BLACKROCK SUSTAINABLE AMERICAN INCOME TRUST PLC
BlackRock North American Income Trust plc
Annual results announcement
For the year ended 31 October 2015
Financial Highlights
Attributable to ordinary shareholders 31 October 31 October
2015 2014
Net assets (£'000)¹ 98,046 121,199
Net asset value per ordinary share 122.50p 120.76p
Ordinary share price (mid-market) 113.00p 112.00p
Discount to cum income net asset value 7.8% 7.3%
Performance
Net asset value per share (with income reinvested) +4.9% +11.8%
Russell 1000 Value Index (total return) +4.1% +16.9%
Share price (with income reinvested) +4.7% +2.4%
¹ The change in net assets reflects market movements, the tender offer and
share buybacks during the year.
31 October 31 October Change
2015 2014 %
Revenue
Net revenue after taxation (£'000) 3,883 4,256 -8.8
Revenue return per ordinary share 4.54p 4.25p +6.8
Interim dividends
1st interim 1.00 1.00 -
2nd interim 1.10 1.00 +10.0
3rd interim 1.10 1.00 +10.0
4th interim 1.10 1.00 +10.0
Total dividends paid 4.30 4.00 +7.5
Chairman's statement
Overview
U.S. Equity markets made further progress in the financial year ending 31
October 2015, although returns were modest compared with last year. For the
most part economic indicators continue to suggest that the U.S. economy appears
to be on track to continue its recent trend of moderate growth. However,
concerns over Chinese growth which in turn have impacted most commodities have
reinforced concerns about the outlook for many emerging market economies. A
strong U.S. dollar has also weighed on corporate earnings growth in the year
under review.
August and September brought considerable market volatility, largely driven by
concerns over the extent of the economic slowdown in China and other emerging
market economies. Oil prices also featured in the headlines as, after a brief
revival in the early summer, prices again slumped. Other headwinds remained,
including the continued fall in commodity prices given the fundamental mismatch
between supply and demand, and further concerns over Greek sovereign debt.
Markets rallied during the month of October, logging their biggest monthly rise
in years and shrugging off the global growth fears that had unsettled the
market during the summer. The S&P 500 Index rose almost 9%, the best
performance since its rally in October 2011.
Performance
For the twelve months ended 31 October 2015, the Company's net asset value per
share (NAV) outperformed the benchmark returning +4.9%, compared with a return
of +4.1% from the Russell 1000 Value Index. The share price returned +4.7%
(all percentages calculated in sterling terms with income reinvested).
Since the year end and up until the close of business on 14 January 2016, the
Company's NAV has increased by 0.7% and the share price has decreased by 2.2%.
Earnings and dividends
The Company's revenue earnings per share for the year ended 31 October 2015
amounted to 4.54p (2014: 4.25p). A quarterly dividend of 1.0p per share was
paid on 7 April 2015 and three further dividends of 1.1p per share were paid on
1 July 2015, 7 October 2015 and 5 January 2016.
It is the Directors' intention to pay dividends amounting to at least 1.1p per
share each quarter for the year ending 31 October 2016. The ability to match or
exceed this target will depend on portfolio dividend distributions and option
writing from our underlying portfolio. This should not be interpreted as a
profit forecast.
Investment management fee
Following a review of the investment management fee, the Board agreed with the
Manager that with effect from 1 November 2015, the beginning of the Company's
current financial year, the existing rate of 1.0% of the Company's market
capitalisation would be replaced with a rate of 0.75% of net assets.
Change to investment policy
The published investment policy of the Company contains a restriction that no
more than 25% of the gross assets of the Company, at the time of investment,
shall be exposed to any one sector. The Board is proposing an amendment to the
investment policy to increase the maximum permitted in any one sector, at the
time of investment, to 35% of the gross assets of the Company.
The Board believes that the proposed change will allow the Investment Manager
greater flexibility to invest the portfolio in a broad range of companies
within the different industry groups that comprise the sector groupings, whilst
at the same time spreading risk within a diversified portfolio. The amended
investment policy will apply, subject to shareholder approval, with effect from
the date of the Company's Annual General Meeting on 18 February 2016. Full
details of the amended investment policy are set out in the appendix on page 71
of the Annual Report.
Policy on share discount and continuation vote
Your Board believes that shareholders should have the opportunity to vote on
the continuation of the Company as an investment trust at regular intervals.
Accordingly, an ordinary resolution to shareholders that the Company should
continue as an investment trust has been included in the agenda for the
forthcoming Annual General Meeting and it is proposed that, if passed, similar
resolutions will be put to shareholders at every third Annual General Meeting
thereafter.
Your Board unanimously recommends voting in favour of the Company continuing as
an investment trust and intends to vote in favour of the resolution in respect
of their own shares. The investment trust structure, which includes the ability
to use reserves to provide more predictable dividends, is particularly well
suited to the equity income sector. Given that U.S. equities represent
approaching 60% of the MSCI World index by market capitalisation it is
surprising how few UK closed end funds are devoted to this region. Your Board
therefore believes that demand for investment trusts which provide an
attractive dividend income from U.S. equities should continue to appeal to a
wide range of potential investors in the future.
Changes to the portfolio management team have resulted in improved performance
and in the Board's view the Manager's strategy, which is to deliver above
market returns through the cycle by investing in high quality, dividend paying
companies, is well positioned to deal with the prevailing market conditions.
The Directors also recognise the importance to shareholders that the market
price of the Company's shares in the stock market should not trade at a
significant discount to the underlying NAV. Therefore, the Board has concluded
that the Company's share buy back and share issuance powers will, in normal
market conditions, be used to ensure that the share price does not trade at a
significant discount to the underlying NAV per share. As a consequence, and in
line with the conclusions from the shareholder consultation exercise in April
2015, your Board will not be seeking authority from shareholders to implement
discretionary semi-annual tenders at the forthcoming Annual General Meeting.
Any shares repurchased by the Company may be held in treasury and, subsequently
be reissued to satisfy market demand, but only at a premium to the estimated
NAV at the time of issue. The Directors have the authority from shareholders to
buy back up to 14.99% of the Company's issued share capital. This authority to
buy back shares expires at the conclusion of the 2016 Annual General Meeting
and a resolution will be put to shareholders to renew it.
Annual General Meeting
The Annual General Meeting of the Company will be held at BlackRock's offices
at 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 18 February 2016 at
12.00 noon. Details of the business of meeting are set out in the Notice of
Meeting on pages 66 to 69 of the Annual Report. The Portfolio Managers will
make a presentation to shareholders on the Company's performance and the
outlook for the year ahead.
Outlook
The Federal Reserve has kept investors guessing about the eventual timing of
the first interest hike in nine years, having held rates at the near-zero
levels set during the financial meltdown in 2008. Federal Reserve officials
have been carefully monitoring the U.S. economy for an economic upturn. At
their meeting on 16 December they announced the first rate increase since the
middle of 2006. The start of a tightening cycle, even a gentle one, should
benefit those quality stocks held within the Company's portfolio, with high
profitability, stable earnings growth and low financial leverage.
Simon Miller
18 January 2016
Strategic report
The Directors present the Strategic Report of the Company for the year ended 31
October 2015.
Principal activity
The Company carries on business as an investment trust and its principal
activity is portfolio investment.
Objective and investment policy
The Company's investment objective is to provide an attractive and growing
level of income return with capital appreciation over the long term,
predominantly through investment in a diversified portfolio of primarily
large-cap U.S. equities. The Company will invest predominantly in a diversified
portfolio of equity securities quoted in the U.S., with a focus on companies
that pay and grow their dividends. The Company may invest through an active
options overlay strategy utilising predominantly covered call options and may
also hold other securities from time-to-time including, inter alia, convertible
securities, fixed interest securities, preference shares, non-convertible
preferred stock and depositary receipts. The Company may also invest in listed
large-cap equities quoted on exchanges outside the U.S., subject to the
restrictions set out below, and may invest in securities denominated in U.S.
dollars and non-U.S. dollar currencies.
Strategy
In order to achieve the Company's investment objective, the Manager will adopt
a stock specific approach in managing the Company's portfolio, selecting
investments that it believes will both increase in value over the long term and
provide income. The Company will not invest in companies which are not listed,
quoted or traded at the time of investment, although it may have exposure to
such companies where, following investment, the relevant securities cease to be
listed, quoted or traded. Typically it is expected that the investment
portfolio will comprise of between 80 and 120 securities (excluding its active
options overlay strategy).
Business model and investment policy
The Company may invest through derivatives for efficient portfolio management
and may, for investment purposes, employ an active options overlay strategy
utilising predominantly covered call options. Any use of derivatives for
efficient portfolio management and options for investment purposes will be made
on the basis of the same principles of risk spreading and diversification that
apply to the Company's direct investments. For the avoidance of doubt, the
Company will not enter into physical or synthetic short positions or write any
uncovered options.
Portfolio risk will be mitigated by investing in a diversified spread of
investments. In particular, the Company shall observe the following investment
restrictions: no single investment (including for the avoidance of doubt, any
single derivative instrument) shall, at the time of investment, account for
more than 10% of the gross assets; no more than 20% of the gross assets, at the
time of investment, shall be invested in securities issued outside of the U.S.;
no more than 25% of the gross assets, at the time of investment, shall be
exposed to any one sector; and no more than 20% of the Company's portfolio
shall be under option at any given time.
The Board proposes to amend the wording of this policy to increase the maximum
exposure permitted to any one sector, at the time of investment, to 35% of
gross assets. The amended investment policy will apply, subject to shareholder
approval, with effect from the date of the Company's Annual General Meeting on
18 February 2016. Full details of the amended investment policy are set out in
the appendix on page 71 of the Annual Report.
The Company's foreign currency investments will not be hedged to sterling as a
matter of general policy. However, the investment team may employ currency
hedging, either back to sterling or between currencies (i.e. cross-hedging of
portfolio investments).
In order to comply with the current Listing Rules, the Company also complies
with the following investment restrictions (which do not form part of the
Company's investment policy): the Company will not conduct any trading activity
which is significant in the context of its group as a whole; the Company will
not invest more than 10% of its gross assets in other listed closed-ended
investment funds, whether managed by the Manager or not, except that this
restriction shall not apply to investments in listed closed-ended investment
funds which themselves have stated investment policies to invest no more than
15% of their gross assets in other listed closed-ended investment funds; and
the Company will not invest more than 15% of its gross assets in other listed
closed-ended investment funds, notwithstanding whether or not such funds have
stated policies to invest no more than 15% of their gross assets in other
closed-ended investment funds.
The Company may borrow up to 20% of its net assets (calculated at the time of
draw down), although the Board intends only to utilise borrowings representing
up to 10% of net assets at the time of draw down. Borrowings may be used for
investment purposes. The Company has entered into a multi-currency overdraft
facility with its custodian for this purpose. The Company may enter into
interest rate hedging arrangements.
Information regarding the Company's investment exposures is contained within
the schedule of investments on pages 13 to 16 of the Annual Report. Further
information regarding investment risk and activity throughout the year can be
found in the Investment Manager's Report.
No material change will be made to the investment policy without the approval
of shareholders by ordinary resolution.
Performance
Over the year ended 31 October 2015, the Company's net asset value returned
+4.9% compared with a return of +4.1% in the Russell 1000 Value Index. The
ordinary share price returned +4.7% (all percentages are calculated in sterling
terms with income reinvested). The Investment Manager's Report includes a
review of the main developments during the year, together with information on
investment activity within the Company's portfolio.
Results and dividends
The results for the Company are set out in the Statement of Comprehensive
Income. The total return for the year, after taxation, was £5,671,000 (2014: £
12,654,000) of which the revenue return amounted to £3,883,000 (2014: £
4,256,000) and the capital return amounted to £1,788,000 (2014: £8,398,000).
The Company pays dividends quarterly and for the year ended 31 October 2015 the
target was to pay dividends amounting to at least 4.0p per share. One quarterly
interim dividend of 1.0p per share was paid on 7 April 2015 and three quarterly
dividends of 1.1p per share were paid on 1 July 2015, 7 October 2015 and 5
January 2016. Total dividends of 4.0p per share were paid in the year to 31
October 2014.
Key performance indicators
The Directors consider a number of performance measures to assess the Company's
success in achieving its objectives. The key performance indicators (KPIs) used
to measure the progress and performance of the Company over time and which are
comparable to those reported by other investment trusts are set out below.
Year ended Year ended
31 October 31 October
2015 2014
Net asset value per share 122.50p 120.76p
Share price 113.00p 112.00p
Benchmark index¹ 4.1% 16.9%
Dividends per share 4.3p 4.0p
Discount to net asset value 7.8% 7.3%
Ongoing charges² 1.24% 1.31%
¹ Russell 1000 Value Index.
² Ongoing charges represent the management fee and all other operating expenses
excluding interest as a % of average shareholders' funds.
The ongoing charges ratio has decreased in the year due to a lower management
fee as the ordinary shares were trading at a discount; lower expenses; and
market movements during the year.
Performance is assessed on a total return basis for both the NAV and the share
price. The performance of the benchmark is assessed on a total return basis.
The Board monitors the above KPIs on a regular basis. Additionally, it
regularly reviews a number of indices and ratios to understand the impact on
the Company's relative performance of the various components such as asset
allocation and stock selection. The Board also reviews the performance of the
Company against its peer group of investment trusts with similar investment
objectives.
Share rating
The Directors recognise the importance to investors that shares should not
trade at a significant discount to their prevailing net asset value.
Accordingly, the Board has concluded that the Company's share buy back and
share issuance powers will, in normal market conditions, be used to ensure that
the share price does not trade at a significant discount to the underlying net
asset value per share. In the year under review, the Company's shares have
traded at a discount in the range of 2.3% to 11.2% on a cum income basis and
were trading at a discount of 10.4% as at close of business on 14 January 2016.
Principal risks
The key risks faced by the Company are set out below. The Board has put in
place a robust process to assess and monitor the principal risks of the
Company. A core element of this is the Company's risk register, which
identifies the risks facing the Company and assesses the likelihood and
potential impact of each risk and the quality of the controls operating to
mitigate the risk. A residual risk rating is then calculated for each risk
based on the outcome of this assessment. This approach allows the effect of any
mitigating procedures to be reflected in the final assessment.
The register, its method of preparation and the operation of the key controls
in the Manager's and other third party service providers systems of internal
control, are reviewed on a regular basis by the Audit and Management Engagement
Committee. In order to gain a more comprehensive understanding of the Manager's
and other third party service providers' risk management processes and how
these apply to the Company's business, the Audit and Management Engagement
Committee periodically receives presentations from BlackRock's Internal Audit
and Risk & Quantitative Analysis teams and reviews Service Organisation Control
(SOC 1) reports from the Company's service providers.
In relation to the 2014 update to the UK Corporate Governance Code, the Board
is comfortable that the procedures that the Company has in place are sufficient
to ensure that the necessary monitoring of risks and controls has been carried
out throughout the reporting period.
The current risk register includes 44 risks spread between performance risk,
income/dividend risk, regulatory risk, operational risk, market risk, financial
and gearing risk. The principal risks and uncertainties faced by the Company
during the year, together with the potential effects, controls and mitigating
factors, are set out below.
* Performance risk - The Board is responsible for deciding the investment
strategy to fulfil the Company's objectives and for monitoring the
performance of the Investment Manager. An inappropriate strategy may lead
to underperformance against the benchmark index and the Company's peer
group. To manage this risk the Investment Manager provides an explanation
of significant stock selection decisions and the rationale for the
composition of the investment portfolio. The Board monitors and mandates an
adequate spread of investments in order to minimise the risks associated
with particular countries or factors specific to particular sectors, based
on the diversification requirements inherent in the Company's investment
policy. The Board also receives and reviews regular reports showing an
analysis of the Company's performance against the Russell 1000 Value Index
and other similar indices.
* Income/dividend risk - The amount of dividends and future dividend growth
will depend on the Company's underlying portfolio and option income earned
by the Company. Any change in the tax treatment of the dividends or
interest received by the Company (including as a result of withholding
taxes or exchange controls imposed by jurisdictions in which the Company
invests) may reduce the level of dividends received by shareholders. The
Board monitors this risk through the receipt of detailed income forecasts
and considers the level of income at each meeting.
* Regulatory risk - The Company operates as an investment trust in accordance
with the requirements of Chapter 4 of Part 24 of the Corporation Tax Act
2010. As such, the Company is exempt from capital gains tax on the profits
realised from the sale of its investments. The Investment Manager monitors
investment movements, the level and type of forecast income and expenditure
and the amount of proposed dividends, if any, to ensure that the provisions
of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached
and the results are reported to the Board at each meeting. Following
authorisation under the Alternative Investment Fund Managers' Directive
(AIFMD), the Company and its appointed Alternative Investment Fund Manager
(AIFM or Manager) are subject to the risks that the requirements of the
Directive are not correctly complied with. The Board and the Manager also
monitor changes in government policy and legislation which may have an
impact on the Company.
* Operational risk - In common with most other investment trust companies,
the Company has no employees. The Company therefore relies upon the
services provided by third parties and is dependent on the control systems
of the Manager, BNY Mellon Trust & Depositary (UK) Limited (the Depositary)
and the Bank of New York Mellon (International) Limited, who maintain the
Company's assets, dealing procedures and accounting records. The security
of the Company's assets, dealing procedures, accounting records and
maintenance of regulatory and legal requirements, depend on the effective
operation of these systems. These have been regularly tested and monitored
throughout the year which is evidenced through their SOC 1 Reports to
provide assurance regarding the effective operation of internal controls
which are reported on by their service auditors. The Board also considers
succession arrangements for key employees of the Manager and the business
continuity arrangements for the Company's key service providers.
* Market risk - Market risk arises from volatility in the prices of the
Company's investments. It represents the potential loss the Company might
suffer through realising investments in the face of negative market
movements. Changes in general economic and market conditions, such as
interest rates, rates of inflation, industry conditions, tax laws,
political events and trends can also substantially and adversely affect the
securities and, as a consequence, the Company's prospects and share price.
The Board considers asset allocation, stock selection and the level of
gearing on a regular basis and has set investment restrictions
and guidelines which are monitored and reported on by the Investment
Manager. The Board monitors the implementation and results of the
investment process with the Investment Manager.
* Financial risk - The Company's investment activities expose it to a variety
of financial risks which include market risk, currency risk, interest rate
risk, market price risk, liquidity risk and credit risk. Further details
are disclosed in note 14 to the Financial Statements on pages 51 to 59 of
the Annual Report, together with a summary of the policies for managing
these risks.
* Gearing risk - The Company has the power to borrow money (gearing) and does
so when the Investment Manager is confident that market conditions and
opportunities exist to enhance investment returns. However, if the
investments fall in value, any borrowings will magnify the extent of this
loss. All borrowings require the approval of the Board and gearing levels
are discussed by the Board and Investment Manager.
Viability statement
In accordance with provision C.2.2 of the 2014 UK Corporate Governance Code,
the Directors have assessed the prospects of the Company for a period of three
years. In its assessment of the viability of the Company the Directors have
noted that:
* the Company invests in highly liquid, large listed companies so its assets
are readily realisable;
* the Company is not exposed to any one investment or sector because it sets
parameters for its investments;
* the Company has limited gearing and no concerns around facilities, headroom
or covenants; and
* the business model should remain attractive for much longer than three
years, unless there is significant economic or regulatory change.
The Directors have also reviewed:
* the Company's principal risks and uncertainties as set out above;
* the impact of a significant fall in U.S. equity markets on the value of the
Company's investment portfolio;
* the ongoing relevance of the Company's investment objective, business model
and investment policy in the current environment; and
* the level of demand for the Company's shares.
As noted in the Chairman's Statement, the Board has decided to undertake a
continuation vote at the forthcoming Annual General Meeting and has also
reviewed the potential impact that this may have on the Company's viability.
The Board is confident that the continuation vote will pass and have prepared
the viability statement under this assumption.
The Directors have also considered the Company's revenue and expense forecasts
and the fact that expenses and liabilities are relatively stable. The Directors
reviewed the assumptions and considerations underpinning the Company's existing
going concern assertion which are based on:
* processes for monitoring costs;
* key financial ratios;
* evaluation of risk management and controls;
* compliance with the investment objective;
* portfolio risk profile;
* share price discount;
* gearing; and
* counterparty exposure and liquidity risk.
These were extended forward for the three years and based on the results of
this analysis the Directors have concluded that there is a reasonable
expectation that the Company will continue in operation and meet its
liabilities as they fall due over the period of their assessment.
Future prospects
The Board's main focus is to provide an attractive and growing level of income
return with capital appreciation over the long term and the future of the
Company is dependent upon the success of the investment strategy. The outlook
for the Company is discussed in both the Chairman's Statement and in the
Investment Manager's Report.
Social, community and human rights issues
As an investment trust, the Company has no direct social or community
responsibilities. However, the Company believes that it is in shareholders'
interests to consider environmental, social and governance factors and human
rights issues when selecting and retaining investments. Details of the
Company's policy on socially responsible investment are set out on page 28 of
the Annual Report.
Directors, gender representation and employees
The Directors of the Company on 31 October 2015, all of whom held office
throughout the year, are set out in the Directors' biographies on page 17 of
the Annual Report. The Board consists of three male Directors and one female
Director. The Company does not have any employees.
The information set out on pages 10 to 16 of the Annual Report, including the
Investment Manager's Report, forms part of this Strategic Report. The Strategic
Report was approved by the Board at its meeting on 18 January 2016.
By order of the Board
BlackRock Investment Management (UK) Limited
Company Secretary
18 January 2016
Related party transactions
BlackRock Fund Managers Limited (BFM) was appointed as the Company's AIFM with
effect from 2 July 2014. BFM has (with the Company's consent) delegated certain
portfolio and risk management services and other ancillary services to
BlackRock Investment Management (UK) Limited (BIM (UK)) and to the U.S. based
equity income investments' team who are employed by BlackRock Investment
Management LLC. Details of fees payable to BFM are set out in note 4. Further
details of the investment management contract are disclosed in the Directors'
Report on page 18 of the Annual Report.
The investment management fee due to BFM for the year ended 31 October 2015
amounted to £977,000 (2014: £1,092,000). At the year end, £448,000 was
outstanding in respect of the management fee (2014: £356,000). The management
fee was until 2 July 2014 payable to BIM (UK) and thereafter to BFM.
In addition to the above services, BlackRock has provided the Company with
marketing services. The total fees paid or payable for these services for the
year ended 31 October 2015 amounted to £28,000 excluding VAT (2014: £77,000).
Marketing fees of £105,000 (2014: £77,000) were outstanding at 31 October 2015.
The Board consists of four non-executive Directors, all of whom are considered
to be independent of the Manager by the Board. None of the Directors has a
service contract with the Company. For the year ended 31 October 2015, the
Chairman received an annual fee of £30,000, the Chairman of the Audit and
Management Engagement Committee received an annual fee of £25,000 and each of
the other Directors received an annual fee of £21,000.
The related party transactions with the Directors are set out in the Directors'
Remuneration Report on pages 24 and 25 of the Annual Report. At 31 October
2015, £8,000 (2014: £9,489) was outstanding in respect of Directors' fees.
Statement of Directors' Responsibilities in respect of the Annual Report and
Financial Statements
The Directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable United Kingdom 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 under IFRS as adopted by the European Union.
Under Company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company as at the end of each financial year and of the profit
or loss of the Company for that period.
In preparing those financial statements, the Directors are required to:
* present fairly the financial position, financial performance and cash flows
of the Company;
* select suitable accounting policies in accordance with IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors and then apply them
consistently;
* present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable information;
* make judgements and estimates that are reasonable and prudent;
* state whether the financial statements have been prepared in accordance
with IFRS as adopted by the European Union, subject to any material
departures disclosed and explained in the financial statements;
* provide additional disclosures when compliance with the specific
requirements in IFRS as adopted by the European Union is insufficient to
enable users to understand the impact of particular transactions, other
events and conditions on the Company's financial position and financial
performance; 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 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 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 also responsible for preparing the Strategic Report,
Directors' Report, the Directors' Remuneration Report, the Corporate Governance
Statement and the Report of the Audit and Management Engagement Committee in
accordance with the Companies Act 2006 and applicable regulations, including
the requirements of the Listing Rules and the Disclosure and Transparency
Rules. The Directors have delegated responsibility to the Manager for the
maintenance and integrity of the Company's corporate and financial information
included on the BlackRock website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the Directors, whose names are listed on page 17 of the Annual Report,
confirm to the best of their knowledge that:
* the financial statements, which have been prepared in accordance with IFRS
as adopted by the European Union, give a true and fair view of the assets,
liabilities, financial position and net return of the Company; and
* the Strategic Report contained in the Annual Report and Financial
Statements 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.
The 2014 UK Corporate Governance Code also requires Directors to ensure that
the Annual Report and Financial Statements are fair, balanced and
understandable. In order to reach a conclusion on this matter, the Board has
requested that the Audit and Management Engagement Committee advise on whether
it considers that the Annual Report and Financial Statements fulfil these
requirements. The process by which the Committee has reached these conclusions
is set out in the Audit and Management Engagement Committee's report on pages
29 to 31 of the Annual Report. As a result, the Board has concluded that the
Annual Report and Financial Statements for the year ended 31 October 2015,
taken as a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Company's performance,
business model and strategy.
For and on behalf of the Board
Simon Miller
Chairman
18 January 2016
Investment manager's report
Market overview
For the year ended 31 October 2015, U.S. large cap stocks, as represented by
the S&P 500 Index, advanced 5.19% (in U.S. dollar terms). During this period,
the U.S. economy has continued to demonstrate tangible improvements including
employment growth and stronger consumer confidence. In the first half of the
reporting period, divergent monetary policies dominated media headlines as
quantitative easing measures in Europe and Japan stood in contrast to the
Federal Reserve setting the stage for higher interest rates in the U.S. This
dynamic created volatile conditions in the currency markets and exerted upward
pressure on the U.S. dollar. Additionally, volatility in the U.S. equity
markets spiked higher by mid August, reflecting investor concerns about the
pace of global growth, plunging commodity prices and continued uncertainty
regarding U.S. interest rate policy. In fact, the S&P 500 Index experienced a
decline of over 11% in just seven trading days during August before rebounding
back to pre sell-off levels by the end of the reporting period. We do not
believe the recent market volatility is a harbinger of a bear market for U.S.
stocks. Bull markets tend to end when the economy goes into a recession and, in
our view, the odds of a recession are low given the absence of the typical
signals such as rising commodity prices and higher interest rates. Rather, we
believe the U.S. economy is likely to continue its slow growth trajectory. We
continue to see resilient economic data in the U.S. as housing remains solid
and employment growth remains generally positive. Additionally, consumer
confidence remains healthy; consumer balance sheets are strong, wages are
slowly beginning to improve and gasoline prices are low. As such, we believe
the recent equity market weakness is more likely a mid-cycle correction than
the beginning of a bear market.
Portfolio overview
The largest contributor to relative performance was a combination of stock
selection and an underweight to the energy sector. Notably, our selective
exposure to integrated oil & gas operators and our underweight to the oil
services industry proved to be beneficial as WTI crude oil prices declined by
over 52% for the twelve month period. Stock selection in the industrials sector
also contributed positively as aerospace & defence manufacturers Northrop
Grumman, Raytheon and Lockheed Martin outperformed on stronger than expected
quarterly earnings and robust forward guidance. Lastly, stock selection in
consumer staples and consumer discretionary sectors boosted relative returns
for the year.
The largest detractor from relative performance was stock selection in the
health care sector. Notably, not owning benchmark holdings Eli Lilly and Cigna
proved to be costly. In regards to Cigna, the company outperformed due to
merger and acquisition activity during the period; we do not own Cigna due to
the firm's diminutive dividend. A combination of stock selection and an
overweight to materials also dampened relative performance. Notably, portfolio
holding E I. du Pont de Nemours underperformed, primarily due to concerns
about the sustainability of growth in its agriculture segment. Despite recent
weakness, we continue to own the stock given our expectation for
above-consensus strength in the company's specialty chemical segment. Lastly,
stock selection in telecommunications services and an underweight to financials
also detracted modestly from relative returns for the year.
Below is a comprehensive overview of our allocations at the end of the year.
Industrials - 2.9% overweight
(13.1% of portfolio)
The Company's overweight to industrials is concentrated in the aerospace &
defence industry. We are particularly bullish on the defence stocks given their
solid balance sheets, strong free cash flows and the potential for an upward
inflection in defence spending. We also maintain exposure to industrial
conglomerates such as General Electric (3.0% of the portfolio) and Honeywell
International (1.5% of the portfolio) given their diverse revenue streams,
stable growth profiles and healthy dividend yields.
Consumer Discretionary - 2.1% overweight
(7.5% of portfolio)
The balance sheet for U.S. consumers continues to improve, aided by a
recovering domestic housing market, solid jobs growth, lower gas prices and the
beginning of wage growth. Although this is undoubtedly a positive for the
economy and consumer related spending, the Company's overweight position in the
consumer discretionary sector is premised on stock specific factors. Our
largest position in this sector is Home Depot (2.4% of the portfolio).
Health Care - 2.2% overweight
(13.8% of portfolio)
The Company's overweight position in health care is concentrated in the
pharmaceuticals and managed care industries. In pharmaceuticals, valuations are
more expensive than in previous years, but we believe the industry remains
attractively priced relative to other defensive, higher-yielding sectors.
Underlying fundamentals are also strong, with companies offering robust drug
pipelines, improved research and development efficiency, strong free cash flow
generation and lower patient expirations going forward. In the managed care
industry, we initiated positions in UnitedHealth Group (2.2% of the portfolio)
and Anthem (0.8% of the portfolio) during the first quarter of 2015.
Materials - 1.3% overweight
(4.2% of portfolio)
Our exposure to the materials sector is based on the premise that
infrastructure development and spending will continue to be a critical part of
the investment landscape, both domestically and abroad. Recent weakness in the
commodities complex remains a near term headwind, although we are encouraged by
a renewed emphasis on operational efficiency by companies we cover in the
sector. Ultimately, we believe companies with scale and high quality assets in
geographies close to developing markets will be able to reap the benefits of
high barriers to entry within local industries and deliver attractive long
term growth.
Consumer Staples - 1.1% overweight
(7.8% of portfolio)
The Company has traditionally maintained an overweight position in consumer
staples due to the sector's recurring purchase theme, solid-brand leadership,
stable earnings and dividend growth potential. Although these characteristics
remain long term positives, we are now only modestly overweight, after paring
our holdings in the sector due to concerns about valuations and the potential
for slowing earnings and dividend growth.
Telecommunication Services - 0.1% overweight
(2.6% of portfolio)
Within the sector, our allocation remains concentrated in diversified
telecommunication bellwethers such as Verizon Communications. Wireless
operations continue to drive revenue in the sector and the proliferation of
data-heavy smartphones should help certain companies in the space strengthen
margins. Service bundling has led to stickier consumers, better earnings
visibility and less customer churn, all of which are positives for the
industry.
Utilities - equal weight
(6.1% of portfolio)
Our exposure to utilities has been dominated primarily by regulated names,
given their durable dividend profiles and resilience in slow growth
environments. From a fundamental standpoint, we believe the sector is
increasingly bifurcated in terms of the differences between strong and weak
companies. As such, we are focused on owning firms with clear plans for future
growth that are trading at attractive valuations. We also prefer to invest in
firms that are not entirely dependent on demand and are in a unique position to
focus on strategic capital expenditures. We believe these factors will be
increasingly important given slowing demand and declining electricity usage
rates across the industry.
Information Technology - 1.9% underweight
(9.7% of portfolio)
Although the Company remains underweight in information technology, we are
increasingly positive on the sector, with a preference for large-cap, mature
companies. Valuations remain attractive and companies such as Oracle (1.0% of
the portfolio), Qualcomm (1.4% of the portfolio), Microsoft (2.3% of the
portfolio) and Intel (2.4% of the portfolio) offer a compelling mix of healthy
balance sheets, strong free cash flow generation and growing dividend streams.
Energy - 4.2% underweight
(9.2% of portfolio)
Despite near term weakness in crude oil prices, we are exercising patience
within the sector and are focused on the changing catalysts behind current
supply and demand dynamics. Ultimately, we believe the longer term fundamentals
for the sector remain positive. We favour oil-weighted companies over those
levered to natural gas, as well as large cap integrated companies and
independent oil and gas producers due to their diverse revenue streams and
balance sheet strength. At the industry level, strong competitive positioning,
operating specialisation and pricing power remain most desirable from an
investment perspective.
Financials - 3.7% underweight
(26.0% of portfolio)
While underweight relative to the benchmark index, financials is the Company's
largest sector allocation on an absolute basis and we maintain a high level of
conviction in the sector. We are particularly bullish on U.S. banks and capital
markets stocks based on improving balance sheets, low credit losses, high
capital levels and attractive valuations in these industries. In addition, we
believe the headwinds from litigation and regulation are diminishing. As such,
we think these stocks are well positioned for future dividend growth.
Positioning and outlook
We have positioned the Company to benefit from the maturing U.S. business cycle
and the slow growth environment we see unfolding over time. Notably, the
Company's largest sector exposures are in the financials, health care and
industrials sectors. During the trailing twelve month period, we have increased
exposure to information technology given favourable underlying fundamentals,
attractive valuations and the prospects for future dividend growth. More
recently, we have also added opportunistically to the Company's energy
and utilities allocations and trimmed exposure to strong performers in the
health care and consumer discretionary sectors. As always, the Company
continues to emphasize investment in high quality dividend paying companies
with consideration toward balancing capital appreciation and current income
over time.
Tony DeSpirito and Bob Shearer
BlackRock Investment Management LLC
18 January 2016
Ten largest investments as at 31 October 2015
JPMorgan Chase: 4.1% (2014: 3.4%) is a U.S. based diversified financial company
with over $2.4 trillion in assets and operations in dozens of countries.
JPMorgan's capital base remains one of the strongest in the industry and it
provides a measure of safety and financial flexibility. Overall, we believe
JPMorgan offers investors the potential for future earnings power through
broadening customer relationships, increasing loan growth and efficient
management of expenses.
Wells Fargo: 3.9% (2014: 3.7%) is a U.S. diversified bank with a strong west
coast franchise and growing national footprint. Wells boasts a strong and
stable management team, led by CEO John Stumpf, who has been with the firm for
over 30 years. Wells Fargo is an industry leader in cross-selling financial
products and services, which has built deep customer relationships and added to
the bank's pricing and earnings power. The bank has a strong focus on capital
return with above average dividends and buybacks versus peers.
Citigroup: 3.2% (2014: 1.6%) is a U.S. based money centre bank with $1.8
trillion in assets and a global footprint. We believe Citigroup is attractively
valued on both a price-to-earnings and book value basis. The firm has
demonstrated an ability to achieve its efficiency targets and cut costs, which
we believe will ultimately contribute to stronger earnings power and increasing
capital return to shareholders.
General Electric (GE): 3.0% (2014: 2.7%) is a diversified industrials
conglomerate with operations in technology infrastructure, energy
infrastructure, home and business services and capital services. In April 2015,
GE announced plans to divest the majority of its GE Capital business, the
firm's financial arm. We are positive on the decision and believe the
transaction adds financial flexibility and enables the firm to focus on growing
its core industrial units moving forward. GE's strong management team, depth
and breadth of products, and ability to secure pricing, continue to make it a
desirable long term holding.
Pfizer: 2.9% (2014: 2.3%) is a diversified pharmaceutical firm with a history
of generating returns in excess of its cost of capital, which has translated to
strong free cash flow generation and an attractive and consistent dividend
yield over time. We are positive about the company's prospects for future
growth given their pipeline of early Phase I and II drugs with blockbuster
potential. Additionally, we believe Pfizer's recent acquisition of Hospira will
strengthen their global established pharma (GEP) business and position the
company for share gains in biosimilars, a growth segment of the pharma market.
Exxon Mobil: 2.6% (2014: 2.1%) is an integrated oil and gas company based out
of the U.S. The firm is one of only a few companies in the U.S. to boast an AAA
credit rating. Exxon's geographic footprint and diversified operations continue
to make it an industry leader, with the scale and experience to weather
volatility in commodity prices. Management remains committed to generating
shareholder returns, paying almost $40 billion in dividends and repurchasing
approximately $130 billion worth of stock over the last five years.
Intel Corporation: 2.4% (2014: 2.0%) is a designer and manufacturer of digital
technology platforms. Intel is a dominant player in the computer microprocessor
market and we are particularly bullish on the firm's growth potential in its
data centre business segment.
Home Depot: 2.4% (2014: 2.6%) is the world's largest home improvement retailer
with over 2,200 warehouse-format stores. Home Depot has shown an ability to
drive market share gains, currently owning a 20% share of the home improvement
space. We remain encouraged by the company's focus on the in-store shopping
experience and emphasis on controlling costs through utilising new technology
to assist its inventory management. Overall, we are positive on the stock given
the company's strong execution and the ongoing recovery in consumer home
improvement spending and the domestic housing market.
Microsoft: 2.3% (2014: 2.3%) is a global technology leader that is engaged in
developing and licensing both software and hardware products & services. We
view Microsoft as an attractive long term investment given the firm's overall
'ecosystem', which should drive pricing power and efficient free cash flow
generation over time. Ultimately, we believe Microsoft has the right mix of
assets and enterprise business relationships to drive topline growth moving
forward.
UnitedHealth Group: 2.2% (2014: nil) is one of the largest managed-care
organizations in the U.S. serving approximately 45 million members.
UnitedHealth operates a diversified business across product lines, geography
and customer types. Central to our investment thesis is that the managed care
industry is now stronger post Obamacare, with positive tailwinds including new
membership growth, manageable cost trend and industry consolidation.
Ultimately, we believe UnitedHealth is a quality earnings compounder and an
attractive long term holding.
All percentages reflect the value of the holding as a percentage of total
investments. Percentages in brackets represent the value of the holding as at
31 October 2014. Together the ten largest investments represent 29.0% of the
Company's portfolio (31 October 2014: 26.9%). All data in U.S. dollar terms.
Investments as at 31 October 2015
Company Country Sector Securities Market value % of total
£'000 portfolio
JPMorgan Chase United Financials Ordinary 3,954 4.1
States shares
Wells Fargo United Financials Ordinary 3,743 3.9
States shares
Options (12)
Citigroup United Financials Ordinary 3,056 3.2
States shares
General Electric United Industrials Ordinary 2,907 3.0
States shares
Options (43)
Pfizer United Health Care Ordinary 2,659 2.9
States shares
Options (1)
Exxon Mobil United Energy Ordinary 2,496 2.6
States shares
Options (11)
Intel Corporation United Information Ordinary 2,330 2.4
States Technology shares
Options (27)
Home Depot United Consumer Ordinary 2,285 2.4
States Discretionary shares
Options (10)
Microsoft United Information Ordinary 2,215 2.3
States Technology shares
Options (55)
UnitedHealth Group United Health Care Ordinary 2,130 2.2
States shares
Options (2)
Merck United Health Care Ordinary 2,051 2.1
States shares
Options (19)
Raytheon United Industrials Ordinary 1,939 2.0
States shares
Options (29)
Procter & Gamble United Consumer Staples Ordinary 1,841 1.9
States shares
Options (19)
SunTrust Banks United Financials Ordinary 1,755 1.8
States shares
Options (17)
Verizon Communications United Telecommunication Ordinary 1,693 1.8
States Services shares
Options (15)
Johnson & Johnson United Health Care Ordinary 1,653 1.7
States shares
Options (10)
US Bancorp United Financials Ordinary 1,639 1.7
States shares
Options (5)
Occidental Petroleum United Energy Ordinary 1,649 1.7
States shares
Options (23)
Dollar General United Consumer Ordinary 1,540 1.6
States Discretionary shares
Options (6)
American International United Financials Ordinary 1,532 1.6
Group States shares
Comcast United Consumer Ordinary 1,519 1.6
States Discretionary shares
Options (10)
Total France Energy Ordinary 1,478 1.5
shares
Options (4)
Honeywell United Industrials Ordinary 1,484 1.5
International States shares
Options (19)
Bank of America United Financials Ordinary 1,430 1.5
States shares
Northrop Grumman United Industrials Ordinary 1,465 1.5
States shares
Options (37)
Lockheed Martin United Industrials Ordinary 1,316 1.4
States shares
Options (11)
MetLife United Financials Ordinary 1,305 1.4
States shares
Options (7)
Kroger United Consumer Staples Ordinary 1,305 1.4
States shares
Options (10)
Qualcomm United Information Ordinary 1,290 1.4
States Technology shares
Prudential Financial United Financials Ordinary 1,299 1.4
States shares
Options (12)
DuPont United Materials Ordinary 1,226 1.3
States shares
Options (11)
NextEra Energy United Utilities Ordinary 1,206 1.3
States shares
Options (6)
Marathon Petroleum United Energy Ordinary 1,150 1.2
States shares
Options (8)
Travelers Companies United Financials Ordinary 1,129 1.1
States shares
Options (42)
Dominion Resources United Utilities Ordinary 1,088 1.1
States shares
Options (2)
United Parcel Service United Industrials Ordinary 1,086 1.1
States shares
Options (1)
Morgan Stanley United Financials Ordinary 1,053 1.1
States shares
Samsung Electronics South Korea Information Ordinary 1,050 1.1
Technology shares
Dow Chemical United Materials Ordinary 1,007 1.1
States shares
Options (6)
Chevron United Energy Ordinary 1,006 1.0
States shares
Options (6)
Goldman Sachs United Financials Ordinary 996 1.0
States shares
Oracle United Information Ordinary 976 1.0
States Technology shares
Quest Diagnostics United Health Care Ordinary 933 1.0
States shares
Coca-Cola United Consumer Staples Ordinary 921 1.0
States shares
Options (4)
Gap United Consumer Ordinary 907 1.0
States Discretionary shares
International Paper United Materials Ordinary 902 0.9
States shares
Options -
America Water Works United Utilities Ordinary 859 0.9
Association States shares
Options (5)
Motorola Solutions United Information Ordinary 850 0.9
States Technology shares
Options (6)
McDonald's United Consumer Ordinary 863 0.9
States Discretionary shares
Options (20)
CME United Financials Ordinary 836 0.9
States shares
Options (3)
Bristol-Myers Squibb United Health Care Ordinary 834 0.9
States shares
Options (8)
Diageo United Consumer Staples Ordinary 754 0.8
Kingdom shares
Options (4)
Anthem United Health Care Ordinary 750 0.8
States shares
Altria Group United Consumer Staples Ordinary 721 0.7
States shares
Options (12)
Reynolds American United Consumer Staples Ordinary 710 0.7
States shares
Options (7)
Becton Dickinson United Health Care Ordinary 628 0.7
States shares
Options (4)
Union Pacific United Industrials Ordinary 586 0.6
States shares
Options -
Mondelez International United Consumer Staples Ordinary 580 0.6
States shares
Options (5)
CMS Energy United Utilities Ordinary 549 0.6
States shares
Options (3)
Praxair United Materials Ordinary 537 0.6
States shares
Options (5)
AbbVie United Health Care Ordinary 532 0.6
States shares
Options (3)
ACE United Financials Ordinary 520 0.5
States shares
Philip Morris United Consumer Staples Ordinary 505 0.5
International States shares
Options (9)
Nielsen United Industrials Ordinary 483 0.5
States shares
Options (1)
WEC Energy United Utilities Ordinary 478 0.5
States shares
Options (1)
AstraZeneca United Health Care Ordinary 477 0.5
Kingdom shares
Options -
Public Service United Utilities Ordinary 473 0.5
Enterprise States shares
Options (1)
SK Telecom South Korea Telecommunication Ordinary 468 0.5
Services shares
Options (1)
Exelon United Utilities Ordinary 437 0.5
States shares
Options -
Weyerhaeuser United Financials Ordinary 431 0.5
States shares
Options (2)
Tyco International United Industrials Ordinary 424 0.4
States shares
Options (1)
Marathon Oil United Energy Ordinary 408 0.4
States shares
Options (1)
ConocoPhillips United Energy Ordinary 406 0.4
States shares
Options (2)
3M United Industrials Ordinary 404 0.4
States shares
Options (1)
Schlumberger United Energy Ordinary 399 0.4
States shares
Options -
Abbott Laboratories United Health Care Ordinary 397 0.4
States shares
Options (4)
Rockwell Automation United Industrials Ordinary 374 0.4
States shares
Options (3)
Spectra Energy United Utilities Ordinary 370 0.4
States shares
Options -
American Express United Financials Ordinary 331 0.3
States shares
Options -
BHP Billiton Australia Materials Ordinary 329 0.3
shares
Options -
United Technologies United Industrials Ordinary 311 0.3
States shares
Options (1)
BCE Canada Telecommunication Ordinary 295 0.3
Services shares
Options (1)
ITC Holdings United Utilities Ordinary 257 0.3
States shares
Options (1)
Lenovo China Information Ordinary 254 0.3
Technology shares
Unilever Netherlands Consumer Staples Ordinary 220 0.2
shares
Options (3)
International Business United Information Ordinary 185 0.2
Machines States Technology shares
Nvidia United Information Ordinary 117 0.1
States Technology shares
-------------- --------------
Portfolio 95,318 100.0
======== ========
All investments are in ordinary shares unless otherwise stated. The number of
holdings as at 31 October 2015 was 87 (31 October 2014: 90). The total number
of individual open options as at 31 October 2015 was 151 (31 October 2014:
130).
The negative valuation of £618,000 in respect of options held represents the
notional cost of repurchasing the contracts at market prices as at 31 October
2015
(31 October 2014: £746,000).
At 31 October 2015, the Company did not hold any equity interests comprising
more than 3% of any company's share capital.
Financial statements
Statement of comprehensive income for the year ended 31 October 2015
Notes Revenue Revenue Capital Capital Total Total
2015 2014 2015 2014 2015 2014
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair - - 2,572 9,067 2,572 9,067
value through profit or loss
(Losses)/gains on foreign exchange - - (175) 13 (175) 13
Income from investments held at fair 3 2,814 3,123 - - 2,814 3,123
value through profit or loss
Other income 3 2,425 2,670 - - 2,425 2,670
--------------- -------------- ------------ --------- -------- --------
Total income 5,239 5,793 2,397 9,080 7,636 14,873
--------------- -------------- ------------ --------- -------- --------
Expenses
Investment management fees 4 (244) (273) (733) (819) (977) (1,092)
Other operating expenses 5 (329) (386) (25) (37) (354) (423)
--------------- -------------- ------------ -------- -------- --------
Total operating expenses (573) (659) (758) (856) (1,331) (1,515)
-------------- -------------- -------- -------- -------- --------
Net profit on ordinary activities 4,666 5,134 1,639 8,224 6,305 13,358
before finance costs and taxation
Finance costs - (2) (1) (6) (1) (8)
======== ======== ======== ======== ======== ========
Net profit on ordinary activities 4,666 5,132 1,638 8,218 6,304 13,350
before taxation
Taxation (783) (876) 150 180 (633) (696)
======== ======== ======== ======== ======== ========
Net profit on ordinary activities 3,883 4,256 1,788 8,398 5,671 12,654
after taxation
======== ======== ======== ======== ======== ========
Earnings per ordinary share 7 4.54p 4.25p 2.10p 8.38p 6.64p 12.63p
======== ======== ======== ======== ======== ========
The total column of this statement represents the Company's Statement of
Comprehensive Income, prepared in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union. The supplementary
revenue and capital columns are both prepared under guidance published by the
Association of Investment Companies (AIC). All items in the above statement
derive from continuing operations. No operations were acquired or discontinued
during the year.
The Company does not have any other recognised gains or losses. The net profit
for the year disclosed above represents the Company's total comprehensive
income.
Statement of changes in equity for the year ended 31 October 2015
Note Called up Share Capital Special Capital Revenue Total
share premium redemption reserve reserves reserve
capital account reserve
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the year ended 31
October 2015
At 31 October 2014 1,004 36,774 1,460 63,213 17,402 1,346 121,199
Total comprehensive
income:
Net profit for the year - - - - 1,788 3,883 5,671
Transaction with owners,
recorded directly to
equity:
Ordinary shares - - - (24,737) - - (24,737)
purchased into treasury
pursuant to a tender
offer
Share issue and purchase - - - (233) - - (233)
costs
Ordinary shares - - - (287) - - (287)
purchased into treasury
Dividend paid 6 - - - - - (3,567) (3,567)
-------- ---------- -------- ---------- ---------- -------- ----------
At 31 October 2015 1,004 36,774 1,460 37,956 19,190 1,662 98,046
-------- ---------- -------- ---------- ---------- -------- ----------
For the year ended 31
October 2014
At 31 October 2013 994 35,671 1,460 63,213 9,004 947 111,289
Total comprehensive
income:
Net profit for the year - - - - 8,398 4,256 12,654
Transaction with owners,
recorded directly to
equity:
Issue of ordinary shares 10 1,108 - - - - 1,118
Share issue costs - (5) - - - - (5)
Dividend paid 6 - - - - - (3,857) (3,857)
-------------- --------------- --------------- -------------- -------------- --------------- --------------
At 31 October 2014 1,004 36,774 1,460 63,213 17,402 1,346 121,199
======== ======== ======== ======== ======== ======== ========
Statement of financial position as at 31 October 2015
Notes 31 October 31 October
2015 2014
£'000 £'000
Non current assets
Investments designated as held at fair value through 95,936 121,965
profit or loss
-------- --------
Current assets
Other receivables 2,755 218
Cash and cash equivalents 2,003 923
-------- --------
4,758 1,141
-------- --------
Current liabilities
Derivative financial liabilities held at fair value (618) (746)
through profit or loss
Other payables (2,030) (1,161)
-------- --------
(2,648) (1,907)
-------- --------
Net current assets/(liabilities) 2,110 (766)
-------------- --------------
Net assets 98,046 121,199
======== ========
Capital and reserves
Called-up share capital 8 1,004 1,004
Share premium account 36,774 36,774
Capital redemption reserve 1,460 1,460
Special reserve 37,956 63,213
Capital reserves 19,190 17,402
Revenue reserve 1,662 1,346
-------------- --------------
Total equity shareholders' funds 98,046 121,199
======== ========
Net asset value per share 7 122.50p 120.76p
======== ========
Cash flow statement for the year ended 31 October 2015
Year ended Year ended
31 October 31 October
2015 2014
£'000 £'000
Operating activities
Profit before taxation 6,304 13,350
Add back interest paid 1 8
Less: gains on investments held at fair value through profit or (2,572) (9,067)
loss
Net movement on foreign exchange 175 (13)
Sales of investments held at fair value through profit or loss 101,048 91,353
Purchases of investments held at fair value through profit or (72,575) (91,551)
loss
(Increase)/decrease in other receivables (16) 88
(Decrease)/increase in other payables (3) 89
(Increase)/decrease in amounts due from brokers (2,523) 129
Increase/(decrease) in amounts due to brokers 1,090 (351)
-------------- --------------
Net cash inflow from operating activities before interest and 30,929 4,035
taxation
-------------- --------------
Interest paid (1) (8)
Taxation on investment income included within gross income (626) (720)
-------------- --------------
Net cash inflow from operating activities 30,302 3,307
-------------- --------------
Financing activities
Dividends paid (3,567) (3,857)
Proceeds from issue of ordinary shares - 1,796
Shares purchased into treasury pursuant to tender offer (24,737) -
Shares purchased into treasury (287) -
Share issue and share purchase costs paid (456) (8)
-------------- --------------
Net cash outflow from financing activities (29,047) (2,069)
-------------- --------------
Increase in cash and cash equivalents 1,255 1,238
------------- -------------
Cash and cash equivalents at start of the year 923 (328)
Effect of foreign exchange rate changes (175) 13
-------------- ---------------
Cash and cash equivalents at end of the year 2,003 923
-------------- ---------------
Comprised of:
Cash and cash equivalents 2,003 923
-------------- --------------
2,003 923
======== ========
Notes to the financial statements
1. Principal activity
The principal activity of the Company is that of an investment trust company
within the meaning of section 1158 of the Corporation Tax Act 2010.
2. Accounting policies
The principal accounting policies adopted by the Company are set out below.
(a) Basis of preparation
The financial statements have been prepared under the historical cost
convention modified by revaluation of financial assets and financial
liabilities held at fair value through profit or loss and in accordance with
International Financial Reporting Standards as adopted by the European Union
(IFRS), International Financial Reporting Interpretations Committee
interpretations and as applied in accordance with the provisions of the
Companies Act 2006. All of the Company's operations are of a continuing nature.
The Company's financial statements are presented in sterling because that is
the currency of the Company's share capital, the currency of the country in
which the majority of shareholders reside and the currency in which the
shareholders' dividend distributions will be made. All values are rounded to
the nearest thousand pounds (£'000) except where otherwise indicated.
The assets of the Company consist of securities that are readily realisable
and, accordingly, the Directors believe that the Company has adequate resources
to continue in operational existence for the foreseeable future. Consequently
the Directors have determined that it is appropriate for the financial
statements to be prepared on a going concern basis.
Insofar as the Statement of Recommended Practice (SORP) for investment trust
companies and venture capital trusts issued by the AIC, revised in January
2009, is compatible with IFRS, the financial statements have been prepared in
accordance with the guidance set out in the SORP.
A number of new standards, amendments to standards and interpretations are
effective for annual periods beginning on or after 1 November 2015, and have
not been applied in preparing these financial statements (major changes and new
standards issued are detailed below). None of these are expected to have a
significant effect on the measurement of the amounts recognised in the
financial statements of the Company.
IFRS 9 Financial Instruments (2014) replaces IAS 39 and deals with a package of
improvements including principally a revised model for classification and
measurement of financial instruments, a forward looking expected loss
impairment model and a revised framework for hedge accounting. In terms of
classification and measurement, the revised standard is principles based
depending on the business model and nature of cash flows. Under this approach
instruments are measured at either amortised cost or fair value, though the
standard retains the fair value option allowing designation of debt instruments
at initial recognition to be measured at fair value.
The standard is effective from 1 January 2018 with earlier application
permitted but has not yet been endorsed by the European Commission. The Company
does not plan to early adopt this standard.
IFRS 14 Regulatory Deferral Accounts (effective 1 January 2016) allows first
time IFRS adopters to continue to account for 'regulatory deferral account
balances' in accordance with previous GAAP.
The Company has no such accounts and, therefore, the provisions of this
standard are not applicable.
IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)
specifies how and when an entity should recognise revenue and enhances the
nature of revenue disclosures.
Given the nature of the Company's revenue streams from financial instruments,
the provisions of this standard are not expected to be applicable.
Amendments to IFRS 10, IFRS 12 and IAS 28 (effective 1 January 2016) are in
relation to applying the consolidation exception for investment entities.
The Company does not control any of its investments or have any subsidiaries,
hence the provisions of this statement are not applicable.
Amendments to IAS 1 (effective 1 January 2016) require changes to the
presentation of financial instruments.
The amendments are not expected to have a significant effect on the measurement
of amounts recognised in the financial statements of the Company.
(b) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company and in
accordance with guidance issued by the AIC, supplementary information which
analyses the Statement of Comprehensive Income between items of a revenue and a
capital nature has been presented alongside the Statement of Comprehensive
Income.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business being investment business.
(d) Income
Dividends receivable on equity shares are recognised as revenue for the year on
an ex-dividend basis. Where no ex-dividend date is available, dividends
receivable on or before the period end are treated as revenue for the period.
Provision is made for any dividends not expected to be received. Special
dividends, if any, are treated as a capital or a revenue receipt depending on
the facts or circumstances of each particular case. The return on a debt
security is recognised on a time apportionment basis so as to reflect the
effective yield on the debt security. Interest income and expenses are
accounted for on an accruals basis.
Options may be purchased or written over securities held in the portfolio for
generating or protecting capital returns, or for generating or maintaining
revenue returns. Where the purpose of the option is the generation of income,
the premium is treated as a revenue item. Where the purpose of the option is
the maintenance of capital, the premium is treated as a capital item.
Option premium income is recognised as revenue evenly over the life of the
option contract and included in the revenue column of the Statement of
Comprehensive Income unless the option has been written for the maintenance and
enhancement of the Company's investment portfolio and represents an incidental
part of a larger capital transaction, in which case any premia arising are
allocated to the capital column of the Statement of Comprehensive Income.
(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis.
Expenses have been charged wholly to the revenue column of the Statement of
Comprehensive Income, except as follows:
* expenses which are incidental to the acquisition of an investment are
included within the cost of the investment. Details of transaction costs on
the purchases and sales of investments are disclosed within note 9 on pages
49 and 50 of the Annual Report;
* expenses are treated as capital where a connection with the maintenance or
enhancement of the value of the investments can be demonstrated; and
* the investment management fees and finance costs of borrowing borne by the
Company have been allocated 75% to the capital column and 25% to the
revenue column of the Statement of Comprehensive Income in line with the
Board's expectations of the long term split of returns, in the form of
capital gains and income, respectively, from the investment portfolio.
(f) Taxation
The tax expense represents the sum of the tax currently payable and deferred
tax. Tax payable is based on the taxable profit for the year. Taxable profit
differs from profit before tax as reported in the Statement of Comprehensive
Income because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable
or deductible. The Company's liability for current tax is calculated using tax
rates that have been enacted or substantively enacted by the balance sheet
date.
Deferred taxation is recognised in respect of all temporary differences that
have originated but not reversed at the financial reporting date, where
transactions or events that result in an obligation to pay more tax in the
future or right to pay less tax in the future have occurred at the financial
reporting date. 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 future reversal of the temporary differences can be deducted.
Deferred tax assets and liabilities are measured at the rates applicable to the
legal jurisdictions in which they arise.
(g) Investments held at fair value through profit or loss
The Company's investments are classified as held at fair value through profit
or loss in accordance with IAS 39 - 'Financial Instruments: Recognition and
Measurement' and are managed and evaluated on a fair value basis in accordance
with its investment strategy.
All investments are initially recognised as held at fair value through profit
or loss. Purchases of investments are recognised on a trade date basis. Sales
of investments are recognised at the trade date of the disposal. Proceeds are
measured at fair value, which is regarded as the proceeds of sale less any
transaction costs.
The fair value of the financial investments is based on their quoted bid price,
or as otherwise stated at the financial reporting date, without deduction for
the estimated selling costs. This policy applies to all current and non current
asset investments held by the Company.
Changes in the value of investments held at fair value through profit or loss
and gains and losses on disposal are recognised in the Statement of
Comprehensive Income as 'Gains or losses on investments held at fair value
through profit or loss'. Also included within the heading are transaction costs
in relation to the purchase or sale of investments.
(h) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short
term in nature and are accordingly stated at their nominal value.
(i) Dividends payable
Interim dividends are recognised when paid to shareholders. Final dividends, if
any, are only recognised after they have been approved by shareholders.
(j) Foreign currency translation
Transactions involving foreign currencies are converted at the rate ruling at
the date of the transaction.
Foreign currency monetary assets and liabilities are translated into sterling
at the rate ruling on the financial reporting date. Foreign exchange
differences arising on translation are recognised in the Statement of
Comprehensive Income as a revenue or capital item depending on the income or
expense to which they relate.
(k) Cash and cash equivalents
Cash comprises cash in hand and on demand deposits. Cash equivalents are short
term, highly liquid investments that are readily convertible to known amounts
of cash and that are subject to an insignificant risk of changes in value.
(l) Bank overdrafts
Bank overdrafts are recorded as the proceeds received. Finance charges are
accounted for on an accruals basis in the Statement of Comprehensive Income
using the effective interest rate method and are added to the carrying amount
of the instruments to the extent that they are not settled in the period in
which they arise.
(m) Derivatives
Derivatives are held at fair value based on the bid/offer prices of the options
written to which the Company is exposed. The value of the option is
subsequently marked-to-market to reflect the fair value of the option based on
traded prices. Where the premium is taken to revenue, an appropriate amount is
shown as capital return such that the total return reflects the overall change
in the fair value of the option. When an option is closed out or exercised, the
gain or loss is accounted for as a capital gain or loss.
3. Income
2015 2014
£'000 £'000
Investment income:
UK listed dividends 26 35
Overseas listed dividends 2,788 3,088
-------- --------
2,814 3,123
-------- --------
Other income:
Deposit interest 2 4
Option premium income 2,423 2,666
-------- --------
2,425 2,670
-------- --------
Total 5,239 5,793
===== =====
During the year, the Company received premiums totalling £2,348,000 (2014: £
2,747,000) for writing covered call options for the purposes of revenue
generation. Option premiums of £2,423,000 (2014: £2,666,000) were amortised to
income including unamortised option premiums of £238,000 as at 31 October 2014
(31 October 2013: £157,000). All derivative transactions were based on
constituent stocks in the Russell 1000 Value Index. At 31 October 2015, there
were 151 (2014: 130) open positions with an associated liability of £618,000
(2014: £746,000).
4. Investment management fee
2015 2014
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 244 733 977 273 819 1,092
-------- -------- -------- -------- -------- --------
Total 244 733 977 273 819 1,092
==== ==== ==== ==== ==== ====
The investment management fee was payable in quarterly arrears, calculated at
the rate of one-quarter of 1.0% per quarter of the Company's market
capitalisation. With effect from 1 November 2015, the rate is 0.75% of net
assets.
5. Other operating expenses
2015 2014
£'000 £'000
Custody fee 4 5
Auditors' remuneration:
- audit services 27 26
- other non-audit services - 6
Registrar's fee 26 30
Marketing fees 28 77
Directors' emoluments 101 104
Other administration costs 143 138
-------- --------
329 386
==== ====
The Company's ongoing charges, calculated as a percentage of average net assets
and using expenses, excluding interest costs, were 1.24% (2014: 1.31%).
Fees for non audit assurance services were £nil (2014: £6,000 excluding VAT
paid to Ernst & Young LLP for the review of the interim financial statements
whilst auditors to the Company).
For the year ended 31 October 2015, expenses of £25,000 (2014: £37,000) were
charged to the capital column of the Statement of Comprehensive Income relating
to transaction costs paid to custodians.
6. Dividends
The Directors declared a fourth interim dividend of 1.1p per share. The
dividend was paid on 5 January 2016, to shareholders on the Company's register
on 20 November 2015 (ex dividend date 19 November 2015). The fourth interim
dividend has not been recognised as a liability in the financial statements as
interim dividends are not recognised in the financial statements until they are
paid. They are also debited directly to revenue reserves.
The interim dividends paid in respect of the year ended 31 October 2015 meet
the requirements of section 1158 of the Corporation Tax Act 2010 and section
833 of the Companies Act 2006.
Dividends on equity shares:
2015 2014
£'000 £'000
4th interim dividend of 1.0p paid for the year ended 31 October 2014 1,004 845
(2013: 1.0p)
1st interim dividend of 1.0p paid for the year ended 31 October 2015 803 1,004
(2014: 1.0p)
2nd interim dividend of 1.1p paid for the year ended 31 October 2015 880 1,004
(2014: 1.0p)
3rd interim dividend of 1.1p paid for the year ended 31 October 2015 880 1,004
(2014: 1.0p)
-------- --------
Accounted for in the financial statements 3,567 3,857
4th interim dividend of 1.1p paid on 5 January 2016 for the year 880 1,004
ended 31 October 2015 (2014: 1.0p)
-------- --------
4,447 4,861
===== =====
7. Earnings and net asset value per ordinary share 2015 2014
Net revenue profit attributable to ordinary shareholders (£'000) 3,883 4,256
Net capital profit attributable to ordinary shareholders (£'000) 1,788 8,398
-------------- ---------------
Total profit attributable to ordinary shareholders (£'000) 5,671 12,654
-------------- ---------------
Total equity attributable to shareholders (£'000) 98,046 121,199
-------------- ----------------
The weighted average number of ordinary shares in issue during the 85,447,775 100,180,757
year, on which the earnings per ordinary share was calculated was:
-------------- ----------------
The actual number of ordinary shares in issue at the year end, on 80,039,044 100,361,305
which the net asset value per ordinary share was calculated was:
-------------- ----------------
Revenue earnings per share 4.54p 4.25p
Capital earnings per share 2.10p 8.38p
-------------- ----------------
Total earnings per share 6.64p 12.63p
-------------- ----------------
Net asset value per share - basic and diluted 122.50p 120.76p
-------------- ----------------
Share price (mid-market) 113.00p 112.00p
======== ========
Basic and diluted earnings per share and net asset value per share are the
same, as the Company does not have any dilutive securities outstanding.
8. Called up share capital
Number of Treasury Total Nominal
ordinary shares shares value
shares in £'000
issue
Allotted, called up and fully paid share capital
comprised:
Ordinary shares of 1 pence each
Allotted, issued and fully paid:
At 31 October 2014 100,361,305 - 100,361,305 1,004
Shares repurchased and held in treasury pursuant (20,072,261) 20,072,261 - -
to tender offer on 4 February 2015
Shares repurchased and held in treasury (250,000) 250,000 - -
---------------- --------------- ---------------- --------------
At 31 October 2015 80,039,044 20,322,261 100,361,305 1,004
========= ========= ========= ========
During the year ended 31 October 2015, the Company purchased 20,322,261 (2014:
nil) shares for a total consideration of £25,257,000 including tender costs.
During the year ended 31 October 2015, the Company did not issue any shares
(2014: 1,000,000 shares issued for a total consideration of £1,103,000 after
deduction of issue costs). Since 31 October 2015, and up to the date of this
report, the Company has purchased an additional 3,050,000 ordinary shares for a
total consideration of £3,441,000.
9. Contingent liabilities
There were no contingent liabilities at 31 October 2015 (2014: nil).
10. Publication of non-statutory accounts
The financial information contained in this announcement does not constitute
statutory accounts as defined in the Companies Act 2006. The Annual Report and
Financial Statements for the year ended 31 October 2015 will be filed with the
Registrar of Companies after the Annual General Meeting.
The figures set out above have been reported upon by the auditors, whose report
for the year ended 31 October 2015 contains no qualification or statement under
section 498(2) or (3) of the Companies Act 2006.
The comparative figures are extracts from the audited financial statements of
BlackRock North American Income Trust plc for the year ended 31 October 2014,
which have been filed with the Registrar of Companies. The report of the
auditors on those financial statements contained no qualification or statement
under section 498 of the Companies Act.
11. Annual Report
Copies of the Annual Report will be published shortly and will be available
from the registered office, c/o The Company Secretary, BlackRock North American
Income Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.
12. Annual General Meeting
The Annual General Meeting of the Company will be held at the offices of
BlackRock, 12 Throgmorton Avenue, London EC2N 2DL on Thursday, 18 February 2016
at 12.00 noon.
ENDS
The Annual Report will also be available on the BlackRock website at
blackrock.co.uk/brna. Neither the contents of the Manager's website nor the
contents of any website accessible from hyperlinks on the Manager's website (or
any other website) is incorporated into, or forms part of, this announcement.
For further information please contact:
Simon White, Managing Director, Investment Trusts - 020 7743 5284
Emma Phillips, Media & Communications - 020 7743 2922
BlackRock Investment Management (UK) Limited
12 Throgmorton Avenue
London
EC2N 2DL
18 January 2016
BLACKROCK NORTH AMERICAN INCOME : Final Results
January 18, 2016 at 09:59 pm IST
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