Menhaden
Resource Efficiency PLC
(the
“Company”)
Final
Results for the Year Ended 31 December
2023
The
Company’s Annual Report for the year ended 31 December 2023, which includes the notice of
the Company’s forthcoming annual general meeting, will be posted to
shareholders shortly.
Copies may
be obtained by writing to the Company Secretary, Frostrow Capital
LLP at 25 Southampton Buildings, London WC2A 1AL, or from the Company’s website
–
www.menhaden.com – where up
to date information on the Company, including daily NAVs, share
prices and fact sheets, can also be found.
A copy of
the Annual Report has been submitted to the National Storage
Mechanism and will shortly be available in full, unedited text for
inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Frostrow
Capital LLP
Company
Secretary
020 3709
8733
19 April 2024
.
Strategic
Report
Company
Performance
As
at
31
December 2023
|
|
For
the year ended
31
December 2023
|
|
|
|
126.7m
|
|
23.8%
|
NAV per
share
|
|
NAV per
share total return*
|
|
|
|
2022:
£103.8 million
|
|
2022:
(16.5%)
|
|
|
|
160.3p
|
|
13.6%
|
NAV per
share
|
|
Share
price total return*
|
|
|
|
2022:
129.8p
|
|
2022:
(20.3%)
|
|
|
|
100.8p
|
|
0.9p**
|
Share
price
|
|
Dividend
|
|
|
|
2022:
89.0p
|
|
2022:
0.4p
|
|
|
|
37.2%
|
|
1.7%
|
Share
price discount to NAV per share*
|
|
Ongoing
charges ratio*
|
|
|
|
2022:
31.4%
|
|
2022:
1.8%
|
This
report contains terminology that may be unfamiliar to some readers.
The Glossary provides definitions for frequently used
terms.
*Alternative
performance measures (“APMs”)
**Subject
to shareholder approval
.
Chairman’s
Statement
Introduction
After
becoming Chair in May 2023, I am
pleased to present our ninth annual report since our launch in
July 2015. It covers the calendar
year ended 31 December 2023. By way
of reminder, the Company aims to generate long term shareholder
returns, predominantly in the form of capital growth, by investing
in businesses and opportunities that are demonstrably delivering or
benefitting significantly from the efficient use of energy and
natural resources, irrespective of their size, location or stage of
development. We are a high conviction long term patient capital
investment.
Financial performance
Short term
The
overall performance in 2023 has been encouraging, and it was
pleasing to be short listed for specialist investment company of
2023 by ‘Investment Week’.
The
Company’s total net asset value (“NAV”) increased 21.9% from £103.8
million to £126.7 million, and the Company’s share price increased
13.2% from 89.0p per share to 100.8p.
The NAV
per share increased by 16.6% from 129.8p to 160.3p in 2023 giving a
NAV per share total return* of 23.8% (2022: -16.5%). This is a
15.6% outperformance over the Company’s performance benchmark,
RPI+3% (compound), which returned 8.4%, and a 15.0% outperformance
over the AIC environmental sector which returned 8.8%.
Although
the Company’s share price discount to NAV increased to -37.2%
(2022: -31.4%), the share price total return* was a respectable
13.6% (compared to 2022: -0.3%). Notwithstanding this, the Board
continues to try to reduce the discount and actions it is taking
are outlined below.
*Alternative
Performance Measure (see Glossary)
Longer term
In line
with our aim to generate long term shareholder returns,
predominantly in the form of capital growth, the Company’s compound
NAV performance over the last 5 years of 12.3% per annum in 2023
(2022: 7.3% per annum) outperformed by 5.6%, the compound return
for our RPI +3% benchmark of 6.7% per annum (2022: 5.3% per
annum).
Moreover,
the Company’s NAV performance has been ranked 1st in the AIC
environmental sector over the last 1, 3, and 5 years. The Company
aims, wherever it can to reduce on-going charges, and over the last
5 years they have reduced by nearly 20% from 2.1% to 1.7% in 2023
(2022:1.8%). A small shareholder dividend has been paid annually
since 2018, the exception being 2020 during the global
pandemic.
Further
information and performance metrics that describe the development
of the Company over the last 9 years between 2015 and 2023 is
presented on page 89.
Investment strategy
2023 saw
the global demand for energy and resources continue to rise. The
World Meteorological Association stated that 2023 was the hottest
year ever recorded and the International Monetary Fund reported
that financial markets were underpricing climate related risk. The
need for businesses to progressively reduce their use of fossil
fuels and greenhouse gas emissions has never been so critical as
part of the green industrial shift mega trend.
We have
continued to invest in a concentrated portfolio of high quality
largely global businesses, the majority of which have a key role in
enabling the transition to a lower-carbon future. 2023 saw a
moderate reweighting towards sustainable infrastructure and
transportation, leading to a commensurate decrease towards our
digitalisation, industrial emissions reduction, water and waste
management, and clean energy themes.
Our public
equity investments, comprising 77.2% of our portfolio, performed
well during the year delivering a total return of 29.0%, and adding
21.6% to the NAV per share. The largest contributions came from our
digitalisation themed investments (Alphabet, Microsoft, Amazon) and
sustainable transport companies (VINCI, Safran and Airbus). The
weakest contributors were our investments in North American railway
companies.
Our unique
private equity co-investments, which at the end of 2023 comprised
9.7% of our portfolio, also performed well in 2023 delivering a
total return of 32.3%, adding 2.9% to the NAV per share. We made a
successful exit from our largest ever co-investment (£9.1 million)
in a clean energy developer, X-ELIO with Kohlberg Kravis Roberts
(KKR). It delivered a 2.6x return (in sterling terms) following its
acquisition in November 2023 by
Brookfield Renewables. Following on from our US$15 million commitment to The Children’s
Investment Trust (TCI) Real Estate Partners Fund III, which
finances the development of best in class energy efficient
buildings, during 2023 we made a further US$25 million commitment to TCI Real Estate
Partners Fund IV.
In
addition to the investments, our net assets as at 31 December 2023 predominantly comprised 1.5% FX
hedge and 11.8% cash. In early 2024 FX hedging was discontinued and
a proportion of the cash proceeds deployed to increase our public
equity positions. In March 2024 we
have made a new US$17.5 million clean
energy co-investment commitment with KKR in Avantus (a USA solar and energy storage developer),
further increasing our strategic asset allocation to private
equity. Further details and commentary about the performance and
development of the Company’s investment portfolio can be found in
the Portfolio Manager’s report (pages 15 to 19).
Environmental performance
In 2023,
the energy use disclosures from our listed equities reported a 7%
uplift in the renewable energy they generated and 36% increase in
renewable energy consumed, so reducing emissions from their use of
fossil fuel energy. Some 75% of our listed equities have committed
to, or set science-based targets for emissions reductions in line
with the goals of the Paris global
climate agreement.
Whilst
some companies in which the Company’s portfolio is invested, such
as in transport infrastructure, use fossil fuels, our Portfolio
Manager only invests in those that are using innovative, best
practice technological solutions to significantly reduce their
emissions and become more climate friendly. For example, Airbus is
global leader in decarbonising and improving the efficiency of
aircraft with a target that 50% will use sustainable aviation fuel
by 2030.
E-commerce
is also a key driver of decarbonisation and companies like
Microsoft and Amazon are essential utilities for millions of
businesses and consumers. Microsoft is committed to be carbon
negative by 2030. Amazon has an ambition to reach 100% renewable
energy usage across its business by 2025 and at the end of 2022
used 85% renewable energy.
The
Company is a supporter of the UN Sustainable Development Goals
(SDGs) and a snapshot of how our portfolio companies contribute to
seven key goals can be found within the Company’s Environmental
Impact Report on pages 20 to 24. It is also made available as a
separate document on our website
www.menhaden.com,
including methodological details that are not included within this
annual report.
Share price discount to NAV per share
At the end
of 2023 the shares of over 90% of the London Stock Exchange listed
investment company sector were trading at a discount, including
this Company. It is the Board’s view that this metric is not
necessarily a fair reflection of the value of our assets and
overall financial performance.
However,
the Company’s share price discount continues to be a metric that
concerns the Board and which it monitors extremely closely. The
Board has not previously favoured share buy backs as a means for
mitigation of the share price discount. It remains our view that
share buybacks are not usually in the best long-term interest of
shareholders taken a whole as they reduce the size of the Company
and increase the ongoing charges ratio.
However,
after a step-down in the share price in January 2023 the Board decided it would undertake
a modest programme of share buybacks. We considered that this might
reduce the volatility of the share price at that time, take
advantage of the accretion to NAV that buying back shares at a
discount achieves, and provide a signal to the market of our
confidence in the inherent value of the Company’s portfolio.
975,000 shares (1.2% of total issuance) were bought back between
February and April 2023. While this
provided some additional share liquidity in the volatile market
conditions at that time, the buybacks resulted in no discernible
short-term or longer-term impact on the discount. For small
investment companies, there is scant published evidence that share
buybacks can deliver any sustainable discount reduction.
During
late 2023 the Board approved an enhanced marketing and
communications plan which is being implemented by our AIFM and
Portfolio Manager with the aim to influence investor sentiment and
develop new demand for our shares to try and reduce the discount.
The efficacy of these actions, which together with the relentless
efforts of the Portfolio Manager to continue to generate strong
investment returns should help to narrow the share price discount
over time, will be continuously assessed during 2024.
While
further buybacks to help stabilise a falling share price are not
ruled out, any future decision will be dependent on the prevailing
market conditions, the Company’s available liquid resources, and
the potential conflict between accretive share buybacks and the
availability of more attractive portfolio investment opportunities
offering a greater return on capital.
Additionally,
in the course of the Board’s considerations of the impact of any
such further action, the Company, in consultation with the Takeover
Panel, identified that in the context of any such buybacks
Ben Goldsmith, the CEO of the
Portfolio Manager (Menhaden Capital Management LLP), together with
persons who are, or may be presumed to be, acting in concert with
him, hold a significant percentage of the voting rights of the
Company (27.9% of the Company’s issued share capital as at
31 March 2024). Under Rule 37 of the
Takeover Code, any increase in the percentage of shares carrying
voting rights held by a shareholder or group of persons acting in
concert with that shareholder resulting from the purchase by a
company of its own shares will be treated as an acquisition for the
purpose of Rule 9 of the Takeover Code.
The
identification of this concert party and the level of its aggregate
interests in the Company’s shares is likely to have the effect of
limiting any share buybacks. The Company and the members of the
concert party are keen to avoid inadvertently triggering Rule
9.1(a) of the Takeover Code, which requires a mandatory offer to be
made for the entire issued share capital of the Company in the
event that any person acquires an interest (taken together with
shares in which other persons deemed to be acting in concert are
interested) of 30% or more of the voting rights of the
Company.
The Board
has instructed the Company Secretary to monitor the interests and
dealings of the members of the concert party and has requested that
the Portfolio Manager keep the Board and the Company Secretary
updated with the details of any changes to the composition of the
concert party and its interests in the Company in order for the
Board to be informed of the concert party’s position prior to
considering any future share buybacks.
The Board
is asking shareholders to renew the authority to repurchase the
Company’s shares in the market at the forthcoming AGM. Buybacks
will remain at the discretion of the Board.
It remains
our aim for the Company to be in a position to enlarge its capital
base through the issuance of new shares. This would reduce the
annual ongoing charges and enhance the secondary market liquidity
of the Company’s shares, which the Board believes is in the best
interest of all shareholders. As the Company can only issue new
shares when the share price is at a premium to NAV, our fundamental
aim is to improve the share price through enhanced investment
performance supported by effective marketing strategies and
informative communications to potential new investors who are
attracted by our investment thesis and track record.
Shareholder dividend
While
income generation, via the payment of annual shareholder dividends,
is not one of our primary investment aims, such payments are an
important shareholder benefit. The Company’s dividend policy is to
pay a dividend sufficient for it to maintain compliance with its
investment trust legal status. The revenue return for the year to
31 December 2023 of £894,000 means
that the legal threshold requiring a dividend payment has been
exceeded and so, subject to shareholder approval, a dividend will
be paid for 2023, as it has been
four times previously. The Board is recommending to shareholders
that a final dividend of 0.9p per share (0.4p in 2022) be declared
in respect of the year ended 31 December
2023 and a corresponding resolution has been included in the
Notice of Meeting for the AGM. If this resolution is passed, the
dividend will be paid on 5 July 2024
to shareholders on the register on 7 June
2024. The shares will be marked ex-dividend on 6 June 2024.
Board developments
There have
been a number of changes to the Board during 2023. In May 2023 Ian Cheshire stepped down as Chair and
became an independent non-executive Director and Barbara Donoghue became Chair of the Audit
Committee. Later, in December, Barbara succeeded Ian Cheshire as Chair of the Management
Engagement Committee and was also appointed as Senior Independent
Director. Following a competitive recruitment process, I am
delighted that Soraya Charabak joined the Board in March 2023. Duncan
Budge retired from the Board at our last AGM. We are
exceedingly grateful for his valuable contributions to our Board
and Committee meetings.
Strategic outlook
Looking
ahead further, continued geo-political tensions and economic
uncertainties, with potential disruption to global supply chains,
are quite likely. For example, arising from the continuing
conflicts in the Ukraine and
Gaza; tensions between America and
China over trade; and volatility
in the price of energy and natural resources. Also the impact of
climate change, and increasing incidence of extreme weather events,
has increasing financially material consequences. All these
macro-factors have significant impacts on millions of people,
financial markets and on investor sentiment.
Notwithstanding
these challenges, the Board considers the Company’s unique strategy
and high conviction portfolio to be well placed for further capital
growth because of the high quality and the defensive and inflation
resistant properties of our investment holdings. Moreover, the
Board remains convinced all businesses must respond to climate
change by navigating the energy transition from fossil fuels to
more renewable sources and the need to be ever more energy and
resource efficient becomes even more critical to their on-going
sustainability and success. Accordingly, the Company’s investment
thesis should continue to provide long-term benefits for our
investors. The next five-yearly continuation vote for the Company
will be in July 2025.
Annual General Meeting
The
Company’s AGM will be held at the offices of Frostrow Capital LLP,
25 Southampton Buildings, London
WC2A 1AL on Thursday, 27 June 2024 at
11.30 a.m. The Notice convening the
AGM together with explanations of the proposed resolutions can be
found on pages 94 to 99 of the Annual Report. The Board considers
that all the resolutions are in the best interests of the Company
and the shareholders taken as a whole and unanimously recommend
they be approved.
The Board
strongly encourages shareholders to register their votes online in
advance of the meeting by visiting
www.signalshares.com and
following the instructions on the site. Appointing a proxy online
will not restrict shareholders from attending the meeting in person
should they wish to do so and will ensure their votes are counted
if they are not able to attend. Shareholders are encouraged to
consult the Company’s website at
www.menhaden.com for any
late changes to the arrangements. Shareholders, especially if they
are unable to attend, are invited to send any questions they may
have to the Company Secretary by email to
info@frostrow.com ahead of
the meeting.
Howard Pearce
Chairman
19 April 2024
.
Portfolio
Investments
held as at 31 December
2023
Investment
|
Country
|
Fair
Value
£’000
|
%
of
Total
Net
Assets
|
Airbus
|
France
|
15,858
|
12.5
|
Alphabet
|
United
States
|
15,342
|
12.1
|
Microsoft
|
United
States
|
13,269
|
10.5
|
Safran
|
France
|
11,329
|
8.9
|
VINCI
|
France
|
10,345
|
8.2
|
Canadian
Pacific Kansas City
|
Canada
|
9,181
|
7.2
|
Canadian
National Railway
|
Canada
|
8,536
|
6.7
|
Amazon
|
United
States
|
6,198
|
4.9
|
TCI Real
Estate Partners Fund IV*
|
United
States
|
6,021
|
4.8
|
John Laing
Group*1
|
UK
|
4,503
|
3.6
|
Ten
Largest Investments
|
|
100,582
|
79.4
|
Ocean
Wilsons
|
Bermuda
|
4,320
|
3.4
|
TCI Real
Estate Partners Fund III*
|
United
States
|
1,736
|
1.4
|
Waste
Management
|
United
States
|
886
|
0.7
|
Union
Pacific
|
United
States
|
771
|
0.6
|
ASML
|
Netherlands
|
709
|
0.6
|
KLA
|
United
States
|
593
|
0.5
|
Lam
Research
|
United
States
|
430
|
0.3
|
Total
Investments
|
|
110,027
|
86.9
|
Net
Current Assets (including cash)
|
|
16,652
|
13.1
|
Total
Net Assets
|
|
126,679
|
100.0
|
1 Investment
made through KKR Aqueduct Co-Invest L.P.
* Unquoted
Business
Description
|
Investment
Theme
|
Designs
and manufactures next generation commercial aircraft which offer
significant fuel efficiency savings
|
Sustainable
infrastructure and transportation
|
Delivers a
range of internet-based products and services for users and
advertisers, powered by renewable energy, with the group being the
largest corporate buyer of renewable power worldwide
|
Digitalisation
|
Provides
cloud infrastructure and software services which deliver energy
efficiency savings for customers versus legacy solutions
|
Digitalisation
|
Designs,
manufactures and services next generation aircraft engines which
offer significant fuel efficiency savings
|
Industrial
emissions reduction
|
Builds and
operates energy efficient critical infrastructure assets
|
Sustainable
infrastructure and transportation
|
Owns and
operates fuel-efficient freight railways in Canada and the
USA
|
Sustainable
infrastructure and transportation
|
Operates
rail freight services across North America, which represent the
most environmentally friendly way to transport freight over
land
|
Sustainable
infrastructure and transportation
|
An energy
efficient ecommerce and cloud computing business aiming to use only
renewable energy by 2030
|
Digitalisation
|
Invests in
energy-efficient real estate projects
|
Sustainable
infrastructure and transportation
|
Portfolio
of mostly renewable rail and social infrastructure
assets
|
Sustainable
infrastructure and transportation
|
|
|
Operates
ports and provides (lower climate impact) maritime services in
Brazil
|
Sustainable
infrastructure and transportation
|
Invests in
energy-efficient real estate projects
|
Sustainable
infrastructure and transportation
|
Provides
fuel-efficient rail freight services across the USA
|
Sustainable
infrastructure and transportation
|
Provides
waste management and environmental services in North
America
|
Water and
waste management
|
Develops,
manufactures and services advanced lithography systems used to
produce more energy efficient semiconductor chips
|
Digitalisation
|
Develops,
manufactures and services inspection and metrology equipment used
to increase the efficiency of semiconductor
manufacturing
|
Digitalisation
|
Develops,
manufactures and services etching and deposition equipment used to
produce more energy efficient semiconductor chips
|
Digitalisation
|
.
Portfolio
Manager’s Review
Performance
During
2023, the Company’s NAV per share increased from 129.8p to 160.3p.
Together with the 0.4p per share dividend paid in the year, this
represents a total return of 23.8% and compares to the benchmark
(RPI+3%) return of 8.4%. Importantly, this level of performance has
been achieved with no change in our appetite for, and attitude
towards, risk. The contributions to the NAV per share total return
over the period are summarised below:
|
31
December 2023
|
|
|
NAV
%
|
Contribution
%
|
Quoted
Equities
|
77.2
|
21.6
|
Private
Investments
|
9.7
|
2.9
|
FX
Hedges
|
1.5
|
2.2
|
Cash
|
11.8
|
0.0
|
Other net
current liabilities
|
(0.2)
|
(1.2)
|
Expenses
|
|
(1.7)
|
Dividend
paid
|
|
(0.4)
|
Net
Assets
|
100.0
|
|
Net
Return
|
|
23.4
|
Impact of
dividend reinvestment
|
|
0.4
|
Total
Return
|
|
23.8
|
|
|
|
|
The drive
for resource efficiency continues to accelerate, with the US and
China restarting a joint effort to
tackle climate change in November
2023 and then nearly every country in the world agreeing to
transition away from fossil fuels at the COP28 summit in December
2023. More than 100 countries also signed pledges to triple
global renewable power capacity by 2030 and double the annual rate
of energy efficiency improvements every year to 2030. Our approach
of pairing this theme with a strict focus on quality and valuation
was once again fundamental to generating good investment returns.
This preference for businesses which benefit from barriers to
entry, and which trade at reasonable valuations has led us to
invest primarily within the sustainable infrastructure and
transportation and digitalisation themes, and has mainly been
expressed in quoted equities where the return relative to risk has
been more favourable.
Investment
performance was led by the portfolio’s digitalisation holdings
(Microsoft, Alphabet and Amazon), in a reversal of their poor
performance in 2022. Safran, VINCI and Airbus performed strongly
following the aviation industry’s post Covid resurgence. Within the
private portfolio, KKR agreed a deal to sell its 50% stake (in
which the Company participated) in Spanish solar developer, X-ELIO,
to joint venture partner, Brookfield Renewable. The transaction
completed in November and crystallized an aggregate return on
invested capital of 2.15x in US dollars, equivalent to an IRR of
~13% over 8 years. This was our fourth successful exit from a
private investment since inception. In aggregate, these have
generated realised gains of approximately £21 million (and 2.0x
cost).
Key
portfolio decisions during the period included the reduction of the
Alphabet position by one half, due to concerns over rising
competition, and the partial redeployment of the proceeds into
re-establishing a position in Airbus in February 2023. Airbus has the leading narrow body
aircraft franchise and in our view is best placed to help airlines
meet their growing needs for fleet renewals and decarbonisation. We
continued to increase the size of the Airbus position over the
subsequent months. We always monitor valuations and adjust
positions accordingly where appropriate. In this vein, we opted to
take some profits on the Microsoft holding in June, following very
strong performance. We then added the proceeds, and some excess
cash, to the portfolio’s Airbus, Canadian National Railway and
VINCI holdings. We believed these investments offered similar
returns premised on less demanding valuations.
Within the
Company’s private portfolio, we made a US$25
million commitment to the fourth vintage of the TCI Real
Estate Partners strategy in March
2023. This fund will follow the same strategy, and offer
similar environmental benefits, as the TCI Real Estate Partners
Fund III. The Fund helps to finance developments which are best in
class in terms of energy efficiency and environmental standards.
The first drawdown was called in October
2023, which was funded from cash on hand and by partial
sales of quoted equity holdings.
Following
the year end and the settlement of outstanding currency hedges, we
decided to cease partly hedging US dollar and Euro currency
exposures due to changes in the outlook for currencies and a new
requirement to cash collateralise forward exposures on a daily
basis.
In
February 2023, following a widening
of the discount of the price at which the Company’s shares traded
relative to their NAV, the Board of Directors authorised the
deployment of up to £1 million for a share buyback programme.
975,000 shares (1.2% of the total issued) were purchased between
mid-February to early April at a cost of £920,000.
We
maintain a proactive stance on stewardship. We carefully assess
shareholder resolutions and engage with portfolio companies on
environmental issues. We seek to promote energy transition plans to
progress towards net zero targets and greater disclosure of
greenhouse gas emission reduction and mitigation strategies. During
the period we voted against the recommendation of both Amazon’s and
Microsoft’s management on resolutions requesting disclosure on how
the company is protecting the retirement plan’s beneficiaries from
climate risk.
Quoted Equities
Quoted
equities represented 77.2% of total NAV at 31 December 2023, and delivered a total return of
29.0% over the period, adding 21.6% to the NAV per
share.
Investment
|
Increase/
(Decrease)
%
|
Contribution
to
NAV %
|
Alphabet
|
72.2
|
5.7
|
Microsoft
|
78.5
|
5.1
|
Safran
|
39.4
|
2.9
|
Amazon`
|
90.1
|
2.7
|
VINCI
|
21.2
|
1.6
|
Airbus
|
11.7
|
1.4
|
Ocean
Wilsons
|
46.3
|
1.3
|
KLA
|
55.6
|
0.2
|
LAM
Research
|
89.1
|
0.2
|
ASML
|
36.7
|
0.2
|
Canadian
National Railway
|
6.8
|
0.1
|
Union
Pacific
|
20.7
|
0.1
|
Waste
Management Inc
|
16.0
|
0.1
|
Canadian
Pacific Kansas City
|
6.2
|
0.1
|
Note:
Percentage increase/(decrease) for individual holdings is
calculated on their local currency and based over the holding
period if bought or sold during the year.
Alphabet
is the
market leader in search. The company’s market share (>90%) has
not materially changed following the launch of Open AI’s ChatGPT
and the proliferation of large language models. Ecommerce still
represents only a fraction of total retail sales and we believe
Google’s Search business can continue to generate healthy revenue
growth going forward. The company continues to drive its
sustainability agenda with aims to achieve net-zero emissions, run
on 24/7 carbon-free energy and to replenish more water than it
consumes. Progress is also being made on costs, with management
continuing to restructure business units and reduce headcount. Core
operating margins are improving. Alphabet remains focused on using
Generative AI to enhance Google’s products and services for both
users and advertisers and launched its Gemini AI model in
December 2023, followed by full
release in February 2024.
That said,
we reduced the position materially in February 2023 in the face of rising competition
in Search, following Microsoft’s launch of its new Bing search
engine. Whilst we thought that Alphabet was well positioned to fend
off this new challenge, we believed that the range of outcomes had
widened and associated risk increased. We sold approximately one
half of the position. We also continue to monitor the various
anti-trust actions against the company. The evidentiary phase of
the US Department of Justice’s antitrust trial against Google
concluded during 2023 and closing arguments are set for
May 2024.
Microsoft
is the key
technology partner for enterprise and its software products are
ubiquitous. More than 95% of Fortune 500 companies are customers of
the Azure cloud business and four out of every five use Office 365.
Microsoft strives to ensure their technology infrastructure is
fully sustainable, aiming to operate on carbon-free energy
everywhere, at all times, by 2030. Azure continues to gain share,
with growth rates materially outpacing both Amazon Web Services and
Google Cloud. Microsoft’s CFO expects the growth rate to remain in
the high 20s for the first half of 2024. Office 365 is approaching
500 million users across Commercial and Consumer platforms and
continues to grow. The company fully launched its Microsoft 365
Copilot product at the start of November. Whilst the rate of
adoption may be gradual, we believe that the end productivity gains
will support significant future revenue growth. We opted to take
some profits in June, with the shares then up more than 40%
year-to-date in US dollars, and reduced the position by 2.0% of
NAV.
French
aircraft engine manufacturer Safran
continues
to lead the way towards the decarbonisation of the aviation sector.
The company has committed to reduce absolute Scope 1 and 2
emissions (see page 20) by 50% by 2030 and reduce Scope 3 emissions
by 42.5% per available seat kilometre by 2035 (versus 2018). These
targets were independently approved by the SBTi in January 2023. Renewal of the existing fleet with
the latest generation of aircraft powered by Safran’s LEAP engine
should reduce the carbon emissions per passenger mile by 1-2% per
year over the next 15 years. Safran and GE also launched the RISE
(Revolutionary Innovation for Sustainable Engines) programme in
2021. This engine programme targets further fuel efficiency
improvements of more than 20% and full compatibility with
sustainable aviation fuels. The commercial launch is scheduled for
the mid-2030s.
Safran has
profited from the commercial aviation industry’s resurgence. Flight
cycles are the key driver of the company’s financial performance,
with most of its earnings coming from aftermarket sales of spare
parts. We believe air travel remains a secular growth story, with
most people still never having travelled on a plane. Growing
aftermarket volumes should be augmented by a benign pricing
environment, following difficulties encountered by engine
manufacturer rivals, Pratt & Whitney and Rolls
Royce.
Amazon
aims to
reach net zero carbon emissions by 2040. Progress so far includes
the company’s carbon intensity falling 7% from 2021 to 2022 and 90%
of electricity consumed attributable to renewable energy sources,
with a path to 100% by 2025. Profitability and free cash flow
generation have meaningfully recovered and we expect both to
continue growing well. The retail business’ operating margins are
benefiting from the switch to a regional fulfilment model in the
US. This translates into shorter delivery distances and faster
delivery speeds. New robotics initiatives could further boost
productivity in the coming years. Amazon Web Services’ growth rate
is picking up following a softer Cloud environment focused on
workload optimisations. CEO Jassy is still keen to highlight the
remaining opportunity, with 90% of IT spend still on-premises.
Capital investment is also moderating, following the expansion of
the fulfilment network.
French
infrastructure group, VINCI,
aims to reduce Scope 1 and 2 emissions by 40% and Scope 3 emissions
by 20% by 2030. These are notable goals for a construction company
and include increasing the use of low carbon concrete for 90% of
its needs. The airports segment has recovered strongly in 2023.
Traffic is now above 95% of 2019 levels but there are considerable
differences between regions. Neither France nor the UK, two of the most important
countries, have yet returned to 2019 levels. VINCI’s management
team continues to deploy capital in a measured way and outlined
plans to build and operate a portfolio of renewable energy assets
through its Cobra IS business unit at its Investor Day in
December 2023. The team is aiming to
have 5 GW of capacity in operation or under construction by 2025
and 12 GW by 2030. The company started operating its first
renewable energy asset last year, with the commissioning of the
Brazilian Belmonte solar farm (0.6 GW) in July 2023.
We renewed
a position in aircraft manufacturer Airbus
in
February and repeatedly increased its size over the next six
months. This was the portfolio’s largest holding at 12.5% of NAV at
the year end. The company’s shares had previously been held in the
portfolio but we exited in April
2021, believing that the post-Covid recovery would take
significantly longer than implied by the price. Now commercial
aviation’s recovery is nearly complete and the secular growth of
air travel appears set to resume. Fleet renewal requirements and
the need for the global aviation sector to accelerate their
decarbonisation are key drivers. By upgrading to Airbus’ latest
generation aircraft, customers can reduce carbon emissions by
20-30%. Airbus’ aircraft are also certified to operate on 50%
sustainable aviation fuel (SAF), with a target to reach 100% by the
end of the decade. Airbus plans to reduce scope 1 and 2 emissions
by 63% by 2030 and reduce scope 3 emissions by 46% by
2035.
Their
management team remains focused on ramping A320 production. This
programme is sold out until 2029. Personnel hiring ahead of current
manufacturing needs and the building of certain key inventories
should help to ensure a successful ramp up. Engine deliveries
remain a bottleneck but both CFM (Safran and GE) and Pratt &
Whitney have reaffirmed their commitments for 2024. Deliveries of
aircraft should increase from 735 in 2023 to more than 1,000
annually in the coming years and underpin significant earnings
growth. This profile is well supported by the current backlog of
nearly 8,600 aircraft.
Holding
company, Ocean
Wilsons,
comprises a controlling interest in publicly listed Brazilian port
operator, Wilson Sons, and a
diversified investment portfolio. Shipping has the lowest climate
impact of any freight method, on a per unit basis, producing
between 10-40 grams of CO2 per metric ton of freight per kilometre
of transportation, which is around half that even of rail freight.
Wilson Sons’ asset base enjoys high barriers to entry and
substantial operating leverage for growth in Brazil’s international
trade shipping sector. Following a strategic review in June, Ocean
Wilsons confirmed the receipt of several indicative non-binding
offers for its investment in Wilson
Sons. The company could unlock significant value, with the
shares trading at more than a 50% discount to NAV.
The
semiconductor industry appears to have passed the bottom of its
sales cycle. Whilst the profile of any recovery is uncertain, a
return to growth should translate into higher capital spending.
This should benefit the semiconductor capital equipment companies
in the portfolio, ASML,
Lam
Research and
KLA.
Each company dominates its respective niche in the value chain and
plays a critical role in helping the wider industry both maximise
semiconductor production from finite resources and develop and
produce more advanced and energy efficient chips. We believe the
fundamental drivers of semiconductor demand remain as clear as
ever: cloud computing, artificial intelligence, 5G, the Internet of
Things (IoT) and the digitalisation of the automotive industry.
Semiconductor manufacturers’ capital intensity also continues to
increase. We expect all these companies to have very bright
futures.
The
Company’s North American railroad holdings, Canadian
National Railway,
Canadian
Pacific Kansas City and
Union
Pacific, have
contended with a slowing economy and a period of inventory
destocking in 2023. We view these headwinds as only cyclical in
nature. Rail retains a significant cost advantage over trucks on
longer haul routes and no one is building railroads today. Rail
remains the most environmentally friendly way of transporting
freight over land, with current locomotives four times more fuel
efficient than trucking on a per unit basis. Furthermore, these
companies continue to evaluate and trial new technologies to move
beyond the internal combustion engine.
We opted
to add incrementally to the portfolio’s position in Canadian
National Railway in June. We believed the shares offered good value
compared to the company’s midterm organic growth profile. Canadian
Pacific finally completed its merger with Kansas City Southern in
April 2023. The combined entity has
multiple opportunities to grow volumes, including by converting
truck traffic to rail. We believe the company can outperform its
published earnings per share guidance. New Union Pacific CEO,
Jim Vena, has embarked upon a
programme of decentralisation as he aims for the company to grow
faster than the economy with industry leading margins.
Waste
Management provides
essential services and benefits from a high proportion of
annuity-like revenue streams, with the cost of its services
representing a very small portion (circa 0.5%) of customers’ total
expenses. Solid waste pricing has now moved ahead of cost inflation
and the company should be able to regain some of the lost ground
over the past two years. Progress is also being made on the
automation programme to reduce labour requirements by 5,000-7,000
roles, equivalent to more than 10% of headcount. Growth investments
in new automated recycling facilities and renewable natural gas
plants at landfill sites continue, although certain of the latter
projects have been hampered by interconnection and permission
issues. We believe these will ultimately be resolved and underpin
sustained double digit earnings growth going forward.
Private Investments
The
Company’s portfolio of private investments represented 9.7% of the
total NAV as at 31 December 2023, and
delivered a total return of 32.3% over the period, adding 2.9% to
the NAV per share.
Investment
|
Increase/
(Decrease)
%
|
Contribution
to
NAV %
|
X-ELIO
|
31.3
|
3.0
|
TCI REP
Fund III
|
(1.9)
|
(0.1)
|
John
Laing
|
3.2
|
0.1
|
TCI REP
Fund IV
|
1.6
|
(0.1)
|
Note:
Percentage increase/(decrease) for individual holdings is
calculated on their local currency and based over the holding
period if bought or sold during the year. Excludes distributions
received.
As noted
above, KKR completed the sale of its 50% stake (incorporating the
Company’s co-investment) in Spanish solar energy developer,
X-ELIO,
in November. This crystallised an aggregate return on invested
capital of 2.6x in Sterling terms, equivalent to an IRR of ~16%
over 8 years. The increase and contribution to NAV in the table
above represent percentages for the period until X-ELIO's disposal
in November.
The
remaining investments in TCI
Real Estate Partners Fund III are three
loans to separate real estate developments in the United States. They are first mortgages
and have low loan-to-value ratios (less than 60%). These
developments are best in class in terms of energy efficiency and
environmental standards. Buildings contribute more than 30% of GHG
emissions in the United States and
raising their efficiency levels is vital to reducing emissions.
Whilst the Fund did not manage to commit the level of capital we
originally hoped, investment returns have remained in line with
expectations. The Fund has continued to draw down from its
remaining commitment (circa US$3.2
million) in line with the schedules of its existing loans.
We expect two loans to be repaid this year and the last one to be
repaid in 2026.
We
finalised a new US$25 million
commitment to the TCI
Real Estate Partners Fund IV in
March 2023. This fund will follow the
same strategy, and offer similar environmental benefits, as the TCI
Real Estate Partners Fund III. The coronavirus epidemic provided a
stress test for Fund III. We were very pleased that while certain
developments were affected by construction delays, return
expectations on the loans remained unchanged. Each loan has several
elements of downside protection such as credit seniority,
loan-to-value ratios of up to 65% and completion and carry
guarantees. The strategy has only ever recorded one loss out of 37
loans. The manager believes that stress is starting to permeate
real estate credit markets and that the emerging conditions should
underpin strong demand for its differentiated financing.
Furthermore, the rise in interest rates has increased the relative
attractiveness of their traditionally premium rates. The manager is
targeting gross returns of 11-14%. We believe this level of return
represents an exceptional balance between risk and reward. The fund
made its first drawdown in October
2023, which was funded from cash on hand and by partial
sales of quoted equity holdings. We expect the Company’s net
invested amount, on a cost basis, to peak at approximately 70% of
the total commitment in mid-2026. This will significantly increase
the portfolio’s exposure to real estate and the sustainable
infrastructure and transportation theme.
John Laing is an
active manager of public-private partnerships and similar
concession-based assets. The company makes both green and
brownfield investments. The management team launched a new
sustainability strategy in August
2023 and is aiming to reach net zero by 2050, with an
interim target for 70% of assets to align with net zero by 2030.
John Laing completed its largest
ever investment with the purchase of three Irish infrastructure
assets from AMP Capital in 2023. These consisted of Valley
Healthcare, a portfolio of primary care centres, the Convention
Centre Dublin and Towercom, a mobile tower operator. Then the
purchase of equity interests in four UK Public-Private Partnerships
and a stake in the Hornsea II offshore transmission assets from
HICL Infrastructure PLC was agreed in September 2023. Finally, the sale of the Clarence
Correctional Centre in Australia,
which was planned as part of KKR’s acquisition, was also
agreed.
FX Hedges
We first
hedged currency exposure in November
2017, after a prolonged phase of Sterling weakness. This had
benefitted the portfolio, which was heavily weighted to assets
denominated in US dollars and Euros. We sought to protect some of
these gains by hedging approximately half of the portfolio’s
currency exposures. With the benefit of hindsight, we can see our
concerns that these Sterling currency gains might be substantially
given back were unfounded. Following the settlement of the
outstanding currency forward contracts in early January 2024 we have ceased to hedge the
Company’s currency exposures, due to a new requirement to cash
collateralise the forward exposures on a daily basis (whereas in
the past these were only cash settled, or paid out, on expiry).
Since inception, the cumulative net losses from our hedging
strategy amounted to £5.3 million. It should be noted that, as a
hedge, this loss has been more than offset by the currency gains on
non-Sterling holdings.
Outlook
We keep
focusing on what we can control. Our preference remains for
investments that require us to make as few predictions as possible.
We believe our criteria of investing in energy and resource
efficiency businesses offering quality and value results in a
portfolio well placed to generate superior returns over time
relative to the level of risk taken, in most market
conditions.
The
completion of the sale of X-ELIO meant we finished the year with a
high cash balance. Following the year end, we deployed a portion of
the cash, equivalent to 5.8% of NAV, across the portfolio’s
existing quoted equity holdings in January. Since then, we were
pleased to agree a new co-investment with KKR in a solar developer
in the United States, Avantus, in
March. This company has one of the largest development pipelines
across California and the
Southwest. We believe the deal is highly opportunistic and at an
attractive valuation. As always, we only make private investments
when they offer a more attractive balance between risk and reward
compared to public markets. We believe this transaction met this
criterion and we expect it to produce returns significantly in
excess of public equity markets. Our initial US$17.5 million investment equates to ~10% of the
Company’s NAV and was funded from cash on hand and the partial
sales of existing quoted equities. We expect this transaction and
further drawdowns on our commitment to TCI Real Estate Partners
Fund IV to significantly increase the portfolio’s allocation to
private investments.
Following
the strong performance in 2023, the Company’s net asset value per
share has now compounded at over 12.3%, after fees, for the five
years ended 31 December 2023 compared
to our benchmark RPI+3% return of 6.7%. Share price performance
continues to trail the Company’s net asset value returns, resulting
in a widening discount to net asset value. We believe this is
primarily due to the size of the Company and a corresponding lack
of liquidity in the shares. We intend to keep our relentless focus
on investment performance to deliver growth, and a reduction in the
discount, as both the performance and growth are recognised by the
market. With all members of the Portfolio Manager owning
significant equity stakes in the Company, our interests are in full
alignment with shareholders. Below is a summary of the Company's
compound annual growth rate on total return basis:
To 31 December
2023
|
1 year
|
3 years
|
5 years
|
7 years
|
Inception
|
NAV
per share
|
23.8%
|
6.6%
|
12.3%
|
9.6%
|
6.7%
|
Share
Price
|
13.6%
|
0.7%
|
8.8%
|
6.4%
|
0.0%
|
RPI+3%
|
8.4%
|
11.2%
|
6.7%
|
7.2%
|
6.7%
|
Menhaden
Capital Management LLP
Portfolio
Manager
19 April 2024
.
Business
Review
The
Strategic Report on pages 2 to 36 has been prepared to provide
information to enable shareholders to assess how the Directors have
performed their duty to promote the success of the
Company.
The
Strategic Report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the
information available to them up to the date of this report and
such statements should be treated with caution due to the inherent
uncertainties, including both economic and business risk factors,
underlying any such forward-looking information.
Business Model
The
Company is an externally managed investment trust and its shares
are listed on the premium segment of the Official List and traded
on the main market of the London Stock Exchange.
The
purpose of the Company is to provide a vehicle for investors to
gain exposure to a portfolio of companies that are demonstrably
delivering or benefiting significantly from the efficient use of
energy or resources irrespective of their size, location or stage
of development, through a single
investment.
The
Company is an Alternative Investment Fund (“AIF”) under the UK’s
Alternative Investment Fund Managers Regulations (“UK AIFMD”) and
Frostrow Capital LLP (“Frostrow”) is the appointed Alternative
Investment Fund Manager (“AIFM”).
As an
externally managed investment trust, all of the Company’s
day-to-day management and administrative functions are outsourced
to third party service providers. As a result, the Company has no
executive directors, employees or internal operations.
The Board
is responsible for all aspects of the Company’s affairs, including
setting the parameters for asset allocation, monitoring the
investment strategy and the review of investment performance and
policy. It also has responsibility for all strategic policy issues,
including share issuance and buy backs, share price and
discount/premium monitoring, corporate governance matters, investor
relations, dividends and gearing.
Further
information on the Board’s role and the topics it discusses with
the AIFM and the Portfolio Manager is provided in the Corporate
Governance Statement beginning on page 44.
Investment Strategy
The
implementation of the Company’s investment objective has been
delegated to Frostrow by the Board. Frostrow has, in turn and
jointly with the Company, appointed Menhaden Capital Management LLP
as the Portfolio Manager.
Details of
the Portfolio Manager’s approach are set out in the Investment
Process section on page 11 and in their review beginning on page
15.
While the
Board’s strategy is to allow flexibility in managing the
investments, in order to manage investment risk it has imposed
various investment, gearing and derivative guidelines and limits,
within which Frostrow and the Portfolio Manager are required to
manage the investments, as set out on pages 8 and 9.
Any
material changes to the investment objective or policy require
approval from shareholders.
Dividend Policy
The
Company complies with the United Kingdom’s investment trust rules
regarding distributable income which require investment trusts to
retain no more than 15% of their income from shares and securities
each year. The Company’s dividend policy is that the Company will
pay a dividend as a minimum to maintain investment trust
status.
The Board
Biographical
details of the Directors are set out on pages 37 and 38 and
information on the workings of the Board and its Committees is set
out in the Corporate Governance Statement on pages 44 to
50.
All of the
Directors will seek re-election by shareholders at the Annual
General Meeting to be held on 27 June
2024.
Principal Service Providers
The
principal service providers to the Company are Frostrow, Menhaden
Capital Management LLP (“MCM” or the “Portfolio Manager”) and J.P.
Morgan Europe Limited (the “Depositary”). Details of their key
responsibilities and their contractual arrangements with the
Company follow.
AIFM
The Board
has appointed Frostrow as the designated AIFM of the Company on the
terms and subject to the conditions of an alternative investment
fund management agreement between the Company and Frostrow (the
“AIFM Agreement”). The AIFM Agreement assigns to Frostrow overall
responsibility to manage the Company, subject to the supervision,
review and control of the Board, and ensures that the relationship
between the Company and Frostrow is compliant with the requirements
of UK AIFMD. Frostrow, under the terms of the AIFM Agreement
provides, inter
alia, the
following services:
• risk
management services;
• marketing
and shareholder services;
• administrative
and secretarial services;
• advice and
guidance in respect of corporate governance
requirements;
• maintenance
of the Company’s accounting records;
• preparation
and dispatch of the annual and half yearly reports and monthly
factsheets; and
• ensuring
compliance with applicable tax, legal and regulatory
requirements.
AIFM Fee
Under the
terms of the AIFM Agreement, Frostrow receives a periodic fee equal
to 0.225% per annum of the Company’s net assets up to £100 million,
0.20% per annum of the net assets in excess of £100 million and up
to £500 million, and 0.175% per annum of the net assets in excess
of £500 million.
The AIFM
Agreement is terminable on six months’ notice given by either
party.
Portfolio Manager
MCM is
responsible for the management of the Company’s portfolio of
investments under a delegation agreement between MCM, the Company
and Frostrow (the “Portfolio Management Agreement”). Under the
terms of the Portfolio Management Agreement, MCM provides,
inter
alia, the
following services:
• seeking
out and evaluating investment opportunities;
• recommending
the manner by which cash should be invested, divested, retained or
realised;
• advising
on how rights conferred by the investments should be
exercised;
• analysing
the performance of investments made; and
• advising
the Company in relation to trends, market movements and other
matters which may affect the investment objective and policy of the
Company.
Portfolio Management Fee
MCM
receives a periodic fee equal to 1.25% per annum of the Company’s
net assets up to £100 million and 1.00% of the Company’s net assets
in excess of £100 million.
The
Portfolio Management Agreement is terminable on six months’ notice
given by any of the three parties.
Performance Fee
MCM is
also entitled to a performance fee which is dependent on the level
of the long-term performance of the Company.
The
performance fee is calculated for discrete three year performance
periods. In respect of a given performance period, a performance
fee may be payable equal to 10% of the amount, if any, by which the
Company’s adjusted NAV at the end of that performance period
exceeds the higher of (a) a compounding hurdle (an annualised
compound return)* on the gross proceeds of the IPO (adjusted for
any subsequent share issues and repurchases) of 5% per annum; and
(b) a high-water mark (the highest net asset value that the Company
has reached on which a performance fee has been paid)*. The
performance fee is subject to a cap in each performance period of
an amount equal to the aggregate of 1.5% of the weighted average
NAV in each year (or part year, as applicable) of that performance
period.
*see
Glossary for further details
Depositary
The
Company has appointed J.P. Morgan Europe Limited as its Depositary
in accordance with UK AIFMD on the terms and subject to the
conditions of an agreement between the Company, Frostrow and the
Depositary (the “Depositary Agreement”). The Depositary provides
the following services, inter
alia, under
its agreement with the Company:
• safekeeping
and custody of the Company’s custodial investments and
cash;
• processing
of transactions; and
• foreign
exchange services.
The
Depositary must take reasonable care to ensure that the Company is
managed in accordance with the Financial Conduct Authority’s
Investment Funds Sourcebook, UK AIFMD and the Company’s Articles of
Association.
Under the
terms of the Depositary Agreement, the Depositary is entitled to
receive an annual fee of the higher of £40,000 or 0.0175% of the
net assets of the Company up to £150 million, 0.015% of the net
assets in excess of £150 million and up to £300 million, 0.01% of
the net assets in excess of £300 million and up to £500 million and
0.005% of the net assets in excess of £500 million. In addition,
the Depositary is entitled to a variable custody fee which depends
on the type and location of the custodial assets of the
Company.
The
Depositary has delegated the custody and safekeeping of the
Company’s assets to JPMorgan Chase Bank N.A., London branch (the “Custodian”).
The notice
period on the Depositary Agreement is 90 days if terminated by the
Company and 120 days if terminated by the Depositary.
Evaluation of the AIFM and the Portfolio
Manager
The
performance of the AIFM and the Portfolio Manager is reviewed
continuously by the Board and the Company’s Management Engagement
Committee (the “MEC”), with a formal evaluation process being
undertaken each year. As part of this process, the Board monitors
the services provided by the AIFM and the Portfolio Manager and
receives regular reports from them. The MEC reviewed the
appropriateness of the appointment of the AIFM and the Portfolio
Manager in December 2023, following
which it made a recommendation for continuation to the
Board.
The Board
believes the continuing appointment of the AIFM and the Portfolio
Manager, under the terms described on page 26, is in the interests
of shareholders as a whole. In coming to this decision, the MEC and
the Board took into consideration, inter
alia, the
following:
• the terms
of the AIFM Agreement and the Portfolio Management Agreement, in
particular the level and method of remuneration, the notice period
and the comparable arrangements of a group of the Company’s
peers;
• the
quality of the service provided and the quality and depth of
experience of the company management, company secretarial,
administrative and marketing teams that the AIFM allocates to the
management of the Company; and
• the
quality of service provided by the Portfolio Manager in the
management of the portfolio; and the level of performance of the
portfolio in absolute terms and by reference to RPI+3% and other
relevant indices.
Foreign Exchange Exposure
As
explained in the Portfolio Manager's Review on page 19, the
Portfolio Manager has sought to reduce the volatility in returns
caused by currency movements in respect of the portfolio’s
non-sterling denominated investments through the use of currency
forward contracts. For much of the year approximately 50% of the
Company’s US dollar and euro exposures were hedged in this manner
using 3-month contracts. However, following a review near the year
end it was concluded that the combination of exchange rate
volatility and the relatively short forward contract periods not
matching the longer term nature of the portfolio created a
non-correlated risk of crystallising currency losses on the
rollover of the contracts. Additionally, it has become necessary
for the Company to lodge cash collateral for such contracts, making
them less economic, and the decision has been taken to discontinue
such hedging transactions for the foreseeable future.
Position, Performance and Future
Developments
The
Statement of Financial Position on page 70 shows the Company’s
financial position at the year end. Performance in the year
relative to the Company’s key performance indicators is set out
below and further outlined, together with investment activity and
strategy, market background and the future outlook, in the
Chairman’s Statement beginning on page 4 and the Portfolio
Manager’s Review on pages 15 to 19.
The
Portfolio Manager believes that companies which supply products and
services that help to conserve scarce resources, reduce negative
environmental impacts and improve resource efficiency are likely to
enjoy faster growing end markets. The Directors believe that
environmental and resource-efficiency solutions, together with the
Portfolio Manager’s investment strategy, should provide good
returns for the long-term investor.
It is
expected that the Company’s investment strategy in the coming year
will remain largely unchanged.
Key Performance Indicators (“KPIs”)
The Board
of Directors reviews performance against the following KPIs. They
comprise both specific financial and shareholder-related measures.
The results for the year are summarised in the Chairman’s Statement
beginning on page 4.
The KPIs
for the Company are:
• Net asset
value (“NAV”) per share total return;
• Share
price total return;
• Discount/premium
of the share price to the NAV per share; and
• Ongoing
charges ratio.
These are
all Alternative Performance Measures. Please refer to the Glossary
beginning on page 90 for definitions of these terms and an
explanation of how they are calculated.
NAV per share total return
The
Directors regard the Company’s NAV per share total return as being
the overall measure of value delivered to shareholders over the
long term. This reflects both the net asset value growth of the
Company and any dividends paid to shareholders. The Board monitors
the Company’s NAV total return against its benchmark and peers in
the AIC Global Sector and the AIC Environmental Sector. The
Company’s NAV per share total return over the year to 31 December 2023 was 23.8% (2022: -16.5%). To
reflect the Company’s total return investment strategy, the Board
uses RPI+3% as its primary long-term financial performance
benchmark. RPI+3% over the year was 8.4% (2022: 16.4%).
A full
description of the portfolio and performance during the year under
review is contained in the Portfolio Manager’s Review commencing on
page 15 of this report.
Share price total return
The
Directors regard the Company’s share price total return to be a key
indicator of performance and monitor this closely. This measure
reflects the return to the investor on last traded market prices,
assuming any dividends paid are reinvested. The Company’s share
price total return over the year to 31
December 2023 was 13.6% (2022: -20.3%).
Share price discount/premium to NAV per share
The share
price discount/premium to the NAV per share is considered a key
indicator of performance as it impacts the share price total return
and can provide an indication of how investors view the Company’s
performance and its investment objective. At 31 December 2023 the discount stood at 37.2%
(2022: 31.4%). The Chairman’s Statement beginning on page 4,
addresses the discount and the approach of the Board. The discount
continued to remain disappointingly wide throughout the
year.
Ongoing charges ratio
Ongoing
charges represent the costs that shareholders can reasonably expect
to pay from one year to the next, under normal circumstances. The
Board continues to be conscious of expenses and works hard to
maintain a sensible balance between good quality services and
costs. The Board therefore considers the ongoing charges ratio to
be a KPI and reviews the figure both in absolute terms and in
comparison to the Company’s peers. The ongoing charges ratio for
the year to 31 December 2023 was 1.7%
(2022: 1.8%).
Risk Management
In
fulfilling its oversight and risk management responsibilities, the
Board maintains a framework of the key risks that may affect the
Company and the related internal controls designed to enable the
Directors to manage/mitigate these risks as appropriate. The key
risks are registered in the Company's risk matrix, which the Audit
Committee has been delegated to maintain and review at regular
intervals. The risk matrix covers all key risks the Directors
believe the Company faces, the likelihood of their occurrence and
their potential impact, how these risks are monitored and the
mitigating controls in place. The Directors have carried out a
robust assessment of the emerging and principal risks facing the
Company, including those that would threaten its business model,
future performance, solvency or liquidity.
The
principal risks can be categorised under the following broad
headings:
• Legal and
Regulatory Risks
• Investment
Risks
• Geopolitical
and other Macro Risks
• Corporate
Risks
• Operational
Risks
• Financial
Risks
The
following sections detail the risks the Board considers to be the
most significant to the Company under these headings.
The main
change from last year is an acceptance, and hence reduced risk
rating, that investment risks are largely inherent in the
investment strategy, and investing generally, and that these have
been mitigated so far as practical.
It is
considered that potential impacts from regulation, including on
portfolio companies, related to climate change and Paris Accord
undertakings are tangible and this is recognised below, albeit that
the Company’s resource efficiency theme ought to position it as a
beneficiary of related policies.
Principal
Risks and Uncertainties
|
Management
and Mitigation
|
Legal
and Regulatory Risks
The
regulatory or political environment in which the Company operates
could change to the extent that it affects the Company’s
viability.
Climate
change regulations could affect portfolio companies and portfolio
construction.
|
The Board
monitors regulatory developments but relies on the services of its
external advisers to ensure compliance with applicable law and
regulations. The Board has appointed a specialist investment trust
company secretary who provides industry and regulatory updates at
each Board meeting.
Generally,
the Company's resource efficiency theme should tend to align with
climate change regulation. The Portfolio Manager also corresponds
with portfolio companies on environmental matters.
|
Investment
Risks
The
implementation of the investment strategy adopted by the Portfolio
Manager may be unsuccessful and result in underperformance against
the Company’s principal performance comparators and peer
companies.
The
portfolio may be affected by market risk, that is volatile market
movements (in both equity and foreign exchange markets) in the
sectors and regions in which it invests. The Company is also
exposed to concentration risk, which is the potentially higher
volatility arising from its relatively concentrated portfolio, and
sector-specific risks such as global energy and commodity prices or
withdrawal of government subsidies for renewable energy.
The
departure of a key member of the portfolio management team may
affect the Company’s performance.
|
The Board
regularly reviews the Company’s investment mandate and MCM’s
long-term investment strategy in relation to market and economic
conditions, and the performance of the Company’s peers. The
Portfolio Manager provides an explanation of stock selection
decisions and an overall rationale for the make-up
of the portfolio, including the resource-efficiency credentials of
the portfolio holdings. MCM discuss current and potential
investment holdings with the Board on a regular basis.
As part of
its review of the going concern and longer-term viability of the
Company, the Board also considers the sensitivity of the Company to
changes in market prices and foreign exchange rates (see note 17 to
the financial statements beginning on page 82), an analysis of how
the portfolio would perform during a market crisis, and the ability
of the Company to liquidate its portfolio if the need arose.
Further details are included in the Going Concern and Viability
Statements on pages 39 and 31 respectively.
Whilst
market risk can be reduced through diversification, prospects for
this are limited by the requirement to comply with the Company’s
resource efficiency theme and its concentrated portfolio strategy.
To manage concentration risk, the Board has appointed the AIFM and
the Portfolio Manager to manage the portfolio within the remit of
the investment objective and policy set out on pages 8 and 9. The
investment policy limits ensure a reasonable amount of portfolio
diversification, reducing the risks associated with individual
stocks and markets. The Portfolio Manager’s approach to investment
risk is set out on page 11. Compliance with the investment
restrictions is monitored daily by the AIFM and reported to the
Board on a monthly basis.
The
Portfolio Manager reports to the Board on developments at MCM at
each Board meeting. All investment decisions are made by an
Investment Committee, reducing reliance on a single
individual.
|
Geopolitical
and other Macro Risks
Portfolio
constituents may be affected by regional events or politics.
Examples are the
conflicts
in Ukraine, and related sanctions, and
the Middle
East, with their potential impacts on
supply
chains.
|
The Board
has no control over such macro events. The vast majority of the
Company’s investments, both quoted and unquoted, are in developed
markets which are expected to be more stable. The Company has no
investments located in or exposed to Russia or Ukraine, but the
Board will continue to monitor developments.
|
Corporate
Risks
The share
price may differ materially from the NAV per share i.e. the shares
may trade at a material discount to the NAV per share. A widening
discount affects shareholder returns and satisfaction and, as such,
could influence the outcome of the next continuation vote or, in
extremis, precipitate the requisitioning of a general meeting to
wind-up the Company.
|
At each
meeting, the Board:
• reviews
the Company’s investment objective in relation to the market,
economic conditions and the operation of the Company’s
peers;
• discusses
the Company’s future development and strategy;
• reviews
an analysis of the shareholder register and reports on investor
sentiment from the Company’s corporate stockbroker and
AIFM;
• reviews
the level of the share price discount to the NAV per share and, in
consultation with its advisers, considers ways in which share price
performance may be enhanced; and
• reviews
the Company’s promotional activities and distribution strategy,
which have been delegated to Frostrow, to ensure the Company is
promoted to current and potential investors.
|
Operational
Risks
As an
externally managed investment trust, the Company is reliant on the
systems of its service providers for dealing, trade processing,
administrative services, financial and other functions. If such
systems were to fail or be disrupted (including as a result of
cyber crime or a pandemic) this could lead to a failure to comply
with applicable laws, regulations and governance requirements
and/or to a financial loss.
|
The Board
continuously monitors the performance of all the principal service
providers, with a formal evaluation process also being undertaken
each year. The Audit Committee reviews internal controls reports
and key policies put in place by its principal service providers.
This includes reports on service providers’ cyber security measures
and disaster recovery procedures. Both Frostrow and MCM provide a
quarterly compliance report to the Audit Committee, which details
their compliance with applicable laws and regulations. The Audit
Committee maintains the Company’s risk matrix which details the
risks to which the Company is considered to be exposed, the
approach to managing those risks, the key controls relied upon and
the frequency of their operation. Further details are set out in
the Audit Committee Report on page 52.
|
Financial
Risks
The
Company is exposed to liquidity risk and credit risk arising from
the use of counterparties. If a counterparty were to fail it could
adversely affect the Company through either delay in settlement or
loss of assets. The most significant counterparty to which the
Company is exposed is the Depositary, which is responsible for the
safekeeping of the Company’s custodial assets.
|
The
Company’s assets include liquid securities which can be sold to
meet funding requirements, if necessary. Further information on
financial instruments and risk can be found in note 17 to the
financial statements on page 82.
The Board
reviews the services provided by the Depositary and the internal
controls report of the Custodian to ensure that the security of the
Company’s custodial assets is maintained. The Portfolio Manager is
responsible for undertaking reviews of the credit worthiness of the
counterparties that it uses. The Board reviews the Portfolio
Manager’s approved list of counterparties and the Company’s use of
those counterparties. Appropriate due diligence is undertaken to
verify the existence and ownership of unquoted (non-custodial)
assets.
|
Longer Term Viability Statement
In
accordance with the UK Corporate Governance Code, the Directors
have carefully assessed the Company’s position and prospects as
well as the principal risks and have formed a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due over the next five
financial years. The Board has chosen a five year horizon in view
of the long-term outlook adopted by the Portfolio Manager when
making investment decisions.
To make
this assessment and in reaching this conclusion, the Audit
Committee has considered the Company’s financial position and its
ability to liquidate its portfolio and meet its liabilities,
including unfunded commitments on unquoted investments, as they
fall due:
• The
portfolio is principally comprised of investments traded on major
international stock exchanges. Based on the Company’s latest
available financial positions, it is estimated that 86% of the
current portfolio could be liquidated within seven days and there
is no expectation that the nature of the investments held within
the portfolio will be materially different in future;
• The
expenses of the Company are predictable and modest in comparison
with the assets and there are no capital commitments foreseen which
would alter that position; and
• The
Company has no employees, only its nonexecutive Directors.
Consequently it does not have redundancy or other employment
related liabilities or responsibilities.
The Audit
Committee, as well as considering the potential impact of the
Company’s principal risks and various severe but plausible downside
scenarios, has also made the following assumptions in assessing the
Company’s longer-term viability:
• There will
continue to be demand for investment trusts;
• The Board
and the Portfolio Manager will continue to adopt a long-term view
when making investments, and anticipated holding periods will be at
least five years;
• The
Company invests principally in the securities of listed companies
traded on major international stock exchanges to which investors
will wish to continue to have exposure;
• The closed
ended nature of the Company means that, unlike open ended funds, it
does not need to realise investments when shareholders wish to sell
their shares;
• Regulation
will not increase to a level that makes running the Company
uneconomical; and
• The
performance of the Company will be satisfactory.
As part of
its review the Board considered the impact of a significant and
prolonged decline in the Company’s performance and prospects. This
included a range of plausible downside scenarios such as reviewing
the effects of substantial falls in investment values and the
impact on the Company’s ongoing charges.
Company Promotion
The
Company has appointed Frostrow to promote the Company’s shares to
professional investors in the UK and Ireland. As investment company specialists,
the Frostrow team provides a continuous, proactive marketing,
distribution and investor relations service that aims to improve
the share price and grow the Company by encouraging demand for the
shares.
Frostrow
actively engages with professional investors, typically
discretionary wealth managers, some institutions and a range of
execution-only platforms. Regular engagement helps to attract new
investors and retain existing shareholders, and over time results
in a stable share register made up of diverse, long-term holders.
Frostrow, in turn, provides the Board with up-to-date and accurate
information on the latest shareholder and market
developments.
Frostrow
arranges and manages a continuous programme of one-to-one meetings
with professional investors around the UK. These include regular
meetings with ‘gate keepers’, the senior points of contact
responsible for their respective organisations’ research output and
recommended lists. The programme of regular meetings also includes
autonomous decision makers within large multi-office groups, as
well as small independent organisations. Some of these meetings
involve MCM, but most of the meetings do not, which means the
Company is being actively promoted while MCM focuses on managing
the portfolio. The Chairman is also available to engage with
shareholders.
The
Company also benefits from involvement in the regular professional
investor seminars run by Frostrow in major centres, notably
London and Edinburgh, which are focused on buyers of
investment companies.
The
creation and dissemination of information on the Company is also
overseen by Frostrow. Frostrow produces all key corporate
documents, monthly factsheets, annual reports and manages the
Company’s website
www.menhaden.com. All
Company information and invitations to investor events, including
updates from MCM on the portfolio and market developments, are
regularly emailed to a growing database, overseen by Frostrow,
consisting of professional investors across the UK and Ireland.
Frostrow
maintains close contact with all the relevant investment trust
broker analysts, particularly those from Deutsche Numis, the
Company’s corporate broker, but also others who publish and
distribute research on the Company to their respective professional
investor clients.
Board’s Duty to Promote the Success of the Company
(s172)
The
Directors have a statutory duty to promote the success of the
Company for the benefit of its members as a whole, whilst also
having regard to certain broader matters. These include taking into
consideration the likely consequences of any decision in the
long-term; the need to foster the Company’s business relationships
with its Portfolio Manager and other service providers; the impact
of the Company’s operations on the community and the environment;
the desire for the Company to maintain a reputation for high
standards of business conduct; and the need to act fairly between
members of the Company (s172 Companies Act 2006).
Stakeholder
group
|
How
the Board engaged with the Company’s
stakeholders
|
Investors
|
The
Board’s key mechanisms of engagement with investors
include:
• The Annual
General Meeting.
• The
Company’s website which hosts reports, articles and insights, and
monthly factsheets.
• One-to-one
investor meetings.
• Group
meetings with professional investors.
• The Annual
and Half yearly Reports.
The AIFM
and the Portfolio Manager, on behalf of the Board, complete a
programme of investor relations throughout the year, reporting to
the Board on the feedback received. The Company’s broker also
reports to the Board on investor sentiment and industry issues. In
addition, the Chairman has been available to engage with the
Company’s shareholders where required.
|
Portfolio
Manager
|
The Board
met regularly with the Portfolio Manager throughout the year, both
formally at quarterly Board meetings and informally, as needed. The
Board discussed the Company’s overall performance, including
against the benchmark and the KPIs, as well as developments in
individual portfolio companies and wider macroeconomic
developments. The Board also received monthly performance and
compliance reports.
|
Service
Providers
|
The Board
met regularly with the AIFM, representatives of which attend every
quarterly Board meeting to provide
updates on risk management, accounting, administration and
corporate governance matters.
The
Management Engagement Committee reviewed the performance of all the
Company’s service providers, receiving feedback from Frostrow in
their capacity as AIFM and Company Secretary. The AIFM, which is
responsible for the day-to-day operational management of the
Company, meets and interacts with the other service providers
including the Depositary, Custodian, and Registrar, on behalf of
the Board, on a daily basis. This can be through email, one-to-one
meetings and/or regular written reporting.
The Audit
Committee met with Mazars LLP to review the audit plan, the outcome
of the annual audit and to assess the quality and effectiveness of
the audit process.
|
Portfolio
companies
|
The
Portfolio Manager, on behalf of the Board, engaged with a number of
portfolio companies on a range of issues.
Environmental issues were a key topic of engagement. The Board
received a quarterly update on the Portfolio Manager’s engagement
activities.
|
The Board
seeks to comply with these and the following table sets out how the
Directors have had regard to the views of the Company’s
stakeholders in their decision-making.
Key
areas of engagement
|
Main
decisions and actions taken
|
• Ongoing
dialogue with shareholders concerning the strategy of the Company,
performance and the portfolio.
• Share
price performance.
• The
Portfolio Manager’s investment approach.
|
The Board
and the Portfolio Manager provided updates via RNS, the Company’s
website and the usual financial reports and monthly fact
sheets.
The Board
continued to monitor share price movements closely, both in
absolute terms and in relation to the Company’s peer group. The
actions the Board has taken to address the share price discount to
the NAV per share are described in the Chairman’s Statement
beginning on page 4.
|
• Portfolio
composition, performance, outlook and business updates.
• The
suitability of new investments with respect to the Company’s
resource efficiency theme.
• The
Portfolio Manager’s engagement with investee companies on ESG
matters.
• The
Portfolio Manager’s system of internal controls and investment risk
management.
• The
Company’s management fee structure.
|
The Board
concluded that it was in the interests of shareholders for MCM to
continue in their role as Portfolio Manager on the same terms and
conditions. Further information is provided on page 27.
The Audit
Committee concluded that the Portfolio Manager’s internal controls
were satisfactory. See the Audit Committee Report, beginning on
page 51, for further information.
|
• The
quality of service provision and the terms and conditions under
which service providers are engaged.
• The
assessment of the effectiveness of the audit and the Auditor’s
reappointment.
• The terms
and conditions under which the Auditor is engaged.
|
The Board
concluded that it was in the interests of shareholders for Frostrow
to continue in their role as AIFM on the same terms and conditions.
See page 27 for further details.
The Board
approved the Audit Committee’s recommendation that it would be in
the interests of shareholders for Mazars to be re-appointed as the
Company’s auditor for a further year. See the Audit Committee
Report beginning on page 51 and the Notice of AGM beginning on page
94 for further information.
|
• Environmental
reporting and target setting
|
The Board
worked with the Portfolio Manager to produce the Company’s annual
environmental impact statement, which outlines the impact the
Company’s investments have delivered, or intend to deliver. The
report outlines the subjects on which the Portfolio Manager, with
the support of the Board, engaged with portfolio companies. The
report is on pages 20 to 24 and is published as a separate document
on
www.menhaden.com
|
Social, Human Rights and Environmental
Matters
The
Company is an externally managed investment trust within the AIC
Environmental Sector and invests in companies and markets that are
demonstrably delivering or benefiting significantly from the
efficient use of energy or resources. The Board is responsible for
oversight of the Portfolio Manager and consequently for the risks
and opportunities that derive from their management of the
Company’s portfolio, including any considered to be climate
related. The Company’s resource efficiency mandate is consistent
with the drive towards net zero so the Company is well placed to
benefit as investor focus evolves. The Company does not have any
employees or premises, nor does it undertake any manufacturing or
other operations. All its functions are outsourced to third party
service providers and therefore the Company itself does not have
any employee or direct human rights issues, nor does it have any
direct, material environmental impact. The Company therefore has no
environmental, human rights, social or community
policies.
The
Company notes the Task Force on Climate-Related Financial
Disclosures (“TCFD”) recommendations. As noted above, the Company
is an investment trust with no employees, internal operations or
property and, as such, it is exempt from the Listing Rules
requirement to report against the TCFD framework. The Company
recognises risks from climate change regulation, such as potential
impacts on investee companies, portfolio construction, marketing
and reputation. It also recognises the opportunity provided by the
alignment of its investment objective and policy with the net zero
agenda.
The Board
believes that the integration of financially material
environmental, social and governance (“ESG”) factors into
investment decision-making can reduce risk and enhance returns. The
Portfolio Manager uses CDP ratings data as a basis for engagement
with investee companies on ESG issues, including any considered to
be climate related. More detail is included in the Company’s
Environmental Impact Statement set out on pages 20 to
24.
The
ongoing engagement and dialogue with investee companies, including
through proxy voting, are key parts of an asset stewardship
role.
The
Directors encourage the Portfolio Manager to ensure the Company’s
investments adhere to best practice in the management of ESG issues
and encourage them to have due regard to the UN Global Compact and
UN Principles of Responsible Investment. The Portfolio Manager was
a signatory to the Financial Reporting Council 2012 UK Stewardship
Code. Whilst MCM is not a formal signatory to the 2020 Stewardship
Code, it adheres to the 12 principles as closely as
possible.
As an
investment trust, the Company does not provide goods or services in
the normal course of business and does not have customers.
Accordingly, the Company falls outside the scope of the Modern
Slavery Act 2015. The Company’s suppliers are typically
professional advisers and the Company’s supply chains are
considered to be low risk in this regard.
Anti-Bribery and Corruption Policy
The Board
has adopted a zero-tolerance approach to instances of bribery and
corruption. Accordingly it expressly prohibits anyone performing
services or acting on behalf of the Company from accepting,
soliciting, paying, offering or promising to pay or authorise any
payment, public or private, in the United
Kingdom or abroad, to secure any improper benefit for
themselves or for the Company.
A copy of
the Company’s Anti Bribery and Corruption Policy can be found on
its website at
www.menhaden.com. The
policy is reviewed regularly by the Audit Committee.
Prevention of the Facilitation of Tax
Evasion
In
response to the implementation of the Criminal Finances Act 2017,
the Board has adopted a zero-tolerance approach to the criminal
facilitation of tax evasion. A copy of the Company’s policy on
preventing the facilitation of tax evasion can be found on the
Company’s website
www.menhaden.com. The
policy is reviewed annually by the Audit Committee.
This
Strategic Report on pages 2 to 36 has been approved by the
Board.
Howard Pearce
Chairman
19 April 2024
.
Governance
Statement
of Directors’ Responsibilities
Company
law in the United Kingdom requires
the Directors to prepare financial statements for each financial
year. The Directors are responsible for preparing the financial
statements in accordance with applicable law and regulations. In
preparing these financial statements, the Directors
have:
• selected
suitable accounting policies and applied them
consistently;
• made
judgements and estimates that are reasonable and
prudent;
• followed
applicable UK accounting standards; and
• prepared
the financial statements on a going concern basis.
The
Directors are responsible for keeping adequate accounting records
which disclose with reasonable accuracy at any time the financial
position of the Company and enable them to ensure that the
financial statements comply with the Companies Act 2006. They are
also responsible for safeguarding the assets of the Company and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The
Directors are responsible for ensuring that the Directors’ Report
and other information included in the Annual Report is prepared in
accordance with company law in the United
Kingdom. They are also responsible for ensuring that the
Annual Report includes information required by the Listing Rules of
the FCA.
The
financial statements are published on the Company’s website
www.menhaden.com. The
maintenance and integrity of this website, is the responsibility of
Frostrow. The work carried out by the Auditor does not involve
consideration of the maintenance and integrity of this website and,
accordingly, the Auditor accepts no responsibility for any changes
that have occurred to the financial statements since they were
initially presented on the website. Visitors to the website need to
be aware that legislation in the United
Kingdom governing the preparation and dissemination of the
financial statements may differ from legislation in their
jurisdiction.
Responsibility
Statement of the Directors in respect of the Annual
Report
The
Directors, whose details can be found on pages 37 and 38, confirm
to the best of their knowledge that:
• the
financial statements within this Annual Report, prepared in
accordance with applicable accounting standards, give a true and
fair view of the assets, liabilities, financial position and the
return for the year ended 31 December
2023; and
• the
Chairman’s Statement, Strategic Report and the Directors’ Report
include a fair review of the information required by 4.1.8R to
4.1.11R of the FCA’s Disclosure Guidance and Transparency
Rules.
The
Directors consider that the Annual Report taken as a whole is fair,
balanced and understandable and provides the information necessary
to assess the Company’s position, performance, business model and
strategy.
On behalf
of the Board
Howard Pearce
Chairman
19 April 2024
.
Financial
Statements
Income
Statement
|
|
For
the year ended
31
December 2023
|
For
the year ended
31
December 2022
|
|
Notes
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Gains/(losses)
on investments held at fair value through profit or loss
|
8
|
–
|
25,374
|
25,374
|
–
|
(21,413)
|
(21,413)
|
Income
from investments held at fair value through profit or
loss
|
2
|
1,692
|
–
|
1,692
|
1,309
|
–
|
1,309
|
Investment
and portfolio management fees
|
3
|
(336)
|
(2,175)
|
(2,511)
|
(323)
|
387
|
64
|
Other
expenses
|
4
|
(319)
|
–
|
(319)
|
(404)
|
–
|
(404)
|
Net
income/(loss) before taxation
|
|
1,037
|
23,199
|
24,236
|
582
|
(21,026)
|
(20,444)
|
Taxation
|
5
|
(143)
|
–
|
(143)
|
(96)
|
–
|
(96)
|
Net
income/(loss) after taxation
|
|
894
|
23,199
|
24,093
|
486
|
(21,026)
|
(20,540)
|
Income/(loss)
per share – basic and diluted (pence)
|
6
|
1.1
|
29.3
|
30.4
|
0.6
|
(26.3)
|
(25.7)
|
The
“Total” column of this statement is the Income Statement of the
Company. The “Revenue” and “Capital” columns are supplementary to
this and are prepared under guidance published by the
AIC.
All
revenue and capital items in the above statement derive from
continuing operations.
The
Company has no recognised gains and losses other than those shown
above and therefore no separate Statement of Total Comprehensive
Income has been presented.
The
accompanying notes on pages 72 to 87 are an integral part of these
financial statements.
.
Statement
of Changes in Equity
For the
year ended 31 December
2023
|
Notes
|
Ordinary
share
capital
£’000
|
Special
reserve
£’000
|
Capital
redemption
reserve
£’000
|
Capital
reserve
£’000
|
Revenue
reserve
£’000
|
Total
£’000
|
At 31
December 2022
|
|
800
|
77,371
|
–
|
24,970
|
690
|
103,831
|
Net income
after taxation
|
|
–
|
–
|
–
|
23,199
|
894
|
24,093
|
Repurchase
of ordinary shares for cancellation
|
|
(10)
|
(929)
|
10
|
–
|
–
|
(929)
|
Dividends
paid
|
7
|
–
|
–
|
–
|
–
|
(316)
|
(316)
|
At
31 December 2023
|
|
790
|
76,442
|
10
|
48,169
|
1,268
|
126,679
|
For the
year ended 31 December
2022
|
Notes
|
Ordinary
share
capital
£’000
|
Special
reserve
£’000
|
Capital
reserve
£’000
|
Revenue
reserve
£’000
|
Total
£’000
|
At 31
December 2021
|
|
800
|
77,371
|
45,996
|
364
|
124,531
|
Net
(loss)/income after taxation
|
|
–
|
–
|
(21,026)
|
486
|
(20,540)
|
Dividend
paid
|
7
|
–
|
–
|
–
|
(160)
|
(160)
|
At
31 December 2022
|
|
800
|
77,371
|
24,970
|
690
|
103,831
|
The
accompanying notes on pages 72 to 87 are an integral part of these
financial statements.
.
Statement
of Financial Position
|
Notes
|
As
at
31
December
2023
£’000
|
As
at
31
December
2022
£’000
|
Fixed
assets
|
|
|
|
Investments
|
8
|
110,027
|
93,809
|
Current
assets
|
|
|
|
Debtors
|
10
|
928
|
104
|
Derivative
financial instruments
|
9
|
1,917
|
4,200
|
Cash
|
|
14,898
|
6,061
|
|
|
17,743
|
10,365
|
Current
liabilities
|
|
|
|
Performance
fee payable
|
12
|
(829)
|
-
|
Creditors
|
11
|
(262)
|
(343)
|
Net
current assets
|
|
16,652
|
10,022
|
Net
assets
|
|
126,679
|
103,831
|
|
|
|
|
Capital
and reserves
|
|
|
|
Ordinary
share capital
|
13
|
790
|
800
|
Special
reserve
|
|
76,442
|
77,371
|
Capital
redemption reserve
|
13
|
10
|
-
|
Capital
reserve
|
18
|
48,169
|
24,970
|
Revenue
reserve
|
|
1,268
|
690
|
Total
shareholders’ funds
|
|
126,679
|
103,831
|
Net
asset value per share – basic and diluted
(pence)
|
14
|
160.3
|
129.8
|
The
financial statements on pages 68 to 87 were approved by the Board
of Directors and authorised for issue on 19
April 2024 and were signed on its behalf by:
Howard Pearce
Chairman
The
accompanying notes on pages 72 to 87 are an integral part of these
financial statements.
Menhaden
Resource Efficiency PLC – Company Registration Number 09242421
(Registered in England and
Wales)
.
Statement
of Cash Flows
|
Notes
|
For
the
year
ended
31
December
2023
£’000
|
For
the
year
ended
31
December
2022
£’000
|
Net
cash outflow from operating activities
|
15
|
(489)
|
(751)
|
Cash
flows from investing activities
|
|
|
|
Purchases
of investments
|
|
(27,624)
|
(10,321)
|
Sales of
investments
|
|
33,684
|
28,903
|
Settlement
of derivatives
|
9
|
4,497
|
(12,488)
|
Net
cash inflow from investing activities
|
|
10,557
|
6,094
|
Cash
flows from financing activities
|
|
|
|
Repurchase
of ordinary shares for cancellation
|
|
(929)
|
-
|
Dividends
paid
|
7
|
(316)
|
(160)
|
Net
cash outflow from financing activities
|
|
(1,245)
|
(160)
|
Increase
in cash and cash equivalents
|
|
8,823
|
5,183
|
Cash
and cash equivalents at start of the year
|
|
6,061
|
878
|
Exchange
rate movement
|
|
14
|
-
|
Cash
and cash equivalents at the end of the year
|
|
14,898
|
6,061
|
The
accompanying notes on pages 72 to 87 are an integral part of these
financial statements.
.
Notes
to the Financial Statements
1. ACCOUNTING
POLICIES
The
principal accounting policies, all of which have been applied
consistently throughout the year in the preparation of these
financial statements, are set out below:
(a) Basis
of Preparation
The
financial statements have been prepared in accordance with
United Kingdom company law, FRS
102 ‘The Financial Reporting Standard applicable in the UK and
Ireland’, the Statement of Recommended Practice “Financial
Statements of Investment Trust Companies and Venture Capital
Trusts” (the “SORP”), and the historical cost convention, as
modified by the valuation of investments at fair value through
profit or loss. The Board has considered a detailed assessment of
the Company’s ability to meet its liabilities as they fall due,
including stress and liquidity tests which modelled the effects of
substantial falls in markets and significant reductions in market
liquidity, on the Company’s financial position and cash flows.
Further information on the assumptions used in the stress scenarios
is provided in the Audit Committee report on pages 53 and 54. The
results of the tests showed that the Company would have sufficient
cash, or the ability to liquidate a sufficient proportion of its
listed holdings, to meet its liabilities as they fall due. Based on
the information available to the Directors at the time of this
report, including the results of the stress tests, the Company’s
cash balances, and the liquidity of the Company’s listed
investments, the Directors are satisfied that the Company has
adequate financial resources to continue in operation for at least
the next 12 months and that, accordingly, it is appropriate to
adopt the going concern basis in preparing these financial
statements.
The
Company’s financial statements are presented in sterling, being the
functional and presentational currency of the Company. All values
are rounded to the nearest thousand pounds (£’000) except where
otherwise indicated.
Fair value
measurements are categorised into a fair value hierarchy based on
the degree to which the inputs to the fair value measurements are
observable and the significance of the inputs to the fair value
measurement in its entirety, which are described as
follows:
• Level
1 – fair values measured using quoted prices (unadjusted) in active
markets for identical assets or liabilities;
• Level
2 – fair values measured using valuation techniques for all inputs
significant to the measurement other than quoted prices included
within Level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from
prices);
• Level
3 – fair values measured using valuation techniques for which any
significant input to the valuation is not based on observable
market data (unobservable inputs).
Details in
respect of the fair value of the Company’s financial assets and
liabilities are disclosed in note 17 to the Financial
Statements.
Presentation
of the Income Statement
In order
to reflect better the activities of an investment trust company and
in accordance with the SORP, supplementary information which
analyses the Income Statement between items of a revenue and
capital nature has been presented alongside the Income Statement.
The net revenue return is the measure the Directors believe
appropriate in assessing the Company’s compliance with certain
requirements set out in Sections 1158 and 1159 of the Corporation
Tax Act 2010. Refer to 1(d) for details on how expenses are
allocated to revenue and capital.
Critical
Accounting Judgements and Key Sources of Estimation
Uncertainty
Critical
accounting judgements and key sources of estimation uncertainty
used in preparing the financial information are continually
evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be
reasonable. The resulting estimates will, by definition, seldom
equal the related actual results.
The key
estimates and assumptions that have a significant risk of causing a
material adjustment to the carrying amounts of assets and
liabilities relate to the valuation of the Company’s unquoted
(Level 3) investments. £12,260,000 or 11.1% (2022: £16,864,000 or
18.0%) of the Company’s portfolio is comprised of unquoted
investments. These are all valued in line with accounting policy
1(b) below. Under the accounting policy the reported net asset
value or price of recent transactions methodologies have been
adopted in valuing those investments, as set out on page
86.
As the
Company has judged that it is appropriate to use reported NAVs in
valuing unquoted investments as set out in note 17 (vi), the
Company does not have any key assumptions concerning the future, or
other key sources of estimation uncertainty in the reporting
period, which may have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year.
Whilst the
Board considers the methodologies and assumptions adopted in the
valuation of unquoted investments to be supportable, reasonable and
robust, because of the inherent uncertainty of valuation, the
values used may differ significantly from the values that would
have been used had a ready market for the investment existed. These
values may need to be revised as circumstances change and material
adjustments may still arise as a result of a reappraisal of the
unquoted investments’ fair value within the next year. As set out
on page 86, a 25% discount to NAV has been employed by the Company
as a sensitivity test for the impact of the inherent valuation risk
associated with its unquoted investments.
Segmental Analysis
The Board
is of the opinion that the Company is engaged in a single segment
of business, namely investing in accordance with the Company’s
Investment Objective, and consequently no segmental analysis is
provided.
(b) Financial
Instruments
The
Company has chosen to adopt Sections 11 and 12 of FRS 102 in
respect of financial instruments.
Basic financial assets:
The
Company’s basic financial assets include cash at bank and debtors.
These financial assets are initially recognised at fair value and
subsequently measured at amortised costs using the effective
interest method.
Investment held at fair value through profit or
loss:
Investments
are initially measured and subsequently remeasured at fair value as
at the reporting dates.
Purchases
and sales of quoted investments are recognised on the trade date
where a contract exists whose terms require delivery within a time
frame determined by the relevant market. Purchases and sales of
unlisted investments are recognised when the contract for
acquisition or sale becomes unconditional. Transaction costs
associated with purchases and sales of investments are charged in
the capital column in the Company’s Income Statement.
Changes in
the fair value of investments and gains and losses on disposal are
recognised under the capital column in the Income Statement as
‘gains or losses on investments’. The fair value of the different
types of investment held by the Company is determined as
follows:
• Quoted
Investments
Fair value
is deemed to be bid or last trade price depending on the convention
of the exchange on which it is quoted.
• Unquoted
Investments
Fair value
is determined using recognised valuation methodologies in
accordance with the International Private Equity and Venture
Capital Association valuation guidelines (“IPEVCA
Guidelines”).
Where an
investment has been made recently, or there has been a transaction
in an investment, the Company may use the transaction price as the
best indicator of fair value. In such a case changes or events
subsequent to the relevant transaction date would be assessed to
ascertain if they imply a change in the investment’s fair
value.
The
Company’s unquoted investments comprise limited partnerships or
other entities set up by third parties to invest in a wider range
of investments, or to participate in a larger investment
opportunity than would be feasible for an individual investor, and
to share the costs and benefits of such investment.
For these
investments, in line with the IPEVCA Guidelines, and in the absence
of transactions in the investments, the fair value estimate is
based on the attributable proportion of the reported net asset
value of the unquoted investment derived from the fair value of
underlying investments. Valuation reports provided by the manager
or general partner of the unquoted investments are used to
calculate fair value where there is evidence that the valuation is
derived using fair value principles that are consistent with the
Company’s accounting policies and valuation methods. Such valuation
reports may be adjusted to take account of changes or events to the
reporting date, or other facts and circumstances which might impact
the underlying value.
If a
decision to sell an unquoted investment or portion thereof has been
made then the fair value would be the expected sales price where
this is known or can be reliably estimated.
Where a
portion of an unquoted investment has been sold the level of any
discount implicit in the sale price will be reviewed at each
measurement date for that unquoted investment, taking account of
the performance of the unquoted investment and any other factors
relevant to the value of the unquoted investment.
Derivatives
Derivatives
comprise foreign currency forwards that were used to hedge the
Company’s foreign currency exposure. The forwards comprise sterling
receivable and a foreign currency deliverable. Derivatives are
classified as financial assets or financial liabilities at fair
value through profit or loss, initially recognised at fair value on
the date derivative contracts are entered into and are subsequently
remeasured at their fair value as at the reporting date. Changes in
the fair value of derivative contracts are recognised as capital
income or expense in the Income Statement.
(c) Investment
Income
Dividends
receivable are recognised on the ex-dividend date. Where no
ex-dividend date is quoted, dividends are recognised when the
Company’s right to receive payment is established. UK dividends are
shown net of tax credits and foreign dividends are gross of the
appropriate rate of withholding tax.
Fixed
returns on non-equity shares and debt securities are recognised on
a time apportionment basis so as to reflect the effective yield
when it is probable that economic benefit will flow to the Company.
Where income accruals previously recognised, but not received, are
no longer considered to be reasonably expected to be received, due
to doubt over their receipt, then these amounts are reversed
through expenses.
Income
distributions from limited partnership funds are recognised when
the right to the distribution is established.
(d) Expenses
All
expenses are accounted for on an accruals basis. Expenses are
charged through the revenue column of the Income Statement except
as follows:
• expenses
which are incidental to the acquisition or disposal of an
investment are charged to the capital column of the Income
Statement; and
• expenses
are charged to the capital column of the Income Statement where a
connection with the maintenance or enhancement of the value of the
investments can be demonstrated. In this respect the portfolio
management and AIFM fees have been charged to the Income Statement
in line with the Board’s expected long-term split of returns, in
the form of capital gains and income, from the Company’s portfolio.
As a result 20% of the portfolio management and AIFM fees are
charged to the revenue column of the Income Statement and 80% are
charged to the capital column of the Income Statement.
Performance
fee provisions are recognised when a present obligation arises from
past events, it is probable that the obligation will materialise
and it is possible for a reliable estimate to be made, but the
timing of settlement or the exact amount is uncertain. Any
performance fee accrued or paid is charged in full to the capital
column of the Income Statement.
(e) Taxation
The tax
effect of different items of expenditure is allocated between
capital and revenue using the marginal basis. Deferred taxation is
provided on all timing differences that have originated but not
been reversed by the Statement of Financial Position date other
than those differences regarded as permanent. This is subject to
deferred tax assets only being recognised if it is considered more
likely than not that there will be suitable profits from which the
reversal of timing differences can be deducted. Any liability to
deferred tax is provided for at the rate of tax enacted or
substantively enacted.
(f) Foreign
Currency
Transactions
recorded in overseas currencies during the year are translated into
sterling at the exchange rate ruling on the date of the
transaction. Assets and liabilities denominated in overseas
currencies are translated into sterling at the exchange rates
ruling at the date of the Statement of Financial
Position.
Any gains
or losses on the translation of foreign currency balances, whether
realised or unrealised, are taken to the capital or the revenue
column of the Income Statement, depending on whether the gain or
loss is of a capital or revenue nature.
(g) Cash
and Cash Equivalents
Cash and
cash equivalents are defined as cash and demand deposits readily
convertible to known amounts of cash and subject to insignificant
risk of changes in value.
(h) Share
Capital
Ordinary
shares issued by the Company are recognised at the proceeds or fair
value received with the excess of the amount received over nominal
value being credited to the share premium account. Direct issue
costs net of tax are deducted from equity.
(i) Capital
Reserves
The
following are transferred to this reserve: gains and losses on the
realisation of investments; changes in the fair values of
investments; and expenses, together with the related taxation
effect, charged to capital in accordance with the Company’s
accounting policy on expenses in 1(d).
Any gains
in the fair value of investments that are not readily convertible
to cash are treated as unrealised gains in the capital reserve. The
amounts within capital reserve less unrealised gains are available
for distribution.
(j) Special
Reserve
The
special reserve arose following court approval in 2016 to cancel
the share premium account. This reserve is
distributable.
(k) Revenue
Reserve
The
revenue reserve represents the surplus of accumulated revenue
profits being the excess of income derived from holding investments
less the costs associated with running the Company. This reserve
may be distributed by way of dividends, when positive.
2. INCOME
FROM INVESTMENTS HELD AT FAIR VALUE THROUGH PROFIT OR
LOSS
|
2023
£’000
|
2022
£’000
|
Income
from investments
|
|
|
Unquoted
distributions
|
469
|
419
|
Dividends
from quoted investments
|
1,175
|
883
|
|
1,644
|
1,302
|
Bank
interest
|
48
|
7
|
Total
income
|
1,692
|
1,309
|
3. INVESTMENT
AND PORTFOLIO MANAGEMENT FEES
|
2023
|
2022
|
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
AIFM
fee
|
52
|
208
|
260
|
50
|
198
|
248
|
Portfolio
management fee
|
284
|
1,138
|
1,422
|
273
|
1,092
|
1,365
|
Performance
fee provisions
|
–
|
829
|
829
|
–
|
(1,677)
|
(1,677)
|
|
336
|
2,175
|
2,511
|
323
|
(387)
|
(64)
|
4. OTHER
EXPENSES
|
2023
|
2022
|
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Directors’
remuneration
|
182
|
–
|
182
|
186
|
–
|
186
|
Employers
NIC on directors’ remuneration
|
14
|
–
|
14
|
18
|
–
|
18
|
Auditor’s
remuneration for the audit of the Company’s financial
statements
|
46
|
–
|
46
|
41
|
–
|
41
|
Registrar
fee
|
18
|
–
|
18
|
18
|
–
|
18
|
Broker
retainer
|
30
|
–
|
30
|
30
|
–
|
30
|
Custody
and depositary fees
|
43
|
–
|
43
|
47
|
–
|
47
|
Other
expenses
|
(14)
|
–
|
(14)
|
64
|
–
|
64
|
Total
expenses
|
319
|
–
|
319
|
404
|
–
|
404
|
The
Company has no employees and details of the amounts paid to
Directors are included in the Directors’ Remuneration Report
beginning on page 56 of the Annual Report. Other expenses balance
for the year ended 31 December 2023
includes non-recurring credits of £39,000 relating to historic
periods.
5. TAXATION
ON NET RETURN
(a) Analysis
of charge in period
|
2023
|
2022
|
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
UK
corporation tax
|
–
|
–
|
–
|
–
|
–
|
–
|
Overseas
withholding tax
|
143
|
–
|
143
|
96
|
–
|
96
|
(b) Factors
affecting current tax charge for the year
Approved
investment trusts are exempt from tax on capital gains made within
the Company.
The tax
charged for the period is lower than the standard rate of
corporation tax in the UK of 23.25% (2022: 19%). The difference is
explained below.
|
2023
|
2022
|
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Revenue
£’000
|
Capital
£’000
|
Total
£’000
|
Net
income/(loss) before taxation
|
1,037
|
23,199
|
24,236
|
582
|
(21,026)
|
(20,444)
|
Corporation
tax at 23.25%
(2022:
19%)
|
244
|
5,457
|
5,701
|
110
|
(3,995)
|
(3,885)
|
Non-taxable
gains on investments held at fair value through profit
or loss
|
–
|
(5,969)
|
(5,969)
|
–
|
4,068
|
4,068
|
Overseas
withholding tax
|
143
|
–
|
143
|
96
|
–
|
96
|
Non-taxable
overseas dividends
|
(387)
|
–
|
(387)
|
(247)
|
–
|
(247)
|
Excess
management expenses*
|
143
|
512
|
655
|
137
|
(73)
|
64
|
Tax
charge for the year
|
143
|
–
|
143
|
96
|
–
|
96
|
* Excess
management expenses are expenses that are not relieved in full
against income generated by the Company.
(c) Provision
for deferred tax
No
provision for deferred taxation has been made in the current
period. The Company has not provided for deferred tax on capital
profits and losses arising on the revaluation or disposal of
investments, as it is exempt from tax on these items because of its
status as an investment trust company.
The UK
Government announced in the 2021 budget that from 1 April 2023, the
rate of corporation tax in the United Kingdom would increase from
19% to 25% for companies with taxable profits between £50,000 and
£250,000, but with a marginal relief applying as profits increase.
The Company has not recognised a deferred tax asset of £3,725,000
(25% tax rate) (2022: £3,042,000, 25% tax rate) as a result of
unutilised excess management expenses of £14,900,000 (2022:
£12,168,000). It is not anticipated that these excess expenses will
be utilised in the foreseeable future.
6. INCOME/(LOSS)
PER SHARE
The
capital, revenue and total return per ordinary share are based on
the net income/(loss) shown in the Income Statement on page 68 and
the weighted average number of ordinary shares in issue 79,199,042
(2022: 80,000,001).
No
dilutive instruments have been issued by the Company.
7. DIVIDENDS
PAID
Under UK
GAAP, final dividends are not recognised until they are approved by
shareholders and interim dividends are not recognised until they
are paid. They are also debited directly from reserves. Amounts
recognised as distributable in these financial statements were as
follows:
|
2023
£’000
|
2022
£’000
|
2022 final
dividend of 0.4p per share
|
316
|
-
|
2021 final
dividend of 0.2p per share
|
-
|
160
|
In respect
of the year ended 31 December 2023, a final dividend of 0.9p per
share or £711,000 (2022: 0.4p per share or £316,100) in total has
been recommended to shareholders and, if the resolution is passed
at the AGM, will be reflected in the Annual Report for the year
ending 31 December 2024. Details of the ex-dividend and payment
dates are shown on page 39.
The
Board’s current policy is to only pay dividends out of revenue
reserves. The amount of revenue reserve available for distribution
as at 31 December 2023 is £1,268,000 (2022: £690,000). The Company
generated a revenue profit in the year ended 31 December 2023 of
£894,000 (2022: £486,000).
8. INVESTMENTS
|
2023
|
2022
|
|
Quoted
Investments
£’000
|
Unquoted
Investments
£’000
|
Total
£’000
|
Quoted
Investments
£’000
|
Unquoted
Investments
£’000
|
Total
£’000
|
Opening
balance
|
|
|
|
|
|
|
Cost at 1
January
|
58,985
|
9,132
|
68,117
|
68,965
|
17,901
|
86,866
|
Investment
holdings gains/(losses) at 1 January
|
17,960
|
7,732
|
25,692
|
40,874
|
(2,125)
|
38,749
|
Valuation
at 1 January
|
76,945
|
16,864
|
93,809
|
109,839
|
15,776
|
125,615
|
Movement
in the year:
|
|
|
|
|
|
|
Purchases
at cost
|
20,084
|
7,540
|
27,624
|
9,669
|
652
|
10,321
|
Sales
proceeds
|
(20,204)
|
(14,347)
|
(34,551)
|
(13,197)
|
(3,218)
|
(16,415)
|
Net
movement in investment holdings gains/(losses)
|
20,942
|
2,203
|
23,145
|
(29,366)
|
3,654
|
(25,712)
|
Valuation
at 31 December
|
97,767
|
12,260
|
110,027
|
76,945
|
16,864
|
93,809
|
Closing
balance
|
|
|
|
|
|
|
Cost at 31
December
|
66,263
|
12,088
|
78,351
|
58,985
|
9,132
|
68,117
|
Investment
holding gains at 31 December
|
31,504
|
172
|
31,676
|
17,960
|
7,732
|
25,692
|
Valuation
at 31 December
|
97,767
|
12,260
|
110,027
|
76,945
|
16,864
|
93,809
|
Proceeds
from investments sold during the year were £34,551,000 (2022:
£16,415,000), of which £867,000 were receivable as at 31 December
2023 (2022: £nil). The book cost of these investments was
£17,390,000 (2022: £29,070,000). These investments have been
revalued over time and until they were sold any unrealised
gains/losses were included in the fair value of the investments.The
Company also received £4,497,000 (2022: paid £12,488,000) in cash
on currency forward contracts (Note 9) expired during the
period.
Net
movement in investment holding gains/(losses) on
investments
|
2023
£’000
|
2022
£’000
|
Net
movement in investment holding gains/(losses) in the
year
|
(25,712)
|
(25,712)
|
Net
movement in derivative holding (losses)/gains in the
year
|
4,299
|
4,299
|
Gains/(losses)
on investments
|
(21,413)
|
(21,413)
|
Total
unrealised gains, including transfers, during the year were
£5,984,000 (2022: £13,057,000).
Purchase
transaction costs were £27,000 (2022: £3,000). These comprise
mainly commission and stamp duty. Sales transaction costs were
£5,000 (2022: £3,000). These comprise mainly commission.
9. DERIVATIVES
|
2023
£’000
|
2022
£’000
|
Fair value
of currency forward contracts
|
1,917
|
4,200
|
Forward
contracts were used during the year to hedge the Company’s exposure
to the euro and US dollar. See note 17(ii) for further details. The
Company received £4,497,000 (2022: paid £12,488,000) on contracts
closed during the year. The forward contracts are revalued over
time and any gains or losses (both realised and unrealised) are
included in gains/(losses) on investments in the capital column of
the Income Statement.
The
currency forward contracts expired post year end and the Company
received £1,614,000 in cash on expiry. As disclosed in the
Portfolio Manager's Review and the Business Review in the Strategic
Report, the Company has discontinued hedging activities since the
year end.
10. DEBTORS
|
2023
£’000
|
2022
£’000
|
Amounts
due from brokers
|
867
|
-
|
Withholding
tax recoverable
|
29
|
68
|
Prepayments
and accrued income
|
32
|
36
|
|
928
|
104
|
11. CREDITORS
|
2023
£’000
|
2022
£’000
|
Performance
fees payable
|
829
|
-
|
Other
creditors and accruals
|
262
|
343
|
|
1,091
|
343
|
12. PERFORMANCE
FEE PROVISIONS
The
three-year performance period that commenced on 1 January 2021
ended on 31 December 2023 and £829,000 has been charged in the
Income Statement with a corresponding payable balance in the
Statement of Financial Position. Settlement of performance fee
provisions will take place following approval of the annual results
for the year ended 31 December 2023, in April 2024.
Full
details of the performance fee arrangement can be found in the
Performance Fee section in the Strategic Report.
13. SHARE
CAPITAL
|
2023
£’000
|
2022
£’000
|
Issued and
fully paid:
|
|
|
79,025,001
(2022: 80,000,001) ordinary shares of 1p per share
|
790
|
800
|
There is a
single class of shares in issue, being ordinary shares. The voting
rights of the ordinary shares on a poll are one vote for each share
held. There are no:
• restrictions
on transfer of, or in respect of the voting or dividend rights of,
the Company’s ordinary shares;
• agreements,
known to the Company, between holders of securities regarding the
transfer of ordinary shares;
or
• special
rights with regard to control of the Company attaching to the
ordinary shares
The
Company repurchased 975,000 ordinary shares during the year ended
31 December 2023 (2022: none) and all repurchased ordinary shares
were subsequently cancelled. The nominal amount of £9,750 related
to these cancelled shares was credited to the capital redemption
reserve.
14. NET
ASSET VALUE PER SHARE
|
2023
£’000
|
2022
£’000
|
Net asset
value per share
|
160.3p
|
129.8p
|
The net
asset value per share is based on the assets attributable to equity
shareholders of £126,679,000 (2022: £103,831,000) and on the number
of ordinary shares in issue at the year end of
79,025,001.
No
dilutive instruments have been issued by the Company.
15. RECONCILIATION
OF NET CASH OUTFLOW FROM OPERATING ACTIVITIES
|
2023
£’000
|
2022
£’000
|
Gains/(losses)
before taxation
|
24,236
|
(20,444)
|
(Gains)/losses
on investments
|
(25,374)
|
21,413
|
|
(1,138)
|
969
|
Decrease
in other debtors
|
5
|
133
|
Increase/(decrease)
in creditors
|
748
|
(1,738)
|
Withholding
taxation suffered on investment income
|
(104)
|
(115)
|
Net
cash outflow from operating activities
|
(489)
|
(751)
|
16. RELATED
PARTIES
The
following are considered to be related parties:
• Frostrow
Capital LLP; and
• The
Directors of the Company
Details of
the relationship between the Company and the Company’s AIFM are
disclosed in the Strategic Report on page 27. Details of fees paid
to Frostrow by the Company can be found in note 3 on page 76. All
material related party transactions have been disclosed in note 3
on page 76. Details of the remuneration of the Directors can be
found in note 4 and in the Directors’ Remuneration Report starting
on page 56. Details of the Directors’ interests in the capital of
the Company can be found on page 57.
The
balance outstanding to Frostrow at the year end was £24,000 (2022:
£20,000). No balances were due to the Directors (2022:
nil).
17. FINANCIAL
INSTRUMENTS
Risk
management policies and procedures
The
Company’s financial instruments comprise securities and other
investments, cash balances and certain debtors and creditors that
arise directly from its operations.
As an
investment trust, the Company invests in equities and other
investments for the long term so as to achieve its Investment
Objective. In pursuing its Investment Objective, the Company is
exposed to a variety of risks that could result in a reduction in
the Company’s net assets.
The main
risks that the Company faces arising from its use of financial
instruments are:
(i) market
risk (including foreign currency risk, interest rate risk and other
price risk)
(ii) liquidity
risk
(iii) credit
risk
These
risks and the Directors’ approach to the management of them, are
set out in the Strategic Report on pages 29 to 31. The AIFM, in
close co-operation with the Board and the Portfolio Manager,
co-ordinates the Company’s risk management.
(i) Other
price risk
In
pursuance of the Investment Objective, the Company’s portfolio is
exposed to the risk of fluctuations in market prices and foreign
exchange rates.
The Board
manages these risks through the use of investment limits and
guidelines as set out on pages 8 and 9, and monitors the risks
through monthly compliance reports from Frostrow, with reports from
Frostrow and the Portfolio Manager also presented at each Board
meeting. In addition, Frostrow monitors the exposure of the Company
and compliance with the investment limits and guidelines on a daily
basis.
Other
price risk sensitivity
Other
price risk may affect the value of the quoted
investments.
If market
prices at the date of the Statement of Financial Position had been
25% higher or lower while all other variables had remained
constant: the revenue return would have decreased/increased by
£59,000 and £72,000 respectively (2022: decreased/increased by
£46,000 and £81,000 respectively); the capital return would have
increased/decreased by £21,763,000 and £23,324,000 respectively
(2022: increased/decreased by £18,199,000 and £19,009,000
respectively); and, the return on equity would have
increased/decreased by £21,704,000 and £23,252,000 respectively
(2022: increased/decreased by £18,152,000 and £18,953,000
respectively). The calculations are based on the portfolio as at
the respective dates of the Statement of Financial Position and are
not representative of the year as a whole.
(ii) Foreign
currency risk
A
significant proportion of the Company’s portfolio positions are
denominated in currencies other than sterling (the Company’s
functional currency, and the currency in which it reports its
results). As a
result, movements in exchange rates can significantly affect the
sterling value of those items.
Foreign
currency risk is monitored in conjunction with other price risk as
described above. The Portfolio Manager used foreign currency
forwards to hedge some of the foreign currency risk historically,
but as disclosed in the Manager’s Review and the Business Review in
the Strategic Report hedging activities ceased post the year ended
31 December 2023.
Foreign
currency exposure
The fair
values of the Company’s assets and liabilities that are denominated
in foreign currencies are shown below:
|
2023
|
2022
|
|
Investments
£’000
|
Derivatives*
£’000
|
Current
assets
£’000
|
Net
£’000
|
Investments
£’000
|
Derivatives*
£’000
|
Current
assets
£’000
|
Net
£’000
|
US
dollar
|
62,963
|
(33,339)
|
868
|
30,492
|
69,885
|
(37,329)
|
2,003
|
34,559
|
Euro
|
38,242
|
(17,331)
|
29
|
20,940
|
16,074
|
(6,680)
|
68
|
9,462
|
Other
|
–
|
–
|
49
|
49
|
–
|
–
|
44
|
44
|
|
101,205
|
(50,670)
|
946
|
51,481
|
85,959
|
(44,009)
|
2,115
|
44,065
|
*
Derivatives comprise foreign currency forward contracts used to
partially hedge the Company’s exposure to the euro and US dollar.
As at 31 December 2023, the fair value of the US dollar forward
contract was £1,827,000 (2022: £4,096,000) and of the Euro forward
contract was £90,000 (2022: £103,000).
Foreign
currency sensitivity
The
following table details the sensitivity of the Company’s net return
for the year and shareholders’ funds to a 10% increase and decrease
in sterling on the Company’s net currency exposures after
hedging.
These
percentages have been determined based on market volatility in
exchange rates over the period since launch. The sensitivity
analysis is based on the Company’s significant foreign currency
exposures at each Statement of Financial Position date.
|
2023
|
2022
|
|
USD
|
EUR
|
Other
|
Impact
on NAV
|
USD
|
EUR
|
Other
|
Impact
on NAV
|
|
£’000
|
£’000
|
£’000
|
£’000
|
%
|
£’000
|
£’000
|
£’000
|
£’000
|
%
|
Sterling
depreciates
|
3,388
|
2,327
|
5
|
5,720
|
5%
|
3,840
|
1,051
|
5
|
4,896
|
5%
|
Sterling
appreciates
|
(2,772)
|
(1,904)
|
(4)
|
(4,680)
|
(4%)
|
(3,142)
|
(860)
|
(4)
|
(4,006)
|
(4%)
|
(iii) Interest
rate risk
Interest
rate changes may affect:
- the
level of income receivable from floating and fixed rate securities
and cash at bank and on deposit; and
- the
fair value of investments in fixed interest securities.
Interest
rate exposure
The
exposure of financial assets and liabilities to fixed and floating
interest rates, is shown below.
|
2023
|
2022
|
|
Fixed
rate
£’000
|
Floating
rate
£’000
|
Fixed
rate
£’000
|
Floating
rate
£’000
|
Cash
|
–
|
14,898
|
–
|
6,061
|
|
–
|
14,898
|
–
|
6,061
|
Interest
rate sensitivity
If
interest rates had been 1% higher or lower and all other variables
were held constant, the Company’s net return for the year ended 31
December 2023 and the net assets would increase/decrease by
£149,000 (2022: £61,000).
(iv) Liquidity
risk
This is
the risk that the Company will encounter difficulty in meeting
obligations associated with financial liabilities.
The main
liquidity requirements the Company may face are its commitments to
the investments in limited partnership funds, as set out in note 19
on page 87. These commitments can be drawn down on 3 or 10 days
notice. Having reviewed the nature of the investment and the track
record of the underlying mandate for the most significant
commitment, to TCI Real Estate Fund III Limited and TCI Real Estate
Fund IV Limited, the Board expects that it will be drawn down
gradually over the life of the investment and as such poses a low
risk to the liquidity of the Company. Frostrow and/or the Portfolio
Manager are in regular contact with the managers of the limited
partnership funds, as a part of which they would be made aware of,
and plan accordingly for any drawdowns under those
commitments.
The
Company’s assets comprise quoted securities (equity shares, fixed
income and fund investments), cash, and unquoted limited
partnership funds and investments. Whilst the unquoted investments
are illiquid, short-term flexibility is achieved through the quoted
securities, which are liquid, and cash which is available on
demand.
The
liquidity of the quoted securities is monitored on at least a
monthly basis to ensure that there is sufficient liquidity to meet
the company’s liabilities and any forthcoming drawdowns.
(v) Credit
risk
Credit
risk is the risk of failure of a counterparty to discharge its
obligations resulting in the Company suffering a financial loss.
The Company’s investments are held by J.P. Morgan Europe
Limited(“the Depositary”), which is a large and reputable
international banking institution. The Depositary is liable for the
loss of any financial assets under its custody, and in accordance
with its agreement with the Company, is required to segregate such
assets from its own assets.
Credit
risk exposure
|
2023
£’000
|
2022
£’000
|
Derivative
financial instruments
|
1,917
|
4,200
|
Current
assets:
|
|
|
Other
receivables
|
928
|
104
|
Cash
|
14,898
|
6,061
|
(vi) Hierarchy
of investments
The
Company’s investments are valued within a fair value hierarchy that
reflects the significance of the inputs used in making the fair
value measurements as described in the accounting policies
beginning on page 72.
At
31 December 2023
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Investments
|
97,767
|
–
|
12,260
|
110,027
|
Derivatives
|
–
|
1,917
|
–
|
1,917
|
|
|
|
|
|
At
31 December 2022
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Investments
|
76,945
|
–
|
16,864
|
93,809
|
Derivatives
|
–
|
4,200
|
–
|
4,200
|
Level
3 investments at 31 December 2023
|
Cost
‘000
|
Value
£’000
|
Ownership
|
Valuation
basis
|
TCI Real
Estate Partners Fund IV Limited
|
US$7,849
|
6,021
|
5.72%
|
NAV
|
KKR
Aqueduct Co-Invest LP1
|
£4,000
|
4,504
|
1.12%
|
NAV
|
TCI Real
Estate Partners Fund III Ltd
|
US$2,461
|
1,736
|
1.18%
|
NAV
|
1 Described
as John Laing in the portfolio statement
Level
3 investments at 31 December 2022
|
Cost
‘000
|
Value
£’000
|
Ownership
|
Valuation
basis
|
KKR
Aqueduct Co-Invest LP1
|
£4,000
|
4,646
|
1.15%
|
NAV
|
Helios
Co-Invest LP2
|
US$4,458
|
10,672
|
4.73%
|
NAV
|
TCI Real
Estate Partners Fund III Ltd
|
US$1,715
|
1,546
|
1.18%
|
NAV
|
1 Described
as John Laing in the portfolio statement
2 Described
as X-ELIO in the portfolio statement
In
November 2023, the Company received a final distribution of US$16.9
million (£13.8 million) from its investment in Helios Co-Invest LP,
following the disposal of the partnership’s remaining holding in
X-ELIO.
Unquoted
investment valuations are provided by the underlying investment
managers, who follow industry recognised guidelines and a stringent
valuation process, which includes independent review by third
parties. The Company is satisfied that the valuations received
represent fair value of the investments it holds, but retains the
discretion to make adjustments if there are indicators that suggest
otherwise.
If a 25%
discount to NAV was applied to the NAV of the level 3 investments
as at 31 December 2023, the impact would have been a decrease of
£2,191,000 (2022: £4,154,000) in net assets and the net return for
the year.
(vii) Capital
management policies and procedures
The
Company’s capital management objectives are to ensure that it will
be able to continue as a going concern and to maximise the income
and capital return to its equity shareholders through an
appropriate level of gearing.
The
Board’s policy is to limit gearing to a maximum of 20% of the
Company’s net assets. Currently the Company does not have any
gearing and there are no facilities in place.
The
capital structure of the Company comprises the equity share capital
(ordinary shares), retained earnings and other reserves as
disclosed on the Statement of Financial Position on page
70.
The Board,
with the assistance of the AIFM and the Portfolio Manager, monitors
and reviews the broad structure of the Company’s capital on an
ongoing basis. This includes a review of:
- the
planned level of gearing, which takes into account the Portfolio
Manager’s view of the market;
- whether
to buy back equity shares, either for cancellation or to hold in
treasury, in light of any share price discount to net asset value
per share;
- whether
to issue new equity shares; and,
- the
extent to which revenue in excess of that required for
distributions should be retained.
18. CAPITAL
RESERVE
|
2023
Capital
Reserve
|
2022
Capital
Reserve
|
|
Realised
gains/
(losses)
£’000
|
Unrealised
gains/
(losses)
£’000
|
Total
£’000
|
Realised
gains/
(losses)
£’000
|
Unrealised
gains/
(losses)
£’000
|
Total
£’000
|
At
1 January
|
(4,921)
|
29,891
|
24,970
|
7,347
|
38,649
|
45,996
|
Net
gains/(losses) on investments
|
17,161
|
8,213
|
25,374
|
(12,655)
|
(8,758)
|
(21,413)
|
Expenses
charged to capital
|
(2,175)
|
–
|
(2,175)
|
387
|
–
|
387
|
At
31 December
|
10,065
|
38,104
|
48,169
|
(4,921)
|
29,891
|
24,970
|
Realised
capital reserve and revenue reserve are available for distribution.
Unrealised gains, which are not readily
convertible
to cash are not considered distributable.
19. FINANCIAL
COMMITMENT
The
Company has made commitments to provide additional funds to the
following investments:
|
Sterling
Commitment
|
Local
currency
Commitment
|
Notice
of
drawdown
|
TCI Real
Estate Partners Fund IV Limited
|
£13,664,000
|
US$17,419,000
|
10
business days
|
TCI Real
Estate Partners Fund III Limited
|
£2,200,000
|
US$2,805,000
|
10
business days
|
20. THE
COMPANY
The
Company is a public limited company (PLC) incorporated in England
and Wales. Its principal activity is that of an investment trust
company within the meaning of sections 1158/1159 of the Corporation
Tax Act 2010 and its registered office and principal place of
business is 25 Southampton Buildings, London, WC2A 1AL.
21. POST
BALANCE SHEET EVENT
As
disclosed in the Portfolio Manager’s Review on page 19, in January
2024 the Company ceased to hedge its currency exposures. There are
no other post balance sheet events which would require adjustment
of or disclosure in the financial statements.
.
Glossary
Alternative
Investment Fund Managers Regulations (“UK
AIFMD”)
Agreed by
the European Parliament and the Council of the European Union and
transposed into UK legislation, the UK AIFMD classifies certain
investment vehicles, including investment companies, as Alternative
Investment Funds (“AIFs”) and requires them to appoint an
Alternative Investment Fund Manager (“AIFM”) and depositary to
manage and oversee the operations of the investment vehicle. The
Board of the Company retains responsibility for strategy,
operations and compliance and the Directors retain a fiduciary duty
to shareholders.
Compounding
Hurdle
The
payment of a performance fee is conditional on the Company’s NAV
being above the high-water mark and the return on the gross
proceeds from the IPO of the Company exceeding an annualised
compound return of 5%.
Discount
or Premium
A
description of the difference between the share price and the net
asset value per share. The size of the discount or premium is
calculated by subtracting the share price from the net asset value
per share and is usually expressed as a percentage (%) of the net
asset value per share. If the share price is higher than the net
asset value per share the result is a premium. If the share price
is lower than the net asset value per share, the shares are trading
at a discount.
Gearing
In simple
terms gearing is borrowing. An investment trust can borrow money to
invest in additional investments for its portfolio. The effect of
the borrowing on shareholders’ funds is called ‘gearing’. If the
Company’s assets grow, shareholders’ funds grow proportionately
more because the debt remains the same. But if the value of the
Company’s assets falls, the situation is reversed. Gearing can
therefore enhance performance in rising markets but can adversely
impact performance in falling markets.
Gearing
represents borrowings at par less cash and cash equivalents
expressed as a percentage of shareholders’ funds.
High
Watermark
The high
watermark is the highest net asset value that the Company has
reached on which a performance fee has been paid. Its initial level
was set at 100p on the launch of the Company.
Leverage
For the
purposes of the UK AIFMD, leverage is any method which increases
the Company’s exposure, including the borrowing of cash and the use
of derivatives. It is expressed as a ratio between the Company’s
exposure and its net asset value and can be calculated using gross
and commitment methods. Under the gross method, exposure represents
the sum of the Company’s positions after the deduction of sterling
cash balances, without taking into account any hedging and netting
arrangements. Under the commitment method, exposure is calculated
without the deduction of sterling cash balances and after certain
hedging and netting positions (as detailed in the UK AIFMD) are
offset against each other.
Net
Asset Value (“NAV”)
The value
of the Company’s assets, principally investments made in other
companies and cash being held, minus any liabilities. The NAV per
share is also described as ‘shareholders’ funds’ per share. The NAV
is often expressed in pence per share after being divided by the
number of shares in issue. The NAV per share is unlikely to be the
same as the share price which is the price at which the Company’s
shares can be bought or sold by an investor. The share price is
determined principally by the relationship between the demand for
and supply of the shares.
NAV
Total Return (APM)
Total
return on shareholders’ funds per share, reflecting the change in
NAV assuming that any dividends paid to shareholders were
reinvested at NAV at the time the shares were quoted ex-dividend. A
way of measuring investment management performance of investment
trusts which is not affected by movements in the share
price.
|
31
December
2023
|
31
December
2022
|
Opening
NAV
|
129.8p
|
155.7p
|
Increase/(decrease)
in NAV
|
30.5p
|
(25.9)p
|
Closing
NAV
|
160.3p
|
129.8p
|
%
increase/(decrease) in NAV
|
23.4%
|
(16.6%)
|
Impact of
dividend reinvested
|
0.4%
|
0.1%
|
NAV total
return/(loss)
|
23.8%
|
(16.5%)
|
Share
Price Total Return (APM)
The return
to the investor, on a last traded price to a last traded price
basis, assuming that all dividends paid were reinvested, without
transaction costs, into the shares of the Company at the time the
shares were quoted ex-dividend.
|
31
December
2023
|
31
December
2022
|
Opening
share price
|
89.0p
|
112.0p
|
Increase/(decrease)
in share price
|
11.8p
|
(23.0)p
|
Closing
share price
|
100.8p
|
89.0p
|
%
increase/(decrease) in share price
|
13.2%
|
(20.5%)
|
Impact of
dividend reinvested
|
0.4%
|
0.2%
|
Share
price total return/(loss)
|
13.6%
|
(20.3%)
|
Ongoing
Charges Ratio (APM)
Ongoing
charges ratio is calculated by taking the Company’s annualised
operating expenses and expressing them as a percentage of the
average daily net asset value of the Company over the year. The
costs of buying and selling investments are excluded, as are
interest costs, taxation, costs of buying back or issuing shares
and other non-recurring costs. These items are excluded because if
included, they could distort the understanding of the Company’s
performance for the year and the comparability between periods.
Performance fees are also excluded from the ongoing charges ratio
calculation.
|
31
December
2023
£’000
|
31
December
2022
£’000
|
Total
Expenses
|
2,040
|
2,018
|
Average
NAVs
|
117,147
|
111,560
|
Ongoing
charge ratio
|
1.7%
|
1.8%
|
.
The
figures and financial information for 2022 are extracted from the
published Annual Report for the year ended 31 December 2022 and do
not constitute the statutory accounts for that year. The Annual
Report for the year ended 31 December 2022 has been delivered to
the Registrar of Companies and included the Independent Auditor’s
Report, which was unqualified and did not contain a statement under
either section 498(2) or section 498(3) of the Companies Act
2006.
The
figures and financial information for 2023 are extracted from the
Annual Report and financial statements for the year ended 31
December 2023 and do not constitute the statutory accounts for the
year. The Annual Report for the year ended 31 December 2023
includes the Independent Auditor’s Report, which is unqualified and
does not contain a statement under either section 498(2) or section
498(3) of the Companies Act 2006. The Annual Report and financial
statements have not yet been delivered to the Registrar of
Companies.
ANNOUNCEMENT
ENDS
Neither
the contents of the Company's website nor the contents of any
website accessible from hyperlinks on the Company's website (or any
other website) is incorporated into, or forms part of, this
announcement.