INVO SELE
Invesco Perpetual Select Trust plc
LEI: 549300JZQ39WJPD7U596
HALF-YEARLY FINANCIAL REPORT
SIX MONTHS ENDED 30 NOVEMBER 2016
.
FINANCIAL PERFORMANCE
CUMULATIVE TOTAL RETURNS TO 30 NOVEMBER 2016
UK Equity Portfolio
SIX ONE THREE FIVE
MONTHS YEAR YEARS YEARS
Net Asset Value 4.5% 3.0% 29.3% 105.5%
Share Price 4.4% 1.5% 30.8% 135.7%
FTSE All-Share Index 9.6% 9.8% 15.7% 55.4%
Global Equity Income Portfolio
SIX ONE THREE FIVE
MONTHS YEAR YEARS YEARS
Net Asset Value 17.3% 20.3% 38.8% 100.9%
Share Price 19.2% 18.3% 39.3% 119.8%
MSCI World Index (£) 20.2% 24.3% 46.2% 101.6%
Balanced Risk Portfolio
The name and objective of this Portfolio were changed with effect from 8
February 2012. The strategy followed since 8 February 2012 is substantially
different to the strategy in place prior to that date. The five year figures
below are presented for consistency.
SINCE
SIX ONE THREE 8 FEB FIVE
MONTHS YEAR YEARS 2012 YEARS
Net Asset Value 4.6% 10.6% 14.0% 24.5% 22.8%
Share Price 6.9% 9.0% 15.6% 40.1% 37.8%
3 month LIBOR +5% pa 2.8% 5.6% 16.7% 27.1% 28.3%
Managed Liquidity Portfolio
SIX ONE THREE FIVE
MONTHS YEAR YEARS YEARS
Net Asset Value 0.0% 0.0% 0.0% 1.3%
Share Price 0.2% -1.2% 0.5% 2.3%
Source: Thomson Reuters Datastream.
PERIOD END NET ASSET VALUE, SHARE PRICE AND DISCOUNT
NET ASSET SHARE
VALUE PRICE
SHARE CLASS (PENCE) (PENCE) DISCOUNT
UK Equity 168.9 166.8 1.2%
Global Equity Income 183.8 183.0 0.4%
Balanced Risk 128.4 127.5 0.7%
Managed Liquidity 103.1 101.3 1.7%
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INTERIM MANAGEMENT REPORT INCORPORATING THE
CHAIRMAN'S STATEMENT
CHAIRMAN'S STATEMENT
Investment Objective and Policy
The Company's investment objective is to provide shareholders with a choice of
investment strategies and policies, each intended to generate attractive
risk-adjusted returns.
The Company's share capital comprises four share classes: UK Equity Shares,
Global Equity Income Shares, Balanced Risk Shares and Managed Liquidity Shares,
each of which has its own separate portfolio of assets and attributable
liabilities.
The Company enables shareholders to alter their asset allocation to reflect
their view of prevailing market conditions. Shareholders have the opportunity
every three months to convert between share classes free of capital gains tax.
Performance
In NAV terms, with dividends reinvested, the UK Equity Portfolio returned +4.5%
over the six months to the end of November 2016 compared with its benchmark,
the FTSE All-Share Index's total return of +9.6%. The share price total return
was +4.4%.
The Global Equity Income Portfolio returned +17.3% in NAV terms, and +19.2% on
the share price, compared with its benchmark, the MSCI World Index's total
return over the period of +20.2%.
The Balanced Risk Portfolio returned +4.6% in NAV terms, and +6.9% on the share
price. The Portfolio's benchmark, 3 month LIBOR plus 5% p.a., returned +2.8%.
The Company's Managed Liquidity Shares, whose objective is derived from cash
returns, had a nil return based on the NAV and +0.2% based on the share price.
The performance of the two equity oriented classes suffered from the very
marked reversal of sector performance which began in the first quarter of 2016
and has broadly continued through the year. As a result the UK Equity class
gave back some of its exceptional outperformance since inception. The Global
Equity Income class was underweight in the US and overweight in the UK. This
stance is much influenced by the value and opportunities available in those
markets.
Balanced Risk continued to perform in line with its mandate and ahead of many
"Absolute Return" funds. We are disappointed that it has not so far achieved
the traction it deserves and remain convinced that it is a valid and logical
component of the Company's structure, providing a relatively uncorrelated and
lower risk alternative to the equity based share classes.
UK Equity Portfolio Management Arrangements
I announced at the Company's Annual General Meeting on 4 October 2016 that,
after managing the Company's UK Equity portfolio for the ten years since our
launch, Mark Barnett had relinquished the management of the portfolio in favour
of James Goldstone, one of the senior members of Invesco Perpetual's UK
Equities team. James has 15 years' industry experience and has worked closely
alongside Mark for the last four years. He has a similar philosophy to Mark,
both managers being very valuation focused, having a long-term view in their
investment process and regarding dividends as a key measure of a company
management's discipline. However, they do not have exactly the same outlook or
convictions and the profile of the portfolio has changed somewhat since James
took it over. The NAV was not affected by the realignment process and, in the
very short period since James took over, his changes have been beneficial for
performance. We look forward to seeing the longer term effect.
The Board
As part of the Board's succession policy David Rosier retired from the Board on
4 October 2016 and we appointed a new non-executive Director, Craig Cleland,
with effect from 1 November 2016. Craig is Head of Corporate Development:
Investment Trusts at CQS (UK) LLP and has a wealth of experience in the
investment trust sector.
Dividends
In accordance with the dividend policy that was implemented in 2015, the Board
has declared equal first, second and third quarterly dividends for the current
year for each of the equity share classes. For both the UK Equity shares and
the Global Equity Income shares each of these dividends was 1.4p, making 4.2p
declared to date. We continue to target annual dividends of at least 6.15p for
the UK Equity shares and at least 6p for the Global Equity Income shares, these
being the levels declared last year. Achieving these targets may require a
contribution from capital, as was the case last year.
It continues to be the case that in order to maximise the capital return on the
Balanced Risk Shares, the Directors only intend to declare dividends on the
Balanced Risk Shares to the extent required, having taken into account the
dividends paid on the other Share classes, to maintain the Company's status as
an investment trust. None have been declared to date.
In consequence of the continued very low interest rates prevailing, the
cumulative retained net revenue of the Managed Liquidity Portfolio continues to
be minimal and the Directors have not declared any dividends on the Managed
Liquidity Shares since 18 April 2012.
Discount and Share Buy Backs
The Company has continued to operate a discount control policy for all four
share classes through the period. In light of the uncertainty engendered by the
EU referendum and the related weakness of sterling it was necessary to provide
market liquidity and buy back some shares in connection with operating this
policy. During the period the Company bought back 950,000 UK Equity shares at
an average price of 165.0p, 250,000 Global Equity Income shares at a price of
157.5p, and 63,000 Managed Liquidity shares at a price of 101.1p.
Outlook
Events on the political front were so striking in the reporting period that it
is clearly very dangerous to make any predictions. It does, however, look as
though a "Hard Brexit" has become more likely. This will have repercussions as
it takes effect on the UK economy and, politically, may have material
consequences. On the wider international front I find it impossible to assess
to which of Donald Trump's many and varied statements I should attribute more
weight, let alone how they will interact with the US political system and
foreign governments. However, recent actions post inauguaration suggest,
depressingly, that protection and zero sum nationalism are key parts of the
administration's policy.
Our portfolio managers have always stressed that their approach in equities is
to pick attractive stocks based on their valuation and ability to generate free
cash flow. Fortunately such opportunities continue to exist. Profitability may
indeed improve as the US and Continental European economies grow a little
faster and many British companies benefit from the weakness of sterling.
For the first time in several years inflation has become a concern in several
countries. The US may be about to add a reflationary fiscal programme to an
economy that is approaching capacity constraints. Similar policies are being
proposed in the UK where their impact coincides with the inflationary effects
of sterling weakness. As a result we have seen major, though partially
reversed, rises in bond yields in those markets. Given the very low level of
real yields, changes in inflationary expectations are likely to be more than
reflected in bond yields. In consequence, the very benign conjunction of easy
money and tight(ish) fiscal policy is changing and the overall balance of
policy seems likely to be less favourable to securities markets than in the
recent past.
Patrick Gifford
Chairman
31 January 2017
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Related Party Transactions
Under United Kingdom Generally Accepted Accounting Practice (UK Accounting
Standards and applicable law), the Company has identified the Directors as
related parties. No other related parties have been identified during the
period. No transactions with related parties have taken place which have
materially affected the financial position or the performance of the Company.
Principal Risks and Uncertainties
Explanations of the Company's principal risks and uncertainties are set out on
pages 34 to 37 of the 2016 annual financial report, which is available on the
Manager's website.
These are summarised as follows:
• Investment Objectives - the investment policies may not achieve the
published investment objectives;
• Market Movements and Portfolio Performance - falls in stock markets will
affect the performance of the individual Portfolios and securities held within
the Portfolios;
• Risks Applicable to the Company's shares - the prices of shares in the
Company may not appreciate and the level of dividends may fluctuate;
• Viability and Compulsory Conversion of a Class of Shares - lack of demand
for one of the Company's share classes could result in the relevant portfolio
becoming too small to be viable. If ownership of a class of shares becomes too
concentrated the Directors may serve notice on holders of the affected class
requiring them to convert to another class;
• Liability of a Portfolio for the Liabilities of Another Portfolio - in the
event that any Portfolio was unable to meet its liabilities, the shortfall
would become a liability of the other Portfolios;
• Gearing - borrowing will amplify the effect on shareholders' funds of gains
and losses on the underlying securities;
• Hedging - where hedging is used there is a risk that the hedge will not be
effective;
• Regulatory and Tax Related - whilst compliance with rules and regulations
is closely monitored, breaches could affect returns to shareholders;
• Additional Risks Applicable to Balanced Risk Shares - the use of financial
derivative instruments, in particular futures, forms part of the investment
policy and strategy of the Balanced Risk Portfolio. The degree of leverage
inherent in futures trading potentially means that a relatively small price
movement in a futures contract may result in an immediate and substantial loss
to the Portfolio; and
• Reliance on Third Party Service Providers - the Company has no employees,
so is reliant upon the performance of third party service providers,
particularly the Manager, for it to function.
In the view of the Board these principal risks and uncertainties are as equally
applicable to the remaining six months of the financial year as they were to
the six months under review.
Going Concern
The financial statements have been prepared on a going concern basis. The
Directors consider this to be appropriate as the Company has adequate resources
to continue in operational existence for the foreseeable future, being 12
months after approval of the financial statements. In reaching this conclusion,
the Directors took into account the value of net assets; the Company's
Investment Policy; its risk management policies; the diversified portfolio of
readily realisable securities which can be used to meet funding commitments;
the credit facility and the overdraft which can be used for short-term funding
requirements; the liquidity of the investments which could be used to repay the
credit facility in the event that the facility could not be renewed or
replaced; its revenue; and the ability of the Company in the light of these
factors to meet all its liabilities and ongoing expenses.
.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the half-yearly financial report
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and UK Accounting
Standards.
The Directors confirm that, to the best of their knowledge:
- the condensed set of financial statements contained within the half-yearly
financial report has been prepared in accordance with the FRC's FRS 104 Interim
Financial Reporting;
- the interim management report includes a fair review of the information
required by DTR 4.2.7R and DTR 4.2.8R of the FCA's Disclosure Guidance and
Transparency Rules; and
- the interim management report includes a fair review of the information
required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the
Company's auditor.
Signed on behalf of the Board of Directors.
Patrick Gifford
Chairman
31 January 2017
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UK EQUITY SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS YEAR TO YEAR TO YEAR TO YEAR TO
TO 30 NOV 31 MAY 31 MAY 31 MAY 31 MAY
2016 2016 2015 2014 2013
Net Asset Value 4.5% -1.4% 15.3% 18.3% 42.8%
Share Price 4.4% -2.2% 17.2% 9.2% 63.5%
FTSE All-Share Index 9.6% -6.3% 7.5% 8.9% 30.1%
Source: Thomson Reuters Datastream.
Revenue return per share 2.20p 5.81p 6.38p 5.40p 5.48p
Dividends paid 2.80p 6.15p 6.15p 5.30p 5.55p
UK EQUITY SHARE PORTFOLIO
MANAGER'S REPORT
Investment Objective
The investment objective of the UK Equity Portfolio is to provide shareholders
with an attractive real long-term total return by investing primarily in UK
quoted equities.
Market and Economic Review
After a volatile start to 2016 the UK stock market rallied strongly during the
six month period under review. There was significant divergence in sector
performance, driven initially by rising commodity prices and "dovish" central
bank monetary policy, then by the sharp fall in sterling following the EU
Referendum and, finally, by the US presidential election result.
The resources sectors (oil and mining) performed especially well over the
period, as crude oil continued to rise from its February price lows, notably on
proposed production cuts by OPEC members. Share price falls after the
Referendum were seen most acutely in certain domestically focused sectors; the
share prices of companies with US dollar denominated earnings rose strongly in
anticipation of upgrades to forecast earnings.
The Bank of England's 0.25 per cent. cut in interest rates met expectations,
but the broader language around monetary stimulus went further than many in the
market had anticipated. UK equities and government bond yields rose in response
to the surprise election of Donald Trump as the 45th US President and a
Republican majority to Congress, expecting higher rates of government spending
and lower taxes to provide some tailwinds to global economic growth. Following
the election, US GDP data exceeded expectations with a 3.2 per cent. rise
during the third quarter; on the last day of November, OPEC agreed its first
production cut in eight years, strengthening crude oil prices.
Portfolio Performance
The UK equity share portfolio's net asset value, including re-invested
dividends, rose by 4.5% (£ NAV, total return) during the 6 months to the end of
November 2016, compared to a rise of 9.6% (£, total return) in the FTSE
All-Share index.
Portfolio Review
The portfolio delivered a positive return against a volatile market backdrop,
but failed to match the rise of the index. Relative performance was hurt by the
portfolio's underweight in mining companies - where share prices rose strongly
through the period, gaining from weakened sterling and recovering commodity
prices.
Holdings in the tobacco sector were among the top contributors to performance,
benefiting from international exposure and US dollar earnings, but also from
continued positive news flow. British American Tobacco (BAT) continued the
drive towards consolidation in the sector with a US$47 billion bid for Reynolds
American in the period, to buy out the 57.8% it does not already own. The
merger was described by BAT chief executive Nicandro Durante as the "logical
progression" for the two companies - a view with which we concur. Subsequent to
the reporting period BAT revised its offer, increasing the cash element of a
cash and share offer. The new offer values each Reynolds share at US$59.64, up
from US$56.50 proposed in October. The deal should be earnings enhancing in its
first full year, significantly improve BAT's cash flow generation profile and
be accretive to dividends; it is expected to conclude in the third quarter of
this year. It will provide BAT with direct access to the attractive and cash
generative US market, balance the company's global cash flow streams between
Emerging and Developing markets, and enhance BAT's global brand portfolio.
The holding in BP benefited from weakened sterling and rising oil prices
through the period. Defence conglomerate BAE Systems' share price was buoyed by
a series of US defence contracts announced through the Autumn, including a
seven-year, US$384 million contract to provide specialised weapon sights to the
US Army.
Weighing on performance were the holdings in domestic sectors, notably those
particularly exposed to the fall in sterling. The share prices of companies
expected to be most impacted by emergent challenges to the UK economy performed
poorly in the aftermath of the Referendum. The stock market was also inclined
to de-rate companies which warned of lower profits - delivering a
"double-whammy" impact in those instances.
Notable amongst these was the holding in Capita, which fell sharply in value as
it downgraded full-year earnings forecasts, blaming a slow-down in specific
trading businesses, one-off costs and problems with a major contract with TFL -
along with delayed client decision-making since the EU referendum.
Budget airline easyJet warned of the negative impact of weaker sterling and was
also affected by concerns over terrorist activity and air traffic control
strikes during the period. The share price of Circassia Pharmaceuticals fell
sharply on news that its cat allergy drug had failed to meet the primary end
point of Phase III trials. While this was very disappointing and surprising
news - the drug had performed well in Phase II trials - it is noteworthy that
Circassia retains significant cash on its balance sheet and that, over the past
year, the company has also made significant diversification into respiratory
drugs, devices and technologies.
Change in Portfolio Manager
I took over as portfolio manager from Mark Barnett at the beginning of October,
four months into the reporting period. I have implemented a series of changes
in the portfolio reflecting my views on the implications of the steepening
yield curve in an environment of rising interest rates and inflation. Most
significant among these changes was the addition of Barclays; by period end the
UK banking major was the largest holding in the portfolio with a weighting of
just over 5 per cent. Elsewhere in the financial sector, other new additions to
the portfolio included Lloyds Bank, Aviva and Aldermore. Cairn Homes and
Hibernia have been added to gain exposure to the structural attractions of the
Dublin real estate market. This was funded by disposals in the UK REIT sector.
I have built some exposure to gold via Randgold Resources and Acacia Mining,
the portfolio's only exposure to the metals and mining sector. Portfolio
holdings in London Stock Exchange, Capita, Bunzl, Shaftesbury and New River
Retail were disposed of.
Outlook & Strategy
The short term outlook for UK equities appears to me to be closely dependent
upon wider macro and political factors, including global currency and interest
rate trends. Despite recent currency-driven earnings upgrades, the UK market
level looks quite fully valued, albeit punctuated by significant pockets of
value.
Within what is a more volatile macro environment, I continue to be pragmatic in
my investment approach. Ultimately, I look for undervalued shares and favour
businesses with strong balance sheets, high barriers to entry, and the ability
to expand market share and deliver real returns over the long-term.
James Goldstone
Portfolio Manager
31 January 2017
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UK EQUITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2016
Ordinary shares listed in the UK unless stated otherwise
MARKET
VALUE % OF
COMPANY SECTOR† £'000 PORTFOLIO
Barclays Banks 4,056 5.3
Reynolds American - US common stock Tobacco 4,016 5.3
BP Oil & Gas Producers 3,236 4.3
BAE Systems Aerospace & Defence 3,016 4.0
British American Tobacco Tobacco 2,574 3.4
BT Fixed Line 2,445 3.2
Telecommunications
Lloyds Bank Banks 2,192 2.9
Legal & General Life Insurance 2,124 2.8
Aviva Life Insurance 2,100 2.8
Imperial Brands Tobacco 1,796 2.4
RELX Media 1,795 2.4
Acacia Mining Mining 1,597 2.1
AstraZeneca Pharmaceuticals & 1,558 2.0
Biotechnology
Babcock International Support Services 1,558 2.0
Compass Travel & Leisure 1,540 2.0
BTG Pharmaceuticals & 1,455 1.9
Biotechnology
Centrica Gas, Water & Multiutilities 1,434 1.9
Safestyle UK General Retailers 1,423 1.9
Novartis - Swiss common stock Pharmaceuticals & 1,410 1.9
Biotechnology
SSE Electricity 1,371 1.8
Rentokil Initial Support Services 1,344 1.8
Beazley Non-life Insurance 1,337 1.8
Dairy Crest Food Producers 1,326 1.7
Provident Financial Financial Services 1,293 1.7
Roche - Swiss common stock Pharmaceuticals & 1,286 1.7
Biotechnology
G4S Support Services 1,196 1.6
Ashtead Support Services 1,195 1.6
HomeServe Support Services 1,128 1.5
Cairn Homes Household Goods & Home 1,092 1.4
Construction
Johnson Service Support Services 1,033 1.4
BCA Marketplace Financial Services 1,008 1.3
Sherborne Investors Guernsey B - A Financial Services 1,006 1.3
shares
Thomas Cook Travel & Leisure 953 1.3
Next General Retailers 920 1.2
Drax Electricity 908 1.2
Derwent London Real Estate Investment 883 1.2
Trusts
Smith & Nephew Health Care Equipment & 879 1.1
Services
Aldermore Banks 871 1.1
Summit Germany Real Estate Investment & 822 1.1
Services
easyJet Travel & Leisure 820 1.1
A J Bell - Unquoted Financial Services 750 1.0
Sigma Capital Financial Services 734 1.0
Hollywood Bowl Travel & Leisure 681 0.9
JD Sports Fashion (formerly JD General Retailers 680 0.9
Sports)
Mears Support Services 670 0.9
Randgold Resources Mining 653 0.8
Secure Trust Bank Banks 616 0.8
McBride Household Goods & Home 610 0.8
Construction
N Brown General Retailers 606 0.8
Hibernia REIT Real Estate Investment 582 0.8
Trusts
Zegona Communications Non-equity Investment 580 0.8
Instruments
Harworth Real Estate Investment & 574 0.7
Services
Vectura Pharmaceuticals & 574 0.7
Biotechnology
P2P Global Investments Equity Investment 528 0.7
Instruments
International Consolidated Airline Travel & Leisure 525 0.7
Chesnara Life Insurance 494 0.6
Hadrians Wall Secured Investments Equity Investment 491 0.6
Instruments
Coats General Industrials 462 0.5
Melrose Industries Construction & Materials 362 0.4
Howden Joinery Support Services 309 0.4
Circassia Pharmaceuticals Pharmaceuticals & 269 0.3
Biotechnology
GAME Digital General Retailers 197 0.3
Tullet Prebon Financial Services 189 0.2
Nimrod Sea Assets Equity Investment 14 -
Instruments
HaloSource Chemicals 8 -
Barclays Bank - Nuclear Power Notes Non-equity Investment 1 -
28 Feb 2019 Instruments
76,155 100.0
†FTSE Industry Classification Benchmark.
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UK EQUITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED SIX MONTHS ENDED
30 NOVEMBER 2016 30 NOVEMBER 2015
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments - 1,951 1,951 - (172) (172)
Foreign exchange gains - 7 7 - 5 5
Income 1,066 23 1,089 1,166 - 1,166
Management fee - note 2 (65) (152) (217) (65) (152) (217)
Performance fee - note 2 - 284 284 - (574) (574)
Other expenses (102) - (102) (99) - (99)
Net return before finance 899 2,113 3,012 1,002 (893) 109
costs and taxation
Finance costs (16) (37) (53) (21) (49) (70)
Return on ordinary activities 883 2,076 2,959 981 (942) 39
before taxation
Tax on ordinary activities (14) - (14) (11) - (11)
Return on ordinary activities 869 2,076 2,945 970 (942) 28
after taxation for the
financial period
Basic return per ordinary 2.20p 5.24p 7.44p 2.43p (2.36)p 0.07p
share - note 4
SUMMARY OF NET ASSETS
AT AT
30 NOVEMBER 31 MAY
2016 2016
£'000 £'000
Fixed assets 76,155 73,579
Current assets 447 1,106
Creditors - amounts falling due within one year, (1,737) (1,808)
excluding borrowings
Bank loan (8,900) (7,150)
Net assets 65,965 65,727
Net asset value per ordinary share - note 5 168.9p 164.3p
Gearing:
- gross 13.5% 10.9%
- net 13.1% 9.9%
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GLOBAL EQUITY INCOME SHARE PORTFOLIO
PERFORMANCE RECORD
TOTAL RETURN
SIX MONTHS YEAR TO YEAR TO YEAR TO YEAR TO
TO 30 NOV 31 MAY 31 MAY 31 MAY 31 MAY
2016 2016 2015 2014 2013
Net Asset Value 17.3% -0.2% 13.1% 9.6% 33.9%
Share Price 19.2% -2.8% 16.1% 8.3% 40.4%
MSCI World Index (£) 20.2% 0.7% 16.2% 7.4% 29.7%
Source: Thomson Reuters Datastream.
Revenue return per 2.07p 5.51p 4.68p 4.22p 3.28p
share
Dividends paid 2.80p 6.00p 4.60p 3.55p 3.40p
GLOBAL EQUITY INCOME SHARE PORTFOLIO
MANAGER'S REPORT
Investment Objective
The investment objective of the Global Equity Income Portfolio is to provide an
attractive and growing level of income return and capital appreciation over the
long term, predominantly through investment in a diversified portfolio of
equities worldwide.
Market and Economic Review
A lack of clarity about the frequency and magnitude of US interest rate hikes
and political events in the UK and the US dominated markets. Markets were
completely wrong-footed by the decision of UK voters on 23 June to leave the
European Union and investors' emotional response to the outcome was reflected
in dramatic market moves. Equities sold off and bond markets - particularly
core government bonds - went up. Sterling fell against the US dollar to a level
last seen in the mid-1980s as investors reacted to the Brexit vote. The brunt
of the equity sell-off was experienced by the UK, but other markets were also
impacted to varying degrees. As the initial shock wore off, global equity
markets ? supported by assurances from major central banks to provide support
and investors' returning to a risk-on mood - rallied over the summer months.
Diminishing fears about Brexit-related volatility and encouraging economic data
in the US, Europe and China supported investors' risk appetite and triggered a
rotation away from perceived 'safer' bond-like (i.e. 'bond proxy') sectors and
into the more cyclical and economically sensitive areas of the market over the
summer months. These market segments tend to do well when the economy is
stronger and bond yields are moving higher.
Growing disenchantment with the widening gap between the privileged minority
and those left behind has been reflected in the rise of populism in many parts
of the globe. In particular, the surprise outcomes of the EU referendum in the
UK and the US presidential election in November are clear examples of
electorates pushing back against the social and wealth inequality that they
have experienced in recent years. Still, Donald Trump's unexpected US
presidential success took investors by surprise. Mimicking market reactions
post-Brexit, US equity markets rallied strongly to reach new all-time highs.
Trump's pro-growth and reflationary views also accelerated the sector rotation
away from 'bond proxies'. If realised, financials, defence-related and
infrastructure-related industries are likely to be the primary beneficiaries of
Trump's policies. Meanwhile, in November, crude oil prices received a boost
after the Organization of the Petroleum Exporting Countries' (OPEC) confirmed
its earlier agreement reached in September to cut production from 1 January
2017. With US economic growth gathering speed on the back of strengthening core
economic and labour data, bond markets fully priced-in a December US interest
rate rise by the end of November, and expectations are growing for further
increases in 2017.
Portfolio Performance
On a total return basis, the Global Equity Income Portfolio's net asset value
returned 17.3% over the six months to the end of November 2016, compared to a
return of 20.2% in the MSCI World Index (£, net of withholding tax).
Portfolio Strategy and Review
The Portfolio's underperformance of the benchmark MSCI World index during the
six months was primarily attributable to holdings in the UK post-Brexit,
especially within the telecommunications sector, and mixed performances from
positions in the more economically sensitive areas of the equity market. Whilst
the Portfolio's holdings in these market segments, such as industrials and
materials, managed to generate strong absolute returns, they underperformed
relative to the benchmark index. In particular, our industrials sector holdings
weighed on relative performance, with most of the performance deficit stemming
from our airline holding easyJet, which was impacted by the post-Brexit
environment, terror-related events and strike action (especially in France).
However, easyJet has remained resilient, reporting a record number of
passengers year-on-year to the end of September 2016 and expecting renewed
growth in key markets, both in the UK and across Europe. Relative weakness also
came from our industrials positions in the professional services sectors,
including Nielsen and publisher and information provider RELX. Within the
materials sector, a position in UK-based international packaging company DS
Smith and lack of exposure to the metals and mining sector weighed on returns.
Among so called 'bond proxies', the relative weakness of our telecommunication
services position in BT, and to a lesser degree in mobile communications
provider Orange, weighed strongly on performance during the review period. This
was primarily attributed to investor concerns around the regulatory environment
in the UK and Europe, as well as BT's growing pension liability. However, we
remain confident of the dividend paying capacity of both companies.
Over the review period, our large weighting in financials enjoyed robust
performance as the sector benefited from the rotation into previously
'out-of-favour' areas of the equity market and an apparent policy shift,
notably in the US, towards more expansionary fiscal policies. With the
prospects of a US interest rate rise firming up, a steepening yield curve and
strong quarterly corporate earnings results for banks especially in the US, our
financials holdings in aggregate generated strong absolute returns. Dutch
financial services group ING, JPMorgan Chase and PNC Financial Services were
our top three performers in this sector, with Citigroup also contributing.
Nonetheless, our holdings in the sector underperformed versus the benchmark
index. This was in part due to the exposure to the UK financial industry
through our holding in Legal & General. Our holding in Italian lender Intesa
Sanpaolo, despite its own strong market position and balance sheet, was
impacted by sentiment because of the weak state of many other Italian banks.
Relative softness among our insurance and capital markets positions also
countered some of our otherwise good performance in the sector. We remain of
the view that financials appear undervalued and offer attractive dividend
prospects.
On a more positive note, our consumer discretionary holdings outperformed the
benchmark performance of that sector. In particular, our holding in gaming and
resort company, Las Vegas Sands, benefited from strong share performance after
the opening of their new resort, The Parisian Macau, on Macau's Cotai Strip in
mid-September and was among the top 5 individual contributors to performance
over the review period. Elsewhere, our information technology holdings in
strongly performing Taiwan Semiconductor Manufacturing and Microsoft helped the
outperformance.
Performance support also came from holdings in the energy sector. Whilst the
oil price has remained fairly stable since the initial lows at the start of the
year, both oil prices and oil company stocks received a boost from OPEC's
agreements in September and November. However, scepticism remains about the
group's ability to deliver output cuts outside OPEC's 14 members. This was
underpinned by the International Energy Agency, which highlighted in its report
the significant task faced by OPEC if the oil cartel is to cut its production
and boost the price of the commodity. The agency pointed out that output was
actually increasing in Russia, Brazil, Canada and Kazakhstan. Among our energy
positions, US-based Chevron, BP and Norway's Statoil were among the top 20
individual performers. We continue to be impressed by the commitment of
companies in the sector to lower their operating costs, limit capital
expenditure and to protect dividends.
Outlook
Our global outlook remains one of a slow and prolonged economic recovery,
against a backdrop of heightened market uncertainty. With the European economic
recovery continuing to gain ground, we remain optimistic that a number of
European companies offer compelling valuation opportunities and should benefit
from the combined tailwinds of a weaker euro and loose monetary policy.
However, whilst fiscal austerity in the developed world has dominated much of
the post global financial crisis period, we are starting to see signs of a
shift towards more expansionary fiscal policies. Overall, our strategy remains
constant, to invest in high quality companies at attractive valuations. We view
high quality companies as those that can sustain profit margins and deliver
positive returns through the economic cycle. We view growing and sustainable
dividends as clear evidence of these sorts of companies. In aggregate,
therefore, we target companies that offer attractive yields, sustainable income
and capital upside.
Nick Mustoe
Portfolio Manager
31 January 2017
GLOBAL EQUITY INCOME SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2016
Ordinary shares unless stated otherwise
MARKET
VALUE % OF
COMPANY INDUSTRY GROUP† COUNTRY† £'000 PORFOLIO
JPMorgan Chase Banks US 2,438 3.8
Chevron Energy US 2,172 3.4
PNC Financial Services Banks US 2,038 3.2
Microsoft Software & Services US 1,983 3.1
Novartis Pharmaceuticals Biotechnology Switzerland 1,824 2.8
& Life Sciences
ING Banks Netherlands 1,715 2.7
Pfizer Pharmaceuticals Biotechnology US 1,711 2.7
& Life Sciences
BP Energy UK 1,689 2.6
Legal & General Insurance UK 1,657 2.6
BT Telecommunication Services UK 1,651 2.6
Statoil Energy Norway 1,567 2.5
United Technologies Capital Goods US 1,552 2.4
British American Tobacco Food Beverage & Tobacco UK 1,538 2.4
Airbus Capital Goods France 1,520 2.4
Taiwan Semiconductor Semiconductors & Semiconductor Taiwan 1,495 2.3
Manufacturing Equipment
Orange Telecommunication Services France 1,415 2.2
Amgen Pharmaceuticals Biotechnology US 1,411 2.2
& Life Sciences
Nielsen Commercial & Professional US 1,367 2.1
Services
Total Energy France 1,361 2.1
Deutsche Post Transportation Germany 1,326 2.1
Citigroup Banks US 1,292 2.0
Roche Pharmaceuticals Biotechnology Switzerland 1,219 1.9
& Life Sciences
RELX Commercial & Professional Netherlands 1,212 1.9
Services
Aon - A shares Insurance US 1,210 1.9
Intesa Sanpaolo Banks Italy 1,182 1.8
Philip Morris Food Beverage & Tobacco US 1,175 1.8
International
Deutsche Boerse Diversified Financials Germany 1,159 1.8
Allianz Insurance Germany 1,107 1.7
Gilead Sciences Pharmaceuticals Biotechnology US 1,101 1.7
& Life Sciences
Centrica Utilities UK 1,082 1.7
China Mobile - R Telecommunication Services Hong Kong 1,066 1.7
Las Vegas Sands Consumer Services US 1,057 1.6
Royal Dutch Shell - A Energy Netherlands 1,030 1.6
shares
Adecco Commercial & Professional Switzerland 986 1.5
Services
Hiscox Insurance UK 981 1.5
UBS Diversified Financials Switzerland 954 1.5
Nordea Banks Sweden 935 1.5
Amcor Materials Australia 935 1.5
Honda Motor Automobiles & Components Japan 903 1.4
Williams-Sonoma Retailing US 899 1.4
easyJet Transportation UK 852 1.3
Union Pacific Transportation US 833 1.3
BAE Systems Capital Goods UK 819 1.3
Booker Food & Staples Retailing UK 804 1.3
Canadian Natural Energy Canada 672 1.0
Resources
Zurich Insurance Insurance Switzerland 644 1.0
Nasdaq Diversified Financials US 623 1.0
Yue Yuen Industrial Consumer Durables & Apparel Hong Kong 603 0.9
American Express Diversified Financials US 595 0.9
Canon Technology Hardware & Japan 589 0.9
Equipment
Zhejiang Expressway - H Transportation Hong Kong 551 0.9
DS Smith Materials UK 442 0.7
CK Hutchison Capital Goods Hong Kong 423 0.7
London Stock Exchange Diversified Financials UK 420 0.7
BASF Materials Germany 338 0.5
64,123 100.0
†MSCI and Standard & Poor's Global Industry Classification Standard.
H: H-Shares - shares issued by companies incorporated in the People's
Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings - holdings in companies incorporated outside the
PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by
way of direct or indirect shareholding and/or representation on the board.
.
GLOBAL EQUITY INCOME SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED SIX MONTHS ENDED
30 NOVEMBER 2016 30 NOVEMBER 2015
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments - 8,389 8,389 - (1,814) (1,814)
Foreign exchange losses - (7) (7) - (1) (1)
Income 909 - 909 785 - 785
Management fees - note 2 (57) (134) (191) (49) (114) (163)
Other expenses (87) (1) (88) (72) - (72)
Net return before finance 765 8,247 9,012 664 (1,929) (1,265)
costs and taxation
Finance costs (11) (25) (36) (12) (29) (41)
Return on ordinary activities 754 8,222 8,976 652 (1,958) (1,306)
before taxation
Tax on ordinary activities (81) - (81) (56) - (56)
Return on ordinary activities 673 8,222 8,895 596 (1,958) (1,362)
after taxation for the
financial period
Basic return per ordinary 2.07p 25.25p 27.32p 1.88p (6.17)p (4.29)p
share - note 4
SUMMARY OF NET ASSETS
AT AT
30 NOVEMBER 31 MAY
2016 2016
£'000 £'000
Fixed assets 64,123 57,669
Current assets 1,075 1,271
Creditors falling due within one year, excluding borrowings (612) (397)
Bank loan (4,500) (6,600)
Net assets 60,086 51,943
Net asset value per ordinary share - note 5 183.8p 159.2p
Gearing:
- gross 7.5% 12.7%
- net 7.0% 11.4%
.
BALANCED RISK SHARE PORTFOLIO
PERFORMANCE RECORD
The name and objective of this Portfolio were changed with effect from on 8
February 2012.
Total Return
SIX MONTHS YEAR TO YEAR TO YEAR TO YEAR TO
TO 30 NOV 31 MAY 31 MAY 31 MAY 31 MAY
2016 2016 2015 2014 2013
Net Asset Value 4.6% -0.3% 4.1% 5.5% 8.8%
Share Price 6.9% -2.1% 5.0% 4.5% 20.7%
3 month LIBOR +5% pa 2.8% 5.6% 5.6% 5.5% 5.7%
Source: Thomson Reuters Datastream.
BALANCED RISK SHARE PORTFOLIO
MANAGER'S REPORT
Investment Objective
The investment objective of the Balanced Risk Portfolio is to provide
shareholders with an attractive total return in differing economic and
inflationary environments, and with low correlation to equity and bond market
indices by gaining exposure to three asset classes: debt securities, equities
and commodities.
Market and Economic Review
Government bonds started the period strongly, owing primarily to concerns about
the UK's EU referendum and its aftermath and expectations that central banks
would be forced to abandon rate hikes in the near term. Bond prices remained
firm through the third quarter of 2016 as low growth and inflation kept central
banks on hold from rising rates or revising existing accommodative policy.
However, yields spiked at the end of the period as rate hike fears returned and
demand for safe havens declined.
Equity performance was mixed at the beginning of the period, with Japan and
Europe experiencing meaningful declines while other developed markets managed
gains. The UK emerged as the leader in spite of the Brexit outcome of the EU
referendum. Equities posted positive performance globally in the third quarter
of 2016, due to dovish language from central banks as they continued to contend
with low growth and below target inflation, which continued through to the end
of the period, although results were not uniformly positive across individual
markets.
The commodities rally that began in the first quarter of 2016 continued into
the period under review. Performance began to pull back in the middle of the
third quarter, but returns varied among the commodity complexes. In aggregate,
commodity prices finished the period on a positive note, while across the
various complexes, cyclical areas such as industrial metals and energy
performed well, while precious metals and agricultural commodity prices fell.
Portfolio Performance
The Balanced Risk Shares Portfolio outperformed the benchmark. The Portfolio
return for the six months was 4.6%, compared with the benchmark, 3 month LIBOR
plus 5%, return of 2.8%.
Portfolio Strategy and Review
Strategic exposure to bonds led results in June as prices increased and yields
declined - nervous investors sought refuge from volatility in equities early in
the month as polling data indicated that "leave" had taken the lead amongst UK
voters leading up to the EU referendum. After the Brexit vote later in the
month, bond yields moved lower still in response to the uncertainty about what
impact the UK leaving the European Union would have and the belief that central
banks would be forced to postpone any hike in policy rates - German bund yields
were driven into negative territory and other markets revisited or set
historical lows. The positive bond price performance continued through the
third quarter of 2016 as tepid economic growth and below trend inflation kept
central banks on hold. Additionally, safe haven demand triggered by renewed
volatility among commodities in July and August and fears that concerns about
Deutsche Bank could lead to European banking contagion in September, helped to
suppress yields. However, yields spiked across the board at the end of the
period on the heels of Donald Trump's victory in the US presidential election
as economic optimism and calls for a rate hike in the US, together with hints
from the European Central Bank (ECB) about the potential to begin to taper
asset purchases, reduced the demand for safe haven assets.
Equity markets had a bifurcated outcome in June with Japan and Europe selling
off while the UK, US and Hong Kong markets enjoyed gains. Performance was
positive for developed equities in the third quarter as they continued to
levitate on dovish policies from central banks as they tried to generate real
growth and inflation across their respective economies through a combination of
extremely low rates and, in the case of the Bank of Japan and the ECB, outright
asset purchases. Equity exposures ended the period on a positive note but
performance was varied among markets. US small caps led results in November
followed by Japanese equities and US large caps. European equities ended
November flat, while share prices in Hong Kong and the UK ended in negative
territory. The outsized gains for US small caps relative to the other markets
may reflect a belief that economic policies under Trump will benefit US
domiciled companies with a domestic customer base where US dollar strength or a
tariff war will not have the negative impact that other markets may suffer.
Commodity performance was positive in June as the rally from earlier in the
year continued. Precious metals increased as the US Federal Reserve (Fed) once
again deferred making a second increase in interest rates. Then, safe-haven
demand caused a second surge in prices on the outcome of the UK's Brexit vote.
Agricultural commodities contributed by exposure to both grains and soft
commodities. Industrial metals found aluminium outpacing copper as the
sub-complex traded up on the subsidence of Chinese economic fears, along with
some softness in the dollar pre-Brexit. The energy sub-complex was the sole
detractor in June due to declines in unleaded gasoline as stocks remained at
excessive levels. Commodity prices pulled back in the third quarter.
Agriculture prices suffered as crop reports indicated improvement in expected
yields, particularly in the soy complex. Energy prices remained depressed in
response to the ongoing supply glut in crudes and distillates such as unleaded
gasoline. Industrial metals had a neutral impact as weakness mid-quarter was
offset by surprise strength in China manufacturing data in the later part of
the period boosting prices of aluminium and copper. Precious metals were a mild
contributor as silver traded in line with industrial metals. However, commodity
performance improved at the end of the period as price gains in cyclical
commodities outweighed the impact of price declines across agricultural
commodities and precious metals. Industrial metals rose as Trump's election and
strong Chinese manufacturing data sparked a surge in optimism that drove the
complex to its best gain since 2012 and the single best month for copper since
2009. Energy prices surged on the last day of the month, as OPEC and Russia
reached an agreement to cut production. Precious metals detracted in November
as economic optimism and continued calls for a rate hike in December diminished
demand for safe-havens. Agriculture prices were mixed in November with strong
declines in coffee, sugar, wheat and corn leading to losses that were only
partially offset by gains in soybeans and soybean oil.
Outlook
As we start the year, investors are looking for hints about what policy
direction the new Trump administration will take in the first 100 days in
office. There are already signs of protectionist tendencies with the threat of
tariffs for US companies who relocate production outside of the US as well as a
number of cabinet appointees who are viewed as being hardliners when it comes
to policy regarding trade deals with China. The degree of uncertainty that
could result from policy announcements against already elevated equity
valuations may cause difficulties later in the year.
Scott Wolle
Portfolio Manager
31 January 2017
.
TARGET ANNUALISED RISK
The targeted annualised risk (volatility of monthly returns) for the portfolio
as listed above is analysed as follows:
ASSET CLASS RISK CONTRIBUTION
Bonds 1.6% 18.3%
Equities 4.4% 50.0%
Commodities 2.8% 31.7%
8.8% 100.0%
Derivative instruments held in the Balanced Risk Share Portfolio are shown on
the next page. At the period end all derivative instruments held in this
Portfolio were exchange traded futures contracts. Holdings in futures contracts
that are not exchange traded are permitted as explained in the investment
policy which is disclosed in full on page 30 of the 2016 annual financial
report.
BALANCED RISK SHARE PORTFOLIO
LIST OF INVESTMENTS
AT 30 NOVEMBER 2016
MARKET %
YIELD VALUE OF NET
% £'000 ASSETS
Short Term Investments
UK Treasury Bill 8 May 2017 0.22 2,997 32.9
UK Treasury Bill 27 Feb 2017 0.21 2,499 27.4
Short-Term Investment Company (Global Series) 0.32 2,290 25.1
Total Short Term Investments 7,786 85.4
Hedge Funds(1)
Harbinger Class PE Holdings 16 0.2
Harbinger Class L Holdings 2 -
Total Hedge Funds 18 0.2
Total Fixed Asset Investments 7,804 85.6
(1)The hedge fund investments are residual holdings of the previous investment
strategy, which are awaiting realisation of underlying investments.
LIST OF DERIVATIVE INSTRUMENTS
AT 30 NOVEMBER 2016
NOTIONAL
NOTIONAL EXPOSURE
EXPOSURE AS % of
£'000 NET ASSETS
Government Bonds
Canada 1,655 18.2
Australia 1,601 17.6
UK 863 9.5
US 724 7.9
Total Bond Futures (4) 4,843 53.2
Equities Futures
Japan 723 7.9
Hong Kong 707 7.8
UK 678 7.4
Europe 617 6.8
US small cap 532 5.8
US large cap 530 5.8
Total Equity Futures (6) 3,787 41.5
Commodities Futures
Agriculture
Soybean meal 230 2.5
Cotton 229 2.5
Soy bean 211 2.3
Sugar 211 2.3
Corn 88 1.0
Soybean oil 54 0.6
Wheat 53 0.6
Coffee 46 0.5
Energy
Gasoline 199 2.2
Brent crude 129 1.4
Natural gas 110 1.2
WTI crude 83 0.9
Gas-oil (diesel) 72 0.8
New York Harbor ultra-low sulphur diesel 54 0.6
Industrial Metals
Copper 343 3.8
Aluminium 241 2.6
Precious Metals
Gold 376 4.1
Silver 199 2.2
Total Commodities Futures (18) 2,928 32.1
Total Derivative Instruments (28) 11,558 126.8
BALANCED RISK SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED SIX MONTHS ENDED
30 NOVEMBER 2016 30 NOVEMBER 2015
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 4 4 - 1 1
Gains/(losses) on derivative 15 307 322 39 (512) (473)
instruments
Foreign exchange gains - 118 118 - 1 1
Income 16 - 16 20 - 20
Management fees - note 2 (10) (24) (34) (10) (22) (32)
Other expenses (21) - (21) (19) - (19)
Return before finance costs - 405 405 30 (532) (502)
and taxation
Finance costs - - - - - -
Return on ordinary - 405 405 30 (532) (502)
activities before taxation
Tax on ordinary activities - - - - - -
Return on ordinary - 405 405 30 (532) (502)
activities after taxation
for the financial period
Basic return per ordinary - 5.67p 5.67p 0.40p (7.05)p (6.65)p
share - note 4
SUMMARY OF NET ASSETS
AT AT
30 NOVEMBER 31 MAY
2016 2016
£'000 £'000
Fixed assets 7,804 7,698
Derivative assets held at fair value through profit or 327 388
loss
Current assets 1,139 845
Derivative liabilities held at fair value through profit (127) (68)
or loss
Other creditors excluding borrowings (30) (26)
Net assets 9,113 8,837
Net asset value per ordinary share - note 5 128.4p 122.8p
Notional exposure as % of net assets 126.8% 137.7%
.
MANAGED LIQUIDITY SHARE PORTFOLIO
PERFORMANCE RECORD
Total Return
SIX MONTHS YEAR TO YEAR TO YEAR TO YEAR TO
TO 30 NOV 31 MAY 31 MAY 31 MAY 31 MAY
2016 2016 2015 2014 2013
Net Asset Value 0.0% -0.1% -0.1% 0.2% 0.5%
Share Price 0.2% -0.9% 0.5% 0.4% 1.3%
Source: Thomson Reuters Datastream.
Revenue return per share 0.00p (0.14)p (0.12)p 0.02p 0.10p
Dividend nil nil nil nil nil
.
MANAGED LIQUIDITY SHARE PORTFOLIO
MANAGER'S REPORT
Investment Objective
The investment objective of the Managed Liquidity Share Portfolio is to produce
an appropriate level of income return combined with a high degree of security.
Market and Economic Review
For sterling bond markets, the six months to 30 November 2016 were dominated by
the UK's vote to leave the European Union and subsequent decision by the Bank
of England (BoE) to ease UK monetary policy further.
After pausing in July, the BoE loosened monetary policy in August. Amongst the
measures announced was a 0.25% cut in Bank Rate. Sterling denominated bond
yields moved sharply lower following the cut. More recently, an increase in
inflation expectations, better than expected economic data and a potential
shift toward fiscal stimulus has seen bond yields rise.
Over the six months to the end of November, 2 year Gilt yields fell 30 basis
points (bps) ending the period at 0.13%. The majority of this fall occurred
during the first week after the Brexit vote. Yields had risen to 0.52% on 23
June, as polls indicated a lead for the "remain" vote. In the following seven
days, yields fell to 0.10% before then trading in a 10bps (0.01%) range to the
end of October. During October, 2 year Gilt yields broke out of this range,
peaking at 0.29% before then falling back to 0.13% by the end of November.
Interbank lending rates were also lower over the period. In line with Gilt
yields, 3 month LIBOR fell from a peak of 0.59% on 23 June to 0.49% in the
first few weeks following the vote. The cut in Bank Rate caused a second 10bps
drop in LIBOR, which then traded between 0.38% and 0.41% until 30 November
2016.
Portfolio Strategy and Review
Our investment strategy is achieved by investing in the Invesco Perpetual Money
Fund and the Sterling Liquidity Portfolio of Short-Term Investments Company
(Global Series) plc, each of which invests in a diversified portfolio of high
quality sterling denominated short-term money market instruments.
The Invesco Perpetual Money Fund has positions in a number of government,
quasi-government and corporate bonds. In order to limit the exposure to
interest rate risk and credit risk (the likelihood of an issuer defaulting),
these bonds are both short dated and of high quality. The fund also holds some
floating rate notes, debt instruments whose interest rates are reset at regular
intervals.
The Sterling Liquidity Portfolio of the Short-Term Investments Company (Global
Series) plc invests in high quality sterling denominated money market
instruments such as commercial paper, certificates of deposit, time deposits
and floating rate notes. At 30 November 2016 the Sterling Liquidity Portfolio
was rated AAAm by Standard and Poor's and AAAmmf by Fitch Ratings.
Outlook
Inflation pressures in the UK have increased, albeit from a low level, and
economic data has so far exceeded expectations post-referendum. Nonetheless, we
continue to think that any upward adjustment in the Bank Rate will be gradual
and to a lower level than in previous cycles.
Stuart Edwards
Portfolio Manager
31 January 2017
MANAGED LIQUIDITY SHARE PORTFOLIO
LIST OF INVESTMENTS
AT AT
30 NOVEMBER 31 MAY
2016 2016
MARKET MARKET
VALUE VALUE
£'000 £'000
Invesco Perpetual Money Fund† 4,899 4,894
Short-Term Investments Company (Global Series) 848 418
5,747 5,312
†At the period end the Managed Liquidity Share Portfolio held 6.2% (May 2016:
9.9%) of the shares in issue of the Invesco Perpetual Money Fund.
MANAGED LIQUIDITY SHARE PORTFOLIO
INCOME STATEMENT
SIX MONTHS ENDED SIX MONTHS ENDED
30 NOVEMBER 2016 30 NOVEMBER 2015
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - - - - 2 2
Income 13 - 13 12 - 12
Management fees - note 2 (3) - (3) (6) - (6)
Other expenses (10) - (10) (10) - (10)
Return on ordinary activities - - - (4) 2 (2)
before taxation
Tax on ordinary activities - - - - - -
Return on ordinary activities - - - (4) 2 (2)
after taxation
Basic return per ordinary - - - (0.08)p 0.04p (0.04)p
share - note 4
SUMMARY OF NET ASSETS
AT AT
30 NOVEMBER 31 MAY
2016 2016
£'000 £'000
Fixed assets 5,747 5,312
Current assets 17 925
Creditors falling due within one year, excluding (141) (146)
borrowings
Net assets 5,623 6,091
Net asset value per ordinary share - note 5 103.1p 103.1p
.
CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED 30 NOVEMBER
2016 2015
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments - 10,344 10,344 - (1,983) (1,983)
Gains/(losses) on derivative 15 307 322 39 (512) (473)
instruments
Foreign exchange gains - 118 118 - 5 5
Income 2,004 23 2,027 1,983 - 1,983
Management fees - note 2 (135) (310) (445) (130) (288) (418)
Performance fees - note 2 - 284 284 - (574) (574)
Other expenses (220) (1) (221) (200) - (200)
Net return before finance costs 1,664 10,765 12,429 1,692 (3,352) (1,660)
and taxation
Finance costs (27) (62) (89) (33) (78) (111)
Return on ordinary activities 1,637 10,703 12,340 1,659 (3,430) (1,771)
before taxation
Tax on ordinary activities (95) - (95) (67) - (67)
Return on ordinary activities 1,542 10,703 12,245 1,592 (3,430) (1,838)
after taxation for the financial
period
Basic return per ordinary share
- note 4
UK Equity Share Portfolio 2.20p 5.24p 7.44p 2.43p (2.36)p 0.07p
Global Equity Income Share 2.07p 25.25p 27.32p 1.88p (6.17)p (4.29)p
Portfolio
Balanced Risk Share Portfolio - 5.67p 5.67p 0.40p (7.05)p (6.65)p
Managed Liquidity Share - - - (0.08)p 0.04p (0.04)p
Portfolio
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The return on
ordinary activities after taxation is the total comprehensive income and
therefore no additional statement of comprehensive income is presented. The
supplementary revenue and capital columns are presented for information
purposes in accordance with the Statement of Recommended Practice issued by the
Association of Investment Companies. All items in the above statement derive
from continuing operations. No operations were acquired or discontinued in the
period. Income Statements for the different Share classes are shown on pages
11, 16, 21 and 24 for the UK Equity, Global Equity Income, Balanced Risk and
Managed Liquidity Share Portfolios respectively.
.
CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE SIX MONTHS ENDED 30 NOVEMBER
CAPITAL
SHARE SHARE SPECIAL REDEMPTION CAPITAL REVENUE
CAPITAL PREMIUM RESERVE RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 31 May 2016 1,062 1,290 85,252 345 44,073 576 132,598
Cancellation of - - (2) 2 - - -
deferred shares
Share conversions (1) - 1 - - - -
Shares bought - - (2,039) - - - (2,039)
back and held in
treasury
Return on - - - - 10,703 1,542 12,245
ordinary
activities per
the income
statement
Dividends - note - - - - - (2,017) (2,017)
9
At 30 November 1,061 1,290 83,212 347 54,776 101 140,787
2016
At 31 May 2015 1,059 1,290 83,157 343 49,326 538 135,713
Cancellation of - - (1) 1 - - -
deferred shares
Net proceeds from - - 1,775 - - - 1,775
shares issued
from treasury
Return on - - - - (3,430) 1,592 (1,838)
ordinary
activities per
the income
statement
Dividends - note - - - - - (1,847) (1,847)
9
At 30 November 1,059 1,290 84,931 344 45,896 283 133,803
2015
CONDENSED BALANCE SHEET
AS AT 30 NOVEMBER 2016
REGISTERED NUMBER 5916642
GLOBAL
UK EQUITY BALANCED MANAGED
EQUITY INCOME RISK LIQUIDITY TOTAL
£'000 £'000 £'000 £'000 £'000
Fixed assets
Investments held at fair value 76,155 64,123 7,804 5,747 153,829
through profit or loss
Current assets
Derivative assets held at fair value - - 327 - 327
through profit or loss
Debtors 167 777 305 4 1,253
Cash and cash equivalents 280 298 834 13 1,425
447 1,075 1,466 17 3,005
Creditors: amounts falling due within
one year
Derivative liabilities held at fair - - (127) - (127)
value through profit or loss
Other creditors (10,637) (5,112) (30) (141) (15,920)
Net current (liabilities)/assets (10,190) (4,037) 1,309 (124) (13,042)
Net assets 65,965 60,086 9,113 5,623 140,787
Shareholders' funds
Share capital 460 364 113 124 1,061
Share premium - - 1,290 - 1,290
Special reserve 39,989 32,989 5,149 5,085 83,212
Capital redemption reserve 73 78 24 172 347
Capital reserve 25,431 26,459 2,644 242 54,776
Revenue reserve 12 196 (107) - 101
Shareholders' funds 65,965 60,086 9,113 5,623 140,787
Net asset value per ordinary share 168.9p 183.8p 128.4p 103.1p
Basic - note 5
CONDENSED BALANCE SHEET
AS AT 31 MAY 2016
GLOBAL
UK EQUITY BALANCED MANAGED
EQUITY INCOME RISK LIQUIDITY TOTAL
£'000 £'000 £'000 £'000 £'000
Fixed assets
Investments held at fair 73,579 57,669 7,698 5,312 144,258
value through profit or
loss
Current assets
Derivative assets held at - - 388 - 388
fair value through profit
or loss
Debtors 477 570 191 8 1,246
Cash and cash equivalents 629 701 654 917 2,901
1,106 1,271 1,233 925 4,535
Creditors: amounts
falling due within one
year
Derivative liabilities - - (68) - (68)
held at fair value
through profit or loss
Other creditors (8,958) (6,997) (26) (146) (16,127)
Net current (liabilities) (7,852) (5,726) 1,139 779 (11,660)
/assets
Net assets 65,727 51,943 8,837 6,091 132,598
Shareholders' funds
Share capital 460 361 114 127 1,062
Share premium - - 1,290 - 1,290
Special reserve 41,589 32,834 5,277 5,552 85,252
Capital redemption 73 78 24 170 345
reserve
Capital reserve 23,355 18,237 2,239 242 44,073
Revenue reserve 250 433 (107) - 576
Shareholders' funds 65,727 51,943 8,837 6,091 132,598
Net asset value per 164.3p 159.2p 122.8p 103.1p
ordinary share Basic -
note 5
.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Accounting Policies
The condensed financial statements have been prepared in accordance with
applicable United Kingdom Accounting Standards and applicable law (UK Generally
Accepted Accounting Practice), including FRS 102 The Financial Reporting
Standard applicable in the UK and Republic of Ireland, FRS 104 Interim
Financial Reporting and the Statement of Recommended Practice Financial
Statements of Investment Trust Companies and Venture Capital Trusts, issued by
the Association of Investment Companies in November 2014. The financial
statements are issued on a going concern basis.
In March 2016, the FRC published amendments to FRS 102 Fair value hierarchy
disclosures. These amendments become effective for accounting periods beginning
on or after 1 January 2017. The Company has chosen to adopt these amendments
early. There are no accounting policy or disclosure changes as a result of this
adoption.
The accounting policies applied to these condensed financial statements are
consistent with those applied in the financial statements for the year ended 31
May 2016.
2. Management Fees
The Manager is entitled to a basic fee which is calculated and payable
quarterly. The fee is based on the net assets of each Portfolio, at the
following percentages:
- 0.65% per annum in the case of the UK Equity and Global Equity Income
Portfolios;
- 0.75% per annum for the Balanced Risk Portfolio; and
- 0.12% from 1 June 2016 (previously 0.25%) per annum for the Managed
Liquidity Portfolio.
The Manager is also entitled to receive performance fees in respect of the UK
Equity and Global Equity Income Portfolios of 12.5% of the increase in net
assets per relevant Share in excess of a hurdle of the relevant benchmark plus
1% per annum. The amount of the performance fee that can be earned in any one
year is limited to 0.65% of the net assets of the relevant Portfolio and
payment is subject to a high water mark. Any underperformance of the benchmark,
or performance above the cap, is carried forward to subsequent periods.
No performance fee was earned for the UK Equity Portfolio during the six months
(30 November 2015: performance fee of £574,000 provided for). In addition,
performance fee of £284,000 previously accrued was written back due to the
current period's underperformance. The remaining performance fee accrued for
past periods is £1,021,000 and, as it cannot be reduced by future
underperformance, remains an obligation of the Company.
No performance fee was earned for the Global Equity Portfolio during the six
months (30 November 2015: £nil). Any underperformance must be fully set off by
over performance before any performance fee can be paid. As at the last year
end, the underperformance carried forward was £607,000.
The management fees and finance costs are charged to the applicable Portfolio
as follows, in accordance with the Board's expected split of long-term income
and capital returns:
REVENUE CAPITAL
PORTFOLIO RESERVE RESERVE
UK Equity 30% 70%
Global Equity Income 30% 70%
Balanced Risk 30% 70%
Managed Liquidity 100% -
Any entitlement to the investment performance fee which is attributable to the
UK Equity or Global Equity Income Portfolio is allocated 100% to capital as it
is directly attributable to the capital performance of the investments in those
Portfolios.
3. Tax expense represents the sums of tax currently payable and deferred tax.
Any tax payable is based on the taxable profit for the period.
It is the intention of the Directors to conduct the affairs of the Company so
that it satisfies the conditions for approval as an investment trust company.
Any company so approved is not liable for taxation on capital gains.
4. Basic Return per Ordinary Share
Basic revenue, capital and total return per ordinary share is based on each of
the returns on ordinary activities after taxation as shown by the income
statement for the applicable Share class and on the following number of shares
being the weighted average number of shares in issue throughout the period for
each applicable Share class:
WEIGHTED AVERAGE
NUMBER OF SHARES
SIX MONTHS SIX MONTHS
ENDED ENDED
30 NOVEMBER 30 NOVEMBER
SHARE 2016 2015
UK Equity 39,568,327 39,919,191
Global Equity Income 32,554,801 31,765,942
Balanced Risk 7,137,292 7,545,881
Managed Liquidity 5,801,765 5,214,241
5. Net Asset Values per Ordinary Share
The net asset values per ordinary share were based on the following
Shareholders' funds and shares (excluding treasury shares) in issue at the
period end:
AT AT
30 NOVEMBER 31 MAY
2016 2016
£'000 £'000
PORTFOLIO SHAREHOLDERS' FUNDS
UK Equity 65,965 65,727
Global Equity Income 60,086 51,943
Balanced Risk 9,113 8,837
Managed Liquidity 5,623 6,091
PORTFOLIO SHARES IN ISSUE AT PERIOD END
UK Equity 39,047,678 40,013,223
Global Equity Income 32,695,170 32,627,852
Balanced Risk 7,099,860 7,199,116
Managed Liquidity 5,451,474 5,906,165
6. Classification Under Fair Value Hierarchy
FRS102 as amended for fair value hierarchy disclosures (March 2016) sets out
three fair value levels. These are:
Level 1 - The unadjusted quoted price in an active market for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data) for the asset or liability,
either directly or indirectly.
Level 3 - Inputs are unobservable (i.e. for which market data is unavailable)
for the asset or liability.
The fair value hierarchy analysis for investments held at fair value at the
period end is as follows:
GLOBAL
UK EQUITY BALANCED MANAGED
EQUITY INCOME RISK LIQUIDITY
£'000 £'000 £'000 £'000
AT 30 NOVEMBER 2016
Financial assets designated at fair
value through profit or loss:
Level 1 75,404 64,123 5,496 -
Level 2 1 - 2,617 5,747
Level 3 750 - 18 -
Total for financial assets 76,155 64,123 8,131 5,747
Financial liabilities:
Level 2 - Derivative instruments - - 127 -
AT 31 MAY 2016
Financial assets designated at fair
value through profit or loss:
Level 1 72,827 57,669 5,490 -
Level 2 2 - 2,578 5,312
Level 3 750 - 18 -
Total financial assets 73,579 57,669 8,086 5,312
Financial liabilities:
Level 2 - Derivative instruments - - 68 -
Level 1 This is the majority of the Company's investments and comprises quoted
investments and Treasury bills.
Level 2 This comprises the UK Equity Portfolio's holdings of Barclays Bank
Nuclear Power Notes, liquidity funds held in the Balanced Risk and Managed
Liquidity Portfolios, and any derivative instruments.
Level 3 This includes the UK Equity Portfolio's holding of an unquoted stock,
AJ Bell, and the remaining hedge fund investments of the Balanced Risk
Portfolio.
7. Movements in Share Capital and Share Class Conversion
IN THE SIX MONTHS ENDED 30 NOVEMBER 2016
GLOBAL
UK EQUITY BALANCED MANAGED
EQUITY INCOME RISK LIQUIDITY
Ordinary 1p shares (number)
At 31 May 2016 40,013,223 32,627,852 7,199,116 5,906,165
Shares bought back into treasury (950,000) (250,000) - (63,000)
Arising on share conversion:
- August 2016 (130,868) 231,149 (91,769) (55,664)
- November 2016 115,323 86,169 (7,487) (336,027)
At 30 November 2016 39,047,678 32,695,170 7,099,860 5,451,474
GLOBAL
UK EQUITY BALANCED MANAGED
EQUITY INCOME RISK LIQUIDITY
Treasury Shares (number)
At 31 May 2016 5,973,000 3,418,000 4,240,000 6,837,785
Share bought back into treasury 950,000 250,000 - 63,000
At 30 November 2016 6,923,000 3,668,000 4,240,000 6,900,785
Total shares in issue at 30 November 45,970,678 36,363,170 11,339,860 12,352,259
2016
Average buy back price 165.0p 157.5p n/a 101.1p
As part of the conversion process 192,231 deferred shares of 1p each were
created. All deferred shares are cancelled before each period end and no
deferred shares are in issue at the start or end of a period.
8. Share Prices
GLOBAL
UK EQUITY BALANCED MANAGED
PERIOD END EQUITY INCOME RISK LIQUIDITY
30 November 2015 171.0p 160.5p 117.0p 102.5p
31 May 2016 162.5p 156.0p 119.3p 101.0p
30 November 2016 166.8p 183.0p 127.5p 101.3p
9. Dividends on Ordinary Shares
The first and second interim dividends were paid on 15 August 2016 and 15
November 2016 respectively:
NUMBER DIVIDEND TOTAL
PORTFOLIO OF SHARES RATE £'000
UK Equity
First interim 39,763,023 1.40p 557
Second interim 39,317,155 1.40p 550
2.80p 1,107
Global Equity Income
First interim 32,377,852 1.40p 453
Second interim 32,609,001 1.40p 457
2.80p 910
Dividends paid for the six months to 30 November 2016 totalled £2,017,000
(six months to 30 November 2015: £1,847,000).
10. The financial information contained in this half-yearly financial report,
which has not been reviewed or audited by the independent auditor, does not
constitute statutory accounts within the meaning of section 434 of the
Companies Act 2006. The financial information for the half years ended 30
November 2016 and 30 November 2015 has not been audited. The figures and
financial information for the year ended 31 May 2016 are extracted and abridged
from the latest published accounts and do not constitute the statutory accounts
for that year. Those accounts have been delivered to the Registrar of Companies
and include the Independent Auditor's Report, which was unqualified and did not
include a statement under section 498 of the Companies Act 2006.
By order of the Board
Invesco Asset Management Limited
Company Secretary
31 January 2017
INVESCO PERPETUAL SELECT TRUST : Half-year Report
January 31, 2017 at 10:44 am
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