INVESCO ASIA TRUST PLC: Annual Financial Report
Invesco Asia Trust plc
Annual Financial Report Announcement
For the Financial Year Ended 30 April 2013 FINANCIAL INFORMATION AND PERFORMANCE STATISTICS The benchmark index of the Company is the MSCI All Countries Asia Pacific ex Japan Index (total return), measured in sterling. Performance Statistics At At 30 April 30 April % 2013 2012 change
Total Return Statistics (1):
- Diluted net asset value (2) (NAV) +11.9
- Share Price +12.3
- Benchmark index +18.3
Net assets (£'000) 195,528 164,741 +18.7
- gross 5.6% 3.8%
- net 5.1% 3.6%
NAV per ordinary share:
- basic 184.6p 176.6p +4.5
- diluted (2) 184.6p 168.6p +9.5
Benchmark index (1) 311.1 271.7 +14.5
Mid-market price per ordinary share 164.0p 149.4p +9.8
Discount per ordinary share (2):
- cum income 11.2% 11.4%
- ex income 9.6% 9.7%
(1)Source: Thomson Reuters Datastream.
(2)As there are no longer any subscription shares, the diluted NAV is the equivalent of the undiluted (basic) NAV.
YEAR YEAR ENDED ENDED 30 April 30 April % 2013 2012 change
Gross income (£'000) 4,557 4,738 - 3.8
Net revenue available for ordinary shares (£ 3,328 3,593 - 7.4 '000)
Dividend per share 3.2p 3.2p -
Ongoing charges ratio† 1.08% 1.05%
Revenue return per ordinary share - diluted 3.3p 3.8p
Performance and Prospects
The financial year to 30 April 2013 was a volatile period for Asian markets, with global macroeconomic issues dominating again. It began with further concerns over the sustainability of the euro, a weak patch in the US economy, fears of a hard-landing in China and with economically sensitive companies in Asia performing poorly. However, the commitment of the major central banks to maintaining loose monetary policy convinced equity markets that another liquidity crisis could be avoided. This triggered a rally in Asian equity markets towards the end of 2012. Against this backdrop, the value of the portfolio increased over the period, but regrettably performance has lagged that of the benchmark index, the MSCI All Countries Asia Pacific ex Japan (in sterling terms). On a total return basis, the net asset value per share of the Company increased by 11.9% compared to the benchmark index which returned 18.3%. The Company's share price rose from 149.4p to 164p and the ex-income discount to net asset value at which the shares traded ended the year relatively unchanged from the prior year at 9.6%
Taking advantage of the low valuations available, the investment managers positioned the portfolio in markets and stocks that had been most impacted by investor caution over the global economic situation. However, over the financial year Asian markets have continued to be led by relatively defensive stocks despite their higher valuations. Whilst the portfolio was underweight in Australia, it was overweight in China, Hong Kong and South Korea, and this was a key reason for underperformance. In the opinion of the investment managers, the Australian dollar had become overvalued and represented a significant risk to capital for a sterling-based investor. In addition, the reasons for Australia's status as a safe haven, namely its AAA sovereign rating, above average interest rates and a positive commodity price cycle, were felt to be on the wane. Conversely, concerns about economic developments in China and South Korea, Asia's two cheapest markets, seemed adequately reflected in those markets' valuations. Over the reporting year the Australian market outperformed and the Australian dollar remained strong. However, in the first month of the new financial year the Australian dollar has weakened by around 5.2% against sterling, positively impacting the relative performance of the Company.
Continuation Vote, Tender Offer and Discount Control
Shareholders are given the opportunity to vote on the future of the Company every three years and at the forthcoming Annual General Meeting an ordinary resolution is being proposed that the Directors be released from their obligation to convene an Extraordinary General Meeting proposing a special resolution that the Company be wound up on a voluntary basis. The Directors continue to believe that a wind-up would not serve shareholders' best interests and that the combination of the management expertise of the investment managers and the encouraging prospects we foresee for the markets in which we invest will be of benefit to shareholders.
In 2012 the Board proposed a tender offer at the end of the Company's 2012-2013 financial year (subject to necessary shareholder approval) for up to 15% of the Company's issued share capital, at a 2% discount to NAV after deduction of the costs of the tender, if the Company's shares had traded over the year to 30 April 2013 at an average discount of more than 10% to NAV (fully diluted, ex income). As a result of the average discount over the year being 10.9%, the Board is seeking the approval of shareholders to implement such a tender offer at a separate general meeting to be held after the conclusion of the Company's Annual General Meeting. The Board has also concluded that it would be in shareholders' interests to extend the discount control arrangements for a further year.
The Board considers it desirable that the Company's shares do not trade at a significant discount to NAV and believes that, in normal market conditions, the shares should trade at a price which on average represents a discount of less than 10% to NAV. To enable the Board to take action to deal with any material overhang of shares in the market it seeks authority from shareholders annually to buy back shares. Shares may be repurchased when, in the opinion of the Board, the discount is higher than desired and shares are available in the market. The Board is of the view that the principal purpose of share repurchases is to enhance net asset value for remaining shareholders, although it may also assist in addressing the imbalance between the supply of and demand for the Company's shares and thereby reduce the scale and volatility of the discount at which the shares trade in relation to the underlying net asset value.
Subscription Share Exercise and Share Buy Backs
As I explained in my statement in the half-yearly financial report, subscription shareholders had their final opportunity to exercise their right to subscribe for ordinary shares of the Company at a price of 125p per share. As result, 17,648,153 ordinary shares were allotted in mid-September 2012 and the Company subsequently bought back 2,678,325 of these shares into treasury.
The Company also bought back a further 2,223,899 ordinary shares, of which 598,899 were retained in treasury and 1,625,000 were cancelled. These buy backs resulted in an enhancement to NAV of £1,008,000 (0.6%). At the period end, the issued share capital consisted of 110,338,910 ordinary shares, of which 3,277,224 were held in treasury.
Following the slightly early payment of an interim dividend in 2012 to assist the Manager in their outsourcing of some administration, the dividend reverts to a final, with the Board recommending a final dividend of 3.2p per ordinary share (2012: interim 3.2p), maintaining the 2012 level despite an increase of 16,023,153 in the number of shares in issue. The dividend, which is subject to the approval of shareholders at the Annual General Meeting, will be payable on 13 August 2013 to shareholders on the register on 19 July 2013. The shares will go ex-dividend on 17 July 2013.
Relative to other parts of the world Asia continues to have good growth prospects, supported by strong fundamentals and structural trends that can be expected to remain intact over the medium-term. These trends are most evident in the emerging countries of South East Asia, where there is robust domestic consumption growth and growing evidence of an investment cycle. However, one must be mindful of over exuberance from local and foreign investors and there are signs of widening current account deficits in Thailand and Indonesia, where export growth is struggling to keep up with the growth in imports. Meanwhile, inflation remains moderate in most countries across Asia but appears to have bottomed, with any further easing of monetary policy unlikely unless global macroeconomic conditions worsen markedly.
The slowdown in Asian economic growth and corporate earnings stabilised in the latter half of 2012, when a modest recovery took place. However, recent economic indicators have generally fallen short of expectations, which is unsurprising given the anaemic demand from developed markets where an extended deleveraging cycle continues to act as a headwind for growth. In China, there are growing concerns over the strength of the economy. We do not expect a strong rebound as the authorities have stressed the need to control rapid credit growth while retaining a commitment to rebalancing the economy towards consumption, with less emphasis on fixed asset investment which has boosted growth in the past.
Given recent positive momentum in Asian equity markets, valuations now appear reasonable considering the earnings growth rates expected, especially when compared with those found in developed markets. However, broader market direction will continue to be influenced by global macroeconomic conditions, with general investor risk appetite and liquidity conditions likely to remain the dominant swing factors. As such, I expect stock selection to be of paramount importance, and remain confident that we can continue to find attractive investment opportunities.
As was announced on 2 April 2013, I shall be stepping down from the board after the AGM in August. I have been a director of the Company for ten years and chairman since 2005 and I think it is time to give way to a new face. I would like to thank my colleagues and the team at Invesco Perpetual for all the support they have given me. I am delighted that Carol Ferguson has agreed to take over the chair as I know I will be leaving your Company in safe hands. In addition, Owen Jonathan was appointed a director on 1 March 2013 and I am confident that with his legal background and knowledge of Asia the composition and experience of the Board is appropriate for taking the Company forward.
Annual General Meeting
The Company's AGM will be held at 12 noon on 8 August 2013 at 30 Finsbury Square, London EC2A 1AG. The Directors and the investment managers, Stuart Parks and Ian Hargreaves, will be available at the meeting to answer shareholder questions. The Directors have considered all the resolutions proposed in the Notice of AGM and, in their opinion, consider them all to be in the interests of shareholders as a whole. The Directors therefore recommend that shareholders vote in favour of each resolution.
1 July 2013
INVESTMENT MANAGERS' REPORT
Market & Economic Review
Asian equity markets made solid gains over the last twelve months. Global macroeconomic risks have eased and investor risk appetite returned, with European policymakers intervening to contain the risks of a Eurozone debt crisis, while developed market central banks have continued to run loose monetary policies, which has offered support to risk assets, including emerging market equities. However, somewhat surprisingly given the improved macroeconomic conditions, market leadership has come from relatively defensive stocks, despite their higher valuations, thanks to the higher yield and steady growth they offer, rather than the more attractively valued, economically sensitive or cyclical sectors which might have been expected to lead in such a scenario.
Market sentiment also improved with signs that China's economy was stabilising. However, its equity market has lost momentum in recent months as economic data, although relatively strong by global standards, has been slightly weaker than expected. Real GDP growth slowed to 7.7% year-on-year in the first quarter of 2013, against expectations that it would slightly exceed the 7.9% growth achieved the previous quarter. Other indicators such as manufacturing purchasing manager's indices (PMI), retail sales and industrial production have been reasonably robust, but reflect slower growth than that recorded in recent years. There have also been concerns over additional tightening measures as the authorities seek to control rising house prices in tier-1 cities and the fast growth of non-bank social financing. It appears therefore, that the market continues to adjust to the reality of slower growth from China, as the economy gradually shifts away from investment-driven growth.
ASEAN markets have continued to outperform the broader region thanks to strong domestic demand and positive credit cycles. Australia and Singapore also made strong gains over the period, supported by positive returns from stocks that offer high dividend yields. The attractiveness of steadily growing higher yielding stocks in a low interest rate world has also seen sectors such as real estate and banks outperform the broader market, while the energy and materials sectors have lagged due to falling commodity prices.
The slowdown in India's economy appears to have come to an end and we believe the medium-term outlook has improved on the back of a more promising reform agenda. However, progress is likely to be gradual and returns from India's equity market have been dampened by the lack of a pick-up in the economy. Finally, Korea's equity market has lagged the Asian region due to lingering concerns over the strength of its domestic economy, with relatively high levels of household debt by Asian standards continuing to act as a headwind for growth.
In corporate news, Samsung Electronics and Taiwan Semiconductor Manufacturing reported strong earnings growth driven by demand for smartphones and tablets, although there are near-term headwinds for the sector with signs that sales of smartphones may start to ease. Meanwhile, conglomerates Hutchison Whampoa and Jardine Matheson have reported robust full year earnings across their diverse business units.
In the twelve months to the end of April 2013, the Company's net asset value increased by 11.9% (total return, in sterling terms), which was behind that of the benchmark, the MSCI All Countries Asia Pacific ex-Japan index, which returned 18.3% (total return, in sterling terms).
While the Company delivered positive returns over the period, our performance has lagged that of the benchmark. This is largely due to stock selection and asset allocation in Australia, where our large underweight position, relative to the benchmark, has acted as a significant headwind for performance as its equity market has outperformed. Our positioning is largely driven by our belief that the Australian dollar is overvalued. Since the global financial crisis, the Australian dollar has been considered a relative `safe-haven'. However, given the current global macro environment, with the US economy showing signs of recovery and China's appetite for Australia's resources slowing, we believe the currency should weaken, although it has proven enduringly resilient. Over the period, Australian stocks have generated strong returns, particularly banks and retailers which offer attractive dividend yields. Our limited exposure in these areas of the market detracted significantly from overall performance. Furthermore, our holding in Newcrest Mining detracted as the improved global backdrop saw gold-related stocks fall from favour.
Stock selection in China was also a significant detractor from overall performance. We have been surprised by how long the economic slowdown has acted as a headwind for consumer-related sectors, and our holdings in retailers and media companies have disappointed with weaker-than-expected earnings. The uncertain economic outlook has also impacted sentiment towards holdings in energy stocks such as CNOOC and China Shenhua Energy. Elsewhere, stock selection in Chinese internet companies detracted, with our holding in Baidu more than cancelling out the positive impact of our holding in NetEase. Baidu, typically referred to as the "Google of China", has been hit by concerns over competition and the monetisation of mobile search. We believe valuation levels underestimate the company's dominant position and the high growth characteristics of the industry, exemplified by Baidu's 1Q revenue growth of 40% y-o-y.
Our limited exposure in more defensive areas of the market, such as the utilities and telecom services sectors, has also detracted. These areas have outperformed in the period supported by the stable nature of their earnings and high dividend payout ratios.
On the other hand, stock selection in industrials added value, particularly our holding in Jardine Matheson which continued to deliver robust earnings against a background of slowing growth. Our overweight position in the Philippines and stock selection in Thailand and Indonesia also contributed positively, with holdings in banks and real estate companies proving well placed to capitalise on increasing loan demand and buoyant property markets. Our limited exposure in the energy and materials sectors also added value, as these areas underperformed over the period.
Outlook for Asian Economies and Markets
Although recent macroeconomic data from Asia has generally fallen short of expectations, a modest recovery in economic growth and corporate earnings appears to be underway. The emerging countries of South-East Asia continue to generate strong levels of growth, with robust domestic consumption and growing evidence of an investment cycle in the Philippines, Thailand and Indonesia. Meanwhile, recent economic data from China has been mixed and we believe that, although it is recovering, the upturn in China's economy is likely to be moderate given the authorities' commitment to rebalancing the economy towards consumption, and less emphasis on investment-led growth.
Meanwhile, inflation remains moderate in most countries across Asia, with further easing of monetary policy unlikely unless global macroeconomic conditions worsen markedly. Consensus earnings growth forecasts for Asia Pacific ex Japan companies in 2013 have stabilised in recent months and currently stand at around 13%, bringing current valuation levels for the region to 12.7 times 2013 earnings. We believe these are reasonable valuation levels relative to history.
During the year we introduced a target of between 50 and 60 stock holdings, as being the number that would allow for sufficient diversification while still allowing exposure to the broad range of opportunities in the region. As a result, by the year end the number of stocks held had reduced from 72 to 63.
The Company offers diversified exposure to the Asia Pacific ex-Japan region, a region that continues to offer attractive earnings growth potential over the medium-term. We remain focused on companies that we believe possess strong competitive advantages and undervalued earnings growth prospects. As such, we continue to have considerable exposure in the technology sector, with relatively high weightings in Samsung Electronics and Taiwan Semiconductor Manufacturing. These companies are global leaders in their industry and are key beneficiaries of the move away from PCs to smartphones and tablets, but remain attractively valued in our view. We have also continued to add exposure in Chinese internet companies, which are fundamentally undervalued in our opinion whilst generating strong free cash flow.
Our main overweight position relative to the benchmark index is in Hong Kong, where we continue to believe that there are a number of stock specific opportunities. We favour franchises with what we consider to be undervalued exposure to consumer demand growth, including Jardine Matheson, which is largely focussed on the ASEAN region, and Hutchison Whampoa which has Hong Kong and European-focused operations. We also hold large positions in what we believe to be high quality, but undervalued financials with global (HSBC and Standard Chartered) or pan-Asian exposure (AIA Group).
Our overweight position in China is largely driven by exposure to consumer-related areas of the market, including retailers and Chinese internet companies. Given signs of stabilisation in China's economy and the attractive valuations on offer, we have also increased our cyclical exposure, adding to existing positions in China Shenhua Energy and CNOOC, as well as Korean steelmaker POSCO. We introduced into the portfolio a new holding in Qingling Motors, as we believe the market is underestimating that company's earnings growth potential. We have also added a holding in the Hong Kong based airline Cathay Pacific Airways, which in our view was trading at close to trough valuations and at what we consider to be the bottom of the earnings cycle.
We remain underweight in Australia, particularly its banks, as we believe it is at a later stage in the credit cycle and has a lower growth profile compared to other economies in the region. We also believe the Australian dollar is overvalued. However, we still have significant exposure in financials across Asia, preferring to hold high quality, but undervalued banks in Korea, and have continued to add to holdings in banks which we believe have the potential to grow their loan books profitably. For example, we have added a significant position in ICICI Bank, which we believe is well placed to capitalise on increased loan demand in India thanks to its strong balance sheet and market leading franchise. This addition has also reversed our small underweight position in India to a small overweight, reflecting our increased confidence in the medium-term outlook for the country, where we see the gradual progress of a significant reform agenda as being a positive development. Finally, the portfolio also continues to have selective exposure to smaller companies (with market cap of less than US$1 billion), which offer the opportunity to deliver superior returns being at an earlier stage in their growth cycle.
Stuart Parks Ian Hargreaves
1 July 2013
INVESTMENTS IN ORDER OF VALUATION
at 30 April 2013
Ordinary shares unless stated otherwise
† MSCI and Standard & Poor's Global Industry Classification Standard.
at market % of Value Port-
company industry group† country £'000 folio
Samsung Electronics Semiconductors & South Korea 13,399 6.5
Hutchison Whampoa Capital Goods Hong Kong 8,136 4.0
Jardine Matheson - Singapore Capital Goods Hong Kong 7,236 3.5 Reg
Taiwan Semiconductor Semiconductors & Taiwan 6,992 3.4 Manufacturing Semiconductor
Industrial & Commercial Bank Banks China 5,740 2.8 of ChinaH
Kasikornbank Banks Thailand 5,647 2.7
NetEase - ADR Software & Services China 4,856 2.4
CNOOCR Energy China 4,795 2.3
HSBC - Hong Kong Reg Banks United 4,690 2.3
ICICI Banks India 4,556 2.2
Top Ten Holdings 66,047 32.1
Hon Hai Precision Industry Technology Hardware & Taiwan 4,523 2.2
Standard Chartered Banks United 4,394 2.1
Shinhan Financial Banks South Korea 4,353 2.1
Baidu - ADR Software & Services China 4,313 2.1
United Phosphorus Materials India 4,271 2.1
POSCO Materials South Korea 4,260 2.1
BHP Billiton Materials Australia 4,140 2.0
Housing Development Finance Banks India 4,049 2.0
China MobileR Telecommunication China 4,042 2.0
Hyundai Motor - Preference Automobiles & South Korea 3,963 1.9 Shares Components
Top Twenty Holdings 108,355 52.7
Daphne International Consumer Durables & Hong Kong 3,551 1.7
Hyundai Mobis Automobiles & South Korea 3,543 1.7
AIA Group Insurance Hong Kong 3,471 1.7
Westpac Banking Banks Australia 3,364 1.6
Bank Negara Indonesia Banks Indonesia 3,362 1.6 Persero
Australia & New Zealand Banks Australia 3,305 1.6 Banking
Wharf Real Estate Hong Kong 2,985 1.5
Mindray Medical Health Care Equipment China 2,969 1.5 International - & Services
LG Fashion Consumer Durables & South Korea 2,957 1.4
Cathay Pacific Airways Transportation Hong Kong 2,957 1.4
Top Thirty Holdings 140,819 68.4
Korean Reinsurance Insurance South Korea 2,896 1.4
China Shenhua EnergyH Energy China 2,872 1.4
Cheung Kong Real Estate Hong Kong 2,842 1.4
Metro Pacific Investments Diversified Philippines 2,797 1.4
E.Sun Financial Banks Taiwan 2,749 1.3
Goodpack Transportation Singapore 2,748 1.3
Far Eastern New Century Capital Goods Taiwan 2,741 1.3
Sohu.com - US Common Stock Software & Services China 2,710 1.3
Filinvest Land Real Estate Philippines 2,694 1.3
Infosys Software & Services India 2,668 1.3
Top Forty Holdings 168,536 81.8
HKR International Real Estate Hong Kong 2,545 1.3
DGB Financial Banks South Korea 2,544 1.2
China Resources EnterpriseR Food & Staples China 2,518 1.2
QBE Insurance Insurance Australia 2,370 1.2
Newcrest Mining Materials Australia 2,122 1.0
Qingling MotorsH Automobiles & China 2,048 1.0
Korea Investment Diversified South Korea 2,013 1.0
Digital China Technology Hardware & China 1,914 0.9
China Life Insurance Insurance Taiwan 1,892 0.9
Metropolitan Bank & Trust Banks Philippines 1,889 0.9
Top Fifty Holdings 190,391 92.4
LT Food, Beverage & Philippines 1,856 0.9
- Keppel Energy Singapore 1,799 0.9
- Keppel REIT Real Estate Singapore 51
Pacific Basin Shipping Transportation Hong Kong 1,718 0.9
Wumart StoresH Food & Staples China 1,701 0.8
Venture Technology Hardware & Singapore 1,506 0.7
E-House China - ADR Real Estate China 1,453 0.7
Yageo Technology Hardware & Taiwan 1,423 0.7
Charm Communications - ADR Media Hong Kong 1,151 0.6
Samsonite International Consumer Durables & Hong Kong 897 0.5
China Taiping InsuranceR Insurance China 860 0.4
Top Sixty Holdings 204,806 99.5
Treasury Wine Estates Food, Beverage & Australia 808 0.4
Greatview Aseptic Packaging Materials China 191 0.1
Dart Energy Energy Australia 78 -
Total holdings of 63 (2012: 205,883 100.0 78)
H: H-Shares - shares issued by companies incorporated in the People's Republic of China (PRC) and listed on the Hong Kong Stock Exchange.
R: Red Chip Holdings - holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.
Classification of Investments by Country/Sector
at 30 April
2013 2012 AT % of AT % of Valuation Portfolio Valuation Portfolio £'000 £'000
Consumer Staples 808 0.4 515 0.3
Energy 78 - 358 0.2
Financials 9,039 4.4 5,402 3.2
Industrials - - 1,758 1.0
Materials 6,262 3.0 6,184 3.6
16,187 7.8 14,217 8.3
Consumer Discretionary 2,048 1.0 1,251 0.7
Consumer Staples 4,219 2.0 5,237 3.1
Energy 7,667 3.7 6,032 3.5
Financials 8,053 3.9 9,641 5.7
Health Care 2,969 1.5 - -
Industrials - - 4,263 2.5
Information Technology 13,793 6.7 7,881 4.6
Materials 191 0.1 - -
Telecommunication Services 4,042 2.0 4,654 2.7
42,982 20.9 38,959 22.8
Consumer Discretionary 5,599 2.8 7,969 4.7
Financials 11,843 5.9 8,675 5.1
Industrials 20,047 9.8 12,261 7.2
Materials - - 223 0.1
Telecommunication Services - - 1,893 1.1
37,489 18.5 31,021 18.2
Financials 8,605 4.2 2,666 1.5
Industrials - - 1,563 0.9
Information Technology 2,668 1.3 2,030 1.2
Materials 4,271 2.1 3,075 1.8
15,544 7.6 9,334 5.4
Consumer Discretionary - - 362 0.2
Financials 3,362 1.6 1,769 1.0
3,362 1.6 2,131 1.2
Consumer Staples 1,856 0.9 - -
Financials 7,380 3.6 7,010 4.1
9,236 4.5 7,010 4.1
Energy 1,799 0.9 1,991 1.2
Financials 51 - 620 0.4
Industrials 2,748 1.3 3,047 1.7
Information Technology 1,506 0.7 1,337 0.8
6,104 2.9 6,995 4.1
Consumer Discretionary 10,463 5.0 11,310 6.7
Consumer Staples - - 1,788 1.0
Financials 11,806 5.7 10,158 6.0
Information Technology 13,399 6.5 11,864 6.9
Materials 4,260 2.1 2,415 1.4
39,928 19.3 37,535 22.0
Financials 4,641 2.2 3,379 2.0
Industrials 2,741 1.3 - -
Information Technology 12,938 6.3 12,369 7.3
20,320 9.8 15,748 9.3
Financials 5,647 2.7 1,976 1.2
5,647 2.7 1,976 1.2
Financials 9,084 4.4 5,818 3.4
Total 205,883 100.0 170,744 100.0
Principal Risks and Uncertainties
There can be no guarantee that the Company will meet its investment objective.
At the core of the Manager's philosophy is a belief in active investment management. Fundamental principles drive a genuinely unconstrained investment approach, which aims to deliver attractive total returns over the long term. The investment process emphasises pragmatism and flexibility, active management, a focus on valuation and the combination of top-down and bottom-up fundamental analysis. Bottom-up analysis forms the basis of the investment process. It is the key driver of stock selection and is expected to be the main contributor to alpha generation within the portfolio. Portfolio construction at sector level is largely determined by this bottom-up process but is also influenced by top-down macro economic views.
Research is structured to provide a detailed understanding of a company's key historical and future business drivers, such as demand for its products, pricing power, market share trends, cash flow and management strategy. This allows the Manager to form an opinion on a company's competitive position, its strategic advantages/disadvantages and the quality of its management. Each member of the investment management team travels to the region between three and four times per year. In total the team has contact with around 700 companies a year. The Manager will also use valuation models selectively in order to understand the assumptions that brokers/analysts have incorporated into their valuation conclusions and as a structure into which the Manager can input its own scenarios.
Risk management is an integral part of the investment management process. Core to the process is that risks taken are not incidental but are understood and taken with conviction. The Manager controls stock-specific risk effectively by ensuring that the portfolio is always appropriately diversified.
Also, in-depth and constant fundamental analysis of the portfolio's holdings provide the Manager with a thorough understanding of the individual stock risk taken. The internal Performance & Risk Team, an independent team, ensures that the Manager adheres to the portfolio's investment objectives, guidelines and parameters. There is also a culture of challenge and debate between the investment managers regarding portfolio construction and risk.
Portfolio performance is substantially dependent on the performance of Asian and Australasian equities. Stocks are influenced by the general health of the economies in the Far Eastern region.
The Company's investments are traded on the Far Eastern, Indian and Australasian stockmarkets as well as the UK. The principal risk for investors in the Company is of a significant fall and/or a prolonged period of decline in the markets. This could be triggered by unfavourable developments within the region or events outside it.
The value of investments held within the portfolio is influenced by many factors including the general health of the world economy, interest rates, inflation, government policies, industry conditions, political and diplomatic events, tax laws, environmental laws, and by changing investor demand. Such factors are outside the control of the Board and the Manager and may give rise to high levels of volatility in the prices of investments held by the Company.
Bad performance of individual portfolio investments is mitigated as the Board has established guidelines to ensure that the investment policy of the Company is pursued by the investment managers who undertake continual analysis of the fundamentals of all holdings and ensures that the Company's portfolio of investments is appropriately diversified. The performance of the investment managers is carefully monitored by the Board and the continuation of the management contract is reviewed each year. Past performance of the Company is not necessarily indicative of future performance.
A fuller discussion of the economic and market conditions facing the Company and the current and future performance of the portfolio of the Company are included in the Investment Managers' Report above.
Foreign Exchange Risk
The movement of exchange rates may have unfavourable or favourable impact on returns as the majority of the assets are non-sterling denominated. This risk can be mitigated by the use of hedging and by the use of non-sterling denominated borrowing. The foreign currency exposure of the Company is monitored by the Manager on a daily basis and reviewed at Board meetings.
The market value of the ordinary shares in the Company may not reflect their underlying NAV and may trade at a discount to it. The Board and the Manager maintain an active dialogue with the aim of ensuring that the market rating of the Company's shares reflects the underlying NAV and there are in place share repurchase and issuance facilities, and a declared discount monitoring mechanism to help the management of this process.
The value of an investment in the Company and the income derived from that investment may go down as well as up and an investor may not get back the amount invested.
Any tender offer would result in a decrease in the size of the Company which could potentially affect both the liquidity of the Company's shares as well as requiring the disposal of assets to fund the tender. A tender offer could also materially affect the ongoing charges ratio.
Whilst the use of borrowings by the Company should enhance the total return on the shares where the return on the Company's underlying portfolio is positive and exceeds the cost of borrowings, it will have the opposite effect where the underlying return is negative, further reducing the total return on the shares.
The Company may enter into derivative transactions approved by the Board for efficient portfolio management. Derivative instruments can be highly volatile and expose investors to a high risk of loss. There is a risk that the returns on the derivative do not exactly correlate to the returns on the underlying investment, obligation or market sector being hedged against. If there is imperfect correlation, the Company may be exposed to greater loss than if the derivative had not been entered into.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a non-executive basis. The Company is reliant upon the performance of third party service providers for its executive function. The Company's most significant contract is with the Manager, to whom responsibility both for the Company's portfolio and for the provision of company secretarial and administrative services are delegated. The Company has other contractual arrangements with third parties to act as auditor, registrar, custodian and broker. Failure by any service provider to carry out its obligations to the Company in accordance with the terms of its appointment could have a materially detrimental impact on the operation of the Company and could affect the ability of the Company to successfully pursue its investment policy and expose the Company to reputational risk.
In particular, the Manager performs services which are integral to the operation of the Company. The Manager may be exposed to the risk that litigation, misconduct, operational failures, negative publicity and press speculation, whether or not it is valid, will harm its reputation. Any damage to the reputation of the Manager could result in counterparties and third parties being unwilling to deal with the Manager and by extension the Company. This could have an adverse impact on the ability of the Company to pursue its investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation to agreed service standards on a regular basis, and any issues and concerns are dealt with promptly and reported to the Board. The Manager formally reviews the performance of all third party providers and reports to the Board on an annual basis.
• The Board reviews the performance of the Manager at every board meeting and otherwise as appropriate. The Board has the power to replace the Manager and reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of Stuart Parks and Ian Hargreaves, who are part of the Invesco Perpetual Asian Equities team, who have worked in equity markets for 28 years and 19 years, respectively and have been the investment managers of the Company since 2004. The Board has adopted guidelines within which the investment managers are permitted wide discretion. Any proposed variation outside these guidelines is referred to the Board and the guidelines themselves are reviewed at every board meeting.
• The risk that the investment managers might be incapacitated or otherwise unavailable is mitigated by the fact that they work closely with each other and they also work within, and are supported by, the wider Invesco Perpetual Asian Equities team.
The Company is subject to various laws and regulations by virtue of its status as a public limited company, its status as an investment trust and its listing on the Official List of the UK Listing Authority.
Loss of investment trust status for tax purposes could lead to the Company being subject to tax on any realised capital profits on the sale of its investments. A serious breach of other regulatory rules could lead to suspension from the Official List, a fine or a qualified audit report. Other control failures, either by the Manager or any other of the Company's service providers, could result in operational or reputational problems, erroneous disclosures or loss of assets through fraud, as well as breaches of regulations.
The Alternative Investment Fund Managers Directive will impose obligations on the Company and the Manager which may have significant consequences for the Company and may increase its compliance and regulatory costs. Failure to meet these obligations may impair the Manager's ability to manage the investments of the Company, which may materially affect the Company's ability to implement its investment strategy and achieve its investment objective.
The Manager reviews compliance with tax and other financial regulatory requirements on a daily basis. All transactions, income and expenditure are reported to the Board. The Board regularly considers all perceived risks and the measures in place to control them. The Board ensures that satisfactory assurances are received from service providers. The Manager's Compliance and Internal Audit Officers produce reports regularly for review by the Company's Audit Committee.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under the law the Directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice. Under company law, the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent;
• state whether applicable accounting standards have been followed; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records which are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and which enable them to ensure that the financial statements comply with the Companies Act 2006 (CA 2006). They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, a Directors' Remuneration Report and a Corporate Governance Statement that comply with that law and those regulations.
In so far as each of the Directors is aware:
• there is no relevant audit information of which the Company's Auditor is unaware; and
• the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the Auditor is aware of that information.
This information is given and should be interpreted in accordance with provision s418 of CA 2006.
The Directors of the Company each confirm to the best of their knowledge that:
• the financial statements, prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and net return of the Company; and
• this annual financial report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
Signed on behalf of the Board of Directors
1 July 2013
for the year ended 30 April
Revenue Capital Total Revenue Capital Total
return return return return return return
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on - 17,236 17,236 - (10,169) (10,169) investments
Losses on foreign - (869) (869) - (318) (318) currency revaluation
Income 2 4,557 - 4,557 4,738 - 4,738
Investment management fee 3 (339) (1,016) (1,355) (313) (940) (1,253)
Other expenses (538) (11) (549) (476) (5) (481)
Return before finance 3,680 15,340 19,020 3,949 (11,432) (7,483) costs and taxation
Finance costs (35) (106) (141) (22) (66) (88)
Return on ordinary 3,645 15,234 18,879 3,927 (11,498) (7,571) activities before tax
Tax on ordinary (317) - (317) (334) - (334) activities
Net return on ordinary 3,328 15,234 18,562 3,593 (11,498) (7,905) activities after tax for
the financial year
Return per ordinary
Basic 4 3.3p 15.0p 18.3p 3.8p (12.2)p (8.4)p
Diluted 4 3.2p 14.9p 18.1p 3.8p (12.2)p (8.4)p
The total return column of this statement represents the Company's profit and loss account prepared in accordance with the UK Accounting Standards. The supplementary revenue and capital columns are prepared in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations and the Company has no other gains or losses, therefore no statement of total recognised gains and losses is presented. No operations were acquired or discontinued in the year.
reconciliation of movements in shareholders' funds
for the year ended 30 April
Capital Share Share Redemption Special Capital Revenue
Capital Premium Reserve Reserve Reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 30 April 2011 9,598 74,506 1,863 11,798 74,633 4,458 176,856
Final dividend - - - - - - (2,724) (2,724) note 5
Net return for the - - - - (11,498) 3,593 (7,905) year
Exercise of (8) 8 - - - - -
into ordinary shares
Net proceeds from 82 943 - - - - 1,025 issue of ordinary
shares on conversion
Shares bought back (179) - 179 (2,511) - - (2,511) cancelled
At 30 April 2012 9,493 75,457 2,042 9,287 63,135 5,327 164,741
Interim dividend - - - - - - (2,980) (2,980) note 5
Net return for the - - - - 15,234 3,328 18,562 year
Exercise of (176) 176 - - - - -
into ordinary shares
Net proceeds from 1,765 20,278 - - - - 22,043 issue of ordinary
shares on conversion
Shares bought back (163) - 163 (6,838) - - (6,838) and held in treasury
At 30 April 2013 10,919 95,911 2,205 2,449 78,369 5,675 195,528 - BALANCE SHEET at 30 April 2013 2012
Notes £'000 £'000
Investments designated at fair value 205,883 170,744
Debtors 1,020 814
Cash at bank 944 327
Creditors: amounts falling due within one (12,319) (7,144) year
Net current liabilities (10,355) (6,003)
Total net assets 195,528 164,741
Capital and reserves
Share capital 6 10,919 9,493
Share premium 95,911 75,457
Capital redemption reserve 2,205 2,042
Special reserve 2,449 9,287
Capital reserve 78,369 63,135
Revenue reserve 5,675 5,327
Total Shareholders' funds 195,528 164,741
Net asset value per ordinary share
Basic 7 184.6p 176.6p
Diluted 7 n/a 168.6p
These financial statements were approved and authorised for issue by the Board of Directors on 1 July 2013.
Signed on behalf of the Board of Directors
Cash Flow Statement
for the year ended 30 April
Notes £'000 £'000
Cash inflow from operating activities 1,870 2,268
Servicing of finance (143) (83)
Taxation - -
Capital expenditure and financial (17,119) 3,315 investment
Dividends paid 5 (2,980) (2,724)
Net cash (outflow)/inflow before management (18,372) 2,776 of liquid resources and financing
Financing 19,174 (1,858)
Increase in cash in the year 802 918
Reconciliation of cash flow to movement in net Debt
for the year ended 30 April
2013 2012 £'000 £'000
Increase in cash in the year 802 918
Cash (inflow)/outflow from movement in debt (3,969) 372
Change in net debt resulting from cash (3,167) 1,290 flows
Exchange differences (869) (318)
Movement in net debt in the year (4,036) 972
Net debt at beginning of year (5,959) (6,931)
Net debt at end of year (9,995) (5,959)
-NOTES TO THE FINANCIAL STATEMENTS
for the year ended 30 April 2013
1. Accounting Policies
A summary of the principal accounting policies, all of which have been consistently applied throughout this and the preceding year is set out below:
(a) Basis of Preparation
(i) Accounting Standards Applied
The financial statements have been prepared under the historical cost convention, except for the measurement at fair value of investments, and in accordance with applicable United Kingdom Accounting Standards and with the Statement of Recommended Practice (SORP) `Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies in January 2009.
(ii) Going Concern
The Company's Articles of Association require that, unless the AGM of the Company to be held in 2013 approves an ordinary resolution releasing the Directors from the obligation, the Directors shall convene an Extraordinary General Meeting in 2014 at which a special resolution will be proposed to wind up the Company. The Board intends to propose the necessary resolution at the AGM in 2013 to seek release from the obligation to wind up the Company, and the financial statements have therefore been drawn up on the going concern basis. Accordingly the accounts do not include any adjustments which might arise from the reconstruction or liquidation of the Company.
2013 2012 £'000 £'000
Income from investments
Overseas dividends 4,150 4,132
Scrip dividends 140 484
UK dividends 267 120
Total dividend income 4,557 4,736
Interest - 2
Total income 4,557 4,738
3. Investment Management Fee
2013 2012 Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 339 1,016 1,355 313 940 1,253 fee
Details of the investment management and secretarial agreement are contained in the Annual Financial Report. At 30 April 2013, £367,000 was due for payment in respect of the management fee (2012: £304,000).
4. Return per Ordinary Share
2013 2012 £'000 £'000
Return per ordinary share is based on the following:
Revenue return 3,328 3,593
Capital return 15,234 (11,498)
Total return 18,562 (7,905)
Weighted average number of ordinary shares
in issue during the year:
- basic 101,744,195 94,419,356
- dilutive potential shares arising from 619,906 3,062,250 subscription shares
- diluted 102,364,101 97,481,606
The diluted return per ordinary share is based on the weighted average number of ordinary shares in issue during the year, as adjusted in accordance with the requirements of FRS22 `Earnings per Share'.
In calculating the diluted return, the exercise of all the subscription shares has been assumed, with the exercise proceeds of 125p per share being used to purchase ordinary shares at the average market price up to the subscription share exercise date of 139.16p.
The subscription shares were dilutive when, and only when, their conversion to ordinary shares would have decreased total earnings per ordinary share or increased total loss per ordinary share. For the year ended 30 April 2012 there was no dilution to the total return per ordinary share based on the average market price for the year of 150.77p.
5. Dividends on Ordinary Shares
Dividends on shares paid in the year:
2013 2012 pence £'000 pence £'000
Interim/final dividend in 3.2 2,981 2.9 2,730 respect of previous year
Unclaimed dividends in respect - (1) - (6) of prior years
3.2 2,980 2.9 2,724 Dividend on shares payable in respect of the current year: 2013 2012 pence £'000 pence £'000
Final/interim dividend proposed 3.2 3,389 3.2 2,981
6. Share Capital
(a) Allotted, called-up and fully paid
2013 2012 £'000 £'000
105,911,686 (2012: 93,165,757) ordinary shares 10,591 9,317 of 10p each
3,277,224 (2012: nil) treasury shares of 10p 328 - each
Nil (2012: 17,648,153) subscription shares of 1p - 176 each
10,919 9,493 (b) Share movements 2013 ordinary Treasury subscription number number number
Number at start year 93,165,757 - 17,648,153
Exercise of subscription shares 17,648,153 - (17,648,153)
Shares bought back and cancelled (1,625,000) - -
Shares bought back into treasury (3,277,224) 3,277,224 -
105,911,686 3,277,224 - 2012 ordinary Treasury subscription number number number
Number at start year 94,136,605 - 18,468,305
Exercise of subscription shares 820,152 - (820,152)
Shares bought back and cancelled (1,791,000) - -
93,165,757 - 17,648,153 Each subscription share conferred the right to subscribe for one ordinary share on or around 31 August for each of the years 2010 to 2012 at an exercise price of 125p per share. All outstanding subscription rights were exercised on 31 August 2012. As a result, 17,648,153 subscription shares were converted to 17,648,153 ordinary shares on 3 September 2012. The Company subsequently bought back 2,678,325 of these shares into treasury. The Company also bought back a further 2,223,899 ordinary shares at an average price of 138.50p each, of which 598,899 were retained in treasury and 1,625,000 were cancelled. (c) Winding-up provisions The Directors are obliged to convene an Extraordinary General Meeting (EGM) to consider a special resolution to wind up the Company every third year from the date of the AGM at which the Directors were released from such obligation. At the AGM in 2010 the Directors were released from their obligation to convene an EGM and a resolution to release the Directors from their obligation to convene an EGM will be put to shareholders at this year's AGM. (d) Tender offer As explained in detail in the Annual Financial Report, the Board intends to seek the approval of shareholders to implement a tender offer for up to 15% of the Company's issued share capital. 7. Net Asset Value The net asset values attributable to each share in accordance with the Company's Articles are set out below. 2013 2012
Ordinary shareholders' funds £195,528,000 £164,565,000
Subscription shareholders' funds of 1p each - £176,000
Total shareholders' funds £195,528,000 £164,741,000
Number of ordinary shares in issue, excluding 105,911,686 93,165,757 treasury shares
Net asset value per ordinary share 184.6p 176.6p
Ordinary shareholders' funds n/a £186,801,000
Number of ordinary shares in issue, excluding n/a 110,813,910 treasury shares
Net asset value per ordinary share n/a 168.6p
No diluted NAV is calculated as there were no subscription shares in issue at the year end. For 2012 the diluted net asset value per ordinary share assumed that all outstanding subscription shares were converted into ordinary shares at the year end based on an exercise price for the subscription shares of 125p per share.
8. Related Party Transactions and Transactions with the Manager
Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco Limited, acts as Manager, Company Secretary and Administrator to the Company. Details of IAML's services and fees are disclosed in the Annual Financial Report.
Fees paid to Directors and full details of Directors' interests are disclosed in the Annual Financial Report.
9. This Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 30 April 2013 have been agreed with the auditors and are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2012 and 2013 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s498 of the Companies Act 2006. The financial information for 2012 is derived from the statutory accounts for 2012 which have been delivered to the Registrar of Companies. The 2013 accounts will be filed with the Registrar of Companies in due course.
10. The Audited Annual Financial Report will be posted to shareholders shortly Copies may be obtained during normal business hours from the Company's registered office, 30 Finsbury Square, London, EC2A 1AG. A copy of the Annual Financial Report will be available from Invesco Perpetual on the following website: www.invescoperpetual.co.uk/investmenttrusts
11. The Annual General Meeting of the Company will be held at 12.00 noon on 8 August 2013 at 30 Finsbury Square, London EC2A 1AG.
By order of the Board
Invesco Asset Management Limited - Company Secretary
1 July 2013
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