Blackrock Greater Europe Investment Trust plc (LON:BRGE) has announced its final results.
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Annual Report and Financial Statements 31 August 2020
|As at |
|As at |
|Net assets (£’000)1||387,861||338,442|
|Net asset value per ordinary share (pence)||459.97||399.52|
|Ordinary share price (mid-market) (pence)||447.00||385.00|
|Discount to cum income net asset value2||2.8%||3.6%|
|FTSE World Europe ex UK Index||1467.97||1457.46|
|For the year |
|For the year |
|Performance (with dividends reinvested)|
|Net asset value per share2||16.9%||6.3%|
|Ordinary share price2||18.0%||7.9%|
|FTSE World Europe ex UK Index||0.7%||4.8%|
|For the year |
|For the year |
|Net profit after taxation (£’000)||5,776||4,160||+38.8|
|Revenue profit per ordinary share (pence)||6.85||4.87||+40.7|
|Total dividends paid/payable||6.15||5.85||+5.1|
1 The change in net assets reflects the buyback of shares into treasury, market movements and dividends paid.
2 Alternative Performance Measures, see Glossary on pages 104 to 106 of the Annual Report and Financial Statements.
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The past few months have been quite extraordinary as COVID-19 has affected markets around the world and how we as a Board have adjusted our mode of operation, just as people in all walks of life have been forced to do. I refer below to the challenges posed by the current pandemic and to the arrangements for this year’s Annual General Meeting. Since March your Board has met regularly but all meetings have been held by video conference. It is very important in these difficult times that the Board remains closely in touch with your Manager and this we have done. Your Portfolio Managers should be commended on the truly excellent performance that has been delivered in such difficult circumstances.
It is pleasing to report that during the year to 31 August 2020 the Company’s net asset value per share (NAV) returned 16.9%, outperforming its reference index, the FTSE World Europe ex UK Index, which returned 0.7%. The Company’s share price returned 18.0% over the same period. (All percentages calculated in sterling terms with dividends reinvested.) This is a remarkable achievement given that for part of the financial year our Portfolio Managers have had to navigate unprecedented global economic and social upheaval following the outbreak of the COVID-19 pandemic.
Despite a promising start to the year, with all-time highs in global equities in February 2020, the COVID-19 pandemic, compounded by a slump in the oil price, sent stock markets plummeting. The pandemic led to countries adopting varying degrees of social distancing, self-quarantine and lockdown measures which severely curtailed economic activity in most countries. However, the unprecedented policy response, with significant fiscal and monetary stimulus, has played an important part in markets rebounding from their March lows. Central banks have committed to keeping rates low, enabling fiscal expansion, and economies are slowly restarting, albeit at different paces.
Since the financial year end and up to close of business on 21 October 2020, the Company’s NAV has increased by 6.1% compared with a rise in the FTSE World Europe ex UK Index of 0.3% over the same period.
REVENUE EARNINGS AND DIVIDENDS
The Company’s revenue return per share for the year ended 31 August 2020 amounted to 6.85p per share, which compares with 4.87p per share for the previous year, an increase of 40.7%. A fall in dividend income, reflecting the challenges faced by many portfolio companies struggling to pay dividends during the COVID-19 crisis, has been offset by the positive outcome on a tax ruling in relation to overseas dividends, which is explained below.
In April the Board declared an interim dividend of 1.75p per share (2019: 1.75p). The Board is proposing the payment of a final dividend of 4.40p per share for the year (2019: 4.10p). This, together with the interim dividend, makes a total dividend for the year of 6.15p per share (2019: 5.85p), an increase of 5.1%.
Subject to shareholder approval, the dividend will be paid on 9 December 2020 to shareholders on the Company’s register on 30 October 2020, the ex-dividend date being 29 October 2020.
PRUDENTIAL ASSURANCE COMPANY LIMITED VS HMRC
In 2003 The Prudential Assurance Company Limited filed a case against HM Revenue & Customs (HMRC) on the treatment of foreign sourced dividends. The litigation concerned the tax treatment of UK-resident companies (including investment funds) that received dividends from portfolio shareholdings in non-UK companies. It had previously been settled that the UK dividend tax regime that applied to portfolio dividends prior to 2009 was contrary to EU law, as UK dividends were not subject to tax whereas non-UK dividends were taxable.
On 25 July 2018 the UK Supreme Court handed down its judgement in the Prudential case, ruling (inter alia) that non-UK dividends remained taxable, but that credit should be given for the underlying foreign tax at the foreign nominal corporate income tax rate of the source country. In June 2020 the Company received correspondence from HMRC accepting that the Company was entitled to claim double tax relief in relation to underlying tax suffered on dividends received from non-UK companies in a number of past accounting periods. As the Board was advised that the receipt of a repayment in respect of these amounts was sufficiently probable to merit recognition in the Company’s NAV, it was announced on 11 June 2020 that an asset had been reflected in the Company’s NAV in respect of these claims. The cumulative impact of the FII GLO reclaim (reflecting both the expected tax refund and release of a related provision in the accounts), including interest received, is £2,713,683. As the original tax expense was debited to the revenue column of the income statement, the benefit of this recovery has been credited to the revenue column of the income statement and has resulted in an uplift of 3.22p per share to the Company’s revenue earnings per share for the year ended 31 August 2020. Subsequently, on 29 June 2020, the Company received the corporation tax refund including interest. More information is given in note 7 on page 81 of the Annual Report and Financial Statements.
The Board recognises the importance to investors that the market price of the Company’s shares should not trade at a significant discount to the underlying NAV. Accordingly, the Board monitors the Company’s discount to NAV and will look to buyback shares and/or operate six monthly tender offers in normal market conditions if it is deemed to be in the interests of shareholders as a whole.
As reported in the Half Yearly Financial Report, the Directors exercised their discretion not to operate the half yearly tender offers in November 2019 and May 2020, and it was announced on 15 September 2020 that the Board had decided not to implement a semi-annual tender offer in November 2020. Over the six-month period to 31 August 2020, the average discount to NAV (cum income) was 4.6%. The Board therefore concluded that it was not in the interests of shareholders as a whole to implement the latest semi-annual tender offer.
During the year the Company bought back 390,000 ordinary shares in the market at a total cost of £1,506,000. As the COVID-19 pandemic took hold and market conditions deteriorated during March, the Company’s share price fell sharply and the discount briefly widened to 13.2% before rapidly narrowing again. No further shares have been purchased since the year end, up to and including the date of this report. All repurchased shares have been placed in treasury.
Resolutions to renew the Company’s semi-annual tender offers and share buyback authorities will be put to shareholders at the forthcoming Annual General Meeting.
The impact of COVID-19 is unpredictable and we are now contemplating an economic downturn of unknown scale and duration. The market falls in March and April were indiscriminate, only to be followed by a dramatic rally, and we anticipate continued volatility for European equities and the broader market. The €750 billion European Recovery Fund agreed by EU leaders in July is a step towards a more resilient European Union and an exceptional response to temporary but extreme circumstances. The European Recovery Fund should be supportive of a more robust economy and monetary union and is a significant step in the right direction.
The Board has maintained a regular dialogue with our Portfolio Managers to monitor the resilience of the Company’s portfolio in these extraordinary times. The investment team is very experienced and has a wide range of resources dedicated to the European universe. Our Portfolio Managers will continue to focus on well-capitalised companies with strong balance sheets and quality growth investment opportunities which have served us well during the year under review.
ANNUAL GENERAL MEETING (AGM)
The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on Tuesday, 1 December 2020 at 12 noon. Shareholders will not be able to attend the AGM whilst current restrictions in relation to the COVID-19 pandemic are in force and they are therefore advised to submit their votes by proxy. If the current restrictions remain in force, the only attendees who will be permitted entry to the meeting will be those who will need to be present to form the quorum to allow the business to be conducted. Shareholders are encouraged to check the Company’s website at www.blackrock.com/uk/brge for updates to the AGM arrangements as changes may well be required to comply with new guidance and/or Government measures.
22 October 2020
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INVESTMENT MANAGER’S REPORT
The Company enjoyed positive performance over the period with a share price increase of 18.0% and underlying NAV increase of 16.9% in the year ended 31 August 2020. By way of comparison, the FTSE World Europe ex UK Index gained 0.7% over the same period. All performance returns are in sterling terms with dividends reinvested.
The year ended 31 August 2020 saw unprecedented levels of uncertainty, dominated by a trade war between the world’s two largest economies, the US and China, as well as a global pandemic which led to a shutdown of many economies across the world. While news flow around the US-China trade war quietened down with the signing of a Phase I trade agreement between both countries in January, renewed optimism was sadly met by the COVID-19 crisis which posed a significant challenge for global risk assets.
As we now know, the nature and scale of the disruption has been unprecedented. That being said, from relatively early in the crisis our analysis led us to feel optimistic about the recovery potential of the global economy given the absence of the underlying economic imbalances that typically accompany longer lasting recessions and bear markets. In our view the 2020 downturn was politically induced, driven by the mostly popular decisions by governments to prioritise public health over the economy. The scale of the fiscal response also reassured us that economies would not suffer large scale or permanent demand destruction outside of a few specific industries. Estimates from McKinsey suggest that European governments have allocated circa US$4 trillion to mitigate the impacts of the economic shutdowns and, as a percentage of Gross Domestic Product, Germany, France and the UK are spending roughly 10 times more than they did during the 2008 global financial crisis (Source: McKinsey & Company, based on IMF data, June 2020).
Despite this extraordinary level of fiscal and monetary support it is also clear that this volatile financial market episode posed a severe test to any investment philosophy. For us it required a heightened focus on maintaining our long-term approach to investing, thinking like business owners and long-term stewards of our clients’ capital. While there was an atmosphere of panic amongst some market commentators, we were able to lean on our investment process: focusing on well-run businesses with a clearly articulated strategy, high returns on capital, strong free cash-flow generation and options to deploy capital into growth projects at attractive returns. Whilst this process leads us to businesses which are fundamentally durable and resilient, we had to endure a certain degree of loss tolerance in the short term: maintaining positions in many of our world leading more cyclical businesses and avoiding the temptation of reacting to short-term market gyrations by positioning the portfolio more defensively.
Ultimately, we believe this approach creates the greatest amount of value for our clients over the long term, which is why we made few changes to the general composition of the portfolio during the period aside from opportunistically adding to some of our highest conviction ideas at compelling valuations.
Large market sell-offs like the one experienced in March also affords patient investors opportunities to initiate positions in world-class businesses such as Atlas Copco, which we see as one of the most attractive industrial businesses in our investment universe. The company sells mission critical components such as compressors used in petrochemical and processing plants and vacuum pumps used in the production of semi-conductor chips and equipment. Its expanding base of installed equipment supports the company’s aftermarket and services business which gives a high level of growing recurring revenues. Overall, the company generates high returns on capital, is extremely cash generative and has a net cash balance sheet, which means it is a perfect fit for this portfolio.
Reflecting upon how our portfolio companies performed during the last twelve months, we would categorise our holdings in three broad clusters: those most directly impacted by lockdowns and travel restrictions; those which proved their resilience through the skilful stewardship of their management teams; and finally those which have become direct beneficiaries of the pandemic.
The first category includes some of the Company’s largest detractors over the past year. These include aerospace holding Safran and travel technology company Amadeus IT Group, which both suffered due to widespread travel bans. We thoroughly examined these companies’ balance sheets and cashflows and engaged extensively with their management teams. Even with the postponement of engine deliveries and a reduction in scope within the maintenance business we believed that Safran had sufficient balance sheet headroom and cost levers to pull to get through this difficult period and beyond, particularly since the heavy investment phase in their new LEAP engine is behind them. Management have also proven extraordinarily proactive in reducing costs.
In the long term we expect air travel to remain a growing industry supplied by an oligopoly of engine-makers, which should allow for durable value creation when traffic patterns start to normalise.
Amadeus IT Group, which provides IT infrastructure solutions for airlines, travel agents and hotels, was severely impacted by the sudden stop in economic activity. The company took swift action to right size its cost base and to secure a strong balance sheet position. Given its technology leadership, the company has taken market share in this downturn, winning new airlines as well as expanding the product offering to existing clients. Its unique capabilities in air traffic disruption management and ticket changing have proven particularly popular in this context.
Overall, we consider both Safran and Amadeus IT Group as good examples of businesses that should come out of this crisis with stronger market positions by capitalising on the weaker competitive position of their main peers.
Two of our emerging European holdings, Bank Pekao and Alpha Bank, saw share prices directly impacted by the crisis as yield curves flattened and investors priced in a credit loss cycle equivalent in scale to the global financial crisis in 2008/09. In our mind, this thesis will likely prove too pessimistic given government support schemes for small and medium sized businesses across Europe. Further, regulation following 2008/09 ensured that banks now have stronger capital positions to survive these challenging market conditions.
These detractors to portfolio returns were more than offset by companies which were able to prove their resilience, many as a result of strong execution by company management teams. Evaluating management capabilities has long been a core pillar of our stock selection process. While one can assess management quality in various ways, we would suggest that scrutinising an executive’s ability to operate effectively during the largest economic contraction since World War II proves a formidable test in itself.
In our mind, DSV Panalpina, one of the global leaders in freight forwarding and logistics, constitutes a prime example of strong operational execution. We believe DSV Panalpina has one of the best management teams in any industry across Europe, with an exceptional track record in creating value by successfully deploying capital through acquisitions. This was evidenced further in a recent meeting with management which revealed that newly integrated Panalpina increased volumes in DSV’s German operations by 50% with no net additions in costs. Overall, DSV Panalpina managed to increase operating profits during the second quarter by 63% versus the same period last year by over-delivering on deal related cost synergies and via capturing higher air yields from freight planes that came with their Swiss acquiree. These results not only significantly surpassed market expectations but they are all the more impressive when held against the backdrop of one of the worst periods for global trade volumes we are likely to experience in our careers.
Royal Unibrew, a company which operates in very different end markets to DSV Panalpina, also benefited from its management team’s excellent stewardship during the period. The brewing and beverage company’s decentralised organisational structure brings them closer to their end customers and allows local management to identify trends for products, brands, packaging and consumption and to react quickly to newly emerging opportunities. This is crucial in an industry shaped by changing consumer preferences and we believe played a significant role in Royal Unibrew being able to reinstate full year 2020 guidance in June 2020, the first beverage company to do so.
A relentless focus on meeting and exceeding customer requirements has also benefited Sika, one of the global leaders in the development and production of specialty chemicals used in large construction and infrastructure projects. The company’s focus on research and development (R&D) and product innovation make them an indispensable partner to their customers, which in turn allows for a healthy degree of pricing power, crucial in an environment where many investors expected a sharp contraction in demand for its products. As we have learnt since, global construction spend has been one of the few income streams that has shown great resilience and is considered an end market poised to benefit from future stimulus programmes, a trend which has already started to materialise in Sika’s numbers.
Not for the first time, ASML was among the Company’s top performance contributors for the year. This company dominates its market segment through R&D leadership and unmatched product innovation. ASML is the global leader in cutting edge photolithography systems used in the semiconductor industry. Their Extreme Ultra-Violet machine tools business has amassed a US$10.5 billion order backlog, which means these machines are now sold out until the middle of 2021. At times we like to refer to businesses like ASML as ‘order book’ companies, as its tools play such an integral part in the technology roadmap of clients like TSMC and Samsung that a decision to delay or cancel an order potentially has multi-year strategic implications. This is why ASML has managed to weather this crisis well and why we continue to see a long runway of growth, benefiting from structural tailwinds such as data centre investments, artificial intelligence and cloud computing.
Another beneficiary of this trend towards digitalisation is Netcompany Group, a provider of information technology solutions and consultancy services. Founder run, we believe this is an exceptionally well-managed company with a strong value creating culture. Rather impressively, customer demand during the crisis remained virtually unchanged with the company maintaining its target of 18-20% organic sales growth for 2020. For us this was the result of many customers continuing to prioritise digitalisation investments and the company executing strongly by servicing clients from remote locations. Netcompany Group benefited further from its diverse client base across the financial, telecommunication, retail, energy and industrial sectors, as well as governments and municipalities. Overall, we see the group’s end markets offering attractive growth opportunities for many years to come.
The final grouping of companies that warrant comment are those which directly benefited from the pandemic. Our long-standing position in contract drug manufacturer Lonza Group was amongst the top performers over the past year. Its unrivalled market position was highlighted yet again during a recent conversation with the chairman where we learnt that practically all of Lonza Group’s global manufacturing capacity is sold out. This reflects the strong demand it enjoys in the production of biological drugs, as well as in the development of gene therapy and vaccines. The operational performance of the business remains strong, as impressive cost control coupled with the potential disposal of non-core special ingredients assets leaves investors with a highly attractive investment proposition of long duration growth in earnings and cashflows.
Within the same sector, a position in in vitro diagnostics company DiaSorin contributed equally strongly as it benefited from the crisis due to its role in developing antibody tests for COVID-19. The Italian company develops and manufactures reagents for in vitro diagnostics and creates products for a variety of tests in fields including infectious disease, hepatitis, endocrinology, therapeutic drug monitoring and autoimmunity. The last few months have helped the group raise its profile among US hospital groups since both speed of development as well as accuracy of its COVID-19 tests compare favourably to its much larger US peers, which in itself bodes well for future opportunities to generate new business in a large and attractive market.
For this Company, portfolio construction remains purposefully designed to tap into a diverse range of end markets and income streams, from consumer goods to the construction industry, to trade related companies, and technology capex. Overall, we follow a high conviction approach that seeks to deliver a diversified stream of alpha for our shareholders, which makes it pleasing to see those diverse sources of performance in portfolio returns for the year.
As active investors, we have never believed a positive view on the European economy to be a prerequisite for attractive equity returns in the region. In our mind, the European market remains home to many exceptional businesses that have and will continue to provide compelling investment opportunities regardless of the wider economic outlook.
That being said, we find ourselves today feeling more optimistic about the outlook for Europe than we have done in many years. The newly established European Recovery Fund marks a structural change in the outlook for Europe and provides a facility for a cohesive response to all future crises. While the Eurozone does not appear en route towards full fiscal union, it is taking a significant step towards stronger fiscal co-ordination when it matters. In our view, this deal sets a precedent. The EU issues debt in a crisis, which is why we expect some common fiscal response to play a greater role in future crises as well.
As far as this €750 billion European Recovery Fund is concerned, we expect it to direct spending, focused on the periphery, towards a green and digital transition, which should not only lend support to countries most severely hit by the crisis but it also offers the potential to make the region more competitive in a global context over time. We see interest free grants providing necessary incentives for conducting pro-growth reforms. The overall benefit of such actions should be most acutely felt in smaller countries in Emerging Europe, which is a designated part of the investment universe of this Company.
Finally, while a material improvement for the region’s economic and political stability and outlook, one should refrain from considering these latest developments as a tide that lifts all boats in European equity markets. Structural challenges are likely to remain in some industries and we believe investors will be best served by staying selective. Consequently, we continue to focus rigorously on taking an active approach to stock selection for this Company by identifying and investing in companies with superior business models, strong management teams and growth prospects that enable them to earn an attractive spread over their cost of capital. We believe these wealth creating businesses are the key to delivering strong shareholder returns over the long term.
STEFAN GRIES AND SAM VECHT
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
22 October 2020
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TEN LARGEST INVESTMENTS
1 + Sika (2019: 5th)
Market value: £24,804,000
Share of investments: 6.0%
A speciality chemical company with a leading position in both construction chemicals and in bonding agents for the automotive industry. Sika has proprietary technology within adhesives, which has an increasing array of applications as technology advances. Last year’s acquisition of rival Parex allowed Sika to realise cost synergies through optimising its production footprint and through enhanced direct distribution channels.
2 + ASML (2019: 10th)
Market value: £24,722,000
Share of investments: 6.0%
A Dutch company which specialises in the supply of photolithography systems for the semiconductor industry. The company is at the forefront of technological change and invests in leading research and development to capture the structural growth opportunity supported by growth in mobile devices and microchip components. The high barriers to entry within the industry give ASML a protected position with strong pricing power allowing growth in margins whilst they continue to innovate. The company has strong management who aim to create long-term value for the business whilst returning excess cash to shareholders.
3 = SAP (2019: 3rd)
Market value: £23,741,000
Share of investments: 5.8%
One of the leading global enterprise software providers. Its S4/Hana software and database solution appears a ‘must own’ product for a large existing client base in need of enhanced data analytics capabilities. In our view the company is one of Europe’s best defensive assets, with an enviable starting position of more than 75% of total worldwide transaction revenue having a touchpoint with an SAP system. Further, customers’ transitions to cloud based software improves the resiliency of the earnings and cash flows and we expect recurring revenue to amount to 70-75% of group sales by year-end and continue to grow in the next few years.
4 + Lonza Group (2019: 7th)
Health care company
Market value: £21,621,000
Share of investments: 5.3%
A Swiss biotechnology and speciality chemicals group. Lonza Group has established itself as one of the leading contract-manufacturers of high-end biological drugs, as well as cell and gene therapy. Overall, we see those end markets growing at double digit rates well into 2025 and beyond, which leaves Lonza Group well placed to deliver attractive growth in earnings and cashflows regardless of the prevailing macro-economic environment.
5 + Kering (2019: 27th)
Consumer services company
Market value: £21,256,000
Share of investments: 5.2%
A French luxury group owning brands such as Gucci, Yves Saint Laurent and Bottega Veneta. We believe Kering is one of the winners in a ‘winner takes all’ market given the strength and resilience of its brands. This position is cemented by its best in class e-commerce offering, which in combination with a rejuvenated product portfolio, has enabled Kering to capture the imagination of global millennials. We believe Kering remains an extremely well-positioned company with a strong balance sheet that offers optionality for both increased shareholder returns as well as value accretive deals.
6 – Novo Nordisk (2019: 1st)
Health care company
Market value: £20,976,000
Share of investments: 5.1%
A Danish multinational pharmaceutical company which is a leader in diabetes care. We expect growth in earnings and cashflows driven by demand for ‘Ozempic’ which treats Diabetes type 2. Overall, we believe Novo Nordisk offers attractive long-term growth potential at high returns and sector leading cash flow conversion with any excess in cash being returned to shareholders.
7 – Royal Unibrew (2019: 6th)
Consumer goods company
Market value: £20,531,000
Share of investments: 5.0%
A brewing and beverage company based in Denmark. Through a number of well-timed acquisitions, the group has transformed itself into a multi-beverage company offering attractive growth in soft drink niches at high returns with significant potential to export their brands with strong European heritage into International markets.
8 + DSV Panalpina (2019: n/a)
Market value: £18,798,000
Share of investments: 4.6%
A Danish freight forwarding company with a strong acquisitive history. Their success in making acquisitions has been facilitated by their strong technology platform which drives operational efficiencies leading to high conversion margins. In 2019 DSV took over Swiss peer Panalpina in its largest ever acquisition which they have been integrating successfully.
9 = RELX (2019: 9th)
Consumer services company
Market value: £16,467,000
Share of investments: 4.0%
A multinational information and analytics company which has high barriers to entry in most of its divisions, including scientific publishing. The capital light business model allows for a high rate of cash flow conversion with repeatable revenues built on subscription-based models. The business also benefits from the structurally increasing usage of data globally, which supports their data analytics business.
10 + Hexagon (2019: 18th)
Market value: £14,236,000
Share of investments: 3.5%
An industrial and software conglomerate. The business specialises in the provision of geo-mapping and monitoring software and sensors, as well as plant management and automation systems. Its products have applications in diverse end markets including smart phones, mining automation, construction surveying and agriculture optimisation.
All percentages reflect the value of the holding as a percentage of total investments.
Together, the ten largest investments represent 50.5% of the Company’s portfolio (31 August 2019: 52.8%).
INVESTMENTS AS AT 31 AUGUST 2020
|Amadeus IT Group||Spain||4,420||1.1|
|Oil & Gas|
|Bezeq – Israeli Telecommunication||Israel||6,893||1.7|
All investments are in ordinary shares unless otherwise stated. The total number of investments held at 31 August 2020 was 38 (31 August 2019: 33).
Industry classifications in the table above are based on the Industrial Classification Benchmark standard for categorisation of companies by industry and sector.
As at 31 August 2020, the Company did not hold any equity interests comprising more than 3% of any company’s share capital.
INVESTMENT EXPOSURE AS AT 31 AUGUST 2020
|% of Portfolio|
|€1bn to €10bn||19.8|
|€10bn to €20bn||10.0|
|€20bn to €50bn||42.1|
|Number of investments||% of|
|£1m to £3m||1||0|
|£3m to £5m||4||4|
|£5m to £10m||19||37|
DISTRIBUTION OF INVESTMENTS
|Oil & Gas||3.8|
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The Directors present the Strategic Report of the Company for the year ended 31 August 2020. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.
The Chairman’s Statement together with the Investment Manager’s Report form part of this Strategic Report. The Strategic Report was approved by the Board at its meeting on 22 October 2020.
The Company carries on business as an investment trust and has a premium listing on the London Stock Exchange. Its principal activity is portfolio investment. Investment trusts are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading investment risk.
The Company’s objective is the achievement of capital growth, primarily through investment in a focused portfolio constructed from a combination of the securities of large, mid and small capitalisation European companies, together with some investment in the developing markets of Europe. The Company will also have the flexibility to invest in any country included in the FTSE World Europe ex UK Index, as well as the freedom to invest in developing countries not included in the Index but considered by the Manager and the Directors as part of greater Europe.
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
The Company invests in accordance with the objective given above. The Board is collectively responsible to shareholders for the long-term success of the Company and is its governing body. There is a clear division of responsibility between the Board and BlackRock Fund Managers Limited (the Manager). Matters reserved for the Board include setting the Company’s strategy, including its investment objective and policy, setting limits on gearing, capital structure, governance, and appointing and monitoring of performance of service providers, including the Manager.
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third party service providers including the Manager, who is the principal service provider. In accordance with the Alternative Investment Fund Managers’ Directive (AIFMD) the Company is an Alternative Investment Fund (AIF). BlackRock Fund Managers Limited is the Company’s Alternative Investment Fund Manager.
The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited (BIM (UK) or the Investment Manager). The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.
The Company delegates fund accounting services to BIM (UK), which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (BNYM). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. Details of the contractual terms with the Manager and the Depositary and more details of sub-delegation arrangements in place governing custody services are set out in the Directors’ Report.
The Company’s policy is that the portfolio should consist of approximately 30-70 securities and the majority of the portfolio will be invested in larger capitalisation companies, being companies with a market capitalisation of over €5 billion. Up to 25% of the portfolio may be invested in companies in developing Europe. The Company may also invest up to 5% of the portfolio in unquoted investments. However, overall exposure to developing European companies and unquoted investments will not in aggregate exceed 25% of the Company’s portfolio.
As at 31 August 2020, the Company held 38 investments and 4.2% of the portfolio was invested in developing Europe. The Company had no unquoted investments.
Investment in developing European securities may be either direct or through other funds, including those managed by BlackRock Fund Managers Limited, subject to a maximum of 15% of the portfolio. Direct investment in Russia is limited to 10% of the Company’s assets. Investments may also include depositary receipts or similar instruments representing underlying securities.
The Company also has the flexibility to invest up to 20% of the portfolio in debt securities, such as convertible bonds and corporate bonds. No bonds were held at 31 August 2020. The use of any derivative instruments such as financial futures, options and warrants and the entering into of stock lending arrangements will only be for the purposes of efficient portfolio management.
While the Company may hold shares in other investment companies (including investment trusts), the Board has agreed that the Company will not invest more than 15%, in aggregate, of its gross assets in other listed closed-ended investment funds (save to the extent that such closed-ended investment funds have published investment policies to invest no more than 15% of their total assets in such other listed closed-ended investment funds).
The Company achieves an appropriate spread of risk by investing in a diversified portfolio of securities.
The Investment Manager believes that appropriate use of gearing can add value over time. This gearing typically is in the form of an overdraft facility which can be repaid at any time. The level and benefit of any gearing is discussed and agreed regularly by the Board. The Investment Manager generally aims to be fully invested and it is anticipated that gearing will not exceed 15% of net asset value (NAV) at the time of drawdown of the relevant borrowings. At the balance sheet date, the Company had net gearing of 5.7% (2019: 0.7%).
The Investment Manager takes a bottom-up approach to investing, meaning companies are analysed on an individual basis upon a number of qualitative and quantitative measures. Research is comprehensive and collaborative, backed by a team of 19 European Equity analysts and a further seven Emerging European analysts who conduct over 1,200 company meetings a year.
Idea generation is the first step of the investment process and important in ensuring that there is a continuous flow of new ideas entering the team’s proprietary research process. There is a structured approach to research, a dedicated research coordinator, and a formal research pipeline to ensure that efficient use is made of team resources and to prioritise research to take advantage of the most promising investment opportunities.
As part of their research, the analyst will conduct a thorough industry and company analysis using a range of valuation techniques depending on the company and sector. Time is spent analysing a company’s market dynamics, revenue drivers, financial statements, valuations and risks to the central scenario. The team also seek to understand the factors that influence a share price, as well as what the market is anticipating or missing.
As part of the company analysis, the analyst completes a proprietary research template which has been designed to capture all data relevant to the investment case in a concise and consistent framework. This consistency drives focus on debate and discussion and helps to ensure the investment case is robust.
Research on each company belongs to the analyst; however, portfolio construction and investment decisions within the Company are entirely the responsibility of the Investment Manager. Primary investment criteria the Investment Manager looks for includes:
· Quality management
· Strong free cash flow conversion
· Options to invest in growth
· Unique aspects
This focus on sustainable cash returns and unique franchises should help concentrate the portfolio towards the best ideas delivered by the European and Emerging European Equity teams and drive positive outcomes for our clients.
In the year to 31 August 2020, the Company’s NAV per share returned 16.9% (compared with a return in the FTSE World Europe ex UK Index of 0.7%) and the share price returned 18.0% (all percentages calculated in sterling terms with dividends reinvested). The Investment Manager’s Report includes a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Income Statement in the Financial Statements. The total profit for the year, after taxation, was £55,862,000 (2019: £18,993,000) which is reflected in the increase in the net asset value of the Company. The revenue return amounted to £5,776,000 (2019: £4,160,000) and relates to net revenue earnings from dividends received during the year after adjusting for expenses, as well as the positive outcome on a tax ruling relating to overseas dividends.
As explained in the Company’s Half Yearly Financial Report, the Directors declared an interim dividend of 1.75p per share (2019: 1.75p). The Directors recommend the payment of a final dividend of 4.40p per share, making a total dividend of 6.15p per share (2019: 5.85p). Subject to approval at the forthcoming Annual General Meeting, the dividend will be paid on 9 December 2020 to shareholders on the register of members at the close of business on 30 October 2020.
The Board’s main focus is to achieve capital growth. The future performance of the Company is dependent upon the success of the investment strategy and, to a large extent, on the performance of financial markets. The outlook for the Company is discussed in both the Chairman’s Statement and Investment Manager’s Report.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust with no employees, the Company has no direct social or community responsibilities or impact on the environment. However, the Directors believe that it is in shareholders’ interests to consider human rights issues and environmental, social and governance factors when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on pages 55 and 56 of the Annual Report and Financial Statements.
MODERN SLAVERY ACT
As an investment vehicle, the Company does not provide goods or services in the normal course of business and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 31 August 2020, all of whom held office throughout the year, are set out in the Directors’ Biographies on pages 25 and 26 of the Annual Report and Financial Statements. The Board consists of two male Directors and two female Directors. The Company’s policy on diversity is set out on page 53 of the Annual Report and Financial Statements. The Company does not have any executive employees.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to other investment trusts are set out below. As indicated in the footnote to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary on pages 104 to 106 of the Annual Report and Financial Statements.
Additionally, the Board regularly reviews the performance of the portfolio, as well as the net asset value and share price of the Company and compares this against various companies and indices. The Company does not have a benchmark. However, the Board reviews performance and ongoing charges against a peer group of European investment trusts and open-ended funds, as well as the FTSE World Europe ex UK Index.
|As at |
|As at |
|Net asset value per share||459.97p||399.52p|
|Net asset value total return1, 2||+16.9%||+6.3%|
|Share price total return1, 2||+18.0%||+7.9%|
|Discount to net asset value2||2.8%||3.6%|
|Revenue return per share||6.85p||4.87p|
|Ongoing charges2, 3||1.01%||1.08%|
1 This measures the Company’s share price and NAV total return, which assumes dividends paid by the Company have been reinvested.
2 Alternative Performance Measures, see Glossary on pages 104 to 106 of the Annual Report and Financial Statements.
3 Ongoing charges represent the management fee and all other operating expenses, excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation and certain non-recurring items, as a % of average daily net assets.
The Company is exposed to a variety of risks and uncertainties. As required by the 2018 UK Corporate Governance Code (the UK Code), the Board has put in place a robust ongoing process to identify, assess and monitor the principal risks and emerging risks facing the Company. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.
The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control, are reviewed on a regular basis by the Audit and Management Engagement Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee chairmen of the BlackRock investment trusts setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit and Management Engagement Committee also periodically receives and reviews internal control reports from BlackRock and the Company’s service providers.
The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. The risks identified by the Board have been described in the table that follows, together with an explanation of how they are managed and mitigated. Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.
The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.
The principal risks and uncertainties faced by the Company during the financial year, together with the potential effects, controls and mitigating factors are set out in the following table.
The potential loss that the Company could incur if a counterparty is unable (or unwilling) to perform on its commitments.
Due diligence is undertaken before contracts are entered into and exposures are diversified across a number of counterparties.
The Depositary is liable for restitution for the loss of financial instruments held in custody unless able to demonstrate the loss was a result of an event beyond its reasonable control.
The returns achieved are reliant primarily upon the performance of the portfolio.
The Board is responsible for:
· deciding the investment strategy to fulfil the Company’s objective; and
· monitoring the performance of the Investment Manager and the implementation of the investment strategy.
An inappropriate investment policy may lead to:
· underperformance compared to the reference index;
· a reduction or permanent loss of capital; and
· dissatisfied shareholders and reputational damage.
To manage this risk the Board:
· regularly reviews the Company’s investment mandate and long-term strategy;
· has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on;
· receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio;
· monitors and maintains an adequate spread of investments in order to minimise the risks associated with particular countries or factors specific to particular sectors, based on the diversification requirements inherent in the investment policy;
· receives and reviews regular reports showing an analysis of the Company’s performance against the FTSE World Europe ex UK Index and other similar indices; and
· has been assured that the Investment Manager has training and development programmes in place for its employees and its recruitment and remuneration packages are developed in order to retain key staff.
|Legal and regulatory compliance|
The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions, and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments.
Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event, the investment returns of the Company may be adversely affected.
Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings, or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010.
Amongst other relevant laws, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules, Disclosure Guidance and Transparency Rules and Market Abuse Regulation.
The Investment Manager monitors investment movements, the level and type of forecast income and expenditure and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.
Compliance with the accounting rules affecting investment trusts are also carefully and regularly monitored.
The Company Secretary, Manager and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations. The Board and the Manager also monitor changes in government policy and legislation which may have an impact on the Company.
Market risk arises from volatility in the prices of the Company’s investments. It represents the potential loss the Company might suffer through realising investments in the face of negative market movements.
Changes in general economic and market conditions, such as currency exchange rates, interest rates, rates of inflation, industry conditions, tax laws, political events and trends, including the impact of the UK leaving the EU, can also substantially and adversely affect the securities and, as a consequence, the Company’s prospects and share price.
Market risk includes the potential impact of events which are outside the Company’s control, such as the COVID-19 pandemic.
The Board considers the diversification of the portfolio, asset allocation, stock selection, and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager.
The Board monitors the implementation and results of the investment process with the Investment Manager.
The Board also recognises the benefits of a closed-end fund structure in extremely volatile markets such as those experienced with the COVID-19 pandemic. Unlike open-ended counterparts, closed-end funds are not obliged to sell-down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed-end fund structure to remain invested for the long term enables the Portfolio Managers to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves.
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties and is dependent on the control systems of the Manager, the Depositary, Custodian and Fund Accountant, which maintains the Company’s assets, dealing procedures and accounting records.
The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements depend on the effective operation of the systems of these other third-party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating effectiveness.
Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records (including cyber security risk) could prevent the accurate reporting and monitoring of the Company’s financial position.
Due diligence is undertaken before contracts are entered into with third-party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board.
The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to and also a summary of the controls put in place by the Manager, Depositary, Custodian, Fund Accountant and Registrar specifically to mitigate these risks.
Most third-party service providers produce internal control reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit and Management Engagement Committee for review. The Committee would seek further representations from service providers if not satisfied with the effectiveness of their control environment.
The Company’s assets are subject to a strict liability regime and, in the event of a loss of assets, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control.
The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers on a regular basis and compliance with the Investment Management Agreement annually.
The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of its review of the Company’s risk register. In respect of the unprecedented and emerging risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board has received reports from key service providers setting out the measures that they have put in place to address the crisis, in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board are confident that a good level of service has and will be maintained.
The Company’s investment activities expose it to a variety of financial risks which include market risk, counterparty credit risk, liquidity risk and the valuation of financial instruments.
Details of these risks are disclosed in note 15 to the Financial Statements, together with a summary of the policies for managing these risks.
Marketing efforts are inadequate or do not comply with relevant regulatory requirements. There is a failure to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening of the discount.
The Board reviews marketing strategy and initiatives and the Manager is required to provide regular updates on progress. BlackRock has a dedicated investment trust sales team visiting both existing and potential clients on a regular basis. Data on client meetings and issues raised are provided to the Board on a regular basis.
All investment trust marketing documents are subject to appropriate review and authorisation.
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the twelve months referred to by the ‘Going Concern’ guidelines.
The Board is cognisant of the uncertainty surrounding the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for many of the Company’s portfolio holdings. Notwithstanding this crisis, and given the factors stated below, the Board expects the Company to continue for the foreseeable future and has therefore conducted this review for a period of three years. This is generally the investment holding period investors consider while investing in the European sector.
In its assessment of the viability of the Company, the Directors have noted that:
· the Company invests predominantly in highly liquid, large listed companies so its assets are readily realisable;
· the Company has limited gearing and no concerns around facilities, headroom or covenants;
· the Company’s forecasts for revenues, expenses and liabilities are relatively stable and it has largely fixed overheads which comprise a small percentage of net assets (1.01%); and
· the business model should remain attractive for much longer than three years, unless there is significant economic or regulatory change.
The Directors have also reviewed:
· the impact of a significant fall in European equity markets on the value of the Company’s investment portfolio, factoring in the impact of the recent volatility related to the COVID-19 pandemic;
· the ongoing relevance of the Company’s investment objective, business model and investment policy in the current environment; and
· the level of demand for the Company’s shares.
The Board has also considered a number of other factors, including:
· portfolio liquidity in light of the COVID-19 pandemic on global market liquidity. As at 21 October 2020, 97.7% of the portfolio was estimated as being capable of being liquidated within 3 days;
· the Company’s revenue and expense forecasts in light of the COVID-19 pandemic and its anticipated impact on dividend income and market valuations. The Board is confident that the Company’s business model remains viable and that there are sufficient resources to meet all liabilities as they fall due for the period under review;
· the Company’s borrowing facility and considers that the Company continues to meet its financial covenants in respect of this facility;
· the principal risks and uncertainties as set out above and is confident that the Company has appropriate controls and processes in place to manage these and to maintain its operating model, even given the challenges posed by COVID-19;
· the operational resilience of the Company and its key service providers and their ability to continue to provide a good level of service for the foreseeable future;
· the effectiveness of business continuity plans in place for the Company and key service providers; and
· the level of income generated by the Company and future income forecasts.
Based on the results of their analysis, the Directors have concluded that there is a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the period of their assessment.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE COMPANY
New regulations (The Companies (Miscellaneous Reporting) Regulations 2018) require directors of large companies to explain more fully how they have discharged their duties under section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This includes the likely consequences of their decisions in the longer term and how they have taken wider stakeholders’ needs into account.
The enhanced disclosure that follows covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions. The Board considers the main stakeholders in the Company to be the Manager, Investment Manager and the shareholders. In addition to this, the Board considers investee companies and key service providers of the Company to be stakeholders; the latter comprise the Company’s Custodian, Depositary, Registrar and Broker.
key service providers
|Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long-term capital growth.||The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation.||In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason the Board consider the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle.||Portfolio holdings are ultimately shareholders’ assets and the Board recognise the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management.|
A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.
|Investment mandate and objective||The Board has responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns.||The Board worked closely with the Investment Manager throughout the year in further developing investment strategy and underlying policies, not simply for the purpose of achieving the Company’s investment objective but in the interests of shareholders and future investors.||The portfolio activities undertaken by the Investment Manager can be found in their Report on pages 9 to 13 of the Annual Report and Financial Statements. The Investment Manager aims to construct a portfolio that is high conviction and concentrated in nature but diversified by end market exposures. Outperformance of the reference index in the year has reflected this.|
Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement and in the Strategic Report above.
|Shareholders||Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy.||The Board is committed to maintaining open channels of communication and to engage with shareholders. The Company welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Shareholders will have the opportunity to meet the Directors and Investment Manager and to address questions to them directly. The Investment Manager will also provide a presentation on the Company’s performance and the outlook.|
The Annual Report and Half Yearly Financial Report are available on the BlackRock website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the Manager’s website at blackrock.com/uk/brge.
Unlike trading companies, one-to-one shareholder meetings normally take the form of a meeting with the Investment Manager as opposed to members of the Board. The Company’s willingness to enter into discussions with institutional shareholders is also demonstrated by the programmes of institutional presentations by the Investment Manager.
If shareholders wish to raise issues or concerns with the Board, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given on page 101 of the Annual Report and Financial Statements.
|The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable.|
Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s Broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager.
The portfolio management team attended a number of professional investor meetings and held discussions with a number of wealth management desks and offices in respect of the Company during the year under review.
Portfolio holdings are ultimately shareholders’ assets and the Board recognise the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Investment Manager in respect of meetings with the management of portfolio companies.
|Responsible investing||More than ever, the importance of good governance and consideration of sustainable investment are key factors in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity.||The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors.|
The Investment Manager’s approach to the consideration of Environmental, Social and Governance (ESG) factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation, are kept under review by the Board. The Board also expects to be informed by the Manager of any sensitive voting issues involving the Company’s investments.
The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out on pages 37 and 38 of the Annual Report and Financial Statements. The Investment Manager’s engagement and voting policy is detailed on pages 40 and 41 of the Annual Report and Financial Statements and on the BlackRock website.
|The Investment Manager believes there is likely to be a positive correlation between strong ESG practices and investment performance over time.|
|Discount management||The Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount or premium to their prevailing NAV. The Board believes this may be achieved in two ways: the use of regular tender offers and the active use of share buyback powers.||The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Manager and the Company’s Broker regarding the level of discount. The Board believes that the best way of maintaining the share rating at an optimal level over the long term is to create demand for the shares in the secondary market. To this end, the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail market.|
In addition, the Board has worked closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with existing shareholders and to attract new shareholders to the Company in order to improve liquidity in the Company’s shares and to sustain the share rating of the Company.
|The Board continues to monitor the Company’s discount to NAV and will look to buyback shares and/or operate six monthly tender offers if it is deemed to be in the interests of shareholders as a whole.|
The Board decided not to implement a semi-annual tender offer in November 2019 as, over the six months to 31 August 2019, the average discount to net asset value (cum income) (NAV) was 4.0%. It also decided not to implement the May 2020 semi-annual tender offer, as over the six months to 29 February 2020, the average discount to net asset value (cum income) (NAV) was 3.3%. The Board instead decided to use its share buyback powers and during the financial year the Company bought back 390,000 shares at a cost of £1,506,000.
The Company’s average discount for the year to 31 August 2020 was 4.0% and the discount at 21 October 2020 stood at 2.1%.
|Service levels of third-party providers||The Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service, including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries; and the Company’s Broker in respect of the provision of advice and acting as a market maker for the Company’s shares.||The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources.|
The Board performs an annual review of the service levels of all third-party service providers and concludes on their suitability to continue in their role. The Board receives regular updates from the AIFM, Depositary, Registrar and Broker on an ongoing basis.
In light of the challenges presented by the COVID-19 pandemic to the operation of businesses across the globe, the Board has worked closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s key service providers.
|All performance evaluations were performed on a timely basis and the Board concluded that all key third-party service providers, including the Manager were operating effectively and providing a good level of service. The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Accountant, Registrar, Printer and Broker and is confident that arrangements are in place to ensure a good level of service will continue to be provided despite the impact of the COVID-19 pandemic.|
The interest rate on the Company’s overdraft facility with BNYM was reduced during the year by 10 basis points.
|Board composition||The Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the UK Code, including guidance on tenure and the composition of the Board’s committees.||All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions of the 2020 evaluation process are given on page 54 of the Annual Report and Financial Statements). All Directors stand for re-election by shareholders annually.|
Shareholders may attend the Annual General Meeting and raise any queries in respect of Board composition or individual Directors in person, or may contact the Company Secretary or the Chairman using the details provided on page 101 of the Annual Report and Financial Statements with any issues.
|As at the date of this report, the Board was comprised of two men and two women. No Director has a tenure in excess of nine years, although Ms Curling will have served on the Board for exactly nine years at the date of the forthcoming Annual General Meeting.|
Details of each Directors’ contribution to the success and promotion of the Company are set out in the Directors’ Report on page 44 of the Annual Report and Financial Statements and details of Directors’ biographies can be found on pages 25 and 26 of the Annual Report and Financial Statements.
The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2019 AGM are given on the Manager’s website at www.blackrock.com/uk/brge.
SUSTAINABILITY AND ESG POLICIES
Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. These ethical and sustainability issues cannot be ignored, and your Board has appointed a manager that is committed to applying the highest standards of ESG practice. Effective engagement with management is, in most cases, the most constructive way of driving meaningful change in the behaviour of investee company management. This is particularly true for the Company’s Manager given the extent of BlackRock’s shareholder engagement (BlackRock held 3,040 engagements with 2,020 companies based in 54 markets for the year to 30 June 2020). As well as the influence afforded by its sheer scale, BlackRock is well placed as Manager to fulfil these requirements due to the integration of ESG into its investment processes, the emphasis it places on sustainability, its collaborative approach in its investment stewardship activities and its position in the industry as one of the largest suppliers of sustainable investment products in the global market. More information on BlackRock’s approach to sustainability is set out below. Further details of ESG in the Investment Manager’s investment process are given on pages 55 and 56 of the Annual Report and Financial Statements.
Responsible ownership – BlackRock’s approach
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. From BlackRock’s perspective, business-relevant sustainability issues can contribute to a company’s long-term financial performance and thus further incorporating these considerations into the investment research, portfolio construction and stewardship process can enhance long-term risk adjusted returns. By expanding access to data, insights and learning on material ESG risks and opportunities in investment processes across BlackRock’s diverse platform, BlackRock believes that the investment process is greatly enhanced. The Company’s Portfolio Managers work closely with BlackRock’s Investment Stewardship team to assess the governance quality of companies and investigate any potential issues, risks or opportunities. The Portfolio Managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio.
BlackRock’s approach to sustainable investing
Considerations about sustainability have been at the centre of BlackRock’s investment approach for many years and the firm offers more than 100 sustainable products and solutions. BlackRock believes that climate change is now a defining factor in companies’ long-term prospects and that will have a significant and lasting impact on economic growth and prosperity. It is BlackRock’s belief that climate risk now equates to investment risk and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade.
In January 2020, with this transition in mind, BlackRock announced that it would accelerate its sustainable investing efforts and make a number of enhancements to its investment management and risk processes, including the following:
· heightening scrutiny on sectors with a high ESG risk, such as thermal coal producers, due to the investment risk they present to client portfolios;
· putting ESG analysis at the heart of Aladdin (BlackRock’s proprietary trading platform) and using proprietary tools to help analyse ESG risk; and
· placing oversight of ESG risk with BlackRock’s Risk and Quantitative Analysis group, to ensure that ESG risk is given increased weighting as a risk factor and is analysed with the same weight given to traditional measures such as credit or liquidity risk.
BlackRock also places a strong emphasis on sustainability in its stewardship activities. BlackRock has engaged with companies on sustainability-related questions for a number of years, urging management teams to make progress while also deliberately giving companies time to enhance disclosure consistent with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). This includes each company’s plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock is now a member of Climate Action 100+, a group of investors that engages with companies to improve climate disclosure and align business strategy with the goals of the Paris Agreement. BlackRock will be aligning its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues.
BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. In the year to 30 June 2020, BlackRock voted against or withheld votes from 5,100+ directors at 2,800 different companies. More details about BlackRock’s investment stewardship process can be found on BlackRock’s website at https://www.blackrock.com/corporate/literature/ publication/blk-annual-stewardship-report-2020.pdf.
BY ORDER OF THE BOARD
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
22 October 2020
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