Chairman's Statement
Performance
Seneca Global Income & Growth Trust plc ('SIGT' or 'the Company') generated a net asset value ('NAV') total return per share for the year of +5.7%, which is less than the Benchmark return of +7.7%, though returns are better judged over longer periods, and over three years these returns are +27.6% and +15.5% respectively. At the AGM held on 6 July 2017 Shareholders overwhelmingly approved a change to the Company's Investment Objective, and therefore its Benchmark, to “Over a typical investment cycle, the Company will seek to achieve a total return of at least CPI plus 6% per annum after costs with low volatility, and with the aim of growing the aggregate annual dividends at least in line with inflation, through the application of a Multi-Asset Investment Policy.” Prior to 6 July 2017, the Benchmark was 3-month LIBOR plus 3%, so that the actual Benchmark return for year (and over longer periods) is the result of 'chain-linking' these different Benchmarks together. In addition, certain changes to the Investment Policy were approved at the AGM that provided Seneca Investment Managers Limited ('SIML') with greater flexibility to achieve the new Investment Objective.
SIGT's NAV total return over the year compared reasonably well with some comparator indices, whose returns were: FTSE All-Share +8.2%, FTSE All-World ex-UK +7.8%, FTSE UK Private Investor Balanced +4.8%, and FTSE Actuaries UK Conventional Gilts All-Stocks -0.8%. The AIC Flexible Investment sector unweighted average NAV total return was +4.2% for the year.
The Manager's Review later in this Annual Report provides extensive and detailed analysis of the year's performance. I commend this to you as I do the Strategic Review wherein the Manager's Multi-Asset Value Investing philosophy is well explained, as is its approach to Asset Allocation.
Dividends
The Company will pay a fourth interim dividend of 1.64 pence per share (on 22 June 2018), which, when added to the three preceding interim dividends, produces total dividends of 6.38 pence per share for the year to 30 April 2018, an increase of 3.9% on the previous year's 6.14 pence. Inflation over the year to 30 April, as measured by the CPI, was 2.4%. It is the Board's intention, barring unforeseen circumstances, to at least maintain the quarterly dividend amount of 1.64 pence per share for the year to 30 April 2019 (aggregate dividends of 6.56 pence per share). On this assumption, the shares provided a yield of 3.7% on the share price of 174.75 pence that prevailed at the year end.
The aggregate annual dividends are well covered by earnings, which in turn are generated from a well-diversified range of sources.
Discount Control Mechanism ('DCM')
The Company's DCM became fully effective from 1 August 2016, and during the year it bought-in (to treasury) 1m shares and issued (including those re-issued from treasury) 7.34m shares, for a net issuance of 6.34m shares (worth £11.1m). The Board is delighted to have been able to demonstrate its commitment to the DCM by both buying-in and issuing shares. The liquidity and lack of discount volatility that the DCM provides is, the Board believes, of real value to Shareholders. If this expansion in the Company's size continues over time, it should lead to the reduction of the Ongoing Charges Ratio by spreading the fixed costs over a larger base. This has already been evident in the year, with an approximate 10% effective reduction in the Ongoing Charges Ratio (to 1.45% from 1.61%).
Gearing
On 1 November 2017, SIGT announced a new three year rolling debt facility, from the Royal Bank of Scotland, of £14m which represents an increase in size of the facility (from £11m) and an increase to its term (from two years). The actual average net gearing level for the period was approximately 5%. The increased facility has been put in place largely to assist with the operation of the DCM. This will enable gearing levels to be maintained as the DCM results in the issuance of new shares, and/or will provide short term working capital should shares be bought-in.
Investment Management Industry Regulation
In my Interim Statement of 1 December 2017, I reported to Shareholders (or rather, warned) that three elements of regulation were imminent that would impact the Company. These were: The Alternative Investment Fund Managers' Directive ('AIFMD'); the Packaged Retail and Insurance-based Investment Products Regulation ('PRIIPs'); and, the Markets in Financial Instruments Directive II ('MiFID II').
On 4 April 2018, the Company announced it had successfully grown to a size that required it to comply with the full scope of the AIFMD. It has achieved this by appointing PATAC Limited (who were already the Company's Secretary and Administrator) as its Alternative Investment Fund Manager ('AIFM'). PATAC in turn delegated portfolio management back to SIML. SIML has agreed to absorb the costs of the AIFM within its (otherwise unaltered) management fee. The Company also appointed J.P. Morgan Europe as its depositary who delegated the custody function to J.P. Morgan Chase Bank N.A.
PRIIPs came into force for all investment trusts on 1 January 2018. It introduced a new disclosure document known as a Key Information Document ('KID') that must be prepared and made available to retail investors before they invest. The purpose of the KID is to enable retail investors to compare different products across a common standard. The regulation sets down rules on the format and content of the KID and its provision to retail investors. There has been a good deal of concern expressed about the content of the KID by financial commentators, investors, other investment trust boards, and indeed, to a degree, regulators themselves. We believe there may be changes to how some of the content is displayed and await further guidance.
MiFID II came into force on 3 January 2018. While not directly impacting investment trusts, it has certainly impacted their managers, distributors and brokers. Perhaps the most important impact for many managers, is that the cost of obtaining research from brokers has been 'unbundled' within the overall commission payment for buying and selling investments. In turn, these research costs may (effectively) continue to be borne by the client (SIGT in this case) or paid for direct by the manager. SIML has agreed to bear such research costs. This will mean that commission costs for the Company are lower going forward.
Investment Outlook
This time last year, a (snap) General Election was imminent making my 'Outlook' even more difficult than usual. Its result was unexpected by most and has caused concern and uncertainty for many. Brexit looms inexorably closer though its form remains unclear, causing yet more concern and uncertainty. An old proverb goes 'it is difficult to make predictions, especially about the future'! In most environments, and perhaps especially the current one, we believe the Company's Multi-Asset Value Investing Investment Policy is attractive. It provides transparent and straightforward exposure to a range of assets, which should provide reasonable, relatively low volatility (i.e. lower risk) returns over the medium to long term.
Annual General Meeting ('AGM')
Last year's AGM was held in London and all resolutions were passed by a majority of over 99% of shares voted. These resolutions included changes to the Company's Investment Objective and Policy, its Continuation, and its Dividend Policy, as well as authority to buy-in up to 14.99% of the outstanding shares and to issue new shares for cash on a non pre-emptive basis equivalent to up to 20% of the outstanding shares. These buy-in and issuance authorities are essential to enable the DCM to operate.
Shareholders will be aware of the Company's General Meeting ('GM') held on 28 March 2018, which sought permission to issue up to a further 10% of the Company's shares on a non pre-emptive basis, following the success of the DCM. The resolution was also passed by a majority of over 99% of shares voted. Shareholders' support is much appreciated by the Board.
At this year's AGM, some new resolutions will be proposed. All the Directors will stand for re-election, as they will do annually henceforth, believing this to be best practice. The Company's Articles have been reviewed and require some updating to re?ect regulatory changes as well as aspects of best practice.
The annual Continuation Vote will be proposed in the usual way, and so is another resolution, to seek Shareholders' approval to remove this requirement from the Articles and therefore, going forward. The Board believes the DCM is now well established and makes a Continuation Vote unnecessary given the liquidity the DCM provides. The Board has observed a steady shift in the type of Shareholder owning the Company's shares towards those investing via a platform and/or via an advisor. The Board welcomes this but is concerned that few such Shareholders vote, or have the chance to vote, their shares producing a declining turnout for (Annual) General Meetings. In turn this could give a relatively small shareholder an undue influence and cause mischief over a Continuation Vote. Shareholders will hopefully appreciate that the Board governs the Company for the long term though should the DCM be suspended or withdrawn for any reason in the future, then the Board would seek engagement with Shareholders and explore the possible re-instatement of a Continuation Vote.
As noted, at last year's AGM, Shareholders approved the issue of new shares for cash on a non pre-emptive basis equivalent to up to 20% of the outstanding shares and a further 10% at the GM held in March to meet the demands of the DCM. Shareholders therefore approved 30% in aggregate over the year though there was an extra expense incurred to hold the GM. It seems sensible to the Board therefore to ask Shareholders to approve two separate resolutions concerning the issue of shares, at the forthcoming AGM. The first resolution seeks permission to issue 10%, and the second (extra) resolution seeks permission to issue up to a further 20% solely in connection with the DCM; resulting in an aggregate of 30%. The Board believes this approach to seeking non pre-emption authorities is novel and whilst the aggregate authority sought is higher than that recommended by corporate governance guidelines, the Board believes it is Shareholder friendly as it facilitates the efficient and cost effective operation of the DCM. The Board believes separating the resolutions gives voice to those Shareholders who may be happy to approve the 10% resolution but not the 20% extra resolution. Should such discontents prove to be sufficient in number, the first resolution may pass but not the extra one, but that would still allow the Company to operate share issuance under the DCM, at least with some capacity. The Board acknowledges that some Shareholders are concerned about their ownership percentage in the Company being reduced, even if slightly, via non pre-emptive share issuance. However, increasing the size of the Company via the DCM, adds value for Shareholders in two ways: new shares are issued at a small premium to NAV thereby enhancing NAV per share; and, as the Company grows in size that should lead to the reduction of the Ongoing Charges Ratio by spreading fixed costs over a larger base.
The Board appreciates some of the resolutions put forward at this year's AGM may be a little unusual, and so I encourage any Shareholder with questions to contact me directly at the email address: richard.ramsay@senecaim.com. This year's AGM will be held in Liverpool on Friday, 13 July 2018 and the Directors and Manager would be delighted to meet as many Shareholders as possible. The Board believes that all the resolutions are in the best interests of the Company and its members as a whole, and strongly recommends that Shareholders vote in favour of all of the resolutions as the Directors intend to do in respect of their own beneficial shareholdings of 320,810 shares.
Richard Ramsay
Chairman
7 June 2018
Investment Manager's Review
Overview
The year under review saw the Company post a respectable NAV total return of +5.7%. This is lower than in recent years but reflects the poorer returns from financial markets. The Company's positive performance in relation to financial markets came from both asset allocation, as well as selection effect in two of the four main asset classes in which it invests.
Equity markets across the world were strong for the first nine months of the financial year. Then February and March saw declines which rather took the shine off what had been building up to be a good year. Safe haven bond yields saw big increases in the latter part of 2017 and the first month or two of 2018. This was on the back of improving global growth prospects, which also caused the price of oil and industrial metals to rise sharply.
While the previous year had seen global economic growth disappoint somewhat, the year under review saw economic growth in both developed and emerging countries rising from the lows of 2016. In the US, Europe and Japan, the rate of GDP growth accelerated by around 1 percentage point between Q4 2016 and Q4 2017. Bucking the positive trend was the UK, where growth slipped from 2.0% in the prior year to 1.4% in the current year. Economic growth in China appeared to stabilise following years of declines, while there were also encouraging signs in Russia, Brazil and India.
The strong economic growth meant that unemployment rates continued to fall. Rates across the developed world were considerably lower at the end of the year than at the beginning, while the emerging world also saw declines in joblessness (notably, the unemployment rate in Brazil which had hit 13.7% in mid 2017 was down at 13.1% by March 2018).
Unemployment rates in the US and the UK are now close to lows seen during the last 50 years or so. Unemployment is lowest in Japan – 2.5% – but this must be put into the context of rates that have in recent decades been as low as 1%. At 8.5%, unemployment in Europe is still very high but may not have as far to fall as the absolute number suggests – pre-Great Financial Crisis (GFC), the rate only got as low as 7.2% compared with 4-5% in other major developed economies.
Improving job markets led to rising wages. Wage growth in major developed countries was higher at the end of the year than at the beginning, and noticeably higher than it had been five or so years ago. For example, wage growth in Japan hit 1.3% year on year in February this year. This may not sound like much, until one appreciates that back in 2012 wages were falling by 2% year on year.
This rising wage growth appeared to feed through to consumer price inflation during the year. Core inflation (not including food and energy) was higher in March 2018 than in March 2017 in the case of all four of the key developed countries and regions mentioned. Inflation trends across the emerging world were also positive, although in some cases (Mexico) this meant that it fell from elevated to more manageable levels. It is interesting to note that as of March, inflation in six key emerging countries ranged from 2 to 5%. This compares with 1 to 16% back in 2015, and of course a much wider range in years gone by when emerging countries were often known for very high rates of inflation. The narrow range is a welcome development and perhaps a sign that the emerging world is coming of age.
As for monetary policy, the financial year saw the UK join the US as the only two economies to start raising interest rates this cycle. The Bank of England raised its base rate, from 0.25% to 0.5%, for the first time in almost ten years, while the US raised its Fed Funds rate a further three times, the latest being an increase to 1.75%. Elsewhere, the European Central Bank lowered bond purchases from €60 billion to €30 billion per month but extended the program at least until September 2018. There is little indication that the Bank of Japan would end its bond buying program any time soon, but the reappointment of governor Kuroda for a second term at least provided some reassurance that a dovish policy would remain in place.
Despite statements by Bank of England governor Mark Carney early in 2018 suggesting markets should expect interest rate increases sooner rather than later, weak growth and inflation data announced in April forced him to soften his line. The added headache of Brexit certainly continued to make Carney's job a particularly challenging one.
As for financial markets, the year under review was notable for the reversal in the US dollar. Since the middle of 2014 when then US Federal Reserve Chairman Ben Bernanke announced the end of the US bond buying program, the dollar had risen by nearly 30%, as measured by the US dollar index. It then started to level off in the first quarter of 2017, since when it has declined by 10%. It is not clear whether this decline was the result of anticipated fiscal expansion, or the prospect of tighter monetary policy in other jurisdictions. Perhaps it was a combination of the two, with some mean reversion thrown in.
Whatever the reason, the stronger global growth and inflation saw bond yields, particularly in the US, rise materially over the year (though in Japan's case this was from zero to very slightly more than zero). Interestingly, the rise appeared to be solely due to higher inflation expectations as real long-term yields barely moved. Real long-term yields still have a long way to go to get back to where they were pre-crisis, let alone where they were 20 years ago.
In regard to equities, they were generally very strong throughout the year but then ran out of steam at the beginning of February. After recovering somewhat towards the end of the month – there had been no apparent reason for the falls other than weariness – they then fell again in March following the ratcheting up of trade tariff threats by US President Donald Trump.
Performance
Overall, the Company's investment performance for the year was respectable in light of the performance of financial markets generally.
Asset allocation contributed 0.4 percentage points to relative performance. Notably, in August of 2017, the Company moved to a zero weighting in underperforming US equities, and was heavily positioned in outperforming Asia ex-Japan equities. In fixed income, the Company's zero exposure to poor-performing safe haven bonds contributed positively.
On the selection front, the Company's UK equity portfolio detracted from performance. This was largely due to the underperformance of mid-cap stocks, where your Manager has a focus, in relation to their larger counterparts. The Company's overseas equity portfolio posted a total return for the year of 9.5%, compared with 7.8% for the FTSE All-World ex-UK index. Holdings in Japan and Europe, where the Company was overweight, did particularly well in relation to their underlying markets. In fixed income, positive contribution from selection came from corporate bonds and emerging market debt, where the Company's holdings outperformed their underlying indices.
As for specialist assets, the Company's holdings in AJ Bell and Aberdeen Private Equity Fund combined to contribute 1.6 percentage points to performance. It was decided to increase the carried value of AJ Bell during the year, from £7.00 to £8.30 given strong business performance. The Aberdeen Private Equity Fund announced that it would be selling its entire portfolio and distributing proceeds to investors. This led to an immediate closing of the discount and helped the investment return 26% to the Company. On a negative note, the Company's holding in the Assured Fund slipped throughout the year and was further written down at the year end. It is becoming clearer that the cost of servicing the Fund's holdings in life policies is rising, resulting in persistent decay of net asset value. Nevertheless, selection effects overall for specialist assets were positive in spite of this difficult holding.
The Company's NAV total return for the year of 5.7% was behind that of the blended old and new benchmarks which pertained over the year, that equated to 7.7%. However, this must be considered in the context of the somewhat soggy performance of financial markets, as well as the fact that your Manager seeks to achieve the target over an entire investment cycle, not just one year. As in previous years, the return was delivered with a level of volatility that was significantly below that of the FTSE All-Share Index.
One of the primary objectives for your Manager is to provide shareholders with a good dividend that over time at least rises in real terms. Income from the portfolio is generated from a diversified range of assets, where security of income and scope for this income to rise are major focuses of the investment approach. It is therefore pleasing to report that dividends declared to shareholders grew by 3.9% this year, which compares favourably with UK CPI inflation of 2.4%. This uplift in dividends marks the fifth consecutive year of rises above the rate of inflation, which has been achieved whilst also providing for increases in the Company's revenue reserve in each of these years.
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Contribution analysis by individual holdings in the 12 Month period to 30 April 2018 |
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|
|
|
Contribution to |
|
Top 6 positive contributors |
Asset Class |
Return |
|
AJ Bell Holdings Limited |
Private Equity |
+1.14% |
|
CC Japan Income & Growth Trust |
Japan |
+0.57% |
|
Senior |
UK Equities |
+0.54% |
|
Bovis Homes Group |
UK Equities |
+0.53% |
|
Victrex |
UK Equities |
+0.52% |
|
Conviviality |
UK Equities |
+0.48% |
|
|
|
|
|
|
|
Contribution to |
|
Bottom 6 negative contributors |
Asset Class |
Return |
|
Assured Fund |
Specialist Financial |
-0.54% |
|
Ultra Electronics Holdings |
UK Equities |
-0.44% |
|
Marston's |
UK Equities |
-0.30% |
|
Marks & Spencer |
UK Equities |
-0.25% |
|
Kier Group |
UK Equities |
-0.21% |
|
BT |
UK Equities |
-0.18% |
|
|
|
|
Source: Seneca Investment Managers/StatPro. Private Equity is a component of specialist assets.
Income Statement
For the year ended 30 April 2018
|
|
Year ended 30 April 2018 |
|||
|
|
|
Revenue |
Capital |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
|
|
|
|
|
|
|
Gains on investments |
|
– |
1,246 |
1,246 |
|
Income |
|
3,816 |
– |
3,816 |
|
Investment management fee |
|
(312) |
(312) |
(624) |
|
Administrative expenses |
|
(452) |
– |
(452) |
|
Profit before finance costs and taxation |
|
3,052 |
934 |
3,986 |
|
|
|
|
|
|
|
Finance costs |
|
(59) |
(59) |
(118) |
|
Profit before taxation |
|
2,993 |
875 |
3,868 |
|
|
|
|
|
|
|
Taxation |
|
(5) |
– |
(5) |
|
Profit for year/ total comprehensive income |
|
2,988 |
875 |
3,863 |
|
|
|
|
|
|
|
Return per share (pence) |
2 |
6.85 |
2.01 |
8.86 |
|
|
|
|
|
|
Principal Risks and Uncertainties
The principal risks faced by the Company are: investment and strategy risk; market risk; financial risk; earnings and dividend risk; operational risk; regulatory risk and key man risk. These risks, which have not changed materially since the annual report for the year ended 30 April 2017, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 April 2018. The report will be made available on the manager's website www.senecaim.com during June 2018.
Risk management, financial assets and liabilities
The Company's financial instruments comprise:
· Equities that are held in accordance with the Company's investment objective;
· Term loans, the main purpose of which are to raise finance for the Company's operations;
· Cash and liquid resources that arise directly from the Company's operations; and
· Other short term debtors and creditors
The main risks arising from the Company's financial instruments are market risk, interest rate risk, credit risk, liquidity risk and foreign currency risk. The Board regularly reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged since the inception of the Company.
Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not considered to be significant as the Company's assets comprise of mainly readily realisable securities, which can be sold to meet funding commitments if necessary.
Market risk
Market risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements.
To mitigate the risk the Board's investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis, with the emphasis on long term investments. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy.
Interest rate risk
Financial assets
Prices of bonds and open ended investment companies (on a look-through basis) are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the government's fiscal position, short-term interest rates and international market comparisons. The Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.
Financial liabilities
The Company finances its operations through the use of a loan facility. The Board sets borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis.
Foreign currency risk
The income and capital value of the Company's investments are mainly denominated in Sterling; therefore, the Company is not subject to any material risk of currency movements.
Other price risk
Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The allocation of assets to international markets and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The vast majority of investments held by the Company are listed on various stock exchanges worldwide.
Credit risk
Credit risk represents the failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
The risk is not considered significant, and is managed as follows:
· investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;
· the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports by the Administrator on a daily basis. In addition, the Administrator carries out a stock reconciliation to the Custodian's records on a weekly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its findings to the Manager's Risk Management Committee; and
· cash is held only with reputable banks with high quality external credit enhancements.
None of the Company's financial assets are secured by collateral or other credit enhancements.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and financial statements, in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards), including FRS102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they present a fair, balanced and understandable report and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.
In preparing these financial statements, the Directors are required to:
· select suitable accounting policies and then apply them consistently;
· make judgements and estimates that are reasonable and prudent;
· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
· prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping proper accounting records that 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 enable them to ensure that its financial statements comply with the Companies Act 2006, where applicable. They are responsible 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, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations. The financial statements are published on www.senecaim.com which is a website maintained by the Company's Manager. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Directors confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with the applicable UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
· that in the opinion of the Directors, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and
· the Strategic 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 the Company faces.
For Seneca Global Income & Growth Trust plc
Richard Ramsay
Chairman
7 June 2018