Rights and Issues Investment Trust
STRATEGIC REPORT
The Strategic Report is designed to provide information primarily about the Company's business and results for the year ended 31st December 2019 and should be read in conjunction with the Chairman's Statement on page 7.
STATUS
The Company is a self-managed investment trust. The Company is registered as an investment company as defined in section 833 of the Companies Act 2006 and operates as such. The Company is not a close company within the meaning of the provisions of the Corporation Tax Act 2010.
The Company has been approved by the Financial Conduct Authority to be a Small Registered Alternative Investment Fund Manager (“AIFM”).
In the opinion of the Directors, the Company has conducted its affairs during the year under review, so as to qualify as an investment trust for the purposes of Chapter 4 of Part 24 of the Corporation Tax Act 2010 and continues to meet the eligibility conditions set out in section 1158 of the Corporation Tax Act 2010.
The Board is directly accountable to its shareholders. The Company is listed on the London Stock Exchange and is subject to the Listing Rules, Prospectus Rules and Disclosure Guidance and Transparency Rules published by the Financial Conduct Authority (“FCA”). The Company is governed by its articles of association, amendments to which must be approved by shareholders by special resolution. The Company is a member of the Association of Investment Companies (“AIC”).
The FCA rules in relation to non-mainstream pooled investments do not apply to the Company.
STRATEGY FOR MEETING THE OBJECTIVES
The Board's objective is to exceed the benchmark index over the long term whilst managing risk.
To achieve this objective, the Board continues with its long-term strategy of seeking out undervalued investments that have characteristics consistent with a matrix of criteria developed by the Investment Director. This is supported by the five-yearly review that addresses the above objective. The latest review was conducted in November 2015, which concluded that the continuation of the Company for the period until July 2021 was in the best interests of shareholders.
The Board fulfils its investment objective and policy by operating as an investment company, enabling it to delegate operational matters to specialised third-party service providers. The close-ended nature of the Company allows a longer-term view on investments and means liquidity issues as a result of redemptions are less likely to arise.
In pursuing its strategy, close attention is also paid to the control of costs. Further information on this is contained in the Key Performance Indicators on page 11.
INVESTMENT SELECTION
There is a rigorous process of risk analysis at the level of the individual investment, based on the characteristics of the investee company. This controls the overall risk profile of the investment portfolio, allowing a higher level of concentration in the investment portfolio.
The investment portfolio is then managed on a medium-term basis with a low level of investment turnover. This minimises transaction costs and ensures medium-term consistency of the investment approach.
The Company's investment activities are subject to the following limitations and restrictions:
The policy does not envisage hedging either against price or currency fluctuations. Whilst performance is compared against major UK indices, the composition of indices has no influence on investment decisions or the construction of the portfolio. As a result, it is expected that the Company's investment portfolio and performance will deviate from the comparator indices.
SUSTAINABILITY OF BUSINESS MODEL AND PROMOTING THE SUCCESS THE COMPANY'S SUCCESS
The Board is responsible for the overall strategy of the Company and decisions regarding corporate governance, asset allocation, risk and control. The day-to-day management of the investments is delegated to the Investment Director and the management of the operations to specialist third-party suppliers.
The Directors are conscious of their duties under section 172 of the Companies Act 2006 and particular the overarching duty to promote the success of the Company for the benefit of the shareholders, with careful attention paid to wider stakeholders' interests. The Board is aware of the importance of ensuring that the Company has a sustainable, well-governed business model to achieve its strategy and objectives.
As part of discharging its section 172 duties, the Company, through the Investment Director, uses its influence, where possible, as a shareholder to encourage the companies in which it invests to adopt best practice on environmental, social and corporate governance (“ESG”) matters. The Investment Director, during the coming year, will also actively seek to invest in companies that adopt good ESG practice.
The third-party service providers are a key element of ensuring the success of the business model. The Board monitors the chosen service providers closely to ensure that they continue to deliver the expected level of service. The Board also receives regular reporting from them, evaluates the control environment and governing contract in place at each service provider and formally assesses their appointment annually.
CULTURE & VALUES
All the Directors seek to discharge their responsibilities and meet shareholder expectations in an open and transparent manner. The Board seeks to recruit Directors who have diverse working experience including managing the types of companies in which the Company invests. The industry experience on the Board ensures there is detailed knowledge and constructive challenge in the decision-making process. This helps the Company achieve its overarching aim of enhancing shareholder value. The Directors are mindful of costs and seek to ensure that the best value money is achieved in managing the Company.
The Company's values of skill, knowledge and integrity are aligned to the delivery of its investment objective and are monitored closely by the Board.
The Board seeks to employ third-party providers who share the Company's culture and importantly will work with the Directors openly and transparently to achieve the Company's aims. As detailed in the Business Ethics section below, the Board expects and seeks assurance that the companies with which it works adopt working practices that are of a very high standard.
The Responsibilities as an Institutional Shareholder section below describes the Company's approach to managing its investments, including ESG matters.
BUSINESS ETHICS
The Company maintains a zero-tolerance policy towards the provision of illegal services, bribery and corruption in its business activities, including the facilitation of tax evasion. As the Company has no employees other than the Investment Director and the Company's operations are delegated to third-party service providers, the Board seeks assurances, at least annually, from its suppliers that they comply with the provisions of the Modern Slavery Act 2015 and maintain adequate safeguards in keeping with the provisions of the Bribery Act 2010 and Criminal Finances Act 2017.
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not within the scope of the Modern Slavery Act 2015.
BOARD DIVERSITY
The Company's affairs are overseen by a Board currently comprising four non-executive Directors and one executive Director – all of whom are male. In terms of progress in achieving diversity, the Company is committed to ensuring that vacancies arising are filled by the best qualified candidates and recognises the value of diversity in the composition of the Board. When the Board goes through its next recruitment process, improving the Board's gender diversity will be an important criterion.
The Directors have broad experience, bringing knowledge of investment markets, business, financial services, accounting and regulatory expertise to discussions on the Company's business. The Directors regularly consider the leadership needs and specific skills required to achieve the Company's investment objective. Whilst appointments are based on skills and experience, the Board is conscious of diversity of gender, social and ethnic backgrounds, cognitive and personal strengths and experience. All appointments are based on objective criteria and merit, and are made following a formal, rigorous and transparent process.
RESPONSIBILITIES AS AN INSTITUTIONAL SHAREHOLDER
The Board has delegated authority to the Investment Director for monitoring the corporate governance of investee companies. The Board has delegated to the Investment Director responsibility for selecting the portfolio of investments within investment guidelines established by the Board and for monitoring the performance and activities of investee companies. On behalf of the Company the Investment Director carries out detailed research on investee companies and possible future investee companies through internally generated research. The research includes an evaluation of fundamental details such as financial strength, quality of management, market position and product differentiation. Other aspects of research include an appraisal of social, ethical and environmentally responsible investment policies.
The Board has delegated authority to the Investment Director to vote on behalf of the Company in accordance with the Company's best interests. The primary aim of the use of voting rights is to address any issues which might impinge on the creation of a satisfactory return from investments. The Company's policy is, where appropriate, to enter into engagement with an investee company in order to communicate its views and allow the investee company an opportunity to respond.
In such circumstances the Company would not normally vote against investee company management but would seek, through engagement, to achieve its aim. The Company would vote, however, against resolutions it considers would damage its shareholder rights or economic interests.
The Company has a procedure in place that where the Investment Director, on behalf of the Company, has voted against an investee company resolution, it is reported to the Board.
The Board considers that it is not appropriate for the Company, as a small self-managed investment trust, formally to adopt the UK Stewardship Code. However, many of the UK Stewardship Code's principles on good practice on engagement with investee companies are used by the Company, as described above.
CORPORATE AND SOCIAL RESPONSIBILITY
When investments are made, the primary objective is to achieve the best investment return while allowing for an acceptable degree of risk. In pursuing this objective, various factors that may impact on the performance are considered and these may include socially responsible investment issues.
As an investment trust, the Company's own direct environmental impact is minimal. The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions-producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 for the year to 31st December 2019 (2018: same). All printed material, wherever possible, is on recycled material. The Investment Director attempts to minimise the Company's carbon footprint. The Company's indirect impact occurs through the investments it makes.
The Company does not purchase electricity, heat, steam or cooling for its own use nor does it have responsibility for any other emissions producing sources.
Of more importance is the conduct of the companies in the investment portfolio. The Company does not invest in companies which have significant adverse effect on the global environment and encourages those companies in which it has an investment to pursue responsible environmental policies.
The Company contributes to wider society by generating returns to shareholders whose ownership in shares in the Company affects their savings and by investing in companies which provide employment and innovation. No investments are made in tobacco or fossil fuel producing companies.
REVIEW OF THE BUSINESS
A review of the year and commentary on the future outlook is provided in the Chairman's Statement on page 7.
During the year under review, the assets of the Company were invested in accordance with the Company's investment policy.
During the year the Company's net assets have increased from £169.6m to £171.6m and at 31st December 2019 the net asset value per Ordinary share was 2275.2p.
KEY PERFORMANCE INDICATORS
The Board is provided with detailed information on the Company's performance at every Board meeting. Key Performance Indicators are:
- Shareholders' funds equity return compared to the FTSE All-Share Index (the Company's benchmark index).
- Dividends per Ordinary share.
- Ongoing Charge (formerly titled the Total Expense Ratio).
Shareholders' funds equity return
In reviewing the performance of the Company, the Board monitors shareholders' funds in relation to the FTSE All-Share Index. During the year shareholders' funds increased by 1.2% compared to an increase of 14.2% by the FTSE All-Share Index. Over the five years ended 31st December 2019 shareholders' funds increased by 47.5% compared with a rise of 18.8% by the FTSE All-Share Index.
Dividends per Ordinary share
The total dividend per Ordinary share paid and proposed is 32.25p (2018: 31.50p).
Ongoing Charge
The Ongoing Charge shows the efficiency of control of management costs. The Ongoing Charge for the
year ended 31st December 2019 was 0.47% (2018: 0.48%).
PRINCIPAL RISKS
The Board of Directors has a process for identifying, evaluating and managing the key risks of the Company. This process operated during the year and has continued to the date of this report. The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The Directors describe below those risks and how they are being managed or mitigated.
Investment in an individual smaller company inherently carries a higher risk than investment in an individual large company. In a diversified portfolio, the portfolio risk of a smaller company portfolio is only slightly greater than the portfolio risk of a large company portfolio. The Company manages a diversified portfolio. Additionally, the Company invests overwhelmingly in smaller UK listed and AIM traded companies and has no exposure to derivatives. The principal risks are therefore market price risk and liquidity risk. Further details on these risks and how they are managed may be found in Note 18 to the financial statements on page 49.
Additional key risks identified by the Company, together with the Board's approach in dealing with them are as follows:
Investment performance – The performance of the investment portfolio will deviate from the performance of the benchmark index. The Board's objective is to exceed the benchmark index over the long term whilst managing risk. The Board ensures that the Investment Director is managing the portfolio within the scope of the investment policy; the Board monitors the Company's performance against the benchmark; and the Board also receives detailed portfolio attribution analysis. The Board has a clearly defined investment philosophy and operates a diversified portfolio.
Share price discount – Investment trust shares often trade at discounts to their underlying net asset values. The Board monitors the level of the discount of the Ordinary shares. On 7th December 2016, the Company implemented share buy-back arrangements to mitigate the risk of the discount increasing.
Loss of key personnel – The Investment Director is crucial to performance and the loss of the Investment Director could adversely affect performance in the medium term. The Board reviews its strategy for this risk annually.
Regulatory risk – The Company must abide by section 1158 of the Corporation Tax Act 2010 to maintain its investment trust status. This is achieved by the consistent investment policy and is monitored by the Board. The Board seeks assurance from the Administrator that the investment trust status is being maintained. The Board also reviews a schedule of regulatory risk items at its Board meetings in order to monitor and take action to address any regulatory changes.
Protection of assets – The Company's assets are protected by the use of an independent custodian, Northern Trust Company, and the Board monitors the custodian to ensure assets remain protected. In addition, the Company operates clear internal controls to safeguard all assets.
Future trading relationships – The risk associated with the decision of a majority of the UK electorate to leave EU membership could be considerable for the UK and also for continental European countries. The links between the UK and the EU are wide-ranging and the future trading relationship remains unclear, creating conditions that could mean that markets react unpredictably to the uncertainty created. This risk is challenging to mitigate but the Investment Director is considering the risk of leaving the EU for each investment in the portfolio based on its individual circumstances.
These and other risks facing the Company are reviewed regularly by the Audit and Compliance Committee and the Board.