over the long term.
This is supported by the Company's performance over the last ten years with a net asset value per share total return^ of 130.0% compared with a total return from the Company's benchmark index of 71.8%.
^ Alternative Performance Measure (see glossary)
PRINCIPAL RISKS, EMERGING RISKS AND RISK MANAGEMENT
The Board is responsible for managing the risks faced by the Company. Through delegation to the Audit Committee, the Board has established procedures to manage risk, to review the Company's internal control framework and to establish the level and nature of the principal risks the Company is prepared to accept in order to achieve its long-term strategic objective. At least once a year the Audit Committee carries out a robust detailed assessment of the principal and emerging risks.
A risk management process has been established to identify and assess risks, their likelihood and the possible severity of impact. Further information is provided in the Audit Committee Report.
These principal risks and the ways they are managed or mitigated are set out as follows.
For each risk identified, during the year the Audit Committee considers both the likelihood and impact of the risk and then assigns an inherent risk score. The scoring of the risk is then reconsidered once the respective key mitigations are applied and a residual risk score is assigned.
The Board's policy on risk management has not materially changed during the course of the reporting period and up to the year end.
During the year, the Audit Committee conducted an exercise to identify and assess any new or emerging risks affecting the Company and to take any necessary actions to mitigate their impact. Further information can be found in the report of the Audit Committee within the Annual Report.
THE COMPANY'S APPROACH TO RISK MANAGEMENT
Change in inherent risk assessment over the last financial year: No change, Decreased, Increased, New risk included during the year
Change | Principal Risks and Uncertainties | Key Mitigations |
| Corporate Strategy The Company's investment objective becomes unattractive to Shareholders. | At each meeting the Board reviews movements in the Company's shareholder register. There are regular interactions and engagement with Shareholders (including at the AGM). Regular feedback from Shareholders is received from the Company's broker. Frostrow meets regularly with major Shareholders on the Company's behalf. In addition, the Chairman and the Senior Independent Director meet with key Shareholders to ascertain views. The Company publishes its Active Share score in its monthly fact sheet for investors and in both the annual and half-yearly reports to highlight how different the portfolio is from the Company's benchmark index. |
| The Company's share price total return may differ materially from the NAV per share total return. | The Board operates a share buy-back policy which is intended to offer some protection against the share price widening beyond a 5% discount to NAV per share. There is also a share issuance programme which acts as a premium control mechanism. Further details of the Company's share buy-back policy and premium control mechanism can be found on the Company's website. |
| Investment Strategy and Activity The departure of a key individual at the Portfolio Manager may affect the Company's performance. | The Board keeps the portfolio management arrangements under continual review. In turn, the Portfolio Manager reports on developments at Lindsell Train, including succession and business continuity plans. The Board meets regularly with other members of the wider team employed by the Portfolio Manager. |
| Prolonged underperformance against the Benchmark. | The Board discusses with the Portfolio Manager the structure of the portfolio, including asset allocation and portfolio concentration. The Board reviews the performance of the portfolio against the benchmark and the Company's peer group at every meeting. The Company publishes various measures and statistics in the monthly fact sheet and in both the annual and half-yearly reports, to highlight to investors the effects of the investment approach and to show how different the portfolio is from the Company's benchmark index. These measures include number of holdings, Active Share and portfolio turnover. |
| A major geopolitical or natural event such as war, terrorism, natural disaster or pandemic, and the financial, monetary and/or political responses to such events may have an adverse impact on the revenues and operations of portfolio companies to the extent that they may no longer promise returns sufficient to meet the Company's investment objective. Portfolio companies experience a reduction in share price and dividends. | The Board reviews the performance of the portfolio against the benchmark and the Company's peer group at every meeting. The Board holds monthly portfolio update meetings with the Portfolio Manager. The Portfolio Manager regularly engages with the portfolio companies to discuss any matters of concern that may effect operational activities. |
| The investment approach is not aligned with shareholder expectations in relation to ESG matters. | The Board conducts an annual review of the Portfolio Manager's ESG policy to ensure that it is consistent with that expected by the Board. In addition the Board reviews the ESG activities of Lindsell Train to ensure progress is being made by portfolio companies. The Board also conducts an annual review of other service providers' policies in relation to internal controls and governance matters notably modern slavery, GDPR, cyber security and whistleblowing policies. The Portfolio Manager has developed a propriety system to assess the inherent and emerging ESG risks for the investment portfolio which the Portfolio Manager uses when engaging with the portfolio companies. This informs the decision to invest, retain or divest any portfolio investment. |
| The adverse impact of climate change on the portfolio companies' operational performance. | The Board receives quarterly ESG updates, which include an update on any climate change related engagement, from the Portfolio Manager together with monthly portfolio updates. The Board challenges the Portfolio Manager on ESG matters to ensure that the portfolio companies are acting in accordance with the Board's ESG approach. The Portfolio Manager is a signatory to the UK Stewardship Code and actively engages with portfolio companies on ESG matters including climate change. Lindsell Train developed its own methodology to assess the carbon impact of the portfolio. Lindsell Train became a signatory of the NZAM initiative in December 2021. This reflects Lindsell Train's enhanced efforts as a firm to support the goal of net zero greenhouse gas emissions by 2050. Details of the Company's and Portfolio Manager's ESG policies together with the weighted average carbon intensity of the portfolio companies are set out within the Strategic Report. |
| Operational Service providers to the Company deliver poor performance or fail to meet their contractual obligations to the Company, include errors or irregularities in information published on behalf of the Company. (This risk is included as a result of the consolidation of several operational risks as part of the Audit Committee's review of principal risks to better reflect the current outlook. | The Board reviews all information supplied to Shareholders and the AIFM's marketing activity at each meeting. The AIFM's daily controls ensure accurate publication of information. The Board receives regular updates from the AIFM of press references to the Company and its major service providers, the Board receives regular news on sector developments from the Company's broker and from the AIC. The Board has the ability to replace any service provider which may be the source of reputational concerns. The Audit Committee receives assurance from all service providers that they have adequate business continuity plans and internal controls in place. These controls are reviewed by the AIFM who also meets with the Company's principal service providers during the year. |
| Financial Fraud (including unauthorised payments and cyber crime) occurs leading to a loss. | The AIFM and Portfolio Manager have in place robust compliance monitoring programmes. The Board receives monthly compliance reviews and a quarterly expenses analysis. An annual statement is obtained by the Audit Committee from all service providers giving representations that there have been no instances of fraud or bribery. |
| The Company is exposed to market price risk (i.e. performance of investee companies' shares). | The Directors acknowledge that market risk is inherent in the investment process. The Portfolio Manager maintains a diversified portfolio which is concentrated in a few key sectors. The Board has imposed guidelines within its investment policy to limit exposure to individual holdings and limits the level of gearing. The AIFM reports to the Board with respect to compliance with investment guidelines on a monthly basis. The Portfolio Manager provides the Board with regular updates on market movements. No investment is made in derivative instruments and no currency hedging is undertaken. Further information on financial instruments and risk can be found in note 17 to the Financial Statements. |
| Accounting, Legal and Regulatory The Company and/or the Directors fail(s) to comply with their legal requirements in relation to FCA dealing rules/handbook procedures, the AIFMD, the Listing Rules, the Companies Act 2006, relevant accounting standards, the Bribery Act 2010, the Criminal Finances Act 2017, GDPR, tax regulations or any other applicable regulations. | The Board monitors regulatory change with the assistance of its AIFM, Portfolio Manager and external professional advisers to ensure compliance with applicable laws and regulations. The Board reviews compliance reports and internal control reports provided by its service providers, as well as the Company's Financial Statements and revenue forecasts. The Depositary reports twice yearly to the Audit Committee, confirming that the Company, acting through the AIFM, has been managed in accordance with the AIFMD, the FUND sourcebook, the Articles (in relation to the calculation of the NAV per share) and with investment restrictions and leverage limits. The Depositary Report can be found in the Shareholder information section of the Company's website. The AIFM presents a quarterly report on changes in the regulatory environment, including AIC updates, and how changes have been addressed. |
| The regulatory environment in which the Company operates changes materially, affecting the Company's modus operandi. | The Board monitors regulatory change with the assistance of the Company's AIFM, Portfolio Manager and external professional advisers to ensure that the Board is aware of any likely changes in the regulatory environment and will be able to adapt as required. The Directors attend AIC Roundtables and conferences to keep up to date on regulatory changes and receive industry updates from the AIFM. |
| Poor adherence to corporate governance best practice or errors or irregularities in published information could lead to censure and/or result in reputational damage to the Company. | The Board reviews all information supplied to Shareholders and the AIFM's marketing activity at each meeting. Details of the Company's compliance with corporate governance best practice, including information on relationships with Shareholders, are set out in the Corporate Governance Report within the Annual Report. |
EMERGING RISKS
During the year, the Audit Committee conducted an exercise to identify and assess any new or emerging risks affecting the Company and to take any necessary actions to mitigate their impact.
The Audit Committee regularly reviews the risk register. Mitigations, the scoring of each risk and any emerging risks are discussed in detail as part of this process to ensure that emerging as well as known risks are identified and, so far as practicable, mitigated.
The experience and knowledge of the Directors is useful in these discussions, as are update papers and advice received from the Board's key service providers such as the Portfolio Manager, the AIFM and the Company's broker. In addition, the Company is a member of the AIC, which provides regular technical updates as well as drawing members' attention to forthcoming industry and/or regulatory issues and advising on compliance obligations.
During the year, the Board identified technological breakthroughs, such as AI as an emerging risk. As well as offering investment opportunities, the development and exploitation of technological breakthroughs, such as AI, may challenge and damage the addressable market, revenue and operations of portfolio companies to the extent that they no longer offer the promise of returns consistent with the Company's Investment Objective.
To mitigate this risk the Board holds monthly portfolio update meetings with the Portfolio Manager, who continues to monitor the situation closely.
The Committee will continue to review newly emerging risks that arise from time to time to ensure that the implications for the Company are properly assessed and mitigating controls introduced where necessary.
FUTURE DEVELOPMENTS
The Board's primary focus is on the Portfolio Manager's investment approach and performance. The subject is thoroughly discussed at every Board meeting.
In addition, the AIFM updates the Board on Company communications, promotions and investor feedback, as well as wider investment company issues.
An outline of performance, investment activity and strategy, and market background during the year, as well as the outlook, is provided in the Chairman's Statement and the Portfolio Manager's Review.
It is expected that the Company's strategy will remain unchanged in the coming year.
LONG-TERM VIABILITY STATEMENT
The Directors have carefully assessed the Company's financial position and prospects as well as the principal risks facing the Company and have formed a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five financial years. The Board has chosen a five year horizon in view of the long-term outlook adopted by the Portfolio Manager when making investment decisions.
To make this assessment and in reaching this conclusion, the Audit Committee has considered the Company's financial position and its ability to liquidate its portfolio and meet its liabilities as they fall due and notes the following:
- The portfolio is principally comprised of investments traded on major international stock exchanges. Based on current trading volumes, 97.5% of the current portfolio could be liquidated within 30 trading days, with 60.4% in seven days, and there is no expectation that the nature of the investments held within the portfolio will be materially different in future;
- With an ongoing charges ratio of 0.61%, the expenses of the Company are predictable and modest in comparison with the assets and there are no capital commitments foreseen which would alter that position;
- Expenses of the Company are covered more than four times by investment income;
- The closed-ended nature of the Company means that, unlike an open-ended fund, it does not need to realise investments when Shareholders wish to sell their shares;
- The founder directors of Lindsell Train Limited, have given their verbal assurance that they remain committed to Lindsell Train Limited for at least seven years on a rolling basis; and
- The Company has no employees, only its Non-Executive Directors. Consequently it does not have redundancy or other employment-related liabilities or responsibilities.
The Audit Committee has considered the potential impact of its principal risks and various severe but plausible downside scenarios as well as stress testing and reverse stress testing. It has also made the following assumptions in considering the Company's longer-term viability:
- There will continue to be demand for investment companies;
- The Board and the Portfolio Manager will continue to adopt a long-term view when making investments, and anticipated holding periods will be at least five years;
- The Company invests principally in the securities of UK listed companies to which investors will continue to wish to have exposure;
- The Company will maintain its bank loan facility;
- Regulation will not increase to a level that makes running the Company uneconomical; and
- The performance of the Company will be satisfactory.
The Board's long-term view of viability will, of course, be updated each year in the Company's Annual Report.
ENGAGING WITH THE COMPANY'S STAKEHOLDERS
The following 'Section 172' disclosure, required by the Companies Act 2006 and the AIC Code describes how the Directors have had regard to the views of the Company's stakeholders in their decision-making.
STAKEHOLDER GROUP | THE BENEFITS OF ENGAGEMENT WITH THE COMPANY'S STAKEHOLDERS | HOW THE BOARD, THE AIFM AND THE PORTFOLIO MANAGER HAVE ENGAGED WITH THE COMPANY'S STAKEHOLDERS |
Investors | Clear communication of the Company's strategy and the performance against the Company's objective can help the share price trade closer to its NAV per share which benefits Shareholders. New shares may be issued to meet demand without net asset value per share dilution to existing Shareholders. Increasing the size of the Company can benefit liquidity as well as spread costs. Under the share buy-back policy, the Company will normally buy in shares being offered on the stock market whenever the discount approaches a level of 5% and then either hold those shares in "Treasury" or cancel them. Any shares held in Treasury can later be sold back to the market if conditions permit. | The AIFM and the Portfolio Manager, on behalf of the Board, complete a programme of investor relations throughout the year. An analysis of the Company's shareholder register is provided to the Directors at each Board meeting along with marketing reports from Frostrow. The Board reviews and considers the marketing plans on a regular basis. Reports from the Company's broker are submitted to the Board on investor sentiment and industry issues. Key mechanisms of engagement include:
At each meeting the Board reviews movements in the Company's shareholder register. There are regular interactions and engagement with Shareholders (including at the AGM). Regular feedback from Shareholders is received from the Company's broker. |
Portfolio Manager | Engagement with the Company's Portfolio Manager is necessary to:
The Board ensures that the Portfolio Manager's ESG approach meets standards set by the Board. | The Board met regularly with representatives of the Portfolio Manager throughout the year, with quarterly presentations and also monthly performance and compliance reporting. This provides the opportunity for both the Board and Portfolio Manager to explore and understand how the portfolio has performed and what may be expected in the future. The Board receives regular updates from the Portfolio Manager concerning engagement on ESG matters with the companies within the portfolio. The Audit Committee, also met with members of the risk management and investment compliance teams to better understand the Portfolio Manager's internal controls. The Audit Committee reviews Lindsell Train's AAF01/20 control reports annually. During the year the Board discussed its approach to ESG matters with the Lindsell Train team providing more detail of their specific approach to responsible ownership. The Board considers its approach to ESG as well as that of the companies in which the Company invests, and has developed its own policy. The Board encourages the Company's Portfolio Manager to engage with companies and in doing so expects ESG issues to be a key consideration. The Board receives an update on Lindsell Train's engagement activities within a dedicated quarterly ESG report. A member of Lindsell Train's investment team attends each Board meeting to provide an update on ESG issues and engagement activities since the last Board meeting. |
Service Providers | The Company contracts with third parties for other services including: depositary, investment accounting & administration as well as company secretarial and registrars. The Company ensures that the third parties to whom the services have been outsourced complete their roles in line with their service level agreements and are able to continue to provide these services, thereby supporting the Company in its success and ensuring compliance with its obligations. | The Board and Frostrow engage regularly with other service providers both in one-to-one meetings and via regular written reporting. This regular interaction provides an environment where topics, issues and business development needs can be dealt with efficiently and collegiately. The Audit Committee reviews Frostrow's controls report annually. |
The Company's Lender | Investment companies have the ability to borrow with a view to enhancing long-term returns to Shareholders. Engagement with the Company's lender ensures that it fully understands the nature of the Company's business, the strategy adopted by the Portfolio Manager and the extent to which the Company complies with its loan covenants. | Regular reporting to the lender with respect to adherence with loan covenants and ad hoc meetings with the AIFM. |
KEY AREAS OF ENGAGEMENT | MAIN DECISIONS AND ACTIONS TAKEN |
Investors The impact of market volatility caused by certain geopolitical events on the portfolio. | Shareholders are provided with performance updates via the Company's website as well as the annual and half-year financial reports and monthly factsheets. |
Ongoing dialogue with Shareholders concerning the strategy of the Company, performance and the portfolio. | The Portfolio Manager and Frostrow meet regularly with Shareholders and potential investors to discuss the Company's strategy, performance and portfolio. Both the Portfolio Manager and Frostrow also engage with the Press on the Company's behalf. Information on how to vote your investment company shares on a selection of major platforms can be found in the Notice of Meeting. The Chairman and Senior Independent Director, accompanied by members of the Frostrow team, met with representatives from major Shareholders to discuss, amongst other things, shareholder engagement, particularly with Shareholders who hold their shares via these platforms. |
Share price performance | The Board reviews the Company's share price discount/premium on a daily basis and has a share buy-back policy, which during the year resulted in 11,218,558 shares being bought back. Details of the Company's share issuance and buy-back policy can be found on the Company's website. |
Portfolio Manager Portfolio composition, performance, ESG matters, outlook, and business updates. | The Portfolio Manager has set ESG targets and engages regularly with investee companies' executive management and the Board receives quarterly ESG updates from the Portfolio Manager, enabling the conclusion that the risk of material misstatement due to climate risk remains low. |
The impact of market volatility upon their business and how some companies in the portfolio have sought to take advantage of the pandemic, in particular through increased digitalisation. | The Board has received regular updates from the Portfolio Manager throughout the recent period of market volatility, including its impact on investment decision making. |
The integration of ESG into the Portfolio Manager's investment processes. | The Portfolio Manager reports regularly any ESG issues in the portfolio companies to the Board. |
Climate Change | During the year the Audit Committee considered the Portfolio Manager's assessment of the risks associated with climate change on the portfolio and how the transition to a low-carbon economy will affect all businesses, irrespective of their size, sector or geographic location. |
Other service providers As an externally managed investment company, the Company does not have employees. Its main stakeholders therefore comprise its Shareholders and a small number of service providers. The Board has delegated a wide range of activities to external agents, in addition to the Portfolio Manager. These services include AIFM, investment administration, management and financial accounting, Company Secretarial and certain other administrative requirements and registration services. Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of the services offered, including the control systems in operation in so far as they relate to the affairs of the Company. The Directors have frequent engagement with the Company's other service providers through the annual cycle of reporting and due diligence meetings or site visits by Frostrow. This engagement is completed with the aim of maintaining an effective working relationship and oversight of the services provided. | The Board met regularly with Frostrow (the AIFM), representatives of which attend every Board meeting to provide updates on risk management, accounting, administration and corporate governance matters. Reviews of the Company's service providers have been positive and the Directors believe their continued appointment is in the best interests of the Company. The Company has invested in Frostrow and Lindsell Train. Further details can be found on the Company's website. The Audit Committee met with PricewaterhouseCoopers LLP ("PwC") to review the audit plan for the year, agree their remuneration, review the outcome of the annual audit and to assess the quality and effectiveness of the audit process. Please refer to the Audit Committee Report within the Annual Report. |
The Company's Lender Continued compliance with covenants set out within the loan agreement between the Company and the lender. | The Board ensures compliance with loan covenants throughout the year. |
RESPONSIBLE INVESTMENT
Our Policy
The Board recognises that the most material way for the Company to have an impact on Environmental, Social and Governance ("ESG") issues is through the responsible ownership of its investments.
It has delegated authority to its Portfolio Manager to engage actively with the management of investee companies and encourage that high standards of ESG practice are adopted.
The Company seeks to generate long-term, sustainable returns on capital. The investee companies which consistently deliver superior returns over the long term are typically established, well-run companies whose managers recognise their impact on the world around them.
In its Responsible Engagement & Investment Policy, the Portfolio Manager states that its evaluation of ESG factors is an inherent part of the investment process.
The Board has delegated authority to the Portfolio Manager to vote the shares owned by the Company that are held on its behalf by its Custodian. The Board has instructed that the Portfolio Manager submit votes for such shares wherever possible and practicable. The Portfolio Manager may refer to the Board on any matters of a contentious nature.
The Portfolio Manager is a signatory of the 2021 UK Stewardship Code and became a signatory of Net Zero Asset Managers initiative in December 2021.
LINDSELL TRAIN'S POLICY
ESG INTEGRATION
Seeking Sustainability
As a long-term investor, Lindsell Train aims to identify companies that can generate long-term sustainable high returns on capital. Lindsell Train has historically found that such companies tend to exhibit characteristics associated with good corporate governance and responsible business practices. Indeed, Lindsell Train believes that companies which observe such standards, and that are serious in their intention of addressing environmental and social factors, will not only become more durable but will likely prove to be superior investments over time.
To that end Lindsell Train's initial analysis and ongoing company engagement strategy seeks to incorporate all sustainability factors that they believe will affect the company's ability to deliver long-term value to shareholders. Such factors may include but are not limited to: environmental (including climate change), social and employee matters (including turnover and culture) and governance factors (including remuneration and capital allocation), cyber resilience, responsible data utilisation, respect for human rights, anticorruption and anti-bribery, and any other risks or issues facing the business and its reputation. This work is catalogued in a proprietary database of risk factors in order to centralise and codify the team's views, as well as to prioritise Lindsell Train's ongoing research and engagement work and is cross-referenced with the SASB Materiality Map ©.
If, as a result of this assessment, Lindsell Train believes that an ESG factor is likely to materially impact a company's long-term business prospects (either positively or negatively) then this will be reflected in the long-term growth rate that is applied in the investment team's valuation of that company, which alongside the team's more qualitative research will influence any final portfolio decisions (for example, whether Lindsell Train starts a new position or sells out of an existing holding).
Positive/Negative Screening
As a product of Lindsell Train's investment philosophy, it does not invest in the following industries:
- capital intensive industries (energy, commodities or mining) or any companies involved in the extraction and production of coal, oil or natural gas; and
- industries that Lindsell Train judges to be sufficiently detrimental to society that they may be exposed to burdensome regulation or litigation that could impinge on financial returns (e.g. tobacco, gambling or arms manufacturers).
Similarly, Lindsell Train's investment approach has steered Nick Train and the investment team to invest in a number of companies that play an important positive social or environmental role, for example through providing access to educational information (RELX), encouraging saving for the future (Schroders and Hargreaves Lansdown) or encouraging environmental progress and developing best practice (e.g., Diageo and Mondelez). Lindsell Train believes that such positive benefits for society should be consistent with its aim to generate competitive long-term returns, thus helping it meet its clients' investment objectives.
Climate Change
The risks associated with climate change represent the great issue of our era and the transition to a low-carbon economy will affect all businesses, irrespective of their size, sector or geographic location. Therefore, no company's revenues are immune and the assessment of such risks must be considered within any effective investment approach, particularly one like Lindsell Train's that seeks to protect its clients' capital for decades to come.
As a relatively small company with a single office location and 26 employees, Lindsell Train's climate exposure comes predominantly from the investment portfolios that it manages on behalf of its clients. Lindsell Train recognises the systemic risk posed by climate change and the potential financial impacts associated with a transition to a low-carbon economy.
To help address this, Lindsell Train became a signatory of the Net Zero Asset Managers ("NZAM") initiative in December 2021, which affirms its commitment to support the goal of net zero greenhouse gas emissions by 2050 or sooner. In line with this ambition, Lindsell Train published a 2030 interim target in Q4 2022 which has since been approved by The Institutional Investors Group on Climate Change ("IIGCC"). Lindsell Train felt it was most appropriate to set a Portfolio Coverage Target, and has duly targeted 55% of its asset-weighted committed1 assets to be considered aligned2 by 2030, as set out by the Paris Aligned Investment Initiative ("PAII") Net Zero Investment Framework. This represents a circa 50% improvement from its baseline of 36% of assets being Aligned as of 2022, consistent with a fair share of the 50% global reduction in CO2 identified as a requirement in the Intergovernmental Panel on Climate Change ("IPCC") special report on global warming of 1.5°C.
Lindsell Train also supports the recommendations of the Task Force on Climate-Related Financial Disclosures ("TCFD") and its efforts to encourage companies to report their climate related disclosures and data in a uniform and consistent way. Further information on Lindsell Train's TCFD related disclosures can be found in its 2023 TCFD Report, which can be found on Lindsell Train's website: www.lindselltrain.com/responsibleinvesting/governance-strategy/.
Further, using Morningstar's carbon metrics calculations, Lindsell Train is pleased to note that the Company continues to have a significantly lower weighted average carbon intensity than its comparable benchmark.
Due to availability of carbon intensity data, the Morningstar UK GBP index has been used as a proxy for the FTSE All-Share index. The Morningstar UK index measures the performance of the UK's equity markets targeting the top 97% of stocks by market capitalisation.
1 Committed assets are currently 94% of Lindsell Train's total AUM. The assets that were excluded relate to segregated clients that either declined to have their assets included at this time or did not respond by the required deadline. There is scope to increase the level of committed assets over time.
2 Aligned status, as set out by the PAII Net Zero Framework, has prescribed requirements of the portfolio companies, including; 1) Setting short and medium-term emission reduction targets, 2) Monitoring emission intensity performance relative to those targets, and 3) Disclosure of scope 1, 2 and 3 emissions. For higher impact sectors, further criteria are required to be categorised as Aligned.
Weighted Average Carbon Intensity
The Morningstar carbon intensity definition is as follows: The asset-weighted average for the portfolio of the underlying holdings' Carbon Intensity Scope 1 and 2 (in USD terms). The average only includes holdings for which company Carbon Intensity Scope 1 and 2 (in USD terms) is available. Carbon intensity for a company represents the volume of carbon emissions per million dollars of revenue, computed as follows: Total Emissions Scope 1 and 2 (metric tons of Co2) / Revenue (Mil USD). For a portfolio, carbon intensity represents the average carbon efficiency of its investments, in metric tons of Co2. A lower value indicates lower intensity, and greater carbon efficiency.
Stewardship
Engagement
Engaging with and monitoring investee companies on matters relating to stewardship has always been an essential element of Lindsell Train's investment strategy. Its long-term approach generally leads it to be supportive of company management. However, where Lindsell Train disagrees with a company's actions, it will try to influence management on specific matters or policies if Lindsell Train believe it is in the best interests of its clients. Constructive dialogue has more often than not resulted in satisfactory outcomes, thus limiting the need for escalation. However, where this is not the case, Lindsell Train will consider escalating its engagement and stewardship activities.
During the year, Lindsell Train engaged with five companies held within the Company's portfolio on a wide range of environmental, social and governance issues together with case studies of two such engagements. Moreover, to ensure that the 2030 net zero interim target remains achievable, Lindsell Train continues to engage proactively with the management of companies it holds across its portfolios, the aim being to understand each company's individual goals and, where appropriate, to provide the team's thoughts on their road maps, with the overall ambition of reaching an absolute reduction in global carbon emissions. Using the data gathered to set the 2030 interim target, Lindsell Train has been able to identify which portfolio companies should be prioritised for engagement on their progress. Lindsell Train has engaged with management at a number of companies in recent months and will continue to engage with all portfolio companies to understand how they align with Lindsell Train's net zero goals. This includes encouraging them to commit to setting targets that are measurable, actionable and based on the latest and most accurate scientific data, as laid out by the Science Based Targets initiative* ("SBTi") where possible, to ensure that the targets are measurable, actionable and based on the best available information. This initiative has been led by Madeline Wright, Deputy Portfolio Manager and Head of Investment ESG. The information gathered from this exercise is stored, assessed, and monitored within Sentinel, Lindsell Train's proprietary ESG database.
* Science-based targets provide companies with a clearly-defined path to reduce emissions in line with the Paris Agreement goals.
Engagement by Topic
Source: Lindsell Train. 1 October 2022 - 30 September 2023. 12 topics raised with 5 companies.
Key Engagement Case Studies:
Company name: Unilever
Year Founded: 1929
Year FGT first invested: 2006
Sector: Consumer Staples
Engagement topics: Capital Allocation/Strategy & Other(Reputation)
Date of engagements: February 2023 & August 2023
Engagement format: Call
Reason for Engagement: Lindsell Train spoke with Nils Andersen(Chairman) and Richard Williams (Investor Relations) early in 2023, following the news that Hein Schumacher was succeeding Alan Jope as CEO. It was explained that Hein had been identified several years ago as a possible candidate. He was appointed following Board interviews where he received unanimous support. His CV showcases his numerical capabilities (he has been a CFO at dairy multinational Royal FrieslandCampina) and his sustainability credentials as well as strong leadership skills and a good knowledge of emerging markets (having run China for Heinz). From a perception and reputational standpoint, it also helps that he is an external hire. Unilever's new strategy will be well supported by Hein, who accomplished a similar strategy at his previous employer. Nils reaffirmed that there are currently no plans to make any significant disposals or acquisitions to any significant parts of the business and there is also unlikely to be any large cost-cutting program under Hein's leadership. The fact that Hein hails from the Netherlands does also not foreshadow any shift in focus.
In a call with CFO Graeme Pitkethly later in the year, the Lindsell Train investment team discussed Unilever's decision to retain its presence in Russia. It sought justification for this decision and, whilst the team recognises that there is no easy choice, Lindsell Train conveyed its expectation that management would keep the situation under active review with the hope of finding the 'least worst' outcome.
Next steps: The engagement regarding the hiring of HeinSchumacher was productive and insightful, but as with all of our portfolio companies we will continue to monitor progress closely and engage with management on aspects of their corporate strategy on an ongoing basis. The engagement regarding Unilever's presence in Russia is ongoing.
Company name: Mondelez
Year Founded: 1923 (Cadbury was founded in 1824)
Year FGT first invested: 2001 (Kraft Foods (formerly Cadbury)became Mondelez following a demerger in 2012)
Sector: Consumer Staples
Engagement topic: Human Rights/Modern Slavery
Date of engagement: May 2023
Engagement format: Call
Reason for Engagement: Lindsell Train spoke with themanagement of Mondelez ahead of its AGM, which included a contentious shareholder proposal relating to the eradication of child labour from the cocoa supply chain. The team has regularly engaged with Mondelez on this issue and so were eager to hear management's views on the resolution, and also receive an update on the progress the company is making on this specific initiative. Management communicated that whilst it is entirely supportive of the aims and intentions of the shareholder proposal, the company is already working towards these exact goals and believes that the current strategy continues to be the right one to achieve them. They confirmed that significant progress has been made: 74% of the company's supply chain is now covered by its Cocoa Life programme, up from 28% in 2020. Like Mondelez, Lindsell Train recognises that eradicating child labour from the cocoa supply chain is a systemic issue that requires wide-scale collaboration and so Lindsell Train voted in line with management, as it believes it is unproductive to expect Mondelez to solve this wider issue on its own.
Next steps: This engagement is ongoing. While LindsellTrain accepts that Mondelez cannot solve this wider issue on its own, as the number 2 chocolate brand in the world Lindsell Train would like to see the company continuing to set the agenda. Lindsell Train would like the percentage of the company's supply chain covered by the Cocoa Life programme to continue to increase to full coverage, with credible and sustainable ongoing monitoring firmly in place as this is not a 'set and forget' issue.
Proxy Voting
The primary voting policy of Lindsell Train is to protect or enhance the economic value of its investments on behalf of its clients. Lindsell Train has appointed Glass Lewis to aid the administration of proxy voting and provide additional support in this area. However, the Manager maintains decision making responsibility based on its detailed knowledge of the investee companies. It is Lindsell Train's policy to exercise all voting rights which have been delegated to Lindsell Train by its clients.
Voting record:
| MANAGEMENT PROPOSALS | SHAREHOLDER PROPOSALS | TOTAL PROPOSALS |
With Management | 387 | 2 | 389 |
Against Management | 0 | 0 | 0 |
Abstain | 1 | 1 | 2 |
Totals | 388 | 3 | 391 |
Source: Glass Lewis. 1 October 2022 - 30 September 2023.
Votes against management and abstentions have typically been in the low single-digit range. The main reason for this is that Lindsell Train's long-term approach to investment generally leads it to be supportive of company management and, where required, Lindsell Train will try to influence management through its engagement activities. Given Lindsell Train often builds up large, long-term stakes in the businesses in which it invests, Lindsell Train finds that management is open to (and very often encourage) engagement with Lindsell Train. Furthermore, it is Lindsell Train's aim to be invested in 'exceptional' companies with strong corporate governance and hence it ought to be rare that Lindsell Train finds itself in a position where it is voting against management.
In the majority of cases where Lindsell Train has voted against management it has been on matters relating to remuneration. Where Lindsell Train does not believe that a company's compensation policy is aligned with the long-term best interests of the shareholders it will write to management to inform them of Lindsell Train's intention to vote against such policies.
INTEGRITY AND BUSINESS ETHICS
The Company is committed to carrying out business in an honest and fair manner. The Board has adopted a zero-tolerance approach to instances of bribery and corruption. Accordingly, it expressly prohibits any Director or associated persons when acting on behalf of the Company from accepting, soliciting, paying, offering or promising to pay or authorise any payment, public or private, in the United Kingdom or abroad to secure any improper benefit from themselves or for the Company.
The Board applies the same standards to its service providers in their activities for the Company.
A copy of the Company's Anti Bribery and Corruption Policy can be found in the Board and Policies section of the Company's website. The policy is reviewed annually by the Audit Committee.
In response to the implementation of the Criminal Finances Act 2017, the Board adopted a zero-tolerance approach to the criminal facilitation of tax evasion. A copy of the Company's policy on preventing the facilitation of tax evasion can be found in the Board and Policies section of the Company's website. The policy is reviewed annually by the Audit Committee.
In carrying out its activities, the Company aims to conduct itself responsibly, ethically and fairly, including in relation to social and human rights issues. As an investment company with limited internal resource, the Company has little impact on the environment. The Company believes that high standards of ESG make good business sense and have the potential to protect and enhance investment returns. Consequently, the Portfolio Manager's investment criteria ensure that ESG and ethical issues are taken into account and best practice is encouraged. The Board's expectations are that its principal service providers have appropriate governance policies in place.
COMPANY PROMOTION
The Company has appointed Frostrow to promote the Company's shares to professional investors in the UK and Ireland. As investment company specialists, the Frostrow team provides a continuous, proactive marketing and investor relations service that aims to promote the Company by encouraging demand for the shares.
MANAGEMENT ARRANGEMENTS
Alternative Investment Fund Manager ("AIFM")
Frostrow under the terms of its AIFM agreement with the Company provides, inter alia, the following services:
- oversight of the portfolio management function delegated to Lindsell Train;
- promotion of the Company;
- investment portfolio administration and valuation;
- risk management services;
- share price discount and premium management;
- administrative and company secretarial services;
- advice and guidance in respect of corporate governance requirements;
- maintenance of the Company's accounting records;
- maintenance of the Company's website;
- preparation and publication of annual reports, half year reports and monthly fact sheets; and
- ensuring compliance with applicable legal and regulatory requirements.
The AIFM Agreement may be terminated by either party on giving notice of not less than 12 months.
Portfolio Manager
Lindsell Train, as delegate of the AIFM, is responsible for the management of the Company's portfolio of investments under an agreement between it, the Company and Frostrow (the "Portfolio Management Agreement").
Under the terms of its Portfolio Management Agreement, Lindsell Train provides, inter alia, the following services:
- seeking out and evaluating investment opportunities;
- recommending the manner by which monies should be invested, realised or retained;
- advising on how rights conferred by the investments should be exercised;
- analysing the performance of investments made; and
- advising the Company in relation to trends, market movements and other matters which may affect the investment objective and policy of the Company.
The Portfolio Management Agreement may be terminated by either party on giving notice of not less than 12 months.
Annual Fees
FEES ON THAT PART OF MARKET CAPITALISATION | AIFM | PORTFOLIO MANAGER |
= £1 bn | 0.15% | 0.45% |
> Between £1 bn - £2 bn | 0.135% | 0.405% |
£2 bn + | 0.12% | 0.36% |
Performance Fees
The Company does not pay performance fees.
AIFM AND PORTFOLIO MANAGER EVALUATION AND RE-APPOINTMENT
The performance of Frostrow as AIFM and Lindsell Train as Portfolio Manager is continuously monitored by the Board with a formal evaluation being undertaken each year. As part of this process the Board monitors the services provided by the AIFM and the Portfolio Manager as well as receiving regular reports and views from them. The Board has also considered the assessment carried out by the AIFM as required by the FCA's new Consumer Duty obligations, that the Company's Shares provide fair value. It also receives comprehensive long-term performance measurement reports to enable it to determine whether or not the performance objective set by the Board has been met.
Following a review at the Board meeting in September 2023, the Board considers that the continuing appointment of Frostrow and Lindsell Train, under the terms described above, is in the best interests of the Company's Shareholders. In coming to this decision, it took into consideration the following additional reasons:
- the quality and depth of experience of the management, company secretarial, administrative and marketing team that the AIFM brought to the management of the Company; and
- the quality and depth of experience that the Portfolio Manager brought to the management of the portfolio, the clarity and rigour of the investment process, consideration of ESG targets, the high degree of engagement with portfolio companies on ESG matters, the level of past long-term performance of the portfolio in absolute terms and also by reference to the benchmark index.
Depositary
The Bank of New York Mellon (International) Limited (the "Depositary") acts as the Company's depositary in accordance with the AIFMD on the terms and subject to the conditions of the depositary agreement between the Company, Frostrow and the Depositary (the "Depositary Agreement"). Under the terms of the Depositary Agreement the Company pays the Depositary a fee between 0.007% to 0.008% of net assets.
The Depositary provides the following services:
- responsibility for the safe-keeping of custodial assets of the Company;
- verification and maintenance of a record of all other assets of the Company;
- the collection of income that arises from those assets;
- taking reasonable care to ensure that the Company is managed in accordance with the AIFMD, the FUND Sourcebook and the Company's instrument of incorporation, in relation to the calculation of the net asset value per share and the application of income of the Company; and
- monitoring the Company's compliance with investment restrictions and leverage limits set by the Board and the AIFM.
In accordance with the AIFM Rules the Depositary acts as global custodian and may delegate safekeeping to one or more global sub-custodians. The Depositary has delegated safekeeping of the assets of the Company to The Bank of New York Mellon SA/NV and/or The Bank of New York Mellon (The Global Sub-custodians).
As at the date of this report, the applicable active sub-custodians appointed by the Depositary who might be relevant for the purposes of holding the Company's investments are:
COUNTRY | NAME OF SUB-CUSTODIAN | REGULATOR |
The Netherlands | The Bank of New York Mellon SA/NV | Financial Services and Markets Authority, Belgium |
United States of America | The Bank of New York Mellon, New York | US Securities and Exchange Commission |
France | The Bank of New York Mellon SA/NV | The Autorité des Marchés Financiers |
United Kingdom | Depositary and Clearing Centre (DCC) Deutsche Bank AG, London Branch | The Financial Conduct Authority |
| The Bank of New York Mellon, New York | US Securities and Exchange Commission |
Custodian
The Global Sub-Custodian's safekeeping fees are charged according to the jurisdiction in which the holdings are based. The majority of the Company's assets attract a custody fee of 0.0033% of their market value. Variable transaction fees are also chargeable.
The Depositary Agreement may be terminated by either party on giving notice of not less than 90 days.
On behalf of the Board
Simon Hayes
Chairman
6 December 2023
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Financial Statements for each financial year. Under that law the Directors have prepared the Company's Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", 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 the Financial Statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently;
- state whether applicable United Kingdom Accounting Standards, comprising FRS 102 have been followed, subject to any material departures disclosed and explained in the Financial Statements;
- make judgements and accounting estimates that are reasonable and prudent; and
- prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are 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 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; and
- the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
RESPONSIBILITY STATEMENT
The Directors consider that the Annual Report and Financial Statements, taken as a whole, are fair, balanced, understandable and provide the information necessary for Shareholders to assess the Company's position, performance, business model and strategy.
Each of the Directors, whose names and functions are listed in the 'Board of Directors' section of the Annual Report confirms that, to the best of their knowledge:
- the Company's Financial Statements, which have been prepared in accordance with United Kingdom Accounting Standards give a true and fair view of the assets, liabilities, financial position and profit 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.
Approved by the Board of Directors and signed on its behalf by
Simon Hayes
Chairman
6 December 2023
Note to those who access this document by electronic means:
The Annual Report for the year ended 30 September 2023 has been approved by the Board of Finsbury Growth & Income Trust PLC. Copies of the Annual Report are circulated to Shareholders and, where possible to potential investors. It is also made available in electronic format for the convenience of readers. Printed copies are available from the Company Secretary's office in London.
INCOME STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER 2023
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| NOTE | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Gains/(losses) on investments at fair |
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|
|
value through profit or loss | 9 | - | 96,387 | 96,387 | - | (155,883) | (155,883) |
Currency translations |
| - | (65) | (65) | - | 14 | 14 |
Income | 2 | 47,391 | - | 47,391 | 50,792 | - | 50,792 |
AIFM and portfolio management fees | 3 | (2,609) | (7,828) | (10,437) | (2,678) | (8,034) | (10,712) |
Other expenses | 4 | (1,150) | (17) | (1,167) | (1,069) | (9) | (1,078) |
Return/(loss) on ordinary activities before finance charges and taxation |
| 43,632 | 88,477 | 132,109 | 47,045 | (163,912) | (116,867) |
Finance charges | 5 | (517) | (1,548) | (2,065) | (171) | (512) | (683) |
Return/(loss) on ordinary activities before taxation |
| 43,115 | 86,929 | 130,044 | 46,874 | (164,424) | (117,550) |
Taxation on ordinary activities | 6 | (1,186) | - | (1,186) | (1,190) | - | (1,190) |
Return/(loss) on ordinary activities after taxation |
| 41,929 | 86,929 | 128,858 | 45,684 | (164,424) | (118,740) |
Return/(loss) per share - basic and diluted | 7 | 20.0p | 41.4p | 61.4p | 20.6p | (74.0)p | (53.4)p |
The "Total" column of this statement represents the Company's income statement.
The "Revenue" and "Capital" columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies ("AIC").
All items in the above statement derive from continuing operations.
The Company had no recognised gains or losses other than those declared in the Income Statement; therefore no separate Statement of Comprehensive Income has been presented.
The notes form part of these Financial Statements.
Statement of Changes in Equity
FOR THE YEAR ENDED 30 SEPTEMBER 2023
| NOTE | CALLED UP SHARE CAPITAL £'000 | SHARE PREMIUM ACCOUNT £'000 | CAPITAL REDEMPTION RESERVE £'000 | CAPITAL RESERVE £'000 | REVENUE RESERVE £'000 | TOTAL SHAREHOLDERS' FUNDS £'000 |
At 1 October 2022 |
| 56,248 | 1,099,847 | 3,453 | 614,947 | 55,889 | 1,830,384 |
Net return from ordinary activities |
| - | - | - | 86,929 | 41,929 | 128,858 |
Second interim dividend (9.8p per share) |
|
|
|
|
|
|
|
for the year ended 30 September 2022 | 8 | - | - | - | - | (21,182) | (21,182) |
First interim dividend (8.5p per share) |
|
|
|
|
|
|
|
for the year ended 30 September 2023 | 8 | - | - | - | - | (17,667) | (17,667) |
Repurchase of shares into Treasury | 13 | - | - | - | (97,664) | - | (97,664) |
At 30 September 2023 |
| 56,248 | 1,099,847 | 3,453 | 604,212 | 58,969 | 1,822,729 |
|
|
|
|
|
|
|
|
| NOTE | CALLED UP SHARE CAPITAL £'000 | SHARE PREMIUM ACCOUNT £'000 | CAPITAL REDEMPTION RESERVE £'000 | CAPITAL RESERVE £'000 | REVENUE RESERVE £'000 | TOTAL SHAREHOLDERS' FUNDS £'000 |
At 1 October 2021 |
| 56,248 | 1,099,847 | 3,453 | 855,886 | 49,224 | 2,064,658 |
Net (loss)/return from ordinary activities |
| - | - | - | (164,424) | 45,684 | (118,740) |
Second interim dividend (9.1p per share) |
|
|
|
|
|
|
|
for the year ended 30 September 2021 | 8 | - | - | - | - | (20,474) | (20,474) |
First interim dividend (8.3p per share) |
|
|
|
|
|
|
|
for the year ended 30 September 2022 | 8 | - | - | - | - | (18,545) | (18,545) |
Repurchase of shares into Treasury | 13 | - | - | - | (76,515) | - | (76,515) |
At 30 September 2022 |
| 56,248 | 1,099,847 | 3,453 | 614,947 | 55,889 | 1,830,384 |
The notes form part of these Financial Statements.
Statement of Financial Position
AS AT 30 SEPTEMBER 2023
|
| 2023 | 2022 |
| NOTE | £'000 | £'000 |
Fixed assets |
|
|
|
Investments held at fair value through profit or loss | 9 | 1,836,660 | 1,852,078 |
Current assets |
|
|
|
Debtors | 10 | 10,209 | 12,398 |
Cash and cash equivalents |
| 17,426 | 7,835 |
|
| 27,635 | 20,233 |
Current liabilities |
|
|
|
Creditors: amounts falling due within one year | 11 | (4,866) | (5,227) |
Bank loan | 12 | - | (36,700) |
|
| (4,866) | (41,927) |
Net current assets/(liabilities) |
| 22,769 | (21,694) |
Total assets less current liabilities |
| 1,859,429 | 1,830,384 |
Creditors: amount falling due after more than one year |
|
|
|
Bank loan | 12 | (36,700) | - |
Net assets |
| 1,822,729 | 1,830,384 |
Capital and reserves |
|
|
|
Called up share capital | 13 | 56,248 | 56,248 |
Share premium account |
| 1,099,847 | 1,099,847 |
Capital redemption reserve |
| 3,453 | 3,453 |
Capital reserve | 14 | 604,212 | 614,947 |
Revenue reserve |
| 58,969 | 55,889 |
Total Shareholders' funds |
| 1,822,729 | 1,830,384 |
Net asset value per share | 15 | 891.2p | 848.4p |
The Financial Statements were approved by the Board of Directors on 6 December 2023 and were signed on its behalf by:
Simon Hayes
Chairman
The notes form part of these Financial Statements.
Company Registration Number SC013958 (Registered in Scotland)
Statement of Cash Flows
FOR THE YEAR ENDED 30 SEPTEMBER 2023
|
| 2023 | 2022 |
| NOTE | £'000 | £'000 |
Net cash inflow from operating activities | 18 | 36,895 | 38,098 |
Investing activities |
|
|
|
Purchase of investments |
| (41,840) | (79,080) |
Sale of investments |
| 154,301 | 139,227 |
Net cash inflow from investing activities |
| 112,461 | 60,147 |
Financing activities |
|
|
|
Dividends paid |
| (38,849) | (39,019) |
Repurchase of shares into Treasury |
| (98,792) | (73,253) |
Interest paid† |
| (2,059) | (683) |
Net cash outflow from financing activities |
| (139,700) | (112,955) |
Increase/(decrease) in cash and cash equivalents |
| 9,656 | (14,710) |
Currency transactions |
| (65) | 14 |
Cash and cash equivalents at the beginning of the financial year* |
| 7,835 | 22,531 |
Cash and cash equivalents at the end of the financial year* |
| 17,426 | 7,835 |
† Reclassified as "financing activities" from "operating activities" as it better reflects the nature of this expense.
Reconciliation of net debt
| 2023 | 2022 |
| £'000 | £'000 |
Cash and cash equivalents* | 17,426 | 7,835 |
Borrowings | (36,700) | (36,700) |
Net debt | (19,274) | (28,865) |
* Comprises solely cash held at bank.
The notes form part of these Financial Statements.
Notes to the financial statements FOR THE YEAR ENDED 30 SEPTEMBER 2023
1. Accounting Policies
The Company is a public limited company (PLC) incorporated in the United Kingdom, with registered office at 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ.
The principal accounting policies, all of which have been applied consistently throughout the year in the preparation of these Financial Statements, are set out below:
(A) BASIS OF PREPARATION
The Financial Statements have been prepared in accordance with UK Generally Accepted Accounting Practice (GAAP) under UK and Republic of Ireland Company Law, FRS 102 'The Financial Reporting Standard applicable in the UK, the Statement of Recommended Practice (SORP) for "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued by the Association of Investment Companies in July 2022 and the Companies Act 2006 under the historical cost convention as modified by the valuation of investments at fair value through profit or loss.
The Financial Statements have been prepared on a going concern basis. The disclosure on going concern on in the Statement of Directors' Responsibilities forms part of these Financial Statements.
Presentation of the Income Statement
In order to reflect better the activities of an investment trust company and in accordance with the SORP, supplementary information which analyses the Income Statement between items of a revenue and capital nature has been presented alongside the Income Statement. The net revenue return is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Sections 1158 and 1159 of the Corporation Tax Act 2010.
Significant Judgements and Critical Sources of Estimation Uncertainties
There were no significant judgements or critical estimates reported during the financial year ended 30 September 2023 (2022: none).
(B) INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
Investments are measured under FRS 102, sections 11 and 12 and are measured initially, and at subsequent reporting dates, at fair value.
Changes in the fair value of investments and gains and losses on disposal are recognised in the Income Statement as a capital item. The Company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided internally on this basis to the Board. Fair value for quoted investments is deemed to be bid market prices, or last traded price, depending on the convention of the stock exchange on which they are quoted.
All purchases and sales of investments are accounted for on a trade date basis.
The Company's policy is to expense transaction costs on acquisition/disposal through the gains on investment at fair value through profit or loss. The total of such expenses, showing the total amounts included in disposals and acquisitions, is disclosed in note 9.
(C) INCOME
Dividends receivable from equity shares are recognised in Revenue on an ex-dividend basis except where, in the opinion of the Board, the dividend is capital in nature, in which case it is included in Capital. Overseas dividends are stated gross of any withholding tax.
When the Company has elected to receive scrip dividends in the form of additional shares rather than cash, the amount of cash dividend foregone is recognised in Revenue.
Fixed returns on non-equity shares are recognised on a time apportionment basis.
Special dividends: In deciding whether a dividend should be regarded as a Capital or Revenue receipt, the Company reviews all relevant information as to the reasons for and sources of the dividend on a case by case basis depending upon the nature of the receipt. Special dividends of a revenue nature are recognised through the Revenue column of the Income Statement. Special Dividends of a capital nature are recognised through the Capital column of the Income Statement.
The limited liability partnership (LLP) profit share is recognised in the financial statements when the entitlement to the income is established, following the conclusion of the partnership's annual audit. Deposit interest receivable is taken to revenue on an accruals basis.
(D) DIVIDENDS PAYABLE
Dividends paid by the Company are recognised in the Financial Statements and are shown in the Statement of Changes in Equity in the period in which they became legally binding, which in the case of an interim dividend is the point at which it is paid and for a final dividend when it is approved by Shareholders in line with the ICAEW Tech Release 02/17BL.
(E) EXPENDITURE AND FINANCE CHARGES
All the expense and finance costs are accounted for on an accruals basis. Expenses are charged through the Revenue column of the Income Statement except as follows:
• expenses which are incidental to the acquisition or disposal of an investment are treated as part of the cost or deducted from proceeds of that investment (as explained in 1(B) above);
• expenses are taken to the Capital reserve via the Capital column of the Income Statement, where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In line with the Board's expected long-term split of returns, 75% of the portfolio management fee, AIFM fee and finance costs are taken to the Capital reserve and the balance to the Revenue reserve (2022: 75% capital, 25% revenue).
(F) TAXATION
Dividend income received by the Company may be subject to withholding tax imposed in the country of origin. The tax charges shown in the Income Statement relates to overseas withholding tax on dividend income.
Current tax is provided at the amounts expected to be paid or recovered.
Deferred taxation is provided on all timing differences that have originated but not been reversed by the Statement of Financial Position date other than those differences regarded as permanent. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the reversal of timing differences can be deducted. Any liability to deferred tax is provided for at the rate of tax enacted or substantially enacted.
(G) FOREIGN CURRENCY
Transactions recorded in overseas currencies during the year are translated into sterling at the exchange rates ruling at the date of the transaction. Assets and liabilities denominated in overseas currencies at the Statement of Financial Position date are translated into sterling at the exchange rate ruling at that date. Profits or losses on the translation of foreign currency balances, whether realised or unrealised are credited or debited to the Revenue or Capital column of the Income Statement depending on whether the gain or loss is of a revenue or capital nature.
(H) CASH AND CASH EQUIVALENTS
Cash and cash equivalents and demand deposits readily convertible to known amounts of cash and subject to insignificant risk of changes in value are defined as cash.
(I) BANK LOAN
Bank loans are initially recognised at fair value, net of transaction costs incurred. Bank loans are subsequently measured at amortised cost. The loan amounts falling due for repayment within one year are included under current liabilities in the Statement of Financial Position and the loan amounts falling due after one year are included under "Creditors: amounts falling due after more than one year" in the Statement of Financial Position.
(J) REPURCHASE OF SHARES FOR CANCELLATION OR TO HOLD IN TREASURY
The cost of repurchasing ordinary shares (for cancellation or to hold in Treasury) including the related stamp duty and transaction cost is charged to the 'capital reserve' and dealt with in the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis.
Where shares are cancelled (or are subsequently cancelled having previously been held in Treasury), the nominal value of those shares is transferred out of 'Called up share capital' and into the 'Capital redemption reserve'.
Should shares held in Treasury be reissued, the sales proceeds will be treated as a realised capital profit up to the amount of the purchase price of those shares and will be transferred to capital reserves. The excess of the sales proceeds over the purchase price will be transferred to 'Share premium'.
(K) OPERATING SEGMENTS
The Company defines operating segments and segment performance in the financial statements based on information used by the Board of Directors which is considered the Chief Operating Decision Maker^. The Directors are of the opinion that the Company is engaged in a single segment of business, being the investments business. The results published in this Annual Report therefore correspond to this sole operating segment.
(L) NATURE AND PURPOSE OF RESERVES
Capital Redemption Reserve
This reserve arose when ordinary shares were bought by the Company and subsequently cancelled, at which point the amount equal to the par value of the ordinary share capital was transferred from the ordinary share capital to the Capital Redemption reserve.
Capital Reserve
This reserve reflects any:
• gains or losses on the disposal of investments;
• exchange differences of a capital nature;
• increases and decreases in the fair value of investments which have been recognised in the capital column of the Income Statement;
• expenses which are capital in nature as disclosed in note 1(E); and
• excess of the purchase price over the nominal value of shares which have been bought back by the Company for cancellation or to be held in Treasury. See note 1(J) above for further details.
Following amendments to the Company's Articles of Association in 2015, this reserve can be used to distribute certain capital profits by way of dividend.
Revenue Reserve
This reserve reflects all income and expenditure which are recognised in the revenue column of the Income Statement and may be distributable by way of dividend.
When making a distribution to Shareholders, the Directors determine profits available for distribution by reference to 'Guidance on realised and distributable profits under the Companies Act 2006' issued by the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland in April 2017. The availability of distributable reserves in the Company is dependent on those distributions meeting the definition of qualifying consideration within that guidance and on available cash resources of the Company and other accessible sources of funds. The distributable reserves are therefore subject to these restrictions or limitations at the time such distribution is made.
^ See glossary of terms.
2. Income
| 2023 | 2022 |
| £'000 | £'000 |
Income from investments |
|
|
UK listed dividends* | 39,247 | 41,827 |
Overseas dividends* | 7,496 | 8,257 |
Priority profit share on AIFM Capital contribution | - | 81 |
Limited liability partnership - profit-share | 443 | 613 |
Other operating income - bank interest and miscellaneous income | 205 | 14 |
Total income | 47,391 | 50,792 |
* Include special dividends which have been credited to the revenue account totalling £591,000 (2022: £1,833,000):
• UK listed dividends £nil (2022: £1,205,000).
• Overseas dividends £591,000 (2022: £628,000).
3. AIFM and portfolio management fees
| 2023 | 2022 | ||||
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
AIFM fee | 652 | 1,957 | 2,609 | 670 | 2,008 | 2,678 |
Portfolio Management fee | 1,957 | 5,871 | 7,828 | 2,008 | 6,026 | 8,034 |
Total fees | 2,609 | 7,828 | 10,437 | 2,678 | 8,034 | 10,712 |
75% of the Portfolio management and AIFM fees are taken to the Capital reserve and 25% is taken to the Revenue reserve. See note 1(E) for further details.
4. Other Expenses
|
| 2023 |
|
| 2022 |
|
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Directors' fees | 178 | - | 178 | 150 | - | 150 |
Auditors' fees - statutory annual audit | 69 | - | 69 | 63 | - | 63 |
Depositary's fees | 175 | - | 175 | 193 | - | 193 |
Stock listing and FCA fees | 152 | - | 152 | 140 | - | 140 |
Custody fees | 119 | - | 119 | 118 | - | 118 |
Index costs | 85 | - | 85 | 74 | - | 74 |
Registrar's fees | 64 | - | 64 | 59 | - | 59 |
Promotional costs | 55 | - | 55 | 60 | - | 60 |
Printing and postage | 43 | - | 43 | 52 | - | 52 |
Directors' D&O insurance | 37 | - | 37 | 41 | - | 41 |
Broker fees | 36 | - | 36 | 7 | - | 7 |
Other expenses | 137 | 17 | 154 | 112 | 9 | 121 |
Total expenses | 1,150 | 17 | 1,167 | 1,069 | 9 | 1,078 |
Further details of the amounts paid to Directors are included in the Directors' Remuneration Report
During the year ended 30 September 2023 there were no non-audit services provided by the Company's Auditor (2022: nil).
All of the above expenses include VAT where applicable. The auditor's fees for the statutory annual audit were £57,780 excluding VAT (2022: £52,080).
5. Finance Charges
|
| 2023 |
|
| 2022 |
|
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Interest payable on bank loan | 483 | 1,445 | 1,928 | 161 | 482 | 643 |
Loan facility commitment fees | 23 | 69 | 92 | 10 | 30 | 40 |
Arrangement fee | 11 | 34 | 45 | - | - | - |
| 517 | 1,548 | 2,065 | 171 | 512 | 683 |
6. Taxation on Ordinary Activities
(A) ANALYSIS OF CHARGE IN THE YEAR
|
| 2023 |
|
| 2022 |
|
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
UK Corporation tax at 22%# (2022: 19%) | - | - | - | - | - | - |
Overseas withholding tax | 1,308 | - | 1,308 | 1,364 | - | 1,364 |
Recoverable overseas withholding tax | (122) | - | (122) | (174) | - | (174) |
| 1,186 | - | 1,186 | 1,190 | - | 1,190 |
(B) FACTORS AFFECTING TOTAL TAX CHARGE FOR YEAR
The tax assessed for the year is lower (2022: higher) than the standard rate of UK corporation tax of 25% (2022: 19%).
The differences are explained below:
|
| 2023 |
|
| 2022 |
|
| REVENUE | CAPITAL | TOTAL | REVENUE | CAPITAL | TOTAL |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Total return/(loss) on ordinary activities before taxation | 43,115 | 86,929 | 130,044 | 46,874 | (164,424) | (117,550) |
Return/(loss) on ordinary activities multiplied by UK corporation tax of 22%# (2022: 19%) | 9,485 | 19,124 | 28,609 | 8,906 | (31,240) | (22,334) |
Effects of: |
|
|
|
|
|
|
Overseas taxation | 1,186 | - | 1,186 | 1,190 | - | 1,190 |
Franked investment income not subject to corporation tax - UK dividend income | (8,634) | - | (8,634) | (7,947) | - | (7,947) |
Overseas dividends not taxable | (1,649) | - | (1,649) | (1,569) | - | (1,569) |
Excess management expenses | 798 | - | 798 | 610 | - | 610 |
Amounts charged to capital | - | 2,067 | 2,067 | - | 1,625 | 1,625 |
Non-taxable (return)/loss on investments* | - | (21,205) | (21,205) | - | 29,618 | 29,618 |
Currency translations | - | 14 | 14 | - | (3) | (3) |
Total tax charge for the year (note 6(A)) | 1,186 | - | 1,186 | 1,190 | - | 1,190 |
* (Return)/loss on investments are not subject to corporation tax within an investment company.
# With effect from 1 April 2023, the main rate of corporation tax increased from 19% to 25%, therefore the hybrid rate of 22% has been used.
(C) DEFERRED TAXATION
As at 30 September 2023, the Company had unused management expenses and other reliefs for taxation purposes of £135,063,000 (2022: £122,041,000). It is unlikely that the Company will generate sufficient taxable income in excess of the available deductible expenses and therefore the Company has not recognised a deferred tax asset of £33,766,000 (2022: £30,510,000) based on the prospective corporation tax rate of 25% (2022: 25%).
Given the Company's status as an investment company and the intention to continue to meet the conditions required to maintain such status in the foreseeable future, the Company has not provided for deferred tax on any capital gains or losses arising on the revaluation or disposal of investments.
7. Return/(loss) per share - Basic and Diluted
| 2023 | 2022 |
| £'000 | £'000 |
The return/(loss) per share is based on the following figures: |
|
|
Revenue return | 41,929 | 45,684 |
Capital return/(loss) | 86,929 | (164,424) |
Total return/(loss) | 128,858 | (118,740) |
Weighted average number of shares in issue during the year | 209,802,492 | 222,335,694 |
Revenue return per share | 20.0p | 20.6p |
Capital return/(loss) per share | 41.4p | (74.0)p |
Total return/(loss) per share | 61.4p | (53.4)p |
The calculation of the total, revenue and capital returns/(loss) per ordinary share is carried out in accordance with IAS 33, "Earnings per Share (as adopted in the UK)".
As at 30 September 2023 and 2022 there were no dilutive instruments in issue, therefore the basic and diluted return/(loss) per share are the same.
* Excludes shares held in Treasury.
8. Dividends
In accordance with FRS 102 dividends are included in the Financial Statements in the period in which they are paid or approved by Shareholders.
Amounts recognised as distributable to Shareholders for the year ended 30 September 2023 were as follows:
| EX-DIVIDEND | PAYMENT | 2023 | 2022 |
| DATE | DATE | £'000 | £'000 |
Second interim dividend paid for the year ended 30 September 2022 of 9.8p per share | 29 September 2022 | 4 November 2022 | 21,182 | - |
First interim dividend paid for the year ended 30 September 2023 of 8.5p per share | 6 April 2023 | 19 May 2023 | 17,667 | - |
Second interim dividend paid for the year ended 30 September 2021 of 9.1p per share | 7 October 2021 | 12 November 2021 | - | 20,474 |
First interim dividend paid for the year ended 30 September 2022 of 8.3p per share | 31 March 2022 | 13 May 2022 | - | 18,545 |
|
|
| 38,849 | 39,019 |
* Second interim dividend of 10.5p per share for the year ended 30 September 2023 (2022: 9.8p) | 5 October 2023 | 10 November 2023 | 21,454 | 21,182 |
* The second interim dividend of 10.5p per share (2022: 9.8p) has not been included as a liability in these Financial Statements as it is only recognised in the financial year in which it is paid.
The total dividends payable in respect of the financial year which forms the basis of the retention test under Section 1158 of the Corporation Tax Act 2010 are set out below:
| 2023 | 2022 |
| £'000 | £'000 |
Revenue available for distribution by way of dividend for the year | 41,929 | 45,684 |
2023 First interim dividend of 8.5p per share (2022: 8.3p) paid on 19 May 2023 | (17,667) | (18,545) |
2023 Second interim dividend of 10.5p per share (2022: 9.8p) paid on 10 November 2023 | (21,454) | (21,182) |
Net additions to revenue reserves | 2,808 | 5,957 |
The Company's dividend policy is set out in the Strategic Report.
9. Investments held at Fair Value Through Profit or Loss
ANALYSIS OF PORTFOLIO MOVEMENTS
| 2023 | 2022 |
| £'000 | £'000 |
Opening book cost | 1,293,409 | 1,303,097 |
Opening investment holding gains | 558,669 | 768,169 |
Valuation at 1 October | 1,852,078 | 2,071,266 |
Movements in the year: |
|
|
Purchases at cost | 42,619 | 79,246 |
Sales proceeds | (154,424) | (142,551) |
Gains/(losses) on investments | 96,387 | (155,883) |
Valuation at 30 September | 1,836,660 | 1,852,078 |
Closing book cost | 1,244,868 | 1,293,409 |
Investment holding gains at 30 September | 591,792 | 558,669 |
Valuation at 30 September | 1,836,660 | 1,852,078 |
The Company received £154,424,000 (2022: £142,551,000) from investments sold in the year. The realised gains of these investments were £63,263,000 (2022: £53,618,000) and the book cost of these investments when they were purchased was £91,161,000 (2022: £88,933,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
Purchase transaction costs for the year to 30 September 2023 were £50,000 (2022: £161,000). These comprise stamp duty costs of £33,000 (2022: £110,000) and commission of £17,000 (2022: £51,000). Sales transaction costs for the year to 30 September 2023 were £55,000 (2022: £53,000) and comprise commission.
10. Debtors
| 2023 | 2022 |
| £'000 | £'000 |
Amounts due from brokers in respect of portfolio trading - disposals | 4,121 | 3,998 |
Accrued income and prepayments | 6,088 | 8,400 |
| 10,209 | 12,398 |
11. Creditors: Amounts Falling Due Within One Year
| 2023 | 2022 |
| £'000 | £'000 |
Amounts due to brokers in respect of portfolio trading - purchases | 1,669 | 890 |
Amounts due to brokers in respect of shares repurchased by the Company | 2,134 | 3,262 |
Other creditors and accruals | 1,063 | 1,075 |
| 4,866 | 5,227 |
12. Bank Loan
| 2023 | 2022 |
| £'000 | £'000 |
Bank loan | 36,700 | 36,700 |
Scotiabank Europe PLC, the provider of the Company's loan facility, has a fixed and floating charge over the assets of the Company as security against any funds drawn down under the loan facility. As at 30 September 2023 the Company was in the first year of its three year secured fixed term multi-currency revolving loan facility of £60 million (with an additional £40 million available if required).
This facility was renewed on 4 October 2022 and will expire in early October 2025.
The main covenant under the loan facility required that, at each month end, total borrowings should not exceed £100 million (2022: £100 million), Net Asset Value must not fall below £750 million (2022: £300 million) and the ratio of Adjusted Total Net Assets to Debt is not to be less than 4:1 (2022: 4:1). There were no breaches of the covenants during the year.
The Board has set a gearing limit which must not exceed 25% of the Company's net asset value. See the Strategic Report and the Report of the Directors for further details.
13. Called Up Share Capital
| 2023 | 2022 |
| £'000 | £'000 |
Allotted, issued and fully paid: |
|
|
204,519,434 (2022: 215,737,992) ordinary shares of 25p each | 51,130 | 53,935 |
20,471,869 (2022: 9,253,311) ordinary shares of 25p held in Treasury | 5,118 | 2,313 |
224,991,303 (2022: 224,991,303) total ordinary shares of 25p each | 56,248 | 56,248 |
No shares were issued by the Company during the year (2022: Nil).
During the year, the Company bought back 11,218,558 shares to be held in Treasury at a cost of £97,664,000 (2022: 9,253,311 shares were bought back at a cost of £76,515,000).
Between 1 October 2023 and 5 December 2023, the Company bought back a further 5,045,317 shares into Treasury at a cost of £41,531,000.
14. Capital Reserve
| CAPITAL RESERVE REALISED £'000 | CAPITAL RESERVE INVESTMENT HOLDING GAINS UNREALISED £'000 | 2023 TOTAL £'000 | CAPITAL RESERVE REALISED £'000 | CAPITAL RESERVE INVESTMENT HOLDING GAINS UNREALISED £'000 | 2022 TOTAL £'000 |
At 1 October 2022 | 56,279 | 558,668 | 614,947 | 87,717 | 768,169 | 855,886 |
Net gains/(losses) on investments | 63,263 | 33,124 | 96,387 | 53,618 | (209,501) | (155,883) |
Repurchase of shares into Treasury | (97,664) | - | (97,664) | (76,515) | - | (76,515) |
Expenses charged to capital | (7,845) | - | (7,845) | (8,043) | - | (8,043) |
Finance costs charged to capital | (1,548) | - | (1,548) | (512) | - | (512) |
Currency translations | (65) | - | (65) | 14 | - | 14 |
At 30 September 2023 | 12,420 | 591,792 | 604,212 | 56,279 | 558,668 | 614,947 |
The amount of the capital reserve that is distributable is complex to determine and is not necessarily the full amount of the reserve as disclosed within these Financial Statements of £604,212,000 as at 30 September 2023 (2022: £614,947,000) as this is subject to fair value movements and may not be readily realisable at short notice.
15. Net Asset Value Per Share
| 2023 | 2022 |
Net assets (£'000) | 1,822,729 | 1,830,384 |
Number of shares in issue (excluding shares held in Treasury) | 204,519,434 | 215,737,992 |
Net asset value per share | 891.2p | 848.4p |
As at 30 September 2023 and 2022 there were no dilutive instruments held, therefore the basic and diluted net asset value per share are the same.
At 30 September 2023 20,471,869 shares were held in Treasury (2022: 9,253,311).
16. Transactions with the AIFM, the Portfolio Manager and Related Parties
Details of the relationship between the Company, Frostrow and Lindsell Train are disclosed on the Company's website and also in the Report of the Directors.
As at 30 September 2023, the Company had an investment in Frostrow with a book cost of £200,000 (2022: £200,000) and a fair value of £3,725,000 (2022: £4,725,000) (including the AIFM capital contribution of £125,000 (2022: £125,000)). During the year Frostrow earned a total of £2,609,000 (2022: £2,678,000) in respect of AIFM fees, of which £209,000 was outstanding at 30 September 2023 (2022: £209,000).
The Company has an investment in The Lindsell Train Investment Trust plc, which is managed by Lindsell Train, with a book cost of £1,000,000 (2022: £1,000,000) and a fair value of £8,760,000 as at 30 September 2023 (2022: £9,720,000). During the year Lindsell Train earned a total of £7,828,000 (2022: £8,034,000) in respect of Portfolio Management fees of which £626,000 was outstanding at 30 September 2023 (2022: £627,000).
Further details can be found in the Corporate Information section of the Company's website.
Details of the income received from the AIFM are disclosed in note 2 and details of the remuneration payable to the AIFM and the Portfolio Manager are disclosed in note 3.
Details of the fees of all Directors can be found in the Directors Remuneration Report and in note 4. Directors' interests in the capital of the Company can be found in the Directors Remuneration Report within the Annual Report. There were no other material transactions during the year with the Directors of the Company.
17. Risk Management
As an investment company the Company invests in equities and other investments for the long term so as to secure its investment objective. In pursuit of its investment objective, the Company is exposed to a variety of risks that could result in either a reduction in the Company's net assets or a reduction in the revenue returns available for distribution.
The Company's financial instruments comprise mainly equity investments, cash balances, borrowings, debtors and creditors that arise directly from its operations.
The principal risks inherent in managing financial instruments are market risk, liquidity risk and credit risk.
The principal and emerging risks of the Company and the Directors' approach to the management of those where the Directors consider there to be a high inherent risk are set out in the Strategic Report.
MARKET RISK
Market risk comprises three types of risk: market price risk, interest rate risk and currency risk.
Market Price Risk
As an investment company, performance is dependent on the performance of the underlying companies and securities in which it invests. The market price of investee companies' shares is subject to their performance, supply and demand for the shares and investor sentiment regarding the company or the industry sector in which it operates. Consequently, market price risk is one of the most significant risks to which the Company is exposed.
At 30 September 2023, the fair value of the Company's assets exposed to market price risk was £1,836,660,000 (2022: £1,852,078,000). If the fair value of the Company's investments at the Statement of Financial Position date increased or decreased by 10%, while all other variables remained constant, the capital return and net assets attributable to Shareholders for the year ended 30 September 2023 would have increased or decreased by £183,666,000 or 89.80p per share (2022: £185,208,000 or 85.85p per share).
No derivatives or hedging instruments are currently utilised to manage market price risk.
Interest Rate Risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
Interest rate movement may affect:
- the interest payable on the Company's variable rate borrowings
- the level of income receivable from variable interest securities and cash deposits
- the fair value of investments of fixed rate securities
The Company's main exposure to interest rate risk during the year ended 30 September 2023 was through its three year £60,000,000 (2022: £50,000,000) secured multi-currency committed revolving credit facility (with an additional £40 million facility available if required (2022: £50 million)) with Scotiabank Europe PLC.
Borrowings at the year end amounted to £36,700,000 (2022: £36,700,000) at an interest rate of 6.486% (5.186% SONIA plus 1.30% margin) (2022: 3.257% (2.188% SONIA plus 1.069% margin and fees)).
If the above level of borrowing was maintained for a year, a 10% increase or decrease in SONIA would decrease or increase the revenue return by £48,000, (2022: £20,000), decrease or increase the capital return in that year by £142,000 (2022: £60,000) and decrease or increase the net assets by £190,000 (2022: £80,000).
The weighted average interest rate, during the year, on borrowings under the above mentioned revolving credit facility was 5.15% (2022: 1.74%). At 30 September 2023, the Company's financial assets and liabilities exposed to interest rate risk were as follows:
| 2023 | 2022 | ||
| WITHIN | MORE THAN ONE YEAR | WITHIN | MORE THAN ONE YEAR |
| £'000 | £'000 | £'000 | £'000 |
Exposure to floating rates: |
|
|
|
|
Assets |
|
|
|
|
Cash and cash equivalents | 17,426 | - | 7,835 | - |
Liabilities |
|
|
|
|
Creditors: amount falling due within one year - borrowings under the loan facility | - | - | (36,700) | - |
Creditors: amount falling due after more than one year - borrowings under the loan facility | - | (36,700) | - | - |
Exposure to fixed rates: |
|
|
|
|
Assets |
|
|
|
|
Investments at fair value through profit or loss# | 392 | - | 367 | - |
Liabilities | - | - | - | - |
# Celtic 6% cumulative convertible preference shares and Frostrow Capital LLP AIFM Capital Contribution.
Currency Risk
The Financial Statements are presented in sterling, which is the functional and presentational currency of the Company. At 30 September 2023, the Company's investments, with the exception of five, were priced in sterling. The five exceptions were: Heineken, listed in the Netherlands, Remy Cointreau listed in France, Manchester United, Cazoo and Mondelez, all of which are listed in the United States. The aggregate of these represents 17.9% of the portfolio.
The AIFM and the Portfolio Manager monitor the Company's exposure to foreign currencies on a continuous basis and regularly report to the Board. The Company does not hedge against foreign currency movements, but the Portfolio Manager takes account of the risk when making investment decisions.
Income denominated in foreign currencies is converted into sterling on receipt. The Company does not use financial instruments to mitigate the currency exposure in the period between its receipt and the time that the income is included in the Financial Statements.
Foreign Currency Exposure
At 30 September 2023 the Company held £171,369,000 (2022: £181,124,000) of investments denominated in U.S. dollars and £156,737,000 (2022: £203,900,000) in euros.
Currency Sensitivity
The following table details the sensitivity of the Company's return after taxation for the year to a 10% increase or decrease in the value of sterling compared with the U.S. dollar and euro (2022: 10% increase and decrease).
The analysis is based on the Company's foreign currency financial instruments held at each Statement of Financial Position date.
In addition to the foreign currency exposure on investments held at 30 September 2023, the Company also held £1,125,000 (2022: £4,039,000) in debtors denominated in U.S. dollars and £2,117,000 (2022: £1,766,000) denominated in Euros.
This level of sensitivity is considered to be reasonably possible based on observation of current market conditions and historical trends.
If sterling had weakened against the U.S. dollar and euro, as stated above, assuming all other variables remain constant, this would have had the following effect:
| 2023 | 2022 |
| £'000 | £'000 |
Impact on revenue return | 259 | 299 |
Impact on capital return | 36,568 | 43,109 |
Total return after tax/increase in Shareholders' funds | 36,827 | 43,408 |
If sterling had strengthened against the foreign currencies as stated above, assuming all other variables remain constant, this would have had the following effect:
| 2023 | 2022 |
| £'000 | £'000 |
Impact on revenue return | (212) | (245) |
Impact on capital return | (29,918) | (35,288) |
Total return after tax/decrease in Shareholders' funds | (30,130) | (35,533) |
Credit Risk
Credit risk is the risk that the counterparty to a transaction fails to discharge its obligations under that transaction, which could result in the Company suffering a loss. Credit risk is managed as follows:
- Investment transactions are carried out only with brokers which are considered to have a high credit rating.
- Transactions are undertaken on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transactions entered into by the Company has delivered its obligation before any transfer of cash or securities away from the Company is completed.
- Any failing trades in the market are closely monitored by both the AIFM and the Portfolio Manager.
- Cash is only held at banks that have been identified by the Board as reputable and of high credit quality.
- Bank of New York Mellon has a credit rating of Aa2 (Moody's) and AA- (Fitch).
At 30 September 2023, the exposure to credit risk was £21,814,000 (2022: £12,075,000), comprising:
| 2023 | 2022 |
| £'000 | £'000 |
Fixed assets: |
|
|
Non-equity investments (preference shares) | 267 | 242 |
Current assets: |
|
|
Other receivables (amounts due from brokers) | 4,121 | 3,998 |
Cash and cash equivalents | 17,426 | 7,835 |
Total exposure to credit risk | 21,814 | 12,075 |
Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
Liquidity risk is not considered significant as the majority of the Company's assets are investments in quoted equities. As at 30 September 2023 it is estimated that 97.5% of the investment portfolio could be realised within 30 days with 60.4% in seven days, based on current trading volumes.
Liquidity risk exposure
| 30 SEPTEMBER 2023 | 30 SEPTEMBER 2022 |
FINANCIAL LIABILITIES COMPRISE: | £'000 | £'000 |
Due within one month: |
|
|
Balances due to brokers in respect of portfolio trading - purchases | 1,669 | 890 |
Amounts due to brokers in respect of shares repurchased by the Company | 2,134 | 3,262 |
Accruals | 1,063 | 1,075 |
Bank loan | - | 36,700 |
Due after three months and after one year: |
|
|
Bank loan | 36,700 | - |
FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Financial assets and financial liabilities are either carried in the Statement of Financial Position at their fair value or at a reasonable approximation of fair value.
VALUATION OF FINANCIAL INSTRUMENTS
The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements. Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the asset, noting that most of the Company's investments are quoted assets, which have been categorised as level 1 investments:
- Level 1 - quoted prices in active markets.
- Level 2 - prices of recent transactions for identical instruments.
- Level 3 - valuation techniques using observable and unobservable market data.
The financial assets and liabilities measured at fair value in the Statement of Financial Position are grouped into the fair value hierarchy at the reporting date as follows:
AS AT 30 SEPTEMBER 2023 | LEVEL 1 £'000 | LEVEL 2 £'000 | LEVEL 3 £'000 | TOTAL £'000 |
Equity investments | 1,832,668 | - | - | 1,832,668 |
Limited liability partnership interest (Frostrow) | - | - | 3,600 | 3,600 |
Frostrow - AIFM capital contribution | - | - | 125 | 125 |
Preference share investments | 267 | - | - | 267 |
| 1,832,935 | - | 3,725 | 1,836,660 |
AS AT 30 SEPTEMBER 2022 | LEVEL 1 £'000 | LEVEL 2 £'000 | LEVEL 3 £'000 | TOTAL £'000 |
Equity investments | 1,847,111 | - | - | 1,847,111 |
Limited liability partnership interest (Frostrow) | - | - | 4,600 | 4,600 |
Frostrow - AIFM capital contribution | - | - | 125 | 125 |
Preference share investments | 242 | - | - | 242 |
| 1,847,353 | - | 4,725 | 1,852,078 |
The unquoted investment in Frostrow has been re-valued by the Directors during the year, using two unobservable market data sources, being Frostrow's earnings and an agreed appropriate comparator multiple. This was the same methodology adopted to value Frostrow as at 30 September 2022.
There have been no transfers during the year between Levels 1 and 2. A reconciliation of fair value measurements in Level 3 is set out below.
Level 3 Reconciliation of financial assets at fair value through profit or loss at 30 September
| 2023 | 2022 |
| £'000 | £'000 |
Opening fair value | 4,725 | 5,200 |
Frostrow - AIFM capital contribution (repayment) | - | (775) |
Total (losses)/gains included in gains/(losses) on investments in the Income Statement | (1,000) | 300 |
Closing fair value | 3,725 | 4,725 |
If the earnings used in the valuation were to increase or decrease by 10% while all the other variables remained constant, the return and net costs attributable to Shareholders for the year ended 30 September 2023 would have increased/decreased by £360,000 (2022: £460,000, applying the same assumptions).
CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES
The structure of the Company's capital is described in note 13 and details of the Company's reserves are shown in the Statement of Changes in Equity.
The Company's capital management objectives are:
- to ensure that it is able to continue as a going concern; and
- to achieve capital and income growth and to provide Shareholders with a total return in excess of that of the FTSE All-Share Index through an appropriate balance of equity and debt.
The Board, with the assistance of the AIFM and the Portfolio Manager, regularly monitors and reviews the broad structure of the Company's capital. These reviews include:
- the level of gearing, set at a limit in normal market conditions, is not to exceed 25% of the Company's net assets, which takes account of the Company's position and the views of the Board, the AIFM and the Portfolio Manager on the market;
- the extent to which revenue reserves should be retained or utilised; and
- ensuring the Company's ability to continue as a going concern.
The Company's objectives, policies and procedures for managing capital are unchanged from last year.
There were no breaches by the Company during the year of the financial covenants put in place by Scotiabank Europe plc in respect of the committed revolving credit facility provided to the Company.
Apart from the covenant to ensure that the net asset value of the Company exceeds £750m (2022: £300m), the covenants are unchanged since last year and the Company has complied with them at all times.
18. Net Cash Inflow from Operating Activities
| 2023 | 2022 |
| £'000 | £'000 |
Total return/(loss) before finance charges and taxation | 132,109 | (116,867) |
(Deduct)/add: capital (gain)/loss before finance charges and taxation | (88,477) | 163,912 |
Net revenue before finance charges and taxation | 43,632 | 47,045 |
Decrease in accrued income and prepayments | 2,235 | 81 |
Decrease in creditors | (18) | (68) |
Taxation - overseas withholding tax paid | (1,109) | (917) |
AIFM, portfolio management fees and other expenses charged to capital | (7,845) | (8,043) |
Net cash inflow from operating activities | 36,895 | 38,098 |
19. Substantial Interests
At 30 September 2023 the Company held interests in 3% or more of any class of capital in the following entities:
COMPANY OR LIMITED LIABILITY PARTNERSHIP | NUMBER OF SHARES HELD | 2023 FAIR VALUE £'000 | % OF ISSUED SHARE CAPITAL OR LIMITED LIABILITY PARTNERSHIP INTEREST |
A. G. Barr | 4,420,000 | 21,702 | 4.0 |
Frostrow Capital LLP (unquoted)† | - | 3,725 | 9.8 |
Manchester United | 2,305,000 | 37,334 | 4.4 |
The Lindsell Train Investment Trust plc* | 10,000 | 8,760 | 5.0 |
† Includes Frostrow Capital LLP's AIFM Capital Contribution, fair value £125,000.
* Also managed by Lindsell Train Limited which receives a portfolio management fee based on the Company's market capitalisation.
20. Post Balance Sheet Events
During the period from 1 October 2023 to 5 December 2023, a further 5,045,317 shares were bought back and held in Treasury at a cost of £41,531,000.
GLOSSARY OF TERMS AND ALTERNATIVE PERFORMANCE MEASURES
ACTIVE SHARE (APM)
Active Share is expressed as a percentage and shows the extent to which a fund's holdings and their weightings differ from those of the fund's benchmark index. A fund that closely tracks its index might have a low Active Share of less than 20% and be considered passive, while a fund with an Active Share of 60% or higher is generally considered to be actively managed. The Company has a distinctive strategy: a concentrated portfolio of holdings invested across a small number of sectors and themes. Active Share helps quantify the extent to which the portfolio differs from the benchmark index.
The Active Share performance is sourced from Morningstar.
AIC
Association of Investment Companies. The AIC represents a broad range of investment companies, investment trusts, VCTs and other closed-ended funds.
ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE (AIFMD)
Agreed by the European Parliament and the Council of the European Union and transposed into UK legislation, the AIFMD classifies certain investment vehicles, including investment companies, as Alternative Investment Funds (AIFs) and requires them to appoint an Alternative Investment Fund Manager (AIFM) and depositary to manage and oversee the operations of the investment vehicle. The Board of the Company retains responsibility for strategy, operations and compliance and the Directors retain a fiduciary duty to Shareholders.
ALTERNATIVE PERFORMANCE MEASURE ("APM")
An Alternative Performance Measure (APM) is a numerical measure of the Company's current, historical or future financial performance, financial position or cash flows other than a financial measure defined or specified in the applicable financial framework. In selecting these Alternative Performance Measures, the Directors considered the key objectives and expectations of typical investors and believe that each APM gives the reader useful and relevant information in judging the Company's performance and in comparing other investment companies.
BENCHMARK RETURN
Total return on the benchmark, assuming that all dividends received were re-invested, without transaction costs, into the shares of the underlying companies at the time the shares were quoted ex-dividend.
CHIEF OPERATING DECISION MAKER
The Chief Operating Decision Maker of the Company is considered to be the Board of Directors. It is a Generally Accepted Accounting Principal (GAAP) requirement to disclose who the chief operating decision maker is.
DISCOUNT OR PREMIUM (APM)
A description of the difference between the share price and the net asset value per share. The size of the discount or premium is calculated by subtracting the share price from the net asset value per share and is expressed as a percentage (%) of the net asset value per share. If the share price is higher than the net asset value per share the result is a premium. If the share price is lower than the net asset value per share, the shares are trading at a discount. The Board regularly reviews the level of the discount/premium of the Company's share price to the net asset value per share and considers ways in which share price performance may be enhanced, including the effectiveness of share buy-backs, where appropriate.
DISCOUNT OR PREMIUM (APM) |
| 30 SEPTEMBER 2023 | 30 SEPTEMBER 2022 |
Share price (p) |
| 852.0 | 800.0 |
Net asset value per share (p) |
| 891.2 | 848.4 |
Discount |
| 4.4% | 5.7% |
FTSE DISCLAIMER
"FTSE©" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distributions of FTSE Data is permitted without FTSE's express written consent.
GEARING (APM)
Gearing represents prior charges, adjusted for net current assets, expressed as a percentage of net assets (AIC methodology). The Directors believe that it is appropriate to show net gearing in relation to Shareholders' funds as it represents the amount of debt funding on the investment portfolio. The gearing policy is that borrowing will not exceed 25% of the Company's net assets.
Prior charges includes all loans and bank overdrafts for investment purposes.
|
| 30 SEPTEMBER | 30 SEPTEMBER |
|
| 2023 | 2022 |
|
| £'000 | £'000 |
Bank loan (prior charges) |
| (36,700) | (36,700) |
Net current assets |
| 22,769 | 15,006 |
Bank loan adjusted for net current assets |
| (13,931) | (21,694) |
Net assets |
| 1,822,729 | 1,830,384 |
Gearing |
| 0.8% | 1.2% |
THE INSTITUTIONAL INVESTORS GROUP ON CLIMATE CHANGE ("IIGCC")
IIGCC membership enables organisations to ensure that they are part of the solution to climate change.
THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE ("IPCC")
The IPCC is the United Nations body for assessing the science related to climate change.
NET ZERO ASSET MANAGERS INITIATIVE ("NZAM")
The Net Zero Asset Managers initiative is an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees Celsius; and to supporting investing aligned with net zero emissions by 2050 or sooner.
NET ASSET VALUE ("NAV")
The value of the Company's assets, principally investments made in other companies and cash being held, less any liabilities. The NAV is also described as "Shareholders' funds". The NAV is often expressed in pence per share after being divided by the number of shares that have been issued. The NAV per share is unlikely to be the same as the share price which is the price at which the Company's shares can be bought or sold by an investor. The share price is determined by the relationship between the demand and supply of the shares.
NET ASSET VALUE TOTAL RETURN PER SHARE (APM)
The theoretical total return on an investment over a specified period assuming dividends paid to Shareholders were reinvested at net asset value per share at the time the shares were quoted ex-dividend. This is a way of measuring investment management performance of investment companies which is not affected by movements in discounts or premiums. The Directors regard the Company's net asset value total return per share as being the overall measure of value delivered to Shareholders over the long term. The Board considers the principal comparator to be its benchmark, the FTSE All-Share Index.
NAV TOTAL RETURN |
| 30 SEPTEMBER 2023 | 30 SEPTEMBER 2022 |
Opening NAV per share (p) |
| 848.4 | 917.7 |
Increase/(decrease) in NAV per share (p) |
| 42.8 | (69.3) |
Closing NAV per share (p) |
| 891.2 | 848.4 |
Increase/(decrease) in NAV per share |
| 5.0% | (7.6)% |
Impact of dividends re-invested* |
| +2.2% | +1.8% |
NAV per share total return | 2, 3 and 4 | 7.2% | (5.8)% |
* The NAV total return is calculated on the assumption that the total dividends of 18.3p (2022: 17.4p) paid by the Company during the year were reinvested into assets of the Company at the NAV per share at the ex-dividend date. The Treasury shares held by the Company have been excluded from this calculation.
The source of this data is Morningstar who have calculated the return on an industry comparative basis.
ONGOING CHARGES FIGURE (APM)
Ongoing charges are calculated by taking the Company's annualised operating expenses expressed as a proportion of the average daily net asset value of the Company over the year. The costs of buying and selling investments are excluded, as are interest costs, taxation, cost of buying back or issuing ordinary shares and other non-recurring costs. Ongoing charges represent the costs that Shareholders can reasonably expect to pay from one year to the next, under normal circumstances.
|
| 30 SEPTEMBER | 30 SEPTEMBER |
|
| 2023 | 2022 |
|
| £'000 | £'000 |
AIFM and portfolio management fees |
| 10,437 | 10,712 |
Operating expenses (excluding finance costs) |
| 1,167 | 1,078 |
Total expenses |
| 11,604 | 11,790 |
Average net assets during the year |
| 1,907,121 | 1,973,934 |
Ongoing charges figure (excluding finance costs) |
| 0.61% | 0.60% |
OTHER COST RATIOS
The total ongoing costs as described in the Company's latest Key Information Document ("KID") is 0.72%. This represents the impact of the costs that are incurred each year for the running of the Company including the impact of the finance costs (0.11%).
THE PARIS AGREEMENT
The Paris Agreement's central aim is to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.
THE PARIS ALIGNED INVESTMENT INITIATIVE ("PAII")
The PAII was launched by the Institutional Investors Group on Climate Change ("IIGCC") in Europe in May 2019, to explore how investors can align their portfolios with the goals of the Paris Agreement.
PEER GROUP
Finsbury Growth & Income Trust PLC is part of the AIC's UK?Equity Income sector. The trusts in this universe are defined as trusts whose investment objective is to achieve a total return for Shareholders through both capital and dividend growth.
REVERSE STRESS TEST
Reverse stress tests are stress tests that identify scenarios and circumstances which would make a business unworkable and identify potential business vulnerabilities.
SASB
The Sustainability Accounting Standards Board ("SASB") aims to establish industry-specific disclosure standards across ESG topics that facilitate communication between companies and investors about financially material, information that is useful for decision-making.
SHARE PRICE TOTAL RETURN (APM)
The change in capital value of a company's shares over a given period, plus dividends paid to Shareholders, expressed as a percentage of the opening value. The assumption is that dividends paid to Shareholders are re-invested in the shares at the time the shares are quoted ex-dividend. The Directors regard the Company's share price total return to be a key indicator of performance. This reflects share price growth of the Company which the Board recognises is important to investors.
SHARE PRICE TOTAL RETURN |
| 30 SEPTEMBER 2023 | 30 SEPTEMBER 2022 |
Opening share price share (p) |
| 800.0 | 876.0 |
Increase/(decrease) in share price (p) |
| 52.0 | (76.0) |
Closing share price (p) |
| 852.0 | 800.0 |
Increase/(decrease) in share price |
| 6.5% | (8.7)% |
Impact of dividends re-invested* |
| +1.0% | +3.1% |
Share price total return |
| 7.5% | (5.6)% |
* The share price total return is calculated on the assumption that the total dividends of 18.3p (2022: 17.4p) paid during the year were reinvested into shares of the Company at the share price at the ex-dividend date.
The source is Morningstar who have calculated the return on an industry comparative basis.
STERLING OVERNIGHT INDEX AVERAGE ("SONIA")
SONIA is an interest rate published by the Bank of England. SONIA can be seen as the average interest rate at which a selection of financial institutions lend to one another in British pound sterling (GBP) with a maturity of 1 day (overnight).
STRESS TESTING
Stress testing Is a forward-looking analysis technique that considers the impact of a variety of extreme but plausible economic scenarios on the financial position of the Company.
TCFD
The Financial Stability Board created the Task Force on Climate-related Financial Disclosures ("TCFD") to improve and increase reporting of climate-related financial information.
TREASURY SHARES
Shares previously issued by a company that have been bought back from Shareholders to be held by the company for potential sale or cancellation at a later date. Such shares are not capable of being voted and carry no rights to dividends.
2023 Accounts
The figures and financial information for 2023 are extracted from the Annual Report and financial statements for the year ended 30 September 2023 and do not constitute the statutory accounts for the year. The Annual Report and financial statements include the Report of the Independent Auditor which is unqualified and does not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and financial statements have not yet been delivered to the Registrar of Companies.
2022 Accounts
The figures and financial information for 2022 are extracted from the published Annual Report and financial statements for the period ended 30 September 2022 and do not constitute the statutory accounts for that year. The Annual Report and financial statements have been delivered to the Registrar of Companies and included the Report of the Independent Auditor which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
Annual report and financial statements
Copies of the Annual Report and financial statements will be posted to shareholders in mid December 2023. Members of the public may obtain copies from Frostrow Capital LLP, 25 Southampton Buildings, London WC2A 1AL or from the Company's website www.finsburygt.com where up to date information on the Company, including daily NAV, share prices and fact sheets, can also be found.
The Company's Annual Report for the period ended 30 September 2023 has been submitted to the Financial Conduct Authority and will shortly be available for inspection on the National Storage Mechanism (NSM) via?https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The Annual General Meeting will be held on Tuesday, 23 January 2024.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
-ENDS-
For further information please contact
Victoria Hale
Company Secretary
For and on behalf of Frostrow Capital LLP
020 3170 8732
