Schroder Asian Total Return
Investment Company plc
FINAL RESULTS FOR THE
YEAR ENDED 31 DECEMBER 2023
Schroder
Asian Total Return Investment Company plc (the "Company") hereby
submits its final results for the year ended 31 December
2023.
The
Company's Annual Report and Accounts for the year ended 31 December
2023 are being published in hard copy format and an electronic copy
will shortly be available to download from the Company's web
pages www.schroders.co.uk/satric.
The
Annual Report and Accounts, including the Notice of Annual General
Meeting, together with the form of proxy will shortly be uploaded
to the Financial Conduct Authority's National Storage Mechanism and
available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
A separate announcement will be released once this has taken
place.
Page
numbers and cross references in the following announcement refer to
page numbers and cross references in the Annual Report and Accounts
for the year ended 31 December 2023.
Enquiries:
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Schroder
Investment Management Limited
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Augustine
Chipungu (Press)
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020
7658 6000
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Kerry
Higgins (Company Secretary)
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020
7658 6000
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Annual Report and Accounts
for the year ended 31 December 2023
Performance Summary
NAV per share total
return*
8.8%
2022: -12.7%
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Share price total return*
10.3%
2022: -17.4%
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Dividends per share
11.5p
2022: 11.0p
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MSCI AC Asia ex-Japan Index (with net
income reinvested), sterling adjusted
1.3%
2022: -7.1%
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Some of the financial measures are
classified as Alternative Performance Measures, as defined by the
European Securities and Markets Authority and are indicated with an
asterisk (*). Definitions of these performance measures, and other
terms used in this report, are given on pages 78 and 79 together
with supporting calculations and sources, where
appropriate.
Ongoing charges ratio*
0.87%
2022: 0.82%
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Share price discount to NAV per
share*
4.6%
2022: 5.8%
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Revenue return per share
10.26p
2022: 12.47p
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Gearing*
7.8%
2022: 9.0%
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Share price
440.00p
2022: 409.50p
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Net assets
£448.48m
2022: £457.47m
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Investment objective
Schroder Asian Total Return
Investment Company plc seeks to provide a high rate of total return
through investment in equities and equity-related securities of
companies trading in the Asia Pacific region (excluding Japan). The
Company seeks to offer a degree of capital preservation through
tactical use of derivative instruments.
Why
invest in the Company?
l Investing in
high potential companies across the Asia Pacific
region
The
Portfolio Managers are benchmark agnostic, which means they can
back their highest conviction ideas with an active approach that is
not tied to any particular index resulting in a portfolio that is
diversified across region and sector. With a particular tilt
towards small and mid cap names, they focus on well-managed
businesses that understand the importance of paying a good, growing
dividend to their shareholders as part of an attractive long-term
total return.
l Benefit from a
smoother investment journey and the possibility for higher
returns
The
ability to select stocks that have the potential to deliver strong
long-term returns is complemented by the use of a tactical hedging
strategy. This focuses on delivering a smoother ride in investing
compared to the Reference Index by reducing volatility and
preserving capital. Altogether, this helps to mitigate some of the
broader risks associated with investing in Asia.
l Rely on decades
of Asian investment expertise
The
Co-Portfolio Managers Robin Parbrook and King Fuei Lee have more
than 50 years of combined investment experience and are renowned
for their expertise in Asian equity investing. They draw upon the
extensive resources of Schroders' Asia Pacific equities research
team based in six offices across the region, as well as
Schroders' London-based global sector specialists. This helps
provide an information advantage in an under-researched and market
inefficient region.
Please see page 24 for the full investment policy.
10-Year Financial Record
At
31 December
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2014
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2015
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2016
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2017
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2018
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2019
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2020
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2021
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2022
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2023
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Shareholders' funds
(£'000)
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152,342
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154,186
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195,017
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294,426
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293,783
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357,871
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483,548
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551,745
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457,474
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448,484
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NAV per share, diluted where
applicable
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(pence)
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208.12
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211.36
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267.09
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354.79
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321.43
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365.57
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479.07
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507.24
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434.60
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461.24
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Share price (pence)
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194.00
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190.00
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255.50
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362.00
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331.00
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368.00
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489.00
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506.00
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409.50
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440.00
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Share price (discount)/premium
to
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NAV per share*
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(6.8)
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(10.1)
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(4.3)
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2.0
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3.0
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0.7
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2.1
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(0.2)
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(5.8)
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(4.6)
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Gearing/(net cash) (%)*
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(1.3)
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1.0
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7.0
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4.5
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(0.9)
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2.2
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5.7
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8.3
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9.0
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7.8
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Year
ended 31 December
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2014
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2015
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2016
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2017
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2018
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2019
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2020
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2021
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2022
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2023
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Net revenue after taxation
(£'000)
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2,272
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3,236
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3,940
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4,183
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6,303
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7,653
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8,308
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9,809
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13,466
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10,497
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Net revenue return per share
(pence)
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3.07
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4.43
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5.40
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5.48
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7.18
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8.10
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8.46
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9.25
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12.47
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10.26
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Dividends per share
(pence)
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3.25
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3.80
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4.50
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4.80
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6.20
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6.50
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7.10
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8.50
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11.00
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11.50
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Ongoing Charges (%)*
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1.05
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0.97
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1.00
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0.96
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0.86
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0.85
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0.87
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0.84
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0.82
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0.87
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Performance1
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2013
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2014
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2015
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2016
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2017
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2018
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2019
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2020
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2021
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2022
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2023
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NAV per share total return
(pence)*
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100.0
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116.5
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120.0
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154.2
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207.9
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191.0
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221.0
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295.6
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317.4
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277.1
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301.6
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Share price total return
(pence)*
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100.0
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112.3
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111.7
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153.0
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220.2
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204.1
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230.8
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313.0
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328.4
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271.1
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299.1
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Reference Index2 total
return (pence)
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100.0
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109.2
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104.7
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133.3
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166.8
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152.5
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174.7
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207.4
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203.2
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188.8
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191.3
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1Source: Morningstar/Thomson Reuters. Rebased to 100 at 31
December 2013. 2MSCI AC Asia ex-Japan Index (with net
income reinvested), sterling adjusted.
*Alternative Performance Measures.
Further details can be found on pages 78 and 79.
Chair's Statement
"Our unconstrained approach to
investing in Asia has not only delivered good returns but also
provided a degree of capital protection in difficult market
conditions."
Performance and background
The year to 31 December 2023 has
proved to be more positive for your Company, both in absolute terms
and relative to the Reference Index, after a challenging year in
2022. Furthermore, it is reassuring to see that our long-term track
record remains strong. The Investment Manager's unconstrained
approach to investing in Asia has not only delivered good returns
but also provided a degree of capital protection in difficult
market conditions.
During the year ended 31 December
2023, the Company delivered a NAV total return of 8.8%,
outperforming the Reference Index which rose by 1.3%. The share
price total return was 10.3% as the discount slightly
narrowed.
At the start of the year, China
showed promise with expectations of a robust recovery after
the easing of COVID-related restrictions. However, this momentum
quickly waned as domestic consumption stalled, adversely impacted
by numerous factors. A weak residential property market
precipitated the collapse of Evergrande (China's second largest
property developer) and defaults by Country Garden (the largest
private property developer) in the second half of the year. High
unemployment figures and job insecurity fostered by protracted
COVID lockdowns weighed upon consumer confidence. Local government
debt has reached excessive levels and put a cap on infrastructure
investment in the provinces. Our portfolio has remained
consistently underweight China for the year under
review.
However, in Taiwan and South Korea,
technology stocks and chipmakers saw significant gains as investor
enthusiasm for artificial intelligence ("AI") continued to rise.
The overweight position in Australia was also a positive, making a
significant contribution to returns. Notwithstanding these
beneficial asset allocation decisions, it was the strategic
stock selection of our Investment Manager that accounted for the
majority of the Company's outperformance during the year. In 10 of
the 12 Asia Pacific markets, the portfolio achieved positive
outperformance.
Further comments on performance and
investment policy may be found in the Investment Manager's
review.
Earnings and dividends
Whereas total return per share
jumped from (65.66)p to 34.59p per share revenue return from the
portfolio for the year fell by 17.7% to 10.26p per share, from
12.47p per share in 2022. This fall was primarily attributed to
stock disposals throughout the year, which reduced the values of
dividends received. The Board has recommended a final dividend of
11.50p per share for the year ended 31 December 2023, an
increase of 4.5% over the final dividend of 11.00p per share paid in
respect of the previous financial year. Subject to shareholder
approval at the Annual General Meeting ("AGM"), the dividend will
be paid on 10 May 2024 to shareholders on the register on 12 April
2024. The ex-dividend date is 11 April 2024.
Promotion, share issuance and discount
control
The discount at which the Company's
share price trades at has narrowed slightly during the review
period, from 5.8% at the start of the year to 4.6% at the end of
December 2023.
The Company continued actively to
pursue its objective that the discount at which the shares traded
remained within the Company's target of 5% or less in normal market
conditions and 8,029,083 shares were repurchased during the year
ended 31 December 2023, amounting to 7.6% of the issued share
capital at the start of the year. The shares were repurchased at an
average discount of 6.0%, for a total consideration of £32.9
million and placed in treasury for future reissuance at a premium
to NAV. The Company's shares traded at an average discount of 5.5%
during the year.
The Company will continue to
implement both an issuance and a discount management policy.
Shares will be issued at a moderate premium to NAV and the discount
policy will continue to target a share price discount to NAV
of no more than 5% in normal market conditions. The Board believes
that overall liquidity and the relative discount to the Company's
peers also has to be considered in any decision to issue and to buy
back shares.
The Board will be seeking approval
from shareholders to renew the issuance and buy back authorities at
the AGM to be held on 24 April 2024, further details of which can
be found on page 74.
Gearing and the use of derivatives
Gearing was actively utilised by the
Investment Manager during the year and ranged between 4.6% at its
lowest and 10.3% at its highest. Average debt was 7.9% and gearing
made a positive contribution to performance. Shareholders should be
aware that the use of borrowing must be seen in the context of the
use of derivative hedging instruments. The Company may use gearing
to enhance performance but net gearing will not exceed 30% of NAV.
The Board has agreed a disciplined framework for using gearing to
increase market exposure, based on a number of valuation
indicators.
Positive market performance over the
year limited the contribution to returns from the Company's put
options, although hedging reduced portfolio volatility and thereby
proved beneficial.
The
Board
The Board was pleased to welcome
Jasper Judd as a non-executive Director on 1 February 2023 and as
Chair of the Audit and Risk Committee following the retirement of
Mike Holt on 25 April 2023.
As stated in the half year report,
Caroline Hitch has advised that, following completion of her
nine-year tenure as a Director she does not intend to seek
re-election at the AGM on 24 April 2024. The Board has therefore
commenced a search for a successor and engaged Cornforth Consulting
to assist with the process. An announcement on the appointment of a
new non-executive Director is expected to be made in the second
quarter of the year.
On behalf of the Board, I should
like to thank Caroline for her invaluable contribution to the Board
over the last nine years and to wish her well for the
future.
Results webinar
There will be a presentation by the
Portfolio Managers at 12.00 noon on Wednesday, 24 April 2024 which
will be available to watch online. To sign up to watch the
presentation please click on this link:
https://schroders.zoom.us/webinar/register/WN_8ZW_8RxzRnmJ5bToMMkrKQ
Details on how to watch the
presentation are also available on the Company's web pages:
www.schroders.co.uk/satric.
By holding a webinar, I hope that
more shareholders and interested parties will be able to listen to,
and ask questions of, the Portfolio Managers.
AGM
The AGM will be held on Wednesday,
24 April 2024 at 1.00 pm at the Investment Manager's offices
at 1 London Wall Place, London EC2Y 5AU. Any shareholders
planning to attend the AGM will also be able to watch the Portfolio
Managers' presentation at the Manager's offices at 12 noon, prior
to the AGM.
All shareholders are encouraged to
vote by proxy. Proxy votes can be submitted electronically through
the registrar's portal, by post and also by email. Details are set
out in the Explanatory Notes to the Notice of AGM in this annual
report.
Outlook
Geopolitical tensions remain at the
forefront of investors' concerns with almost half the global
population, a large proportion of which are in our region, headed
to the polls this year: 64 countries will hold elections in 2024.
US elections and the consequences for relations with China will
predominate, along with the heightened tensions across the Taiwan
Strait. Ongoing conflicts in the Middle East and the consequent
disruption to shipping resulting in higher oil prices have further
contributed to the overall uncertainty. Central banks remain slow
to execute forecast interest rate cuts, and weaker economic growth
in China has implications for global growth forecasts and
expectations for the region.
Notwithstanding the mixed outlook
for global economic growth our Investment Manager will continue to
seek to build superior returns by bottom-up stock selection based
on extensive regional research and analysis. Earnings prospects at
the individual stock level offer attractive investment
opportunities while valuations remain modest compared both
historically and against other developed markets. Our two
Portfolio Managers are supported by a team of 40 research analysts
based primarily in Hong Kong and Singapore which, together with
their decades of collective Asian investment experience, place them
in a strong position to identify the most attractive investment
opportunities in the region.
Sarah MacAulay
Chair
13 March 2024
Investment Manager's Review
A
review of 2023
2023 proved to be a much better year
for the Company with the NAV producing a total return of 8.8%
(Source: Schroders) (which compares to the Reference Index which
rose by 1.3%). Whilst returns were moderate, markets were rather
more tempestuous and volatile, buffeted by the spectre of
"higher-for-longer" US rate worries, geopolitical undercurrents,
decelerating Chinese and European economies, and the ominous clouds
of the Israel-Hamas conflict.
So, what were the significant
catalysts behind this performance?
Contributor #1: China stock selection
The largest driver of the Company's
performance, notably against the Reference Index, was our stock
selection in China. The Chinese stockmarket had a tumultuous year.
It kicked off with a surge of investor optimism, riding high on
hopes pinned on its economic reopening, only to see the enthusiasm
quickly deflate amid flagging consumer sentiment, escalating youth
unemployment, and a burgeoning debt crisis in the property sector.
Despite several attempts by the Chinese authorities to reverse the
market's downward trajectory, typically fuelled by claims of large
scale fiscal and monetary stimulus, all efforts proved in vain. The
year finished with the MSCI China Index recording a dismal annual
return of -16.2% in sterling, a sharp contrast against the region's
return of 1.3% in sterling.
Amidst these stormy market
conditions in China the Company navigated its way not only through
stocks we chose to invest in, but also those we strategically
avoided. Our decision to steer clear of major ecommerce players
like Alibaba, JD.com, and Meituan, as well as sportswear giants Li
Ning and ANTA, shielded the Company from the fallout of their
plummeting share prices. Our portfolio's zero-weighting in the
imploding property market and limited exposure to the struggling
domestic sectors further bolstered performance. Meanwhile, our
continued investments in Chinese consumption plays such as Shenzhou
International and LVMH, coupled with a well-timed purchase of
New Oriental Education, ensured that our overall stock selection in
the Chinese market yielded significant returns.
That said, charting the investment
course in China has never been easy or clear cut. This was
particularly true in mid-2023 when, having correctly sidestepped
the temptation to jump on the reopening trade bandwagon, we found
ourselves staring at the emerging pool of potential Chinese stock
opportunities that invariably surfaces when markets plunge by 20%.
The temptation to lock in the profits from our successful large
underweight position in Chinese stockmarkets at that juncture
was palpable.
However, after carefully trawling
through these potential opportunities, we were led to a sobering
conclusion: few were truly appealing. Faced with a scarcity of
promising bottom-up ideas, and with stockbrokers universally
maintaining a bullish stance on China, we adhered to our investment
philosophy of only investing in companies that have robust
long-term fundamentals and attractive valuations. To our minds,
this outcome also underscores, once again, the advantages of a
benchmark-agnostic, unconstrained bottom-up investment
approach.
Contributor #2: Taiwan stock selection
The second key pillar underpinning
the Company's outperformance in 2023 was our investments in Taiwan
technology, and more broadly, our stock selection in Taiwan. This
was a mirror image of the Company's performance in 2022, when our
technology positions in Taiwan had a significant negative impact on
returns. Initial worries over bloated inventory levels at the start
of the year gradually evaporated over subsequent quarters as signs
of digestion surfaced. Simultaneously, the surging demand for AI
chips, spurred by the development of large language models
("LLMs"), only served to highlight the potent structural trends
underpinning tech demand, a conviction your Portfolio Managers
have steadfastly held since the inception of the Schroder Asian
Total Return strategy in 2007.
This shift in market dynamics
sparked a frenzied investor pursuit for tech stocks with a link to
AI, no matter how tangential. While the Company may have missed out
on not holding sizzling AI stocks like Quanta Computer, Accton, and
Wiwynn, the pain was assuaged by our investments in Taiwan
Semiconductor Manufacturing Corporation ("TSMC"), MediaTek, ASE
Technology, and Chroma ATE, who also reaped the benefits of this
trend. Yet, it was not just the AI halo effect that was propelling
our holdings' share prices. MediaTek has benefitted by growing
investor optimism over a potential recovery in the smartphone
industry. The timely release of the Company's new system-on-chip,
Dimensity 9300, designed to handle the more complex workloads of
new generative AI and gaming applications, further bolstered this
bullish sentiment. This launch, following a series of earlier
designs that failed to ignite investor interest, is now seen as a
game-changer that could give MediaTek a competitive edge over
Qualcomm, the current leader in the high-end mobile market. A
similar sentiment holds for the semiconductor stalwart TSMC, which
boasts major clients like Nvidia, AMD, and Broadcom. While TSMC
does reap benefits from the surging demand for AI chips, even TSMC
concedes that these sales constitute only a small portion of its
overall revenue. Nevertheless, with semiconductors powering all
modern applications - from PCs and smartphones to cloud computing,
AI, and autonomous cars - the long-term fundamentals of the firm
continue to shine brightly.
But it was not just technology
stocks that bolstered our performance in the Taiwan market. Our
investments in non-technology sectors, including companies like
shades and blinds manufacturer Nien Made Enterprise, fabric
producer Eclat Textile, and industrial computing and automation
solutions provider Advantech, also registered robust share price
gains, thereby amplifying our overall stock selection returns in
Taiwan.
Contributor #3: Australia and ASEAN
The Company achieved positive
outperformance in 10 of the 12 Asia-Pacific markets and,
despite being theoretically more efficient, it was pleasing that
the Australian market emerged as a significant contributor to
positive returns.
Our Company was bolstered by
investments in Cochlear, a trailblazer in hearing solutions; James
Hardie Industries, a titan of fibre cement production; Aristocrat
Leisure, a master manufacturer of slot machines; Seek, a
facilitator connecting job seekers with employers; and Medibank
Private, a stalwart in the health insurance landscape.
However, these gains were somewhat
tempered by our lack of exposure to the four major Australian banks
and our stake in ResMed, a leading provider of respiratory care
solutions. The performance of the latter has been disappointing and
somewhat unexpected. This is particularly so considering that the
Company posted its highest-ever annual revenues in the fiscal year
of 2023. The share price was hit by worries over the threat posed
by GLP-1 drugs which could potentially offer a new treatment avenue
for obese individuals with obstructive sleep apnea, thereby
encroaching on ResMed's revenues. This concern continues to cast a
pall over its performance, even if the realistic impact of the
threat remains limited, in your Portfolio Managers'
view.
In addition to Australia, our
outperformance was boosted by our stock selection in the ASEAN
markets, which added a noteworthy 1.0% to our overall gains. This
is particularly heartening, considering the markets of Indonesia,
Malaysia and Philippines are small and we only hold a handful
of stocks.
Main detractor: India stock selection
It was not all positive. India
emerged as a detractor to the Company's performance in 2023,
contributing a -0.2% relative return (Source: Factset). While in
the broader scheme this is not a massive drag, it still marks a
regrettable milestone for your Portfolio Managers, as it is the
second consecutive year the Indian market has made a negative
contribution to the Company's returns. Despite the overall market
weighting being in line with the reference benchmark, our stock
selection within this key market failed to hit the mark, extending
a period of underperformance.
The Company's lack of exposure to
the so-called brown or traditional sectors, encompassing internal
combustion engine ("ICE") manufacturing, fossil fuel production,
cement manufacturing, and steel milling, surfaced as a significant
drag on our relative performance. These sectors collectively
constitute approximately one-fifth of our Company's Indian stock
universe. Intriguingly, they also account for a massive four-fifths
of the stockmarket's total greenhouse gas emissions - an
unsurprising statistic given the environmentally harmful nature of
their operations. However, our strategic decision to sidestep
investments in these sectors culminated in a nearly one percent
negative contribution to relative returns.
Our Company's lack of exposure to
India's non-bank financials ("NBFCs") also emerged as a key
detractor in a year that saw the sector undergo a remarkable
metamorphosis. The NBFC landscape was reshaped by a series of
significant developments, not least of which was the surge in
credit demand from the small enterprise sector - the NBFCs' primary
clientele. This was propelled by substantial government policy
support, ranging from sector-specific production-linked incentives
to initiatives aimed at promoting businesses in regions like the
Northeast and those linked to technical skilling and digital
technologies. These measures ignited a boom in credit demand. The
Reserve Bank of India further stoked this positive momentum with a
directive that provided considerable relief to borrowers, mandating
that lenders return all original property documents and erase
registered charges within 30 days of full loan repayment. The
sector's dynamism was further amplified by the arrival of
a new player, Jio Financial, following its demerger from
Reliance, and the continued pursuit of NBFC licenses by fintechs,
which kept the sector in the headlines. Amidst this flurry of
activity, the robust share price performance of Indian NBFCs
weighed on our relative performance.
While the Company did enjoy strong
returns from our holdings in MakeMyTrip, Apollo Hospitals
Enterprise, and ICICI Bank, they were insufficient to
counterbalance the impact of the stocks we did not own. This
resulted in an overall negative stock selection in
India.
Hedging, gearing and exposure management
Our hedging policy had a relatively
neutral impact on performance this year. While our net exposure
oscillated between 85% and 110% (on a notional basis) over the
year, the region's overall positive market performance meant that
there were limited opportunities for our put options1 to enhance
our returns. Nevertheless, the implementation of our hedging policy
still proved beneficial, as it significantly reduced the Company's
volatility compared to the region's index, resulting in better
Sharpe and Sortino ratios (explained on the next page) over most
time frames.
Over the course of the year, gearing
levels closely moved in line with the levels suggested by our
gearing models. We started the year using moderate gearing of c.
10% and reduced this to c. 5% as markets rose during the first
quarter. Our gearing models turned positive on prospective returns
from Asian stockmarkets after the index falls over the summer and
we moved back to a c. 10% geared position. This was subsequently
partly reduced back to c. 5% in December 2023 as several stocks hit
our price targets. Overall, the use of gearing had a positive
impact on performance.
1A put is an options contract that gives the owner the right,
not the obligation, to sell a certain amount of the underlying
asset, at a set price within a specified time. The buyer of a put
option believes that the underlying stock will drop below the
exercise price before the expiration date.
Sharpe ratio: Risk-adjusted measure
calculated by using standard deviation and excess return to
determine reward per unit of risk. The higher the Sharpe Ratio, the
better the fund's historical risk-adjusted performance. Calculated
by dividing a fund's annualised excess returns by the standard
deviation of a fund's annualised excess returns. Since this ratio
uses standard deviation as its risk measure, it is most
appropriately applied when analyzing a fund that is an investor's
sole holding. The Sharpe Ratio can be used to compare two funds
directly on how much risk a fund had to bear to earn excess return
over the risk-free rate.
Sortino Ratio: similar to Sharpe
Ratio except it uses downside risk (Downside Deviation) in the
denominator. Since upside variability is not necessarily a bad
thing, Sortino ratio is sometimes preferable to the Sharpe
ratio.
Wrapping up, while 2023 proved to be
a rollercoaster year for Asia Pacific stock markets, we believe the
Company has weathered the storms relatively unscathed. Key to
performance is our continued focus on long-term fundamentals when
selecting stocks. In the case of China and Taiwan our
outperformance was often as much about the stocks we avoided rather
than the ones we held. Frustratingly, India served as the major
blot on our scorecard, marking a second year of underperformance.
Despite this, the overall impact remained manageable, with the
Company delivering an annual return of 8.8% versus the Reference
Index return of 1.3%. This underscores our belief that an
unconstrained, benchmark-unaware investing approach, focusing on
the best bottom-up ideas with strong long-term fundamentals and
attractive valuations, remains the optimal strategy for investing
in the region.
Strategy review - musings after a month in
Asia
We will keep our strategy review
mercifully short this year. For professional clients that would
like a more comprehensive run down we would recommend they ask
their Schroder contact for our 60-page Year of the Dragon report, a
perfect cure for insomnia.
Instead, for the Company's annual
review we thought a summary of our observations post our recent
five-week trip to the region would be of interest. The month we
spent in Asia was busy and fascinating and after many meetings,
including c. 50 one-on-one corporate meetings, it generated some
solid new investment ideas and some interesting bigger picture
thoughts.
Our first observation reviewing our
company visit notes is that inflation is not an issue in the places
we visited in Asia (Hong Kong, Taiwan, Singapore and Thailand).
Nearly all companies we met instead discussed weak end demand,
selective discounting, increasing promotions and incentives, the
need to pass on falling raw material costs, disruption, and
oversupply and irrational competition from China. This applied
whether it was e-commerce in Taiwan, DIY stores in Thailand,
technology companies, battery manufacturers, convenience stores,
bicycle manufacturers, Indonesian paint suppliers or consumer
staple companies. The picture across the region was quite
consistent with very few companies talking about putting up prices
or claiming to have pricing power. For stockmarkets this is clearly
a double-edged sword - falling inflation is likely to be positive
for market sentiment but clearly pricing pressure is a headwind for
earnings unless companies can eke out cost savings.
The other factor that came out of
our visits was that oversupply from China in certain industries is
very real and poses a threat to those companies competing with
Chinese ones. This applies to multiple industries with China's
economic slowdown very clearly structural and likely to be
prolonged given the extent of the excesses particularly in the
property and financial sectors. With weak demand at home Chinese
companies are likely to be exporting their excess capacity whether
this is electric vehicles ("EV"), batteries, semiconductors, solar
panels, wind turbines, pharmaceuticals, medical equipment,
construction machinery etc etc. Chart 1 overleaf is a rather scary
graph of Chinese export prices. The Chinese domestic slowdown and
continued build out of overcapacity in many industries is likely to
be deflationary. As Chart 2 shows for the EV and solar industries
the capacity build out is huge and this is being replicated across
sectors that are considered "strategic" by the Chinese Communist
Party ("CCP").
The second observation from our
extended trip was how visibly demographics in Asia are changing. In
Hong Kong we did not get in a taxi where the driver looked
under 70 years old, and whilst out hiking the many workers clearing
up after the recent typhoons and thunderstorms all looked well past
the age that they should be wielding chainsaws (especially after
one just missed the head of one of your Portfolio Managers).
Restaurants in Taiwan meanwhile were full of robot servers, and
Taiwanese convenience stores are increasingly unmanned (shoplifting
is less of an issue in law abiding Taipei!) whilst at Bangkok
airport the same Portfolio Manager was literally run over by a
robot cleaner whilst not looking where he was going (rather
embarrassingly I should add). With many Asian countries facing
a rapidly ageing demographic this will throw up some
interesting structural dynamics particularly in Korea, Taiwan, Hong
Kong, China and Thailand - it is an area we will be doing some more
work on. We remain convinced that ageing demographics in Asia at
least are likely to be profoundly deflationary - a quick cut and
paste from Schroders internal Chat GPT model probably explains this
as well as any:
"The impact of aging demographics on inflation
or deflation is not straightforward and can vary depending on
several factors. However, in general, aging demographics tend to
have a deflationary effect on an economy. Here is
why:
1. Decreased consumer spending: as the population
ages, the proportion of older individuals typically increases.
Older individuals tend to have lower consumption patterns compared
to younger generations. This can lead to reduced consumer spending,
which can put downward pressure on prices and contribute to
deflationary pressures.
2. Declining workforce and productivity: aging
demographics often result in a shrinking workforce as the number of
older individuals retiring exceeds the number of younger
individuals entering the workforce. A decline in the working-age
population can lead to lower productivity growth, which can further
contribute to deflationary pressures.
3. Increased savings and reduced investment: older
individuals tend to save more and have a higher propensity to save
for retirement. This can result in increased savings in the
economy, which may lead to reduced investment and lower aggregate
demand. Lower investment can limit economic growth and contribute
to deflationary pressures.
4. Increased healthcare and pension costs: aging
populations typically require increased healthcare services and
pension provisions. The rising costs associated with healthcare and
pensions can strain government budgets and potentially lead to
reduced spending in other areas of the economy, contributing to
deflationary pressures.
It
is important to note that the impact of aging demographics on
inflation or deflation can be influenced by various factors,
including government policies, technological advancements, and
global economic conditions. Therefore, it is always advisable to
consider a range of factors when assessing the potential impact of
aging demographics on inflation or deflation in a specific country
or region."
The third observation from our trip
was how supply chains in Asia are rapidly adapting to our new
geo-political world. Most export related companies we met indicated
they are moving some of their production facilities out of China
with favoured destinations usually Vietnam, India and to lesser
extent Indonesia. US end clients increasingly want all final goods
whether technology products, semiconductors, window blinds, auto
parts, textiles out of China - whilst European clients are happier
with China plus one (or derisking of supply chains)
strategies.
The question for investors then is
whether the trade realignment is good or bad news for corporate
earnings - and for end consumers is it likely to be inflationary as
manufacturing outside China is likely to be higher cost? The
evidence here is interesting and certainly not yet
conclusive.
For some technology companies where
the threat of Chinese competition decreases due to sanctions that
work (bans on access to semiconductor equipment and key skill sets)
it increases their moats or competitive positioning. This would be
the case for companies like TSMC, Hynix and Samsung Electronics and
other specialist Taiwanese and Korean technology companies with
genuinely high levels of intellectual property.
For other industries however where
we see companies adding large scale capacity outside of China,
whilst Chinese competitors continue to expand their domestic
facilities in China, we are likely to see very significant
oversupply and major price pressures. Areas we would be
particularly worried about would be EV batteries and the related
supply chains, auto parts, commodity semiconductors, green energy,
biotech etc - basically any industry under the American Inflation
Reduction Act and/or any industry considered a strategic priority
for the CCP.
The other point to note around the
movement in supply chains is this is not currently a wholesale exit
from China. The production moving to India, Mexico and Vietnam is
often just final assembly whereas all the components and higher
value-added parts still come from China. For the moment this is not
a massive realignment.
Digressing slightly this had your
Portfolio Managers thinking: is deglobalisation really happening
and do sanctions normally actually work? The truth looks to be that
neither is having much impact. As the charts below on Chinese (and
German) exports to Kyrgyzstan and Kazakhstan suggest goods are
getting to Russia as middlemen facilitate trade, and latest trade
numbers showing booming European diesel shipments from India
suggest Russian oil is arriving in Europe just by different
routes.
So, our conclusions after many
company meetings in Asia and surveying evidence on the ground is
that the movement of supply chains appears real, but not
necessarily fundamentally large. By creating more capacity in many
industries, particularly the more commoditised ones we think it may
actually be disruptive and deflationary. This is quite contrary to
what appears the consensus belief amongst some top-down economists
in the West.
What struck us after our month in
Asia is that we may be seeing the return of the 4Ds in Asia at
least. The 4Ds was a presentation your Portfolio Managers used to
give 10 years ago. It highlighted that deflationary forces were
likely structural. These forces were Disruption (and overcapacity),
Demographics (i.e. aging societies), Debt (too much debt in China
and the West), and Disparity in Income (middle class incomes
squeezed whilst rich do better but the rich save more of their
income thus depressing overall consumption). We plan to do some
more analysis on the implications but as it stands we do not see
evidence of inflationary forces, or higher for longer, in Asia
(quite the opposite in fact in China where the risks of a Japanese
style prolonged debt deflation are rising).
What other observations came out of
our trip? On a more positive note, we were struck how financially
healthy most of the companies we met were. Nearly all companies we
hold in the portfolio are net cash positive and nearly all
committed in our meetings to maintaining dividends whether in
absolute terms or percentage payout ratios. We see plenty of
opportunities to make total returns in Asia even if the total
return comes principally from dividends. It is particularly
heartening to see increasing numbers of Asian companies like Swire
Pacific announcing very large buy backs. Another positive that came
from our meetings was that in most industries the painful process
of running down excess inventories built post-COVID is almost
complete (homewares, textiles, mobile handsets) or is well underway
(semiconductors, bicycles). This means, whilst the outlook for end
demand in 2024 is uncertain and visibility low, at least the double
headwind we had in 2023 of weak demand and inventory clearing has
gone. This left us feeling more upbeat about select export
businesses in the region.
Overall then it was a great month in
Asia, the first long trip your Portfolio Managers have made since
pre-COVID. Overall, we left a little more upbeat on prospective
Asian stockmarket returns as we enter 2024. We think inflation is
likely to be less of a headwind and outside of China the economic
picture in Asia looks reasonable. Company balance sheets are
generally in good shape and whilst the earnings outlook is
uncertain, valuations and market sentiment in the main reflect this
in your Portfolio Managers' view.
Robin Parbrook and Lee King Fuei
13 March 2024
Investment Process
Responsible investment
The Company delegates responsibility
to its Manager for taking environmental, social and governance
("ESG") issues into account when assessing the selection, retention
and realisation of investments. The Board expects the Investment
Manager to engage with investee companies on social, environmental
and business ethics issues and to promote best practice. The Board
expects the Investment Manager to exercise the Company's voting
rights in consideration of these issues.
In addition to the description of
the Manager's integration of ESG into the investment process and
the details in the Strategic Report on pages 4 to 32, a
description of the Managers' policy and its engagement with
investee companies on these matters can be found on Schroders'
website at
https://www.schroders.com/en/sustainability/active-ownership/.
The Board notes that Schroders
believes that companies with good ESG management often perform
better and deliver superior returns over time. Engaging with
companies to understand how they approach ESG management is an
integral part of the investment process. Schroders is compliant
with the UK Stewardship Code and its compliance with the principles
therein is reported on its website.
The Board receives reporting from
the Manager on the application of its policy.
Integration of ESG into the investment
process
This Investment Process section of
the annual report reflects the ESG views and activities of the
Manager in relation to the Company's portfolio, and more widely.
References to 'our' or 'we' in this section of the report refer to
the views of the Manager.
Schroders has been considering ESG
issues, and sustainability generally, for over 25 years.
Schroders has a team of more than 50
dedicated ESG professionals (31 December 2023) who develop
proprietary ESG tools and oversee ESG analysis across
Schroders.
The ESG specialists also engage
directly with companies, prioritising those with exposure to higher
ESG risk and low ESG ratings. They attend company meetings with
portfolio managers and analysts to discuss specific sustainability
issues directly with company management, in addition to financial
performance, as well as engaging with company sustainability
experts directly.
Corporate Governance analysts in the
team also work alongside investors, and internal compliance and
legal teams to ensure voting activities comply with the ESG
policy.
In addition to our global
sustainability resources, our Asia-based sustainable investment
analysts form a crucial part of our on-the-ground resources to
ensure the local investment teams are fully informed of key output
from our global sustainable investment team in London. The team is
also tasked to bring further insight and perspective to our ESG
analysis and engagement alongside the investment team, as well as
regular discussion on topical sustainability issues and ESG best
practice across the region.
ESG
and sustainability in Asia - the practical
reality
Sustainability and ESG analysis in
Asia is, in Schroders' view, of greater importance when making
investment decisions than perhaps any other region in the world.
Firstly, there are risks of poor corporate governance and fraud
owing to family and/or state shareholder structures and poor
minority investor protection. Secondly, Asia is the biggest
greenhouse gas emitter in the world and the region that faces the
biggest environmental and economic costs of global warming.
Finally, environmental degradation and the social costs of
industrialisation and malpractice are widespread in
Asia.
How does ESG analysis embed itself
into the investment process for the Company?
The first section of all Asian
research reports covers governance - the management, their
background and track record, whether they treated minority
shareholders poorly in the past, and if they are credible and
professional. The Manager only invests in companies where it is
believed management is trustworthy, where interests are aligned and
where there is no historic record of misdemeanours. This screens
out a significant part of the Asian universe.
In order to capture broader ESG
considerations Schroders' Asian Equity analysts are expected to
provide additional written ESG analysis for all companies under
coverage. For this to be more robust and integrated, our research
team has also drawn upon the Schroders CONTEXT framework as
outlined in the chart below and adapted it to an Asian version
("Asia Context") using a broader stakeholder-based approach to ESG
analysis.
Active ownership at Schroders
Schroders has a long history of
engagement and active ownership and we have engaged with companies
on ESG related matters for the past two decades. As active
investors we have always considered active ownership to be a key
channel of influence on management teams so that more sustainable
practices are properly considered in managing the companies and
assets in which we invest on behalf of our clients. We aim to drive
change that we believe should better protect and enhance the value
of our clients' investments and we are committed to leveraging our
influence as an investor to change how a company operates for the
better. These regular engagements form an important aspect of our
role as stewards of our clients' capital and allow us to deploy
capital in businesses with long-term sustainability of returns and
shareholder value creation.
Active ownership
Enhancing our analysis
Influencing our
investments
Engagement
|
-
|
Understanding how companies are
preparing for the long-term challenges they face
|
|
-
|
Supporting investees to take action
in the areas where change may be required
|
Voting
|
-
|
Using our voice and rights as
shareholders to encourage change
|
Engagement in practice - Samsung Electronics
The diagram below provides an
example of our continuous engagement effort on Korea's Samsung
Electronics, a core holding in the portfolio for many years. Over
the years we have engaged the management team of the company in
regular dialogue on a range of sustainability topics including
governance, diversity and inclusion and climate change. We are
encouraged to see the company taking an increasingly proactive
approach in enhancing its shareholder return policies while
improving its transparency and disclosure on "E" and "S" related
matters.
Coupled with the favourable view
that we hold on the structural outlook for the memory/semiconductor
sector, we have maintained an overweight position in Samsung
Electronics in recent years. The positive change in corporate
governance and increasing transparency around sustainable practices
have given us further confidence to hold our positions in the stock
even through cyclical downcycles, as we believe the improvements in
ESG have set the company on a more sustainable footing and allowed
it to remain a key structural beneficiary of the multi-year trends
we are seeing in technology in general (cloud, 5G, digitisation,
AI, etc.).
Engaging across our priority engagement
themes
Samsung Electronics
|
Themes
|
Format
|
Objectives
|
Outcomes
|
Aug 2019
|
Diversity and Inclusion
|
Email
IR
|
Encourage improvement on gender
diversity.
|
Company committed to improving
culture and launched initiatives for female employees.
|
Aug 2020
Mar 2021
|
Corporate Governance
|
Email
IR
1x1 call
IR
|
Improve transparency on political
lobbying.
Re-election of 3 directors in light
of adverse ISS recommendations.
|
Communicated expectations on
transparency and alignment.
Company recognised that investor
trust needs to be earned and it is something they will work
on.
|
Oct 2022
|
Climate Change
|
1x1 call
IR
|
Communicate climate
expectations.
|
Company has set Scope 1 and 2
emission targets and working to develop Scope 3
visibility.
|
Diversity and Inclusion
|
1x1 call
IR
|
Improve board
diversity.
|
Company recognised the need for more
global presence on the board but highlighted their potential
candidates sit on more than two seats, which will likely be opposed
by ISS/GL given their max two seats over-boarding policy in South
Korea.
|
Nov 2022
|
Corporate Governance
|
Email
CEO
|
Raise concerns on ROE cash
drag.
|
Communicated our analysis and
concerns on valuation.
|
Aug 2023
|
1x1 call
IR
|
Improve shareholder return
policy.
|
The shareholder return policy is
being actively discussed internally. Management expects to provide
a further update during 2024.
|
Stakeholders addressed in
engagements
|
Governance &
Management
|
Regulators &
Governments
|
Environment
|
Employees
|
Customers & Suppliers
|
Local communities
|
Source: Schroders, as at October
2023.
Securities shown are for
illustrative purposes only and should not be viewed as a
recommendation to buy or sell. We recognise that success factors
may be subjective, and that Schroders' influence may not have been
the sole driving force for this change. However, we believe it is
important to track companies' progress and measure the outcomes of
our engagement.
In summary, the Manager looks for
companies with sustainable business models that are doing the right
thing for broader stakeholders in order to generate the best
performance for the Company.
What is the practical reality of all
the Manager's ESG work? The table below shows the current
positioning of the Company in sectors generally considered
"sensitive". The Manager does not invest in companies where their
principal activity is tobacco, coal, oil extraction, thermal
utilities or agribusiness. All of these are sectors where we would
question the long-term sustainability of the business model due to
environmental and social factors. The Company does have exposure to
gaming companies and the resource sector, but the exposure is
limited to those stocks in well regulated markets where we are
confident of best practice. Exposure in both industries is unlikely
to exceed 10% of the Company's assets respectively.
ESG
and sustainability in action - the practical reality for the
Company
|
|
|
Approximate portfolio Exposure
|
Agribusiness
|
Environmental, Social, Governance,
(low barriers of entry, widespread questionable
practices)
|
Avoid
|
0%
|
Tobacco
|
Social, Governance
|
Avoid
|
0%
|
Gambling
|
Social, Governance
|
Limited exposure to best-in-class
players in well-regulated markets (Macau, Australia)
|
4.0% (3 stocks)
|
Utilities
|
Environmental, Governance, (national
service obligations, uncertain regulations/risks of backlash
against coal plants, mostly state-owned enterprises)
|
Avoid carbon heavy energy providers,
focus on hydro and sustainable energy providers in well-regulated
markets (if such a thing exists?)
|
0%
|
Auto
|
Environmental (regulations against
the sector - too much hot money in EVs and multiple players will
mean poor returns for all)
|
Avoid original equipment
manufacturers ("OEMs"), minimise exposure to supply
chains
|
0%
|
Resources
|
Environmental, Social, Governance
(questionable practices such as bribery and poor environmental and
safety controls concerns in Asia ex Australia)
|
Avoid except for Australian blue
chip with minimal thermal coal exposure
|
4.1% (2 stocks)
|
Oil
and Gas
|
Environmental, Governance
(regulations, unfavourable taxes, mostly state-owned)
|
Limited exposure to best-in-class
companies ideally with an LNG/gas focus
|
0%
|
Property
|
Environmental, Social, Governance
(bribery issues, flooding, land clearance compensation)
|
Exposure principally to Hong Kong
and Singapore where there are better practices and cities that
"work". Outside HK/SG, only invest in management teams we 100%
trust (this is a small number of companies)
|
3.0% (2 stocks)
|
Source: Schroders, as at end of
December 2023. For illustrative purposes only and should not be
viewed as a recommendation to buy or sell.
The table below shows a calculation
of the carbon footprint of the Company's investee companies versus
the Reference Index. Whilst data for these calculations can be open
to interpretation, given the difficulties of measuring scope 2
emissions, the Company appears to have a very low carbon footprint
versus the Reference Index. On current calculations, as illustrated
below, the carbon footprint of the Company's investee companies on
Scope 1 and 2 emissions is less than half of the Reference Index
levels.
Top
10 Investments
as at 31 December 2023
1 TSMC % of total investments: 9.2%
(2022: 7.7%)
TSMC is a Taiwanese provider of
semiconductor manufacturing services, and the world's largest logic
chip contract manufacturer. Its dominant position in the
manufacturing of the most cutting-edge chips is a result of a long
track record of R&D-driven innovation. TSMC's customers include
most of the world's most advanced chip design companies, for
applications ranging from smartphone processors to the most
advanced AI chips.
2 Samsung Electronics % of
total investments: 7.3% (2022: 6.1%)
Samsung Electronics is a Korean
semiconductor and electronics manufacturing company. Its key
products include semiconductors (logic and memory chips), mobile
phone handsets, consumer electronics, and home appliances. As well
as being the leading player in both volatile (DRAM) and
non-volatile (NAND) memory, Samsung is one of only a handful of
companies in the world able to manufacture the most advanced logic
chips at scale.
3 HDFC Bank % of total
investments: 4.1% (2022: 2.0%)
HDFC Bank is an Indian financial
services provider, offering banking, insurance and mutual funds
amongst other financial products. Following its merger with HDFC
Ltd, the non- bank financial company, it is now among India's
largest private sector financial companies, serving over
90 million customers through both traditional and digital
channels. India is a relatively underpenetrated market for
financial services.
4 Tencent % of total
investments: 3.3% (2022: 3.2%)
Tencent is China's biggest internet
company, with leading positions in mobile gaming, online
advertising and mobile payments. Its WeChat app is the leading
instant messaging app in China, and is a key platform for other
features, such as payments and social media content, and
third-party services accessed through "mini-programs" on the
platform. In addition to its own operations, Tencent is a
significant shareholder in several other prominent internet
companies, in China and abroad.
5 DBS % of total
investments: 3.1% (2022: 3.2%)
DBS is the largest banking group
headquartered in Singapore. The bank offers a full range of
services in consumer banking, wealth management and institutional
banking across Singapore, Hong Kong and other ASEAN markets. While
being the leading incumbent banking group in Singapore, it has made
significant investment in revamping its digitalisation
infrastructure over the years, putting the bank at the forefront of
financial innovation, which is seen as a key differentiator for the
bank and helps fend off the increasing competition from emerging
fintech companies over the medium term.
6 AIA % of
total investments: 2.8% (2022: 2.9%)
AIA is an insurance company,
providing life insurance, accident and health insurance and savings
plans, as well as financial products and services to corporate
clients. Based in Hong Kong, the company operates in 18 markets
across the Asia Pacific region and has sold over 40 million
policies.
7 MediaTek % of total investments: 2.7%
(2022: 1.7%)
MediaTek is a Taiwanese company
engaged in the design and distribution of semiconductor chips.
Their products focus on mobile connectivity, for example 5G mobile
communication chips, as well as bluetooth and Wifi chips, and are
mainly used in mobile phones, digital TVs, PCs, home appliances,
wearable devices and Internet of Things devices.
8 Bank
Mandiri % of total investments:
2.6% (2022: 2.1%)
Bank Mandiri is one of Indonesia's
largest banks, serving both retail and corporate customers.
Established in 1998 as part of a restructuring program for four
government-owned banks, Mandiri remains majority government-owned.
It also offers other financial services, such as insurance and
securities brokerage. Indonesia is a relatively underpenetrated
market for financial services.
9 Swire
Pacific % of total investments:
2.1% (2022: 2.1%)
Swire Pacific is one of the leading
commercial landlord conglomerates in Hong Kong, with operations
spanning office/retail properties, airline and beverage businesses
across China and South East Asia. Despite the challenging macro
backdrop in Hong Kong/China, Swire Pacific has been navigating well
given its very solid balance sheet. There is clear commitment from
management to make proactive efforts in enhancing shareholder
returns via a combination of share buy back, special dividends and
maintaining a consistent and progressive dividend policy, which
should continue to allow the company to unlock shareholder value
over time.
10 Rio Tinto % of total investments: 2.0%
(2022: 1.8%)
Rio Tinto is one of the largest and
best managed resource companies globally, with strong cash flow
generation and a robust balance sheet. The company runs
best-in-class operations across its main business segments in iron
ore, aluminium, copper and diamonds, energy and minerals. Its
high-quality mining assets also allow it to run a lower-cost
operation with longer asset life than peers, making it less
sensitive to adverse commodity price movements. Given Rio Tinto's
industry leading position and its commitment to carbon neutrality,
the company is an integral part of the global transition into a low
carbon economy, where the accelerating adoption of EVs, wind
turbines, electric grids, etc. will drive structurally higher metal
demand over the coming years.
Investment Portfolio
as at 31 December 2023
Investments are classified by the
Investment Manager in the country of listing, except where noted.
Stocks in bold are the 20 largest investments, which by value
account for 56.8% (2022: 54.2%) of total investments.
|
£'000
|
%
|
Taiwan
|
|
|
TSMC
|
44,683
|
9.2
|
MediaTek
|
13,011
|
2.7
|
Voltronic Power Technology
|
8,134
|
1.7
|
Nien Made Enterprise
|
6,901
|
1.4
|
ASE Technology
|
6,724
|
1.4
|
United Micro Electronics
|
6,487
|
1.3
|
Advantech
|
6,152
|
1.3
|
Merida Industry
|
6,022
|
1.2
|
Eclat Textile
|
5,449
|
1.1
|
Chroma ATE
|
5,382
|
1.1
|
Sinbon Electronics
|
3,126
|
0.7
|
Total Taiwan
|
112,071
|
23.1
|
Australia
|
|
|
Cochlear
|
9,220
|
1.9
|
CSL
|
9,007
|
1.9
|
BHP
Billiton1
|
9,003
|
1.9
|
Aristocrat Leisure
|
7,194
|
1.5
|
ResMed
|
7,000
|
1.4
|
Medibank Private
|
6,827
|
1.4
|
Reliance Worldwide
|
6,775
|
1.4
|
Seek
|
6,707
|
1.4
|
Orica
|
5,169
|
1.1
|
Brambles
|
4,930
|
1.0
|
James Hardie Industries
|
4,744
|
1.0
|
Incitet Pivot
|
3,680
|
0.8
|
Total Australia
|
80,256
|
16.7
|
India
|
|
|
HDFC
Bank
|
19,705
|
4.1
|
ICICI Bank
|
9,073
|
1.9
|
Apollo Hospitals Enterprise
|
8,929
|
1.8
|
MakeMyTrip2
|
6,994
|
1.4
|
Infosys (ADR)2
|
5,978
|
1.2
|
Tata Consultancy Services
|
5,557
|
1.1
|
KPIT Engineering
|
3,115
|
0.6
|
Total India
|
59,351
|
12.1
|
Hong
Kong (SAR)
|
|
|
AIA
|
13,340
|
2.8
|
Swire Pacific
|
10,259
|
2.1
|
Techtronic Industries
|
8,352
|
1.7
|
Galaxy Entertainment
|
6,681
|
1.4
|
Hang Lung
|
3,128
|
0.6
|
Total Hong Kong (SAR)
|
41,760
|
8.6
|
Mainland China
|
|
|
Tencent3
|
15,849
|
3.3
|
Shenzhou International Group3
|
7,339
|
1.5
|
Yum China3
|
5,450
|
1.1
|
New Oriental Education
(ADR)2
|
5,031
|
1.0
|
NetEase3
|
3,939
|
0.8
|
Wuxi Biologic3
|
2,523
|
0.5
|
Total Mainland China
|
40,131
|
8.2
|
Singapore
|
|
|
DBS
|
14,922
|
3.1
|
Singapore Exchange
|
7,696
|
1.6
|
United Overseas Bank
|
6,844
|
1.4
|
Sheng Siong
|
4,503
|
0.9
|
Venture
|
4,335
|
0.9
|
Total Singapore
|
38,300
|
7.9
|
South Korea
|
|
|
Samsung Electronics
|
35,009
|
7.3
|
Total South Korea
|
35,009
|
7.3
|
Philippines
|
|
|
Wilcon
|
8,128
|
1.7
|
International Container Terminal
Services
|
7,066
|
1.5
|
BDO Unibank
|
5,576
|
1.2
|
SM Investments
|
5,191
|
1.1
|
Century Pacific Food
|
4,944
|
1.0
|
Total Philippines
|
30,905
|
6.5
|
Indonesia
|
|
|
Bank
Mandiri
|
12,571
|
2.6
|
Sumber Alfaria Trijaya Tbk
PT
|
1,248
|
0.3
|
Total Indonesia
|
13,819
|
2.9
|
United Kingdom
|
|
|
Rio
Tinto
|
9,400
|
2.0
|
Total United Kingdom
|
9,400
|
2.0
|
Vietnam
|
|
|
FPT
|
4,458
|
0.9
|
Mobile World Investment
|
2,131
|
0.4
|
Total Vietnam
|
6,589
|
1.3
|
Thailand
|
|
|
Bangkok Dusit Medical
Services
|
5,653
|
1.2
|
Total Thailand
|
5,653
|
1.2
|
United States
|
|
|
Las Vegas Sands
|
5,412
|
1.1
|
Total United States
|
5,412
|
1.1
|
France
|
|
|
LVMH
|
5,356
|
1.1
|
Total France
|
5,356
|
1.1
|
Total investments4
|
484,012
|
100.0
|
Derivative Financial Instruments
|
|
|
Index Put Options
|
|
|
Taiwan Stock Exchange Put Option
17600
|
|
|
February 2024
|
178
|
-
|
NIFTYM Put Option 19500 January
2024
|
-
|
-
|
Total Index Put Options5
|
178
|
-
|
Total Investments and Derivative Financial
Instruments
|
484,190
|
100.0
|
1Listed in the UK.
2Listed in the USA.
3Listed in Hong Kong (SAR).
4Total investments comprise the following:
|
|
£'000
|
Equities
|
|
473,003
|
American Depositary Receipts
(ADR)
|
|
11,009
|
Total investments
|
|
484,012
|
5The options give downside protection to 6.1% of total
investments.
Business Review
Purpose, values and culture
The Company's purpose is to create
long-term shareholder value, in line with the investment
objective.
The Company's culture is driven by
its values: transparency, engagement and rigour, with collegial
behaviour and constructive, robust challenge. The values are all
centred on achieving returns for shareholders in line with the
Company's investment objective. The Board also sets out the
effective management or mitigation of the risks faced by the
Company and, to the extent it does not conflict with the investment
objective, aims to structure the Company's operations with regard
to all its stakeholders and take account of the impact of the
Company's operations on the environment and community.
As the Company has no employees and
acts through its service providers, its culture is represented by
the values and behaviour of the Board and third parties to which it
delegates. The Board aims to fulfill the Company's investment
objective by encouraging a culture of constructive challenge with
all key suppliers and openness with all stakeholders. The Board is
responsible for embedding the Company's culture in its
operations.
Business model
The Board has appointed Schroder
Unit Trusts Limited (the "Manager"), to implement the investment
strategy and to manage the Company's assets in line with the
appropriate restrictions placed on it by the Board, including
limits on the type and relative size of holdings which may be held
in the portfolio and on the use of gearing, cash, derivatives and
other financial instruments as appropriate. The terms of the
appointment of the Manager, and the delegation by the Manager of
investment management services to Schroder Investment Management
Limited ("SIM" or the "Investment Manager"), are described more
completely in the Directors' Report. The Manager also promotes the
Company using its sales and marketing teams. The Board and Manager
work together to deliver the Company's investment objective, as
demonstrated in the diagram below.
Investment trust status
The Company carries on business as
an investment trust. Its shares are listed and admitted to trading
on the premium segment of the main market of the London Stock
Exchange. It has been approved by HM Revenue & Customs as an
investment trust in accordance with section 1158 of the Corporation
Tax Act 2010, by way of a one-off application and it is intended
that the Company will continue to conduct its affairs in a manner
which will enable it to retain this status.
The Company is domiciled in the UK
and is an investment company within the meaning of section 833 of
the Companies Act 2006. The Company is not a "close" company for
taxation purposes.
Continuation vote
It is not intended that the Company
should have a limited life but the Directors consider it desirable
that the shareholders should have the opportunity to review the
future of the Company at appropriate intervals. Accordingly, the
articles of association contain provisions requiring the Directors
to put a proposal for the continuation of the Company to
shareholders at three yearly intervals. The next continuation vote
is due to be proposed at the AGM in 2025.
Investment model
Investment objective
The Company seeks to provide a high
rate of total return through investment in equities and
equity-related securities of companies trading in the Asia Pacific
region (excluding Japan). The Company seeks to offer a degree of
capital preservation through tactical use of derivative
instruments.
Investment policy
The Company invests principally in a
diversified portfolio of 40-70 companies operating primarily in
Asia, including Australasia but excluding Japan. It is intended
that the Company will have a bias to investing in small and mid cap
companies.
Investments may be made in companies
listed on the stock markets of countries located in the region
and/or listed elsewhere but controlled from within the region
and/or with a material exposure to the region. The Company will
focus on investing in companies with sound balance sheets,
professional management and capital allocation policies that are
aligned with the interests of minority shareholders.
The use of derivatives to protect
the capital value of the portfolio or for efficient portfolio
management is fundamental to the strategy of the Company's
Portfolio Managers. Such derivatives may include listed futures,
call options, long puts, OTC instruments and instruments to hedge
currency exposure with Board approval. The Board will monitor the
effectiveness of the underlying process and the use of
derivatives.
In order to obtain further exposure
to equity indices or individual stocks, the Company may enter into
contracts for difference where the underlying investments are not
delivered and settlement is made in cash. In extreme circumstances,
and subject to Board approval, the majority, or even all, of the
Company's assets could be held in cash or near cash instruments,
with appropriate diversification of cash held on
deposit.
The Company may use gearing to
enhance performance but net gearing will not exceed 30% of net
asset value.
The Company does not tie its
portfolio construction to the constituents of any benchmark;
instead, the size of stock positions are set on an absolute basis
reflecting where the best potential risk adjusted returns are to be
found.
Investment restrictions and spread of investment
risk
In accordance with its investment
objective, the Company invests in a diversified portfolio with
the aim of spreading investment risk, which is monitored by the
Board and the Manager.
The key restrictions imposed on the
Manager are that:
(a) no more than 15% of the
Company's total net assets, at the date of acquisition, may be
invested in any one single company or group of
companies;
(b) subject to the approval of the
Board, the Company may invest in collective vehicles. If it was to
do so, however, no more than 10% of the Company's total net assets,
at the date of acquisition, may be invested in UK listed
closed-ended investment companies unless such companies have a
stated investment policy not to invest more than 15% of their gross
assets in other UK listed closed-ended investment
companies;
(c) the Company will not
invest more than 15% of its gross assets in UK listed closed-ended
investment companies;
(d) no more than 50% of the
Company's total net assets may be invested in equities listed on a
single stock exchange; and
(e) the Manager will not invest in
unlisted equities other than with the approval of the Board or when
entitlements are received or immediately prior to a
listing.
The Investment Portfolio on pages 21
and 22 demonstrates that, as at 31 December 2023, the Company held
62 investments spread over a range of industry sectors. The
largest investment, Taiwan Semiconductor Manufacturing Company,
represented 9.2% of total investments. The Board therefore believes
that the objective of spreading investment risk has been
achieved.
Key
performance indicators ("KPIs")
The Board reviews performance, using
a number of key measures, to monitor and assess the Company's
success in achieving its objective. Further comment on performance
can be found in the Chair's statement. The following KPIs are
used:
• NAV
performance;
• Share
price discount/premium management; and
• Ongoing
charges ratio.
Some KPIs are Alternative
Performance Measures ("APMs").
Further details can be found on page
4 and definitions of these terms on pages 78 and 79.
Promotion
The Company promotes its shares to a
broad range of investors including discretionary wealth managers,
private investors, financial advisers and institutions which have
the potential to be long-term supporters of the investment
strategy. The Company seeks to achieve this through its Manager and
Corporate Broker, which promote the shares of the Company through
regular contact with both current and potential
shareholders.
These activities consist of investor
lunches, one-on-one meetings, regional road shows and attendance at
conferences for professional investors. In addition, the Company's
shares are supported by the Manager's wider marketing of investment
companies targeted at all types of investors. This includes
maintaining close relationships with adviser and execution-only
platforms, advertising in the trade press, maintaining
relationships with financial journalists and the provision of
digital information on Schroders' website. The Board also seeks
active engagement with investors, and meetings with the Chair are
offered to investors when appropriate.
Shareholders are encouraged to sign
up to the Manager's Investment Trusts update, to receive
information on the Company directly
www.schroders.com/trust-updates/.
Stakeholder engagement
Section 172 of the Companies Act 2006
During the year under review, the
Board discharged its duty under section 172 of the Companies Act
2006 to promote the success of the Company for the benefit of its
members as a whole, having regard to the interests of all
stakeholders. As an externally managed investment trust, the
Company has no employees, operations or premises. The Board has
identified its key stakeholders as the Company's shareholders, the
Investment Manager, other service providers, investee companies and
the Company's lender. The table below explains how the Directors
have engaged with all stakeholders during the year and outlines the
key activities undertaken. The key decisions made by the Board
during the year are set out following the table.
Stakeholder
|
Significance
|
Engagement
|
2023 highlights
|
Shareholders
|
Continued shareholder support and
engagement are critical to the continuing existence of the business
and the delivery of the long-term strategy of its
business
|
- Annual General
Meeting (AGM): The Company welcomes attendance and participation
from shareholders at the AGM. Shareholders have the opportunity to
meet the Directors and the Investment Manager and to ask questions.
The Board values the feedback it receives from shareholders which
is incorporated into Board discussions.
- Publications:
The annual and half year results presentations, as well as
factsheets, are available on the Company's web pages with their
availability announced via the Stock Exchange. Feedback and/or
questions received from shareholders enable the Company to evolve
its reporting which, in turn, helps to deliver transparent and
understandable updates.
- Shareholder
communication: The Investment Manager communicates with
shareholders periodically. All investors are offered the
opportunity to meet the Chair, Senior Independent Director, or
other Board members without using the Manager or Company Secretary
as a conduit, by writing to the Company's registered office. The
Board also corresponds with shareholders by letter and email. The
Board receives regular feedback from its broker on investor
engagement and sentiment.
- Investor
Relations updates: At every Board meeting, the Directors receive
updates on share trading activity, share price performance and any
shareholders' feedback, as well as any publications or comments in
the press. To gain a deeper understanding of the views of its
shareholders and potential investors, the Manager also undertakes
Investor Roadshows following publications of results.
|
At the AGM in 2023 questions and
feedback from shareholders were welcomed. The Board, along with the
Manager, look forward to meeting and interacting with more
shareholders at the forthcoming AGM in April 2024.
The Company's web pages continued to
be refreshed and enhanced during the year to optimise the user
experience for shareholders and investors. Shareholders can, via
the Company's web pages, subscribe to the Schroders investment
trusts newsletter to receive regular updates on the
Company.
The Investment Manager engaged with
a number of its shareholders and investors during the year and
regular feedback was provided to the Board. A number of
promotional activities were undertaken during the year including
Investment Manager interviews, webinars and coverage in key
publications.
The Board continues to work with
Kepler on promoting the Company through its research notes which
were published twice during the year.
|
The
Investment Manager
|
Holding the Company's shares offers
investors a liquid investment vehicle through which they can obtain
exposure to the Company's diversified portfolio of
investments.
The Investment Manager's performance
is critical for the Company to deliver its investment strategy
successfully and meet its objective to provide a high rate of total
return through investment in equities and equity-related securities
of companies trading in the Asia Pacific region (excluding
Japan).
|
Maintaining a close and constructive
working relationship with the Investment Manager is crucial as the
Board and the Investment Manager both aim to continue to achieve
consistent, long-term returns in line with the investment
objective. The Board invites the Investment Manager to attend all
Board and certain Committee meetings in order to update the
Directors on the performance of the investments and the
implementation of the investment strategy and objective.
Important components in the Board's
collaboration with the Investment Manager are:
- Encouraging open
discussion with the Board;
- Recognising that
the interests of shareholders and the Investment Manager (as well
as of its other clients) are, for the most part, well aligned,
adopting a tone of constructive challenge, balanced when those
interests are not fully congruent by robust negotiation of the
Investment Manager's terms of engagement; and
- Drawing on
Directors' individual experience to support the Manager in its
monitoring and change management of portfolio companies, for the
benefit of all of the Investment Manager's clients.
The Management Engagement Committee
reviews the performance of the Investment Manager, its remuneration
and the discharge of its contractual obligations at least
annually.
|
Representatives of the Investment
Manager, including at least one of the Portfolio Managers, attend
each Board meeting to provide an update on the investment portfolio
along with presenting on macroeconomic issues.
The portfolio activities undertaken
by the Investment Manager and the impact of decisions affecting
investment performance are set out in the Investment Manager's
Review on pages 7 to 14.
|
Investee companies
|
The Board is committed to
responsible investing and actively monitors the activities of
investee companies through its delegation to the Investment
Manager.
|
The Investment Management team
conducts face-to-face and/or virtual meetings with the management
teams of all investee companies to understand current trading and
prospects for their businesses, and to ensure that their ESG
investment principles and approach are understood.
The Investment Manager has
discretionary powers to exercise the Company's voting rights on
resolutions proposed by the investee companies within the Company's
portfolio. The Investment Manager report to the Board on
stewardship (including voting) issues and the Board will question
the rationale for voting decisions made.
By active engagement and exercising
voting rights, the Investment Manager actively works with companies
to improve corporate standards, transparency and
accountability.
|
The Board received regular updates
on engagement with investee companies from the Investment Manager
at its board meetings.
During the year, the Investment
Manager engaged with many of its investee companies and voted at
shareholder meetings (further details can be found on page
16).
|
Lender
|
Availability of funding and
liquidity are crucial to the Company's ability to take advantage of
investment opportunities as they arise.
|
Considering how important the
availability of funding is, the Company aims to demonstrate to
lenders that it is a well managed business and, in particular, that
the Board focuses regularly and carefully on the management of
risk.
The Manager manages the relationship
with the Company's lender and reports to the Board at each meeting
as and when required for renewals of terms or negotiation of loan
covenants. The Manager provides a monthly statement of compliance
of the loan covenants to the lender.
|
During the year, gearing was
regularly considered. The Board entered into an amendment and
restatement agreement in July 2023 with The Bank of Nova Scotia,
London, Branch in respect of the revolving credit facility as
previously amended and restated in July 2022.
|
Other service providers
|
In order to operate as an investment
trust with a premium listing on the London Stock Exchange, the
Company relies on a diverse range of advisers to support meeting
all relevant obligations.
|
The Board maintains regular contact
with its key external providers, both through the Board and
Committee meetings, as well as outside of the regular meeting
cycle. Their advice, as well as their needs and views, are
routinely taken into account.
|
Under delegated authority from the
Board, the Management Engagement Committee reviewed all material
third party service providers. The Board considered the ongoing
appointments of its service providers to be in the best interests
of the Company and its shareholders as a whole and will continue to
monitor their progress in the year ahead.
During the year, Directors were
invited to attend an internal controls briefing session, hosted by
the Manager which assessed the internal controls of certain key
service providers including the Company's depositary and custodian,
HSBC and the Company's registrar, Equiniti.
|
Wider society and the environment
|
Whilst strong long-term investment
performance is essential for an investment trust, the Board
recognises that to provide an investment vehicle that is
sustainable over the long-term, both it and the Investment Manager
must have regard to ethical and environmental issues that impact
society. Hence ESG considerations are integrated into the
Investment Manager's investment process and will continue to
evolve.
|
The Board engages with the
Investment Manager at each Board meeting in respect of its ESG
considerations on existing and new investments.
|
The Board's desire for greater
engagement reporting has resulted in the inclusion of case studies
showcasing how the Investment Manager supports and integrates
responsible investing in its investment process set out in this
annual report. Further details of the ESG practices and case
studies can be found in the Investment Process section of this
report.
|
During the year, the Board took a
number of other key decisions which also fall under the Section 172
scope set out above:
• the
declaration of a final dividend of 11.00p per Ordinary share (2022:
8.5p) which, following approval by shareholders at the AGM held on
25 April 2023 was paid to shareholders on 11 May 2023.
• the
consideration of Board succession planning, and following the
appointment of Jasper Judd as a new non-executive Director on
1 February 2023, has commenced the search for a successor to
Caroline Hitch who plans to step down from the Board following the
2024 AGM.
• the
implementation of the Board's discount control policy to target a
discount to NAV of no more than 5% in normal market
conditions.
•
maintaining the Company's disciplined gearing framework, based on a
number of valuation indicators to increase market exposure, which
should, over the longer term, enhance returns to shareholders. The
Company will also use derivative hedging instruments in addition to
borrowing under the revolving credit facility provided by The Bank
of Nova Scotia, London Branch, as amended and restated in July
2023.
• together
with the Portfolio Managers, the Board undertook its second annual
visit to the region, since the lifting of COVID travel
restrictions, and visited Hong Kong and Taiwan to undertake due
diligence meetings with key personnel from the Investment Manager,
consultants and investee companies.
Following the year end, the Board
declared a final dividend of 11.50p per Ordinary share (2023:
11.00p) which, if approved by shareholders at the AGM, will be paid
on 10 May 2024.
Corporate and social responsibility
The Board recognises the Company's
responsibilities with respect to corporate and social
responsibility and engages with its outsourced service providers to
safeguard the Company's interests. As part of this ongoing
monitoring, the Board receives reporting from its service providers
with respect to their anti-bribery and corruption policies; Modern
Slavery Act 2015 statements; diversity policies; financial crime
policies; greenhouse gas and energy usage reporting.
Diversity policy
The Board has adopted a diversity
and inclusion policy. Appointments and succession plans will always
be based on merit and objective criteria and, within this context,
the Board seeks to promote diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths. The Board will
encourage any recruitment agencies it engages to find a range of
candidates that meet the objective criteria agreed for each
appointment. Candidates for Board vacancies are selected based on
their skills and experience, which are matched against the balance
of skills and experience of the overall Board taking into account
the criteria for the role being offered.
Statement on Board diversity - gender and ethnic
background
The Board has made a commitment to
consider diversity when reviewing the composition of the Board and
notes the new Listing Rules requirements (LR 9.8.6R(9) and (11))
regarding the targets on board diversity:
• at least
40% of individuals on the Board are women;
• at least
one senior Board position is held by a woman; and
• at least
one individual on the Board is from a minority ethnic
background.
The FCA defines senior board
positions as Chairman, Chief Executive Officer ("CEO"), Chief
Financial Officer ("CFO") or Senior Independent Director ("SID").
As an investment trust with no executive officers, the Company has
no CEO or CFO. The Board has reflected the senior positions of the
Chair of the Board, the Chair of the Audit and Risk Committee and
the SID in its diversity tables.
The Board has chosen to align its
diversity reporting reference date with the Company's financial
year end and proposes to maintain this alignment for future
reporting periods. The following information has been provided by
each Director through the completion of a questionnaire.
As at 31 December 2023, the Company
met two of the three criteria including the target in relation to
the number of women on the Board and for at least one senior board
position to be held by a woman. The target for at least one
individual on the Board to be from a minority ethnic background was
not met and the Board is conscious that while the Directors are all
independent and have a diverse range of views and experience, its
small composition will make these targets challenging to fully
implement. Recognising the benefits of a diverse Board, it is
intended that improving diversity will continue to be a key factor
when the Board makes its next appointment. There have been no
changes since 31 December 2023 to the date of publication of the
annual report and accounts.
The below tables set out the gender
and ethnic diversity composition of the Board as at 31 December
2023 and at the date of this report.
Gender identity
|
|
|
|
|
|
|
Number of
|
|
Number of
|
Percentage
|
senior
|
|
Board
|
of the
|
positions
on
|
|
members
|
Board
|
the Board
|
Men
|
2
|
50
|
1
|
Women
|
2
|
50
|
2
|
Not specified/prefer not
|
|
|
|
to say
|
-
|
-
|
-
|
Not specified/prefer not to
say
|
-
|
-
|
-
|
Ethnic background
|
|
|
Number of
|
|
Number of
|
Percentage
|
senior
|
|
Board
|
of the
|
positions
on
|
|
members
|
Board
|
the Board
|
White British or other
White
|
|
|
|
(including minority-white
|
|
|
|
groups)
|
4
|
100
|
3
|
Mixed/Multiple Ethnic
Groups
|
-
|
-
|
-
|
Asian/Asian British
|
-
|
-
|
-
|
Black/African/Caribbean/Black
|
|
|
|
British
|
-
|
-
|
-
|
Other ethnic group,
including
|
|
|
|
Arab
|
-
|
-
|
-
|
Not specified/prefer not to
say
|
-
|
-
|
-
|
Financial crime policy
The Company continues to be
committed to carrying out its business fairly, honestly and openly,
and operates a financial crime policy, covering bribery and
corruption, tax evasion, money laundering, terrorist financing and
sanctions, as well as seeking confirmations that the Company's
service providers' policies are operating soundly.
Modern Slavery Act 2015
As an investment trust, the Company
does not provide goods or services in the normal course of business
and does not have customers. Accordingly, the Directors consider
that the Company is not required to make any slavery or human
trafficking statement under the Modern Slavery Act 2015.
Climate
Greenhouse gas emissions and energy usage
As the Company outsources its
operations to third parties, it has no significant greenhouse gas
emissions and energy usage to report.
Taskforce for Climate-Related Financial Disclosures
("TCFD")
Investment trusts are currently
exempt from the TCFD. The Board will continue to monitor the
situation. However, the Company's Manager produces an annual
product level disclosure consistent with the TCFD which can be
found here:
https://mybrand.schroders.com/m/4acd06a887b01a60/original/TCFD-SG12092M-Schroder-Asian-Total-Reurnlnvestment-Company-20221231.pdf.
Principal and emerging risks and
uncertainties
The Board, itself and through its
delegation to its Audit and Risk Committee, is responsible for the
Company's system of risk management and internal control and for
reviewing its effectiveness. The Board has adopted a detailed
matrix of principal risks affecting the Company's business as an
investment trust and has established associated policies and
processes designed to manage and, where possible, mitigate those
risks, which are monitored by the Audit and Risk Committee on an
ongoing basis. This system assists the Board in determining the
nature and extent of the risks it is willing to take in achieving
the Company's strategic objectives.
Risk assessment and internal controls review by the
Board
Risk assessment includes
consideration of the scope and quality of the systems of internal
control operating within key service providers, and ensures regular
communication of the results of monitoring by such providers to the
Audit and Risk Committee, including the incidence of significant
control failings or weaknesses that have been identified at any
time and the extent to which they have resulted in unforeseen
outcomes or contingencies that may have a material impact on the
Company's performance or condition.
Although the Board believes that it
has a robust framework of internal controls in place this can
provide only reasonable, and not absolute, assurance against
material financial misstatement or loss and is designed to manage,
not eliminate, risk.
Both the principal risks and
uncertainties and the monitoring system are also subject to robust
review at least annually. The last assessment took place in March
2024.
During the year, the Board discussed
and monitored a number of risks that could potentially impact the
Company's ability to meet its strategic objectives. The Board
receives updates from the Investment Manager, Company Secretary and
other service providers on emerging risks that could affect the
Company. The Board was mindful of the evolving global environment
during the year; and the risks posed by volatile markets;
geopolitical uncertainty; and inflation and corresponding interest
levels which could affect the asset class. However, these are not
factors which explicitly impacted the Company's performance. These
risks are seen as exacerbating existing risks and have been
incorporated in the macro factors, including the
geopolitical/economic environment and climate change risk section
in the table below.
The Board considered in detail
whether there were any material emerging risks and has included the
development of artificial intelligence as an emerging risk in the
table below.
No significant control failings or
weaknesses were identified from the Audit and Risk Committee's
ongoing risk assessment throughout the financial year and up to the
date of this report. The Board is satisfied that it has undertaken
a detailed review of the risks facing the Company and that the
internal control environment continues to operate
effectively.
Actions taken by the Board and,
where appropriate, its Committees, to manage and mitigate the
Company's principal risks and uncertainties are set out in the
table below. The "Change" column on the right highlights at a
glance the Board's assessment of any increases or decreases in risk
during the year after mitigation and management. The arrows show
the risks as increased, decreased, or unchanged.
Risk
|
Mitigation and management
|
Change
|
Strategy
|
Macro factors, including the geopolitical/economic environment
and climate change
Geopolitical instability or changes
to the global economic environment might materially affect the
ability of the Company to achieve its investment
objective.
The impact of climate change on
investee companies may also materially affect investment
outcomes.
|
Geopolitical risks are an input into
the investment process and are monitored at each Board meeting
where there is also an opportunity to discuss key market risk
factors with the Portfolio Managers. Further information on
geopolitical risk is included in the Outlook section of the Chair's
Statement.
The Board visited Hong Kong and
Taiwan during the year and met with investee companies and analysts
to understand better the tensions and opportunities in the
region.
The risks associated with the
economic environment that might impact the Company include market
risk, liquidity risk and credit risk, all of which are mitigated,
to some extent, by the Investment Manager. Note 22 to the financial
statements provides further details of the steps taken to mitigate
those risks associated with the portfolio.
The Manager's investment process
includes an assessment of climate related risks in the evaluation
of investee companies.
|
é
The continued increased risk
reflects the changing global environment and the risks posed by
volatile markets and geopolitical uncertainty.
|
Investment objective and promotion
The Company's investment objective
may become out of line with the requirements of investors and lead
to the Company becoming unattractive to investors, decreasing
demand for its shares and a widening discount of the share price to
underlying NAV per share.
The Company is not promoted in a way
which generates investor demand.
|
The appropriateness of the Company's
investment mandate and the long-term investment strategy is
periodically reviewed by the Board and the success of the Company
in meeting its stated objectives is monitored. The Board holds a
strategy meeting each year to consider the investment objective and
policy and the Company's longer term investment
strategy.
The share price relative to the NAV
per share is kept under review as a key performance indicator and
is considered against the Company's peers on a regular basis. The
use of the buy back authority is also reviewed regularly. The
Investment Manager and corporate broker monitor market feedback and
the Board consider this at each quarterly meeting.
Proactive engagement with
shareholders takes place via the AGM, feedback from shareholder
presentations, and ad hoc meetings with the Board.
The Manager provides a dedicated
experienced investment trust marketing team together with PR
resource.
|
á â
|
Investment
|
|
|
Investment performance
Poor stock selection or investing
outside of the investment restrictions and guidelines set by the
Board could result in poor performance.
|
The Investment Manager is
experienced and has a long track record in successfully investing
in Asian equity holdings.
The Board oversees the
implementation of the investment strategy, compliance with
investment restrictions and guidelines and keeps investment
performance under close review. The Portfolio Managers attend all
Board meetings and review the portfolio with the Board using
performance data and KPIs.
A detailed formal appraisal of the
performance of the Manager is carried out annually by the
Management Engagement Committee.
|
á â
|
Key
person
The departure of one or more of the
Manager's key investment professionals could impact the Company's
performance.
|
The Investment Manager has a
compensation and incentive scheme to recruit and retain key staff
including the Portfolio Managers, and has developed a suitable
succession planning programme, which seeks to ease the impact that
the loss of a key investment professional may have on the Company's
performance. The Investment Manager would notify any change in its
key professionals to the Board at the earliest possible opportunity
and the Board would be made aware of all efforts made to fill
a vacancy.
Investment decisions are made by a
team of professionals, mitigating the impact of the loss of any key
professional within the Manager's organisation on the Company's
performance.
|
á â
|
ESG
considerations
Failure by the Company to disclose
in an appropriate manner how the investment process integrates
consideration of ESG factors could lead to the Company's shares
being less attractive to investors as well as potential valuation
issues in the underlying investee companies.
|
The consideration of climate change
risks and ESG factors is integrated into the investment process and
reported at Board meetings.
The Investment Manager considers and
evaluates the approach investee companies take to recognise and
mitigate climate change risks and also considers the portfolio's
investee companies carbon footprint versus the Reference
Index.
The Manager has implemented a
comprehensive ESG policy outlined in detail on pages 15 to
18.
|
á â
|
Gearing/liquidity
The Company adopts an inappropriate
gearing or derivative strategy.
The Company's investments are
insufficiently liquid resulting in breach of loan covenants in the
event of a severe fall in valuations.
|
The Board sets gearing limits of 30%
of net asset value and the Investment Manager reports to the Board
on gearing levels and derivative activity at every Board
meeting.
Liquidity stress testing is carried
out on a regular basis.
|
á â
|
Compliance
|
|
|
Compliance with regulations
Failure to comply with relevant laws
and regulations could result in fines, loss of reputation and
potentially loss of investment trust status.
|
The Board and Manager monitor
changes in government policy and legislation which may have an
impact on the Company, and the Audit and Risk Committee monitors
compliance with regulations by reviewing internal control reports
from the Manager.
From time to time the Board employs
external advisers to advise on specific matters.
|
á â
|
Operational
|
|
|
Oversight of service providers
The Company has no employees and has
delegated certain functions to a number of service providers.
Failure of controls, including as a result of fraud, and poor
performance of any service provider, could lead to disruption,
reputational damage or loss.
|
The Board receives reports from the
Manager on its internal controls and risk management throughout the
year, including those relating to cybersecurity, and receives
assurances from all its other significant service providers on at
least an annual basis.
The Management Engagement Committee
reviews the performance of key service providers at least annually.
The Manager also monitors closely the control environments and
quality of services provided by third parties, including those of
the Depositary, through service level agreements and regular
meetings.
Directors are invited to an annual
internal controls briefing session, hosted by the Manager in
respect of the internal controls of the Company's key service
providers including the Company's Depositary and custodian, HSBC,
the Company's registrar, Equiniti, and Schroders Group Internal
Audit team.
Experienced service providers are
appointed by the Company subject to due diligence processes and
clearly documented contractual arrangements which include agreed
service level specifications and notice periods for
terminations.
Further details of the internal
controls which are in place are set out in the Audit and Risk
Committee's Report on pages 39 to 41.
|
á â
|
Information technology resilience and
security
Cyber risk such as fraud, sabotage
or crime perpetrated against the Company or any of its third party
service providers could result in data theft, service disruption
and reputational damage.
|
Cybersecurity is closely monitored by the Audit and Risk
Committee as part of the review of the internal controls of its
service providers.
Schroders IT security team present
to the Directors on the Manager's cybersecurity controls as part of
the annual internal controls briefing session hosted by
Schroders.
|
á â
|
Financial
The Company is exposed to a range of
financial risks including market, liquidity, interest rate, credit
and fair values of financial assets and financial
liabilities.
|
See note 22
for a detailed analysis of these risks.
|
á â
|
Emerging risk
|
|
|
Artificial Intelligence ("AI")
The development of AI presents
potential risks to businesses in almost every sector. The extent of
the risk presented by AI is extremely hard to assess at this point
but the Board considers that it is an emerging risk and together
with the Manager will monitor developments in this area.
Viability statement
The Directors have assessed the
viability of the Company over the five year period ending 31
December 2028, taking into account the Company's position at 31
December 2023 and the potential impact of the principal and
emerging risks and uncertainties it faces for the review period.
This is further detailed in the Chair's Statement, Investment
Manager's Review and principal risks and uncertainties sections of
this report. The Directors have assessed the Company's operational
resilience and they are satisfied that the Company's outsourced
service providers will continue to operate effectively.
The Board believes that a period of
five years reflects a suitable time horizon for strategic planning,
taking into account the investment policy, liquidity of
investments, potential impact of economic cycles, nature of
operating costs, dividends and availability of funding.
In its assessment of the viability
of the Company, the Directors have considered each of the Company's
principal and emerging risks and uncertainties detailed on
pages 29 to 31, including the impact of climate-related
risks.
In preparing these financial
statements the Directors have considered the impact of the
Company's emerging risks as set out on page 31, and have concluded
that there was no further impact to be taken into account as
investments are valued based on market pricing. In line with FRS102
investments are valued at fair value, which for the Company are
quoted bid prices for investments in active markets at the
statement of financial position date and therefore reflect market
participants' views of emerging risks on the investments
held.
The Directors considered the
beneficial tax treatment the Company is eligible for as an
investment trust. If changes to these taxation arrangements were to
be made it would affect the viability of the Company to act as an
effective investment vehicle.
The Directors reviewed a stress test
in which the Company's NAV dropped by 50% and noted that, based on
the assumptions in the test, the Company would continue to be
viable over a five year period.
Whilst the Company's articles of
association require that a proposal for the continuation of the
Company be put forward at the Company's AGM in 2025, the Directors
have no reason to believe that such a resolution will not be passed
by shareholders.
The Directors have also considered
the Company's income and expenditure projections and the fact that
the Company's investments comprise readily realisable securities
which can be sold to meet funding requirements if necessary. Based
on the Company's processes for monitoring operating costs, the
Board's view that the Manager has the appropriate depth and quality
of resource to achieve superior returns in the longer term, the
portfolio risk profile, limits imposed on gearing, counterparty
exposure, liquidity risk and financial controls, the Directors have
concluded that there is a reasonable expectation that the Company
will be able to continue in operation and meet its liabilities as
they fall due over the five year period of their
assessment.
Going concern
The Directors have assessed the
principal and emerging risks and uncertainties and the matters
referred to in the viability statement. The Directors noted the
Company's portfolio is comprised of liquid stocks, and the
Company's operating expenses are predominantly variable costs,
which would fall pro-rata in the event of a severe market downturn.
Based on the work the Directors have performed, they have not
identified any material uncertainties relating to events or
conditions that, individually or collectively, may cast significant
doubt on the Company's ability to continue as a going concern for
the period assessed by the Directors, being the period to
31 March 2025 which is at least 12 months from the date the
financial statements are authorised for issue.
By order of the Board
Schroder Investment Management Limited
Company Secretary
13 March 2024
Statement of Directors' Responsibilities
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 financial statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards, comprising Financial
Reporting Standard ("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 return or
loss of the Company for that period. In preparing these financial
statements, the Directors are required to:
- select suitable
accounting policies and then apply them consistently;
- make judgements
and accounting estimates that are reasonable and
prudent;
- state whether
applicable UK Accounting Standards, comprising FRS 102, have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- notify the
Company's shareholders in writing about the use of disclosure
exemptions in FRS 102, used in the preparation of the financial
statements; and
- prepare the
financial statements on a going concern basis unless it is
inappropriate to presume that the Company will continue in
business.
The Directors are responsible for
keeping adequate accounting records that are sufficient to show and
explain the Company's transactions and disclose with reasonable
accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements and the
Directors' Remuneration Report comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Manager is responsible for the
maintenance and integrity of the web pages dedicated to the
Company. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Directors' Statement
Each of the Directors, whose names
and functions are listed on pages 34 and 35, confirm that to
the best of their knowledge:
- the financial
statements, which have been prepared in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law), give a true and fair view
of the assets, liabilities, financial position and net return of
the Company;
- the Strategic
Report contained in the report and accounts 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
and emerging risks and uncertainties that it faces; and
- the annual
report and accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
shareholders to assess the Company's position and performance,
business model and strategy.
On behalf of the Board
Sarah MacAulay
Chair
13 March 2024
Financial
Income Statement
for the year ended 31 December
2023
|
2023
|
2022
|
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
Note
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Gains/(losses) on investments held at
fair value
|
|
|
|
|
|
|
|
through profit or loss
|
2
|
-
|
28,264
|
28,264
|
-
|
(86,397)
|
(86,397)
|
Net (losses)/gains on derivative
contracts
|
|
-
|
(1,991)
|
(1,991)
|
-
|
9,487
|
9,487
|
Net foreign currency
gains/(losses)
|
|
-
|
1,846
|
1,846
|
-
|
(5,341)
|
(5,341)
|
Income from investments
|
3
|
13,568
|
1,639
|
15,207
|
16,278
|
63
|
16,341
|
Other interest receivable and similar
income
|
3
|
180
|
-
|
180
|
34
|
-
|
34
|
Gross return/(loss)
|
|
13,748
|
29,758
|
43,506
|
16,312
|
(82,188)
|
(65,876)
|
Management fee
|
4
|
(763)
|
(2,288)
|
(3,051)
|
(809)
|
(2,427)
|
(3,236)
|
Performance fee
|
4
|
-
|
-
|
-
|
-
|
-
|
-
|
Administrative expenses
|
5
|
(862)
|
-
|
(862)
|
(720)
|
-
|
(720)
|
Net
return/(loss) before finance costs and taxation
|
|
12,123
|
27,470
|
39,593
|
14,783
|
(84,615)
|
(69,832)
|
Finance costs
|
6
|
(695)
|
(2,084)
|
(2,779)
|
(300)
|
(903)
|
(1,203)
|
Net
return/(loss) before taxation
|
|
11,428
|
25,386
|
36,814
|
14,483
|
(85,518)
|
(71,035)
|
Taxation
|
7
|
(931)
|
(505)
|
(1,436)
|
(1,017)
|
1,129
|
112
|
Net
return/(loss) after taxation
|
|
10,497
|
24,881
|
35,378
|
13,466
|
(84,389)
|
(70,923)
|
Return/(loss) per share (pence)
|
8
|
10.26
|
24.33
|
34.59
|
12.47
|
(78.13)
|
(65.66)
|
The "Total" column of this statement
is the profit and loss account of the Company. The "Revenue" and
"Capital" columns represent supplementary information prepared
under guidance issued by the AIC. The Company has no other items of
other comprehensive income, and therefore the net return/(loss)
after taxation is also the total comprehensive income/(loss) for
the year.
All revenue and capital items in the
above statement derive from continuing operations. No operations
were acquired or discontinued in the year.
The notes on pages 59 to 72 form an
integral part of these accounts.
Statement of Changes in Equity
for the year ended 31 December
2023
|
|
Called-up
|
|
Capital
|
|
|
|
|
|
|
share
|
Share
|
redemption
|
Special
|
Capital
|
Revenue
|
|
|
|
capital
|
premium
|
reserve
|
reserve
|
reserves
|
reserve
|
Total
|
|
Note
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
At 31 December 2021
|
|
5,439
|
113,004
|
11,646
|
29,182
|
370,969
|
21,505
|
551,745
|
Issue of new shares
|
|
17
|
1,652
|
-
|
-
|
-
|
-
|
1,669
|
Repurchase of the Company's own
shares
|
|
|
|
|
|
|
|
|
into treasury
|
|
-
|
-
|
-
|
-
|
(15,742)
|
-
|
(15,742)
|
Net (loss)/return after
taxation
|
|
-
|
-
|
-
|
-
|
(84,389)
|
13,466
|
(70,923)
|
Dividend paid in the year
|
9
|
-
|
-
|
-
|
-
|
-
|
(9,275)
|
(9,275)
|
At 31 December 2022
|
|
5,456
|
114,656
|
11,646
|
29,182
|
270,838
|
25,696
|
457,474
|
Repurchase of the Company's own
shares
|
|
|
|
|
|
|
|
|
into treasury
|
|
-
|
-
|
-
|
-
|
(32,936)
|
-
|
(32,936)
|
Net return after taxation
|
|
-
|
-
|
-
|
-
|
24,881
|
10,497
|
35,378
|
Dividend paid in the year
|
9
|
-
|
-
|
-
|
-
|
-
|
(11,432)
|
(11,432)
|
At
31 December 2023
|
|
5,456
|
114,656
|
11,646
|
29,182
|
262,783
|
24,761
|
448,484
|
The notes on pages 59 to 72 form an
integral part of these accounts.
Statement of Financial Position
at 31 December 2023
|
|
2023
|
2022
|
|
Note
|
£'000
|
£'000
|
Fixed assets
|
|
|
|
Investments held at fair value
through profit or loss
|
10
|
484,012
|
499,305
|
Current assets
|
|
|
|
Debtors
|
11
|
1,194
|
517
|
Cash and cash equivalents
|
11
|
2,527
|
5,161
|
Derivative financial instruments held
at fair value through profit or loss
|
11
|
178
|
-
|
|
|
3,899
|
5,678
|
Current liabilities
|
|
|
|
Creditors: amounts falling due within
one year
|
12
|
(38,841)
|
(47,509)
|
Net
current liabilities
|
|
(34,942)
|
(41,831)
|
Total assets less current liabilities
|
|
449,070
|
457,474
|
Non
current liabilities
|
|
|
|
Deferred taxation
|
13
|
(586)
|
-
|
Net
assets
|
|
448,484
|
457,474
|
Capital and reserves
|
|
|
|
Called-up share capital
|
14
|
5,456
|
5,456
|
Share premium
|
15
|
114,656
|
114,656
|
Capital redemption reserve
|
15
|
11,646
|
11,646
|
Special reserve
|
15
|
29,182
|
29,182
|
Capital reserves
|
15
|
262,783
|
270,838
|
Revenue reserve
|
15
|
24,761
|
25,696
|
Total equity shareholders' funds
|
|
448,484
|
457,474
|
Net
asset value per share (pence)
|
16
|
461.24
|
434.60
|
These accounts were approved and
authorised for issue by the board of directors on 13 March 2024 and
signed on its behalf by:
Sarah MacAulay
Chair
The notes on pages 59 to 72 form an
integral part of these accounts.
Registered in England and Wales as a
public company limited by shares
Company registration number: 02153093
Cash
Flow Statement
for the year ended 31 December
2023
|
|
2023
|
2022
|
|
Note
|
£'000
|
£'000
|
Net
cash inflow from operating activities
|
17
|
10,928
|
11,019
|
Investing activities
|
|
|
|
Purchases of investments
|
|
(115,573)
|
(151,044)
|
Sales of investments
|
|
158,529
|
165,507
|
Net cash flows on derivative
instruments
|
|
(2,169)
|
8,938
|
Net
cash inflow from investing activities
|
|
40,787
|
23,401
|
Net
cash inflow before financing
|
|
51,715
|
34,420
|
Financing activities
|
|
|
|
Dividends paid
|
|
(11,432)
|
(9,275)
|
Interest paid
|
|
(2,732)
|
(1,122)
|
Bank loans repayment
|
|
(6,530)
|
-
|
Bank loans drawn down
|
|
-
|
18,237
|
Issue of shares
|
|
-
|
1,669
|
Repurchase of the Company's own
shares into treasury
|
|
(33,222)
|
(15,451)
|
Net
cash outflow from financing activities
|
|
(53,916)
|
(5,942)
|
Net
cash (outflow)/inflow in the year
|
18
|
(2,201)
|
28,478
|
Cash
and cash equivalents at the beginning of the year
|
|
5,161
|
(23,107)
|
Change in cash and cash
equivalents
|
|
(2,201)
|
28,478
|
Exchange movements
|
|
(433)
|
(210)
|
Cash
and cash equivalents at the end of the year
|
|
2,527
|
5,161
|
Dividends received during the year
amounted to £15,263,000 (2022: £16,365,000) and deposit interest
receipts amounted to £178,000 (2022: £31,000).
The notes on pages 59 to 72 form an
integral part of these accounts.
Notes to the Accounts
1. Accounting policies
(a)
Basis of accounting
Schroder Asian Total Return
Investment Company plc (the "Company") is registered in England and
Wales as a public company limited by shares. The Company's
registered office is 1 London Wall Place, London EC2Y
5AU.
The accounts are prepared in
accordance with the Companies Act 2006, United Kingdom Generally
Accepted Accounting Practice ("UK GAAP"), in particular in
accordance with Financial Reporting Standard (FRS) 102 "The
Financial Reporting Standard applicable in the UK and Republic of
Ireland", and with the Statement of Recommended Practice "Financial
Statements of Investment Trust Companies and Venture Capital
Trusts" (the "SORP") issued by the Association of Investment
Companies in July 2022. All of the Company's operations are of a
continuing nature.
The accounts have been prepared on a
going concern basis under the historical cost convention, as
modified by the revaluation of investments and derivative financial
instruments held at fair value through profit or loss. The
Directors believe that the Company has adequate resources to
continue operating for the period to 31 March 2025, which is at
least 12 months from the date of approval of these accounts. In
forming this opinion, the Directors have taken into consideration:
the controls and monitoring processes in place; the Company's low
level of debt and other payables; the low level of operating
expenses, comprising largely variable costs which would reduce pro
rata in the event of a market downturn; and that the Company's
assets comprise cash and readily realisable securities quoted in
active markets. In forming this opinion, the Directors have also
considered any potential impact of climate change on the viability
of the Company. Further consideration of Directors' considerations
regarding any potential impact of climate change are given in the
Chair's Statement, Investment Managers' Review, Going Concern
Statement, Viability Statement and in the principal risks and
uncertainties on page 29.
In preparing these financial
statements the Directors have also considered the impact of climate
change on the value of the listed investments that the company
holds. As the portfolio consists of listed equities, which are
valued using quoted bid prices for investments in an active market,
the fair value reflects market participants' view of climate change
risk.
The accounts are presented in
sterling and amounts have been rounded to the nearest
thousand.
The accounting policies applied to
these accounts are consistent with those applied in the accounts
for the year ended 31 December 2022.
No significant judgements, estimates
or assumptions have been required in the preparation of the
accounts for the current or prior financial year.
(b)
Valuation of investments
The Company's business is investing
in financial assets with a view to profiting from their total
return in the form of income and capital growth. This portfolio of
financial assets and derivative financial instruments is managed,
and its performance evaluated, on a fair value basis, in accordance
with a documented investment strategy and information is provided
internally on that basis to the Company's Board of Directors.
Accordingly, upon initial recognition the investments are
classified by the Company as "held at fair value through profit or
loss". Investments are included initially at transaction price,
excluding expenses incidental to purchase, which are written off to
capital at the time of acquisition. Subsequently, investments are
valued at fair value, which are quoted bid prices at the close of
each market on the accounting date, for investments traded in
active markets.
All purchases and sales are
accounted for on a trade date basis.
(c)
Accounting for reserves
Gains and losses on sales of
investments are included in the Income Statement and in capital
reserves within "gains and losses on sales of investments".
Increases and decreases in the valuation of investments held at the
year end are included in the Income Statement and in capital
reserves within "holding gains and losses on
investments".
Foreign exchange gains and losses on
cash and deposit balances are included in the Income Statement and
in capital reserves.
The cost of repurchasing the
Company's own shares for cancellation or to hold in treasury,
including the related stamp duty and transactions costs is charged
to a distributable capital reserve.
(d)
Income
Dividends receivable are included 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.
Dividends from overseas companies
are included gross of any withholding tax.
Where the Company has elected to
receive dividends in the form of additional shares rather than in
cash, the amount of the cash dividend foregone is recognised in
revenue. Any excess in the value of the shares received over the
amount of the cash dividend is recognised in capital.
Deposit interest outstanding at the
year end is calculated and accrued on a time apportionment basis
using market rates of interest.
(e)
Expenses
All expenses are accounted for on an
accruals basis. Expenses are allocated wholly to the revenue column
of the Income Statement with the following exceptions:
- The management
fee is allocated 25% to revenue and 75% to capital in line with the
Board's expected long-term split of revenue and capital return from
the Company's investment portfolio.
- Any performance
fee is allocated 100% to capital.
- Expenses
incidental to the purchase or sale of an investment are charged to
capital. These expenses are commonly referred to as transaction
costs and mainly comprise brokerage commission. Details of
transaction costs are given in note 10 on page 63.
(f) Finance costs
Finance costs are accounted for on
an accruals basis using the effective interest method in accordance
with FRS 102.
Finance costs are allocated 25% to
revenue and 75% to capital in line with the Board's expected
long-term split of revenue and capital return from the Company's
investment portfolio.
(g)
Other financial instruments
Cash and cash equivalents may
comprise cash and demand deposits which are readily convertible to
a known amount of cash and are subject to insignificant risk of
changes in value.
Other debtors and creditors do not
carry any interest, are short-term in nature and are accordingly
stated at nominal value, with debtors reduced by appropriate
allowances for estimated irrecoverable amounts.
Bank loans and overdrafts are
initially recognised at cost, being the proceeds received net of
direct issue costs, and subsequently at amortised cost.
(h)
Taxation
The tax charge for the year includes
a provision for all amounts expected to be received or
paid.
Deferred tax is provided on all
timing differences that have originated but not reversed by the
balance sheet date.
Deferred tax liabilities are
recognised for all taxable timing differences but deferred tax
assets are only recognised to the extent that it is probable that
taxable profits will be available against which those timing
differences can be utilised.
Deferred tax is measured at the tax
rate which is expected to apply in the periods in which the timing
differences are expected to reverse, based on tax rates that have
been enacted or substantively enacted at the balance sheet date and
is measured on an undiscounted basis.
(i) Value added tax ("VAT")
Expenses are disclosed inclusive of
any related irrecoverable VAT.
(j) Foreign currency
In accordance with FRS 102, the
Company is required to determine a functional currency, being the
currency in which the Company predominantly operates. The Board,
having regard to the currency of the Company's share capital and
the predominant currency in which its shareholders operate, has
determined that sterling is the functional currency and the
currency in which the accounts are presented.
Transactions denominated in foreign
currencies are converted at actual exchange rates as at the date of
the transaction. Monetary assets, liabilities and equity
investments, denominated in foreign currencies at the year end, are
translated at the rates of exchange prevailing at the year
end.
(k)
Dividends payable
In accordance with FRS 102, the
final dividend is included in the accounts in the year in which it
is approved by shareholders.
(l) Repurchases of shares into treasury and
subsequent reissues
The cost of repurchasing shares into
treasury, including the related stamp duty and transaction costs is
dealt with in the Statement of Changes in Equity. The cost of
repurchases of shares into treasury is charged to a distributable
capital reserve. Share repurchase transactions are accounted for on
a trade date basis.
The sales proceeds of treasury
shares reissued are treated as a realised profit up to the amount
of the purchase price of those
shares and is transferred to capital reserves. The excess of the
sales proceeds over the purchase price is transferred to "share
premium".
2. Gains/(losses) on investments held at fair
value through profit or loss
|
2023
|
2022
|
|
£'000
|
£'000
|
Gains/(losses) on sales of
investments based on historic cost
|
22,776
|
(4,066)
|
Amounts recognised in investment
holding gains and losses in the previous year in respect
of
|
|
|
investments sold in the
year
|
(21,733)
|
(39,534)
|
Gains/(losses) on sales of investments based on the carrying
value at the previous balance sheet date
|
1,043
|
(43,600)
|
Net movement in investment holding
gains and losses
|
27,221
|
(42,797)
|
Gains/(losses) on investments held at fair value through
profit or loss
|
28,264
|
(86,397)
|
3. Income
|
2023
|
2022
|
|
£'000
|
£'000
|
Income from investments
|
|
|
Overseas dividends
|
12,934
|
15,480
|
Overseas special dividends
|
601
|
735
|
Stock dividend
|
33
|
63
|
|
13,568
|
16,278
|
Other interest receivable and similar income
|
|
|
Deposit interest
|
180
|
34
|
|
13,748
|
16,312
|
Capital
|
|
|
Special dividend allocated to
capital
|
1,639
|
63
|
4. Management and performance
fee
|
2023
|
2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Management fee
|
763
|
2,288
|
3,051
|
809
|
2,427
|
3,236
|
No performance fee is payable for
the current or prior year and no provision is required at 31
December 2023.
The basis for calculating the
management and performance fees are set out in the Report of the
Directors on page 37 and details of all amounts payable to the
Manager are given in note 19 on page 67.
5. Administrative expenses
|
2023
|
2022
|
|
£'000
|
£'000
|
Custody fees
|
208
|
235
|
Administrative expenses
|
363
|
212
|
Directors'
fees1
|
164
|
155
|
Secretarial fee
|
75
|
75
|
Auditor's
remuneration2
|
52
|
43
|
|
862
|
720
|
1Details of all amounts payable to Directors are given in the
Directors' Remuneration Report on page 46.
2No amounts are payable to the auditor for non-audit
services.
6. Finance costs
|
2023
|
2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Interest on bank loans and
overdrafts
|
695
|
2,084
|
2,779
|
300
|
903
|
1,203
|
7. Taxation
(a)
Analysis of tax charge for the year
|
2023
|
2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Irrecoverable overseas tax
|
931
|
-
|
931
|
1,017
|
-
|
1,017
|
Overseas capital gains tax
|
-
|
505
|
505
|
-
|
(1,129)
|
(1,129)
|
Taxation for the year
|
931
|
505
|
1,436
|
1,017
|
(1,129)
|
(112)
|
The Company has no corporation tax
liability for the year (2022: nil).
The overseas capital gains tax
relates to the deferred tax liability on unrealised gains on Indian
investments held at the year end.
(b)
Factors affecting tax charge for the year
The standard rate of corporation tax
in the UK is 25%, effective from 1 April 2023. Accordingly, the
Company's profits for this accounting year would be taxed at a rate
of 23.5% (2022: 19.0%). However the corporation tax charge for the
year is nil (2022: nil), as dividends and capital gains are not
subject to corporation tax. The tax charge comprises irrecoverable
withholding tax deducted at source from dividends receivable and
overseas capital gains tax.
The table below shows how taxable
income is reduced to zero by reconciling the expected corporation
tax due on the net return before tax based on current tax rates, to
the actual tax charge for the year.
|
2023
|
2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Net return/(loss) on ordinary
activities before taxation
|
11,428
|
25,386
|
36,814
|
14,483
|
(85,518)
|
(71,035)
|
Net return/(loss)on ordinary
activities before taxation multiplied by
|
|
|
|
|
|
|
the Company's applicable rate of
corporation tax for the year
|
|
|
|
|
|
|
of 23.5% (2022: 19.0%)
|
2,686
|
5,966
|
8,652
|
2,752
|
(16,248)
|
(13,496)
|
Effects of:
|
|
|
|
|
|
|
Capital (gains)/losses on
investments
|
-
|
(6,608)
|
(6,608)
|
-
|
15,628
|
15,628
|
Income not subject to
taxation
|
(3,161)
|
(385)
|
(3,546)
|
(3,071)
|
(12)
|
(3,083)
|
Overseas capital gains tax
|
-
|
505
|
505
|
-
|
(1,129)
|
(1,129)
|
Irrecoverable overseas tax
|
931
|
-
|
931
|
1,017
|
-
|
1,017
|
Unrelieved expenses
|
475
|
1,027
|
1,502
|
319
|
632
|
951
|
Tax
on ordinary activities
|
931
|
505
|
1,436
|
1,017
|
(1,129)
|
(112)
|
(c)
Deferred tax
The Company has an unrecognised
deferred tax asset of £17,738,000 (2022: £16,139,000) based on a
prospective corporation tax rate of 25%
(2022: 25%). In its 2021 budget, the government announced that the
main rate of corporation tax would increase to 25% for the fiscal
year beginning on 1 April 2023. This deferred tax asset has arisen
due to the cumulative excess of deductible expenses over taxable
income. Given the composition of the Company's portfolio, it is not
likely that this asset will be utilised in the foreseeable future
and therefore no asset has been recognised in the
accounts.
Given the Company's intention to
meet the conditions required to retain its status as an Investment
Trust Company, no provision has been made for UK capital gains tax
on any capital gains or losses arising on the revaluation or
disposal of investments. Please refer to note 13 for details of
deferred taxation in relation to overseas capital gains
tax.
8. Return/(loss) per share
|
2023
|
2022
|
|
£'000
|
£'000
|
Revenue return
|
10,497
|
13,466
|
Capital return/(loss)
|
24,881
|
(84,389)
|
Total return/(loss)
|
35,378
|
(70,923)
|
Weighted average number of shares in
issue during the year
|
102,272,753
|
108,005,903
|
Revenue return per share
(pence)
|
10.26
|
12.47
|
Capital return/(loss) per share
(pence)
|
24.33
|
(78.13)
|
Total return/(loss) per share (pence)
|
34.59
|
(65.66)
|
9. Dividends
(a)
Dividends paid and declared
|
2023
|
2022
|
|
£'000
|
£'000
|
2022 final dividend of 11.0p per
share (2021: 8.5p per share), paid out of revenue
profits1
|
11,432
|
9,275
|
|
|
|
|
2023
|
2022
|
|
£'000
|
£'000
|
2023 final dividend of 11.5p per
share (2022: 11.0p per share), to be paid out of revenue
profits
|
11,182
|
11,579
|
1The 2022 final dividend amounted to £11,579,000. However the
amount actually paid was £11,432,000, as shares were repurchased
into treasury after the accounting date but prior to the dividend
record date.
(b)
Dividends for the purposes of Section 1158 of the Corporation Tax
Act 2010 ("Section 1158")
The requirements of Section 1158 are
considered on the basis of dividends declared in respect of the
financial year as shown below. The revenue available for
distribution by way of dividend for the year is £10,497,000 (2022:
£13,466,000).
|
2023
|
2022
|
|
£'000
|
£'000
|
Final dividend of 11.5p (2022:
11.0p)
|
11,182
|
11,579
|
10.
Investments held at fair value through profit or
loss
(a)
Movement in investments
|
2023
|
2022
|
|
£'000
|
£'000
|
Opening book cost
|
391,040
|
409,406
|
Opening investment holding
gains
|
108,265
|
190,596
|
Opening fair value
|
499,305
|
600,002
|
Analysis of transactions made during the
year
|
|
|
Purchases at cost
|
115,788
|
151,107
|
Sales proceeds
|
(159,345)
|
(165,407)
|
Gains/(losses) on investments held at
fair value
|
28,264
|
(86,397)
|
Closing fair value
|
484,012
|
499,305
|
Closing book cost
|
370,259
|
391,040
|
Closing investment holding
gains
|
113,753
|
108,265
|
Closing fair value
|
484,012
|
499,305
|
Sales proceeds amounting to
£159,345,000 (2022: £165,407,000) were receivable from disposals of
investments in the year. The book cost of these investments when
they were purchased was £136,568,000 (2022: £169,473,000). These
investments have been revalued over time and until they were sold
any unrealised gains and losses were included in the fair value of
the investments.
(b)
Transaction costs
The following transaction costs,
mainly comprising brokerage commissions, were incurred during the
year:
|
2023
|
2022
|
|
£'000
|
£'000
|
On acquisitions
|
170
|
197
|
On disposals
|
264
|
337
|
|
434
|
534
|
11.
Current assets
Debtors
|
2023
|
2022
|
|
£'000
|
£'000
|
Dividends and interest
receivable
|
346
|
484
|
Securities sold awaiting
settlement
|
816
|
-
|
Taxation recoverable
|
8
|
10
|
Other debtors
|
24
|
23
|
|
1,194
|
517
|
The Directors consider that the
carrying amount of debtors approximates to their fair
value.
Cash and cash equivalents
The carrying amount of cash,
amounting to £2,527,000 (2022: £5,161,000), represents its fair
value. No cash equivalents were held at the year end (2022:
same).
Derivative financial instruments held at fair value through
profit or loss
|
2023
|
2022
|
|
£'000
|
£'000
|
Index put options
|
178
|
-
|
Details of the index put options
held at the year end are given on page 22.
12.
Current liabilities
Creditors: amounts falling due within one
year
|
2023
|
2022
|
|
£'000
|
£'000
|
Bank loan
|
37,339
|
46,148
|
Securities purchases awaiting
settlement
|
122
|
-
|
Repurchase of ordinary shares into
treasury awaiting settlement
|
-
|
285
|
Other creditors and
accruals
|
1,380
|
1,076
|
|
38,841
|
47,509
|
The Directors consider that the
carrying amount of creditors falling due within one year
approximates to their fair value.
The bank loan comprises US$47.6
million (2022: US$55.5 million) drawn down on the Company's £75
million (2022: £50 million), 364 day multi-currency credit facility
with Scotiabank Europe plc. The facility is unsecured but is
subject to covenants and restrictions which are customary for a
facility of this nature, all of which have been complied with
during the year. The facility is reviewed annually, at which point
the Directors can decide to restate and renew the facility for a
further year. Further details of this facility are given in
note 22(a)(ii) on pages 69 and 70.
13.
Deferred taxation
Deferred taxation comprises the
deferred tax liability on the unrealised gains on Indian
investments. Indian capital gains tax crystallises on disposal of
the underlying asset. The provision for deferred taxation at the
year end was £586,000 (2022: £nil).
14.
Called-up share capital
|
2023
|
2022
|
|
£'000
|
£'000
|
Ordinary shares of 5p each, allotted,
called-up and fully paid
|
|
|
Opening balance of 105,263,203 (2022:
108,774,651) shares
|
5,263
|
5,439
|
Issue of nil (2022: 340,000) new
shares
|
-
|
17
|
Repurchase of 8,029,083 (2022:
3,851,448) shares into treasury
|
(401)
|
(193)
|
Subtotal of 97,234,120 (2022: 105,263,203)
shares
|
4,862
|
5,263
|
11,880,531 (2022: 3,851,448) shares
held in treasury
|
594
|
193
|
Closing balance1
|
5,456
|
5,456
|
1Represents 109,114,651 (2022: 109,114,651) shares of 5p each,
including 11,880,531 (2022: 3,851,448) held in treasury.
During the year, the Company
repurchased 8,029,083 of its own shares, nominal value £401,000, to
hold in treasury, representing 7.6% of the shares outstanding at
the beginning of the year. The total consideration paid for these
shares amounted to £32,936,000. The reason for these purchases was
to seek to manage the volatility of the share price discount to NAV
per share.
15.
Reserves
|
|
|
|
Capital
reserves
|
|
|
|
|
|
Gains and
|
Investment
|
|
|
|
Capital
|
|
losses on
|
holding
|
|
|
Share
|
redemption
|
Special
|
sales of
|
gains and
|
Revenue
|
|
premium1
|
reserve2
|
reserve3
|
investments4
|
losses5
|
reserve6
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
At
31 December 2022
|
114,656
|
11,646
|
29,182
|
167,204
|
103,634
|
25,696
|
Gains on sales of investments based
on the carrying value
|
|
|
|
|
|
|
at the previous balance sheet
date
|
-
|
-
|
-
|
1,043
|
-
|
-
|
Net movement in investment holding
gains and losses
|
-
|
-
|
-
|
-
|
27,221
|
-
|
Transfer on disposal of
investments
|
-
|
-
|
-
|
21,733
|
(21,733)
|
-
|
Losses on derivatives
|
-
|
-
|
-
|
(1,627)
|
(364)
|
-
|
Realised exchange losses on cash and
short-term deposits
|
-
|
-
|
-
|
(433)
|
-
|
-
|
Exchange (losses)/gains on foreign
currency loans
|
-
|
-
|
-
|
(632)
|
2,911
|
-
|
Special dividend allocated to
capital
|
-
|
-
|
-
|
1,639
|
-
|
-
|
Repurchase of shares into
treasury
|
-
|
-
|
-
|
(32,936)
|
-
|
-
|
Management fee and finance costs
allocated to capital
|
-
|
-
|
-
|
(4,372)
|
-
|
-
|
Overseas capital gains tax
|
-
|
-
|
-
|
88
|
(593)
|
-
|
Dividend paid
|
-
|
-
|
-
|
-
|
-
|
(11,432)
|
Retained revenue for the
year
|
-
|
-
|
-
|
-
|
-
|
10,497
|
At
31 December 2023
|
114,656
|
11,646
|
29,182
|
151,707
|
111,076
|
24,761
|
|
|
|
|
Capital
reserves
|
|
|
|
|
|
Gains and
|
Investment
|
|
|
|
Capital
|
|
losses on
|
holding
|
|
|
Share
|
redemption
|
Special
|
sales of
|
gains and
|
Revenue
|
|
premium1
|
reserve2
|
reserve3
|
investments4
|
losses5
|
reserve6
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
At
31 December 2021
|
113,004
|
11,646
|
29,182
|
182,021
|
188,948
|
21,505
|
Losses on sales of investments based
on the carrying value
|
|
|
|
|
|
|
at the previous balance sheet
date
|
-
|
-
|
-
|
(43,600)
|
-
|
-
|
Net movement in investment holding
gains and losses
|
-
|
-
|
-
|
-
|
(42,797)
|
-
|
Transfer on disposal of
investments
|
-
|
-
|
-
|
39,534
|
(39,534)
|
-
|
Gains on derivatives
|
-
|
-
|
-
|
8,613
|
874
|
-
|
Realised exchange losses on cash and
short-term deposits
|
-
|
-
|
-
|
(210)
|
-
|
-
|
Exchange losses on foreign currency
loans
|
-
|
-
|
-
|
(145)
|
(4,986)
|
-
|
Special dividend allocated to
capital
|
-
|
-
|
-
|
63
|
-
|
-
|
Issue of new shares
|
1,652
|
-
|
-
|
-
|
-
|
-
|
Repurchase of shares into
treasury
|
-
|
-
|
-
|
(15,742)
|
-
|
-
|
Management fee and finance costs
allocated to capital
|
-
|
-
|
-
|
(3,330)
|
-
|
-
|
Capital gains tax
provision
|
-
|
-
|
-
|
-
|
1,129
|
-
|
Dividend paid
|
-
|
-
|
-
|
-
|
-
|
(9,275)
|
Retained revenue for the
year
|
-
|
-
|
-
|
-
|
-
|
13,466
|
At
31 December 2022
|
114,656
|
11,646
|
29,182
|
167,204
|
103,634
|
25,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1The share premium is a non distributable reserve and
represents the amount by which the fair value of the consideration
received from shares issued exceeds the nominal value of shares
issued.
2The capital redemption reserve represents the accumulated
nominal value of shares repurchased for cancellation. This reserve
is not distributable.
3This is a distributable capital reserve arising from the
cancellation of the share premium, and may be distributed as
dividends or used to repurchase the Company's own
shares.
4This is a realised (distributable) capital reserve and a
positive balance may be used to repurchase the Company's own shares
or distributed as dividends.
5This reserve may include some holding gains on liquid
investments (which may be deemed to be realised) and other amounts
which are unrealised. An analysis has not been made between those
amounts that are realised (and may be distributed as dividends or
used to repurchase the Company's own shares) and those that are
unrealised.
6A positive balance on the revenue reserve may be distributed
as dividends or used to repurchase the Company's own
shares.
16.
Net asset value per share
|
2023
|
2022
|
Total equity shareholders' funds
(£'000)
|
448,484
|
457,474
|
Shares in issue at the year
end
|
97,234,120
|
105,263,203
|
Net asset value per share
(pence)
|
461.24
|
434.60
|
17.
Reconciliation of total return on ordinary activities before
finance costs and taxation to net cash inflow from operating
activities
|
2023
|
2022
|
|
£'000
|
£'000
|
Total return/(loss) on ordinary
activities before finance costs and taxation
|
39,593
|
(69,832)
|
Less capital (return)/loss on
ordinary activities before finance costs and taxation
|
(27,470)
|
84,615
|
Decrease in prepayments and accrued
income
|
146
|
83
|
Decrease/(increase) in other
debtors
|
1
|
(1)
|
Increase/(decrease) in other
creditors
|
258
|
(388)
|
Special dividend allocated to
capital
|
1,639
|
63
|
Less stock and accumulation
dividends
|
(93)
|
(63)
|
Management fee allocated to
capital
|
(2,288)
|
(2,427)
|
Overseas withholding tax deducted at
source
|
(858)
|
(1,031)
|
Net
cash inflow from operating activities
|
10,928
|
11,019
|
18.
Analysis of changes in net debt
|
|
Cash
|
Exchange
|
|
|
2022
|
flow
|
movements
|
2023
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Cash and cash equivalents
|
5,161
|
(2,201)
|
(433)
|
2,527
|
Bank loan
|
(46,148)
|
6,530
|
2,279
|
(37,339)
|
Net
debt
|
(40,987)
|
4,329
|
1,846
|
(34,812)
|
19.
Transactions with the Manager
Under the terms of the Alternative
Investment Fund Manager Agreement, the Manager is entitled to
receive management, secretarial and performance fees. Details of
the basis of these calculations are given in the Directors' Report
on page 37. If the Company invests in funds managed or advised by
the Manager, any fees earned by the Manager are rebated to the
Company. The management fee payable in respect of the year ended 31
December 2023 amounted to £3,051,000 (2022: £3,236,000) of which
£775,000 (2022: £799,000) was outstanding at the
year end.
No performance fee is payable in
respect of the year (2022: nil was payable and outstanding at the
year end).
The secretarial fee payable for the
year amounted to £75,000 (2022: £75,000) of which £19,000 (2022:
£19,000) was outstanding at the year end.
No Director of the Company served as
a Director of any company within the Schroder Group at any time
during the year.
20.
Related party transactions
Details of the remuneration payable
to Directors are given in the Directors' Remuneration Report on
page 46 and details of Directors' shareholdings are given in the
Directors' Remuneration Report on page 47. Details of transactions
with the Manager are given in note 19 above. There have been no
other transactions with related parties during the year (2022:
nil).
21.
Disclosures regarding financial instruments measured at fair
value
The Company's financial instruments
within the scope of FRS 102 that are held at fair value include its
investment portfolio and derivative financial
instruments.
FRS 102 requires financial
instruments to be categorised into a hierarchy consisting of the
three levels below.
Level 1 - valued using unadjusted
quoted prices in active markets for identical assets.
Level 2 - valued using observable
inputs other than quoted prices included within Level 1.
Level 3 - valued using inputs that
are unobservable.
Details of the Company's policy for
valuing investments and derivative instruments are given in note
1(b) on page 59.
The following table sets out the
fair value measurements using the FRS 102 hierarchy at 31
December:
|
2023
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Financial instruments held at fair value through profit or
loss
|
|
|
|
|
Equity investments
|
484,012
|
-
|
-
|
484,012
|
Derivative financial instruments -
index put options
|
178
|
-
|
-
|
178
|
Total
|
484,190
|
-
|
-
|
484,190
|
|
2022
|
|
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Financial instruments held at fair value through profit or
loss
|
|
|
|
|
Equity investments
|
499,305
|
-
|
-
|
499,305
|
Total
|
499,305
|
-
|
-
|
499,305
|
22.
Financial instruments' exposure to risk and risk management
policies
In pursuing its objective, the
Company is exposed to a variety of financial risks including market
risk (comprising currency risk, interest rate risk and market price
risk), liquidity risk and credit risk. The Directors' policy for
managing these risks is set out below.
The process for managing risk is
unchanged from the previous year. The Company's financial
instruments may comprise:
- investments in
equities and equity related securities which are held in accordance
with the Company's investment objective;
- short-term
debtors, creditors and cash arising directly from its
operations;
- a multi-currency
overdraft facility with HSBC, the purpose of which is to assist in
financing the Company's operations;
- a multi-currency
credit facility with Scotiabank, the purpose of which is to assist
in financing the Company's operations; and
- index put
options, which are used to protect the capital value of the
portfolio.
(a)
Market risk
Market risk comprises three elements
- currency risk, interest rate risk and market price risk.
Information to enable an evaluation of the nature and extent of
these three elements of market risk is given in parts (i) to (iii)
of this note, together with sensitivity analyses where
appropriate.
(i) Foreign Currency risk
The majority of the Company's
assets, liabilities and income are denominated in currencies other
than sterling, which is the Company's functional currency and the
presentational currency of the accounts. As a result, movements in
exchange rates will affect the sterling value of those
items.
Management of foreign currency risk
The Manager monitors the Company's
exposure to foreign currencies on a daily basis and reports to the
Board. The Board has authorised the use of derivative instruments
to hedge currency exposure as part of the investment strategy to
protect the capital value of the portfolio, or for efficient
portfolio management.
Foreign currency exposure
The fair value of the Company's
monetary items that have foreign currency exposure at 31 December
are shown below. The Company's investments and index put options
(which are not monetary items) have been included separately in the
analysis so as to show the overall level of exposure.
|
2023
|
|
Hong
|
|
|
South
|
|
|
|
|
|
|
|
|
Kong
|
US
|
Taiwanese
|
Korean
|
Indian
|
Singaporean
|
Thai
|
Australian
|
Vietnamese
|
|
|
|
dollars
|
dollars
|
dollars
|
won
|
rupees
|
dollars
|
baht
|
dollars
|
dong
|
Other
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Current assets
|
11
|
1,256
|
302
|
137
|
86
|
1
|
122
|
9
|
41
|
1
|
1,966
|
Current liabilities
|
-
|
(38,327)
|
-
|
-
|
-
|
-
|
(122)
|
-
|
-
|
-
|
(38,449)
|
Non current liabilities
|
-
|
-
|
-
|
-
|
(586)
|
-
|
-
|
-
|
-
|
-
|
(586)
|
Foreign currency exposure on
|
|
|
|
|
|
|
|
|
|
|
|
net
monetary items
|
11
|
(37,071)
|
302
|
137
|
(500)
|
1
|
-
|
9
|
41
|
1
|
(37,069)
|
Investments held at fair
value
|
|
|
|
|
|
|
|
|
|
|
|
through profit or loss
|
76,860
|
23,415
|
112,071
|
35,009
|
46,379
|
38,300
|
5,653
|
80,256
|
6,589
|
50,080
|
474,612
|
Derivative instruments held
at
|
|
|
|
|
|
|
|
|
|
|
|
fair value through profit or
loss
|
|
|
|
|
|
|
|
|
|
|
|
- index put options
|
-
|
-
|
178
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
178
|
Total net foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
exposure
|
76,871
|
(13,656)
|
112,551
|
35,146
|
45,879
|
38,301
|
5,653
|
80,265
|
6,630
|
50,081
|
437,721
|
|
2022
|
|
Hong
|
|
|
South
|
|
|
|
|
|
|
|
|
Kong
|
US
|
Taiwanese
|
Korean
|
Indian
|
Singaporean
|
Thai
|
Australian
|
Vietnamese
|
|
|
|
dollars
|
dollars
|
dollars
|
won
|
rupees
|
dollars
|
baht
|
dollars
|
dong
|
Other
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Current assets
|
12
|
275
|
291
|
178
|
-
|
1
|
-
|
221
|
1,843
|
-
|
2,821
|
Current liabilities
|
-
|
(46,270)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(46,270)
|
Foreign currency exposure on net
|
|
|
|
|
|
|
|
|
|
|
|
monetary items
|
12
|
(45,995)
|
291
|
178
|
-
|
1
|
-
|
221
|
1,843
|
-
|
(43,449)
|
Investments held at fair
value
|
|
|
|
|
|
|
|
|
|
|
|
through profit or loss
|
80,881
|
22,394
|
102,549
|
38,146
|
45,747
|
47,327
|
-
|
78,030
|
7,183
|
51,112
|
473,369
|
Total net foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
exposure
|
80,893
|
(23,601)
|
102,840
|
38,324
|
45,747
|
47,328
|
-
|
78,251
|
9,026
|
51,112
|
429,920
|
The above year end amounts are
broadly representative of the exposure to foreign currency risk
during the current and prior year.
Foreign currency sensitivity
The following tables illustrate the
sensitivity of net profit for the year and net assets with regard
to the Company's monetary financial assets and financial
liabilities and exchange rates. The sensitivity analysis is based
on the Company's monetary currency financial instruments held at
each balance sheet date and assumes a 10% (2022: 10%) appreciation
or depreciation in sterling against the currencies to which the
Company is exposed, which is considered to be a reasonable
illustration based on the volatility of exchange rates during the
year.
If sterling had weakened by 10% this
would have had the following effect:
|
2023
|
2022
|
|
£'000
|
£'000
|
Income Statement - return after
taxation
|
|
|
Revenue return
|
1,212
|
1,500
|
Capital return
|
(3,802)
|
(4,316)
|
Total return after
taxation
|
(2,590)
|
(2,816)
|
Net
assets
|
(2,590)
|
(2,816)
|
Conversely if sterling had
strengthened by 10% this would have had the following
effect:
|
|
|
|
|
|
|
2023
|
2022
|
|
£'000
|
£'000
|
Income Statement - return after
taxation
|
|
|
Revenue return
|
(1,212)
|
(1,500)
|
Capital return
|
3,802
|
4,316
|
Total return after
taxation
|
2,590
|
2,816
|
Net
assets
|
2,590
|
2,816
|
In the opinion of the Directors, the
above sensitivity analyses with respect to monetary financial
assets and liabilities is broadly representative of the whole of
the current and comparative year. The sensitivity with regard to
the Company's investments, and any derivative instruments held, to
changes in foreign currency exchange rates is subsumed into market
price risk sensitivity below.
(ii) Interest rate risk
Interest rate movements may affect
the level of income receivable on cash deposits and the interest
payable on variable rate borrowings when rates are
re-set.
Management of interest rate risk
Liquidity and borrowings are managed
with the aim of increasing returns to shareholders. The Board would
not expect gearing to exceed 30% where gearing is defined as
borrowings used for investment purposes, less cash, expressed as a
percentage of net assets.
Interest rate exposure
The possible effects on cash flows
that could arise as a result of changes in interest rates are taken
into account when the Company draws on its overdraft facility or
its credit facility.
The exposure of financial assets and
financial liabilities to floating interest rates, giving cash flow
interest rate risk when rates are re-set, is shown
below:
|
2023
|
2022
|
|
£'000
|
£'000
|
Exposure to floating interest
rates:
|
|
|
Cash and cash equivalents
|
2,527
|
5,161
|
Creditors: amounts falling due within
one year:
|
|
|
Bank loan
|
(37,339)
|
(46,148)
|
Total exposure
|
(34,812)
|
(40,987)
|
Interest receivable on cash
balances, or paid on overdrafts, is at a margin below or above the
applicable Risk Free Reference Rates, respectively (2022:
same).
During the year, the Company's
multi-currency credit facility with Scotiabank Europe plc was
increased to £75 million and extended to 5 July 2024.
Amounts are normally drawn down on the facility for one month
periods. Interest is payable at a rate based on the Secured
Overnight Financing Rate, plus a margin, plus the Credit
Adjustment Spread. At 31 December 2023, the Company had drawn down
US$47.6million (£37.3 million) at an interest rate of 6.61%,
repayable on 5 January 2024. At 31 December 2022, the Company had
drawn down US$55.5 million (£46.1 million) at an interest rate of
3.95%.
The above year end amounts are not
representative of the exposure to interest rates during the year as
the level of cash balances and drawings on the credit facility have
fluctuated. The maximum and minimum net debt balances during the
year are as follows:
|
2023
|
2022
|
|
£'000
|
£'000
|
Maximum debit interest rate exposure
during the year - net debt
|
(47,462)
|
(55,987)
|
Minimum debit interest rate exposure
during the year - net debt
|
(22,561)
|
(34,641)
|
Interest rate sensitivity
The following table illustrates the
sensitivity of the return after taxation for the year and net
assets to a 1.5% (2022: 1.5%) increase or decrease in interest
rates in regards to the Company's monetary financial assets and
financial liabilities. This level of change is considered to be a
reasonable illustration based on observation of current market
conditions. The sensitivity analysis is based on the Company's
monetary financial instruments held at the balance sheet date with
all other variables held constant.
|
2023
|
2022
|
|
1.5%
increase
|
1.5%
decrease
|
1.5%
increase
|
1.5%
decrease
|
|
in rate
|
in rate
|
in rate
|
in rate
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Income statement - return after
taxation
|
|
|
|
|
Revenue return
|
(102)
|
102
|
(96)
|
96
|
Capital return
|
(420)
|
420
|
(519)
|
519
|
Total return after
taxation
|
(522)
|
522
|
(615)
|
615
|
Net
assets
|
(522)
|
522
|
(615)
|
615
|
Given the increase in UK interest
rates, the interest rate sensitivity has been updated to 1.5%. The
prior year disclosure has been updated to 1.5% to show a direct
comparison in the sensitivity. In the prior year report, the
sensitivity was calculated using 1.0%, which was representative of
the market at 31 December 2022. As disclosed in the prior year
annual report, an increase of 1.0% reduced total return after
taxation by £410,000 (a decrease of 1.0% had an equal and opposite
effect).
In the opinion of the Directors,
this sensitivity analysis may not be representative of the
Company's future exposure to interest rate changes due to
fluctuations in the level of cash balances and drawings on the
credit facility.
(iii) Market price risk
Market price risk includes changes
in market prices, other than those arising from interest rate risk,
which may affect the value of equity investments.
Management of other price risk
The Board meets on at least four
occasions each year to consider the asset allocation of the
portfolio and the risk associated with particular countries and
industry sectors. The Board has authorised the Manager to enter
derivative transactions as a means of seeking capital preservation,
subject to limits on the percentage of the portfolio hedged and the
duration of derivatives used.
Market risk exposure
The Company's total exposure to
changes in market prices at 31 December comprises the following
investments:
|
2023
|
2022
|
|
£'000
|
£'000
|
Investments held at fair value
through profit or loss
|
484,012
|
499,305
|
Derivative financial instruments held
at fair value through profit or loss:
|
|
|
Index put options
|
178
|
-
|
|
484,190
|
499,305
|
The above data is broadly
representative of the exposure to market price risk during the
year.
Concentration of exposure to market price
risk
An analysis of the Company's
investments is given on pages 21 and 22. This shows that the
portfolio mainly comprises investments quoted on Asian stock
markets. Accordingly there is a concentration of exposure to that
region. However it should be noted that an investment may not be
entirely exposed to the economic conditions in its country of
classification.
Market price risk sensitivity
The following table illustrates the
sensitivity of net return after taxation for the year and net
assets to an increase or decrease of 10% (2022: 10%) in the fair
values of the Company's investments. This level of change is
considered to be a reasonable illustration based on observation of
current market conditions. The sensitivity analysis is based on the
Company's investments, adjusting for the hedging effect of the
index put options and including the resulting effect on the
management fee, but with all other variables held constant. The
sensitivity analysis also takes account of the "beta coefficient"
of the portfolio. This is a measure of the volatility of the
portfolio compared with the systemic risk of the entire market. As
a result, the percentages in the table below represent a 8.05%
(2022: 8.43%) increase in fair value and a 7.87% (2022: 8.43%)
decrease in fair value.
|
2023
|
2022
|
|
10%
increase
|
10%
decrease
|
10%
increase
|
10%
decrease
|
|
in fair
value
|
in fair
value
|
in fair
value
|
in fair
value
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Income statement - return after
taxation
|
|
|
|
|
Revenue return
|
(63)
|
62
|
(68)
|
68
|
Capital return
|
38,774
|
(37,906)
|
41,887
|
(41,887)
|
|
38,711
|
(37,844)
|
41,819
|
(41,819)
|
Percentage change in net asset value
|
8.6
|
(8.4)
|
9.1
|
(9.1)
|
(b)
Liquidity risk
This is the risk that the Company
will encounter difficulty in meeting its obligations associated
with financial liabilities that are settled by delivering cash or
another financial asset.
Management of liquidity risk
Liquidity risk is not significant as
the Company's assets comprise mainly readily realisable securities,
which can be sold to meet funding requirements if necessary.
Short-term flexibility is achieved through the use of overdraft and
credit facilities.
Liquidity risk exposure
Contractual maturities of financial
liabilities, based on the earliest date on which payment can be
required are as follows:
|
2023
|
2022
|
|
Three
|
Three
|
|
months
|
months
|
|
or less
|
or less
|
|
£'000
|
£'000
|
Creditors: amounts falling due within one
year
|
|
|
Bank loan - including
interest
|
37,546
|
46,359
|
Securities purchased awaiting
settlement
|
122
|
-
|
Other creditors and
accruals
|
1,208
|
954
|
|
38,876
|
47,313
|
(c)
Credit risk
Credit risk is the risk that the
failure of the counterparty to a transaction to discharge its
obligations under that transaction could result in loss to the
Company.
Management of credit risk
This risk is not significant and is
managed as follows:
Portfolio dealing
The Company invests almost entirely
in markets that operate a "Delivery Versus Payment" settlement
process which mitigates the risk of losing the principal of a trade
during settlement. The Manager continuously monitors dealing
activity to ensure best execution, which involves measuring various
indicators including the quality of trade settlement and incidence
of failed trades. Counterparties must be pre-approved by the
Manager's Credit Committee.
Exposure to the Custodian
The custodian of the Company's
assets is HSBC Bank plc which has Long-Term Credit Ratings of AA-
with Fitch and Aa3 with Moody's.
The Company's investments are held
in accounts which are segregated from the custodian's own trading
assets. If the custodian were to become insolvent, the Company's
right of ownership of its investments is clear and they are
therefore protected. However the Company's cash balances are all
deposited with the custodian as banker and held on the custodian's
balance sheet. Accordingly, in accordance with usual banking
practice, the Company will rank as a general creditor to the
custodian in respect of cash balances.
Credit risk exposure
The amounts shown in the balance
sheet under debtors and cash at bank and in hand represent the
maximum exposure to credit risk at the current and comparative year
ends. No debtors are past their due date and none have been
provided for. There has been no stock lending during the year, or
prior year.
(d)
Fair values of financial assets and financial
liabilities
All financial assets and liabilities
are either carried in the balance sheet at fair value, or the
balance sheet amount is a reasonable approximation of fair
value.
23.
Capital management policies and procedures
The Company's capital is represented
by its net assets and borrowings, which are managed to achieve the
Company's investment objective, as set out on page 24.
The Company has overdraft and credit
facilities in place which may be used to maximise the return to
shareholders through an appropriate level of gearing. The Board
would not expect the level of gearing to exceed 30%, where gearing
is defined as borrowings used for investment purposes, less cash,
expressed as a percentage of net assets.
The Board, with the assistance of
the Manager, monitors and reviews the broad structure of the
Company's capital on an ongoing basis. This review
includes:
- the planned
level of gearing, which takes into account the Manager's views on
the market;
- the need to buy
back the Company's own shares for cancellation or to hold in
treasury, which takes into account the share price
discount;
- the
opportunities for issues of new shares or to reissue shares out of
treasury; and
- the amount of
dividend to be paid, in excess of that which is required to be
distributed.
Status of announcement
2022 Financial Information
The figures and financial
information for 2022 are extracted from the published Annual Report
and Accounts for the year ended 31 December 2022 and do not
constitute the statutory accounts for that year. The 2022 Annual
Report and Accounts have been delivered to the Registrar of
Companies and included the Report of the Independent Auditors which
was unqualified and did not contain a statement under either
section 498(2) or section 498(3) of the Companies Act
2006.
2023 Financial Information
The figures and financial
information for 2023 are extracted from the Annual Report and
Accounts for the year ended 31 December 2023 and do not constitute
the statutory accounts for the year. The 2023 Annual Report and
Accounts include the Report of the Independent Auditors which is
unqualified and does not contain a statement under either section
498(2) or section 498(3) of the Companies Act 2006. The 2023 Annual
Report and Accounts will be delivered to the Registrar of Companies
in due course.
Neither the contents of the
Company's web pages nor the contents of any website accessible from
hyperlinks on the Company's web pages (or any other website) is
incorporated into, or forms part of, this announcement.