Half-year Report

Invesco Perpetual Select Trust Plc - Half-year Report

PR Newswire

London, February 5

Invesco Perpetual Select Trust plcLEI: 549300JZQ39WJPD7U596

HALF-YEARLY FINANCIAL REPORT

SIX MONTHS ENDED 30 NOVEMBER 2020

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FINANCIAL PERFORMANCE

CUMULATIVE TOTAL RETURNS(1)(2) TO 30 NOVEMBER 2020

PERIOD END NET ASSET VALUE, SHARE PRICE AND DISCOUNT

(1) Alternative Performance Measure (APM). See pages 38 to 40 for the explanation and calculation of APMs. Further details are provided in the Glossary of Terms and Alternative Performance Measures in the Company’s 2020 annual financial report.

(2) Source: Refinitiv.

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INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT

CHAIRMAN’S STATEMENT

Investment Objective and Policy

The Company’s investment objective is to provide shareholders with a choice of investment strategies and policies, each intended to generate attractive risk-adjusted returns.

The Company’s share capital comprises four Share classes: UK Equity Shares, Global Equity Income Shares, Balanced Risk Allocation Shares and Managed Liquidity Shares, each of which has its own separate portfolio of assets and attributable liabilities.

The Company enables shareholders to alter their asset allocation to reflect their views of prevailing market conditions. Shareholders have the opportunity, every three months, to convert between share classes, free of capital gains tax and free of charges.

Performance

In net asset value (NAV) terms, with dividends reinvested, the UK Equity Share Portfolio returned +10.9% over the six months to the end of November 2020, and +15.3% on the share price, compared with its benchmark, the FTSE All-Share Index total return of +6.9%.

The Global Equity Income Share Portfolio returned +16.1% in NAV terms, and +16.4% on the share price, compared with its benchmark, the MSCI World Index total return over the period of +12.2%.

The Balanced Risk Allocation Share Portfolio returned +14.1% in NAV terms, and +14.7% on the share price. The Portfolio’s benchmark, ICE BoA Merrill Lynch 3 month LIBOR plus 5% per annum, returned +2.6%.

The Managed Liquidity Share Portfolio had a return of +1.0% based on NAV and +0.5% based on the share price.

It is very pleasing to report that all three Portfolios based on risk assets outperformed their benchmarks. In the period under review sentiment towards financial markets, and equities in particular, fluctuated in response to the news about the Covid-19 pandemic. Towards the end of the period, the announcement of a number of successful vaccines led to a significant rise in equities, with many markets having their greatest ever monthly return in November. The Company’s Portfolios benefitted from being geared in the period, as well as from positive stock and sector selection by the portfolio managers. The UK Equity portfolio manager had a balanced approach, holding both gold stocks as a defensive hedge, as well as more economically sensitive stocks such as Barclays, Next and JD Sports Fashion. The latter were impacted by the government lockdowns and restrictions in response to the pandemic, but rallied during November on the vaccine news. The Global Equity Income Portfolio also had a balanced construction, with pharmaceutical stocks such as Novartis and Roche offering defensive characteristics, offset by economically sensitive stocks such as Samsung Electronics, Taiwan Semiconductor Manufacturing and JPMorgan Chase. The Global Equity Income Portfolio outperformed its benchmark despite being underweight the US equity market, which once again has been a very strong performer.

The Balanced Risk Allocation Portfolio by its very nature has a combination of equities, bonds and commodities. During the period under review, the exposure to risk assets such as equities and commodities proved beneficial, whilst bonds had a small negative return. The portfolio manager also generated a positive return during the period through tactical allocation between the different asset classes.

Throughout the period interest rates around the globe remained at, or very near, record lows. Nevertheless, the Managed Liquidity Portfolio generated a positive return from the investment in short dated bonds. As announced at the end of the half year, Derek Steeden has been appointed manager of this Portfolio. The investment policy will remain unchanged, with the portfolio manager targeting a positive return from investing in short dated bonds, with particular attention given to yield, duration and credit risk. As has been mentioned in the past, this Share class has a lower risk profile than the Company’s other three Share classes. Nevertheless, it is not designed to be a cash fund, and as such is not without risk to capital.

Proposed Combination with Invesco Income Growth Trust plc

On 1 December 2020 the Board announced the agreement of Heads of Terms with the board of Invesco Income Growth Trust plc (IVI) in respect of a proposed combination of IVI with the Company’s UK Equity Share class. It is intended that this proposal, if approved by each company’s shareholders and subject to regulatory and tax approvals, will be implemented through a scheme of reconstruction pursuant to section 110 of the Insolvency Act 1986, resulting in the voluntary liquidation of IVI and the rollover of its assets into the Company in exchange for the issue of new UK Equity shares to IVI shareholders and a partial cash exit. A circular and prospectus in relation to this transaction will be posted to shareholders in due course.

If the proposal is approved by shareholders, Ciaran Mallon, who has managed IVI’s portfolio since 2005, will become joint portfolio manager of the UK Equity Share Portfolio, with James Goldstone, who has managed it since October 2016. The Boards of both this Company and IVI believe that the two managers’ combined and complementary skills, with a disciplined investment process, can deliver attractive returns for shareholders. Ciaran and James jointly manage Invesco’s largest open ended UK equity funds, which have outperformed their benchmark since appointment. The Company’s smaller UK Equity portfolio will give the managers freedom to invest across the size and liquidity spectrum and to offer the prospect of a genuine best ideas portfolio, clearly distinguished from their open-ended funds, where stock selection is limited to larger, more liquid investments. The change will bring the benefits of increased scale, including enhancing secondary market liquidity and the spreading of fixed costs over a larger cost base. Additionally, the Board has negotiated improved management fee arrangements to apply from when the scheme becomes effective. The current flat annual management fee of 0.55% of net assets payable by the UK Equity Share Portfolio will be reduced, with 0.55% payable on its net assets up to £100 million and 0.50% over £100 million; and the performance fee (being 12.5% of any increase in net assets above the benchmark plus 1.0%, capped at 0.55% of net assets) will be removed. In the interests of alignment, the 0.55% management fee on the Company’s Global Equity Income Share Portfolio will be amended in the same way, and its performance fee removed. Costs of the transaction will be significantly mitigated by Invesco waiving its accrued performance fee of £531,000 in respect of the UK Equity Share Portfolio.

The Company will retain its innovative capital structure, offering investors the opportunity to switch (on a quarterly basis) between its UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity share classes to react to changing investment conditions.

Dividends

The Board has declared equal first, second and third quarterly dividends for the current year for each of the equity share classes. These were all at the same level as last year. Accordingly, for the UK Equity shares each of these dividends was 1.5p, making 4.5p declared for the financial year to date. For the Global Equity Income shares each of these dividends was 1.55p, making 4.65p declared for the financial year to date.

With pressure on income streams from Covid-19 the Board has not set targets for annual dividends for the current financial year. However, as in recent years, the earnings of the UK Equity and Global Equity Income Portfolios will be augmented with contributions from capital.

It continues to be the case that in order to maximise the capital return on the Balanced Risk Allocation Shares, the Directors only intend to declare dividends on the Balanced Risk Allocation Shares to the extent required, having taken into account the dividends paid on the other Share classes, to maintain the Company’s status as an investment trust. None have been declared to date.

No dividends have been declared in respect of the current financial year on the Managed Liquidity Shares. Although improvements to revenue allowed small dividends to be paid in the last two years, in this exceedingly low interest rate environment it currently appears unlikely to be repeated this year.

Discount and Share Buy Backs

The Company has continued to operate a discount control policy for all four share classes through the period and the discounts have remained within a reasonably narrow range.

During the period the Company bought back 4,588,000 UK Equity shares at an average price of 144.4p, 2,945,000 Global Equity Income shares at an average price of 186.0p, 705,000 Balanced Risk Allocation shares at an average price of 141.9p and 174,000 Managed Liquidity shares at an average price of 101.5p.

Outlook

As I noted in the last annual financial report, the impact of the Covid-19 pandemic on economies and societies has been profound. At the time of writing, there are still very high infection rates in Europe and North America, although the pandemic is much more contained in Asia. As a result, GDP growth has resumed in Asia, whilst it is more subdued in those areas of the globe still experiencing high infection rates. Nevertheless, equity markets have rallied strongly in anticipation of economic recovery following the roll out of vaccines. Equity markets have also been supported by government stimulus packages throughout the world. The magnitude of these has been even greater than during the financial crisis, and yet bond yields are at near record lows, as inflation has remained subdued. Given the profound dislocation that has occurred following the pandemic, it would be foolhardy to make bold predictions for the second half of the Company’s year. Much will depend upon the effectiveness of vaccines, and the speed and extent of the recovery in GDP. Although equity markets are anticipating a recovery, there are still many sectors trading at very low valuations which offer upside. Furthermore, although it is difficult to anticipate government bond yields moving lower, unless there is an upsurge in inflation, bond yields could remain low. Undoubtedly financial markets will be volatile, but this should provide the portfolio managers the opportunity to continue to build upon the strong investment performance in the first half of the Company’s year.

We remain convinced that the Company offers an attractive and unique mix of strategies, and its structure, with opportunities to convert between share classes, makes it an ideal vehicle for self-managed investors who want enhanced control of their investments – long-term investing with flexibility to switch portfolios in response to market changes.

Graham Kitchen

Chairman

5 February 2021

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INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT

Related Party Transactions

Under United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law), the Company has identified the Directors as related parties. No other related parties have been identified during the period. No transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Principal Risks and Uncertainties

Explanations of the Company’s principal risks and uncertainties are set out on pages 39 to 42 of the Company’s 2020 annual financial report, which is available on the Manager’s website.

These are summarised as follows:

• Investment Objectives and Attractiveness to Investors – the investment policies may not achieve the published investment objectives;

• Market Movements and Portfolio Performance – falls in stock markets will affect the performance of the individual Portfolios and securities held within the Portfolios;

• Risks Applicable to the Company’s Shares – the prices of Shares in the Company may not appreciate and the level of dividends may fluctuate;

• Viability and Compulsory Conversion of a Class of Share – lack of demand for one of the Company’s Share classes could result in the relevant portfolio becoming too small to be viable. If ownership of a class of Shares becomes too concentrated the Directors may serve notice on holders of the affected class requiring them to convert to another class;

• Liability of a Portfolio for the Liabilities of Another Portfolio – in the event that any Portfolio was unable to meet its liabilities, the shortfall would become a liability of the other Portfolios;

• Gearing – borrowing will amplify the effect on shareholders’ funds of gains and losses on the underlying securities;

• Hedging – where hedging is used there is a risk that the hedge will not be effective;

• Regulatory and Tax Related – whilst compliance with rules and regulations is closely monitored, breaches could affect returns to shareholders;

• Additional Risks Applicable to Balanced Risk Allocation Shares – the use of financial derivative instruments, in particular futures, forms part of the investment policy and strategy of the Balanced Risk Allocation Portfolio. The degree of leverage inherent in futures trading potentially means that a relatively small price movement in a futures contract may result in an immediate and substantial loss to the Portfolio; and

• Reliance on Third Party Service Providers – the Company has no employees, so is reliant upon the performance of third party service providers, particularly the Manager, for it to function.

In the view of the Board these principal risks and uncertainties are as equally applicable to the remaining six months of the financial year as they were to the six months under review.

Despite the disruption to markets and revenue streams from Covid-19, and the impact on global economies, the Company continues to operate effectively and to pursue its investment objectives. Resilience of the Company, its Board and its service providers has been demonstrated throughout and the Directors remain confident that the Company’s investment strategies will continue to serve shareholders well over the longer term.

Going Concern

The financial statements have been prepared on a going concern basis. The Directors consider this to be appropriate as the Company has adequate resources to continue in operational existence for the foreseeable future, being 12 months after approval of the financial statements. In reaching this conclusion, the Directors took into account the value of net assets; the Company’s Investment Policy; its risk management policies; the diversified portfolio of readily realisable securities which can be used to meet funding commitments; the credit facility and the overdraft which can be used for short-term funding requirements; the liquidity of the investments which could be used to repay the credit facility in the event that the facility could not be renewed or replaced; its revenue; and the ability of the Company in the light of these factors to meet all its liabilities and ongoing expenses.

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MARKET AND ECONOMIC BACKGROUND

The six months to the end of November 2020 saw global equity markets deliver positive returns against a backdrop of the gradual and partial reopening of the global economy from the Covid-19 induced restrictions imposed from March onwards. Commodity markets saw energy and industrial metals make gains on expectations of a return of demand from the increases in travel and economic activity. However, given the strength in risk assets, bond prices retreated as demand for safe havens diminished.

Despite some rebound in economic growth across each region of the world throughout this period, the year 2020 will go on record as delivering the sharpest decline in global GDP since World War 2.

In the UK it was a volatile six months for the equity market, largely dominated by the impact of Covid-19, where the social and economic effect has been devastating, and it will take years to recover. Additional ongoing issues such as US-China trade relations, Brexit, UK domestic politics and the US Presidential Election also added to the background noise in recent months.

The effect on equity markets could have been worse. Rapid and forceful action by central banks and governments around the world to loosen monetary and fiscal policy in order to cushion the economic shock to consumers has prevented, so far at least, economic depression. The challenge for governments is to provide a level of effective support, while at the same time recognising the need to control levels of borrowing. Consumer spending power has largely been maintained, and indeed is likely to be the driver of post-Covid economic recovery in 2021.

Throughout the bulk of the period equity markets continued to be extremely bifurcated, with a narrow range of e-commerce, technology and high growth ‘thematic’ stocks outperforming significantly, in addition to those perceived winners from the changes in consumer behaviour brought about by Covid-19. More traditional companies across a range of sectors, especially those with more ‘value’ orientated characteristics and greater sensitivity to the economic cycle, continued to underperform. Of course, travel and leisure companies as well as energy stocks were in the eye of the storm as restrictions severely curtailed business travel and holidays. Healthcare stocks were also weak, despite their relatively secure short-term profitability, as concerns around a Democrat sweep of the US Presidency and Congress raised fears of more radical healthcare reform in the US.

In the UK, towards the end of the review period the FTSE All-Share Index continued to trade below the pre Covid-19 levels of February, but above the market low that was witnessed in March. Uncertainty around a national lockdown as a result of a steep rise in Covid-19 infections weighed on share prices into the autumn, along with concerns around progress in Brexit negotiations. Whilst there remained uncertainty on some key issues, there appeared to be room for cautious optimism that a negotiated settlement would be reached with the EU before the end of the year, although there was some strong posturing around a threat of a ‘No Deal’.

The beginning of November marked quite a radical rotation within the global equity market. The catalyst was initially the US election result, delivering a Democratic president, but with a gridlocked Congress. In the view of the market, thus preventing radical shake ups of tax policy and the healthcare sector, whilst allowing a more diplomatic approach to foreign relations and policy making. A ‘Goldilocks’ scenario to many investors. This was rapidly followed up by good news both from Pfizer and Moderna on vaccines. The prospect of a rapid pick up in economic growth in 2021 was in sight and hence selling expensive ‘winners’ and buying companies more exposed to a ‘return to normal’ became a popular strategy as we headed to the end of the six months under review.

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UK EQUITY SHARE PORTFOLIO

PERFORMANCE RECORD

Total Return

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UK EQUITY SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the UK Equity Portfolio is to provide shareholders with an attractive real long-term total return by investing primarily in UK quoted equities.

Portfolio Strategy and Review

The Portfolio outperformed its benchmark over the six months to 30 November 2020, with a net asset value total return of +10.9%, compared with +6.9% for the FTSE All-Share Index. 

At the sector level, the largest source of positive performance was the exposure to general retailers, where the share prices of Next and JD Sports Fashion made gains on the strength of their differentiated distribution models. As consumption picked up, their already well-established online models came to the fore. Next benefitted from an upgrade to annual profit expectations as second quarter results in September beat analyst estimates. JD Sports Fashion had resilient sales and very strong growth in its online revenues. The switch to online came with additional costs, but the share price rose on the news of reinstated guidance for strong full-year profits which, whilst below last year’s, were impressive under the circumstances.

CVS, which is an integrated veterinary services provider, coped relatively well with the crisis. Trading began to return to normal in the summer as lockdown eased and it made a strong contribution to performance in the period.

Burford Capital, another positive contributor, released half-year results in October, which were well received and helped to move the share price higher. The company had been beleaguered by short selling activity for some time, but said it had recovered US$820 million from litigations in the six months to the end of June, which was an increase of 32% when compared with the same period in 2019. It has now listed on the New York Stock Exchange, which has helped address some of the company’s governance and liquidity questions. 

The share price of flooring specialist Victoria was boosted by encouraging signs in recent trading and its full year 2020 numbers showed solid recovery from the previous year. The position has now been sold. Meanwhile media group Future, which specialises in consumer websites, was a strong performer despite being temporarily impacted by the market weakness mid-March. The company released a trading statement in July indicating that the business had continued to grow despite the crisis and a further trading statement at the beginning of September prompted analysts to increase estimates.

Global speciality chemicals company Elementis released a trading statement in October. Despite volumes being down approximately 13% on the prior year, pricing remained resilient across most of the business and cost savings and supply chain efficiencies left trading in line with expectations. This news was well received by the market and buoyed the share price, making Elementis one of the top contributors to performance on a relative basis.

Barclays was the largest position in the portfolio at the end of November and reported better than expected quarterly profit on the back of lower provisions for bad loans and a strong performance by the investment bank. Along with other banks, Barclays ceased paying its dividend on the instruction of the Prudential Regulation Authority (PRA), but the regulator has now judged “that an extension of the exceptional and precautionary action” is no longer necessary. 

Travel and leisure sector businesses On the Beach and easyJet have been severely impacted by travel restrictions, but both are well placed to benefit from any pick up in travel. Following news of the successful development of a vaccine, both shares recovered sharply. 

Weaker performance over the six-month period was seen from the portfolio’s overweight exposure to basic materials. This exposure is almost entirely represented by holdings in four North American gold mining companies, namely Barrick Gold, Newmont, Wheaton Precious Metals and Agnico Eagle Mines. After a period of extremely strong performance the gold price weakened as promising news of vaccine developments increased. Sentiment improved towards stocks that had been hit hard by the pandemic and investors started to move from ‘risk off’ to ‘risk on’, but the thesis underpinning these gold stocks’ position in the portfolio remains valid. 

Aerospace and defence company Babcock International also detracted from performance despite a strong rally during the last month of the period. Its March and June dividends were cancelled in order to conserve cash until there was greater certainty around the impact of the pandemic and the company has stated that it intends to prioritise strengthening the balance sheet. A new CEO and CFO, both with relevant experience, are now in place and we await their strategic review at the time of full-year results.

The share price of British American Tobacco has been volatile over the six-month period and ultimately detracted from relative performance. Just after the end of the period the company released a trading statement stating that despite the challenges posed by Covid-19 the business was performing strongly. It is committed to its strategy of gaining new non-combustible product customers, an area which continues to grow (currently approximately 10% of revenues), and has restated that it is committed to a 65% dividend pay-out ratio.

Tesco is a significant overweight in the portfolio and whilst the share price was virtually unchanged over the period the overweight meant that it detracted from performance on a relative basis. Tesco is well capitalised, with around £2 billion of cash on the balance sheet. The company had to employ extra staff during lockdown, which added to the £725 million of Covid-19 costs, but these were in part made up for by increased sales. Online orders have more than doubled, with customers utilising ‘click and collect’ as well as delivery. The business believes that the current crisis has accelerated the shift to online. An agreement to sell its Asian business has been announced and Tesco has said that part of the proceeds will be returned to shareholders as a special dividend. The company has also said that it will repay the business rates relief it received to cope with the pandemic.

The share prices of oil majors BP and Royal Dutch Shell both fell as the pandemic unfurled and as market pessimism around oil demand and prices grew. Both companies cut their dividends early in the crisis on concerns that it would take a long time for demand and prices to recover and to fund expansion in renewable energy. Their share prices remained depressed over the summer. The holding of Royal Dutch Shell was sold in June, leaving a lower allocation to the sector over the summer before the holding in BP was increased in September. More recently, BP has risen in step with oil prices towards the end of the period on expectation that demand for oil will recover sharply as the vaccine is rolled out.

Performance relative to the benchmark was also assisted by a handful of stocks that were not held, notably GlaxoSmithKline, AstraZeneca, Reckitt Benckiser and Diageo, which are in the healthcare and consumer staples sectors. These stocks had been trading on high valuations prior to the pandemic and, while they still are, the premium has eroded as the market has rotated away from these more ‘growth’ orientated stock towards ‘value’. 

New holdings purchased over the period were Aviva, Chemring and Lancashire. Disposals included Royal Dutch Shell, Compass, Pennon, NatWest, DS Smith, and Experian.

The Portfolio has been geared from borrowings during the period, to positive effect. Gearing going into the crisis in 2020 was around 6%, at the beginning of the review period in June 2020 it was 10.3% and it was 18.6% at the end of November 2020.

Outlook

While recent news of the successful development and distribution of a vaccine for Covid-19 is very welcome, it will be some months before a sufficient number of the UK population has been vaccinated for the economy to return to normal. As part of its ongoing efforts to mitigate the impact of the Covid-19 outbreak, the UK government and central bank have continued to provide substantial monetary and fiscal support to corporates and households. Bank of England interest rates remain at historic lows and are further supported by large scale asset purchases. The strength and depth of the UK’s fiscal policy response offers us some reassurance.

Brexit has finally reached a conclusion, albeit with some major outstanding issues (eg Services) to be addressed in the coming months. However, the enormous disruption and consequent soured relations with the EU from a no-deal Brexit has been avoided. The US Presidential Elections have reached their conclusion and, whilst the demonstrations are concerning, were outcome is now clear. 

Although these headwinds look now to have an end in sight, I do expect markets to continue to be volatile. We should expect further waves of optimism as the vaccination programme rolls out but it is clear that the after-effects of Covid-19 will have significant economic consequences for some time to come. The restrictions put in place to limit the further spread of Covid-19 while the vaccine is distributed will naturally have a large impact on a wide range of economic indicators. With significant areas of private sector output currently subject to severe disruption and the exit path from lockdown yet to be determined, the range of possible outcomes for economic activity over 2021 are still much wider than normal. Company earnings estimates have been revised down significantly since the start of the pandemic, but visibility still remains low and guidance by companies has been in large part withdrawn. 

The environment for gold remains supportive despite the gold price having fallen from its recent high in the summer. The portfolio’s holdings in four North American gold mining companies performed their protective role admirably during the market volatility and now represent around 11% of the portfolio. At the current gold price their valuations remain extremely attractive and if things develop as I anticipate, gold should have further gains to make. I believe that these four companies are best in class and have good sustainability credentials which are increasingly being recognised. Barrick Gold recently won the Capital Finance International award for Best Sustainable Mining Strategy (Africa) as a result of its collaborative local partnerships and shared stakeholder benefits. These stocks continue to play a critical role in the portfolio and I intend to maintain the position at or around its current weighting for the foreseeable future.

James Goldstone

Portfolio Manager

5 February 2021

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UK EQUITY SHARE PORTFOLIO

LIST OF INVESTMENTS

AT 30 NOVEMBER 2020

Ordinary shares listed in the UK unless stated otherwise

† FTSE Industry Classification Benchmark.

AIM Investments quoted on AIM.

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UK EQUITY SHARE PORTFOLIO

INCOME STATEMENT

SUMMARY OF NET ASSETS

SUMMARY OF CHANGES IN NET ASSETS

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

PERFORMANCE RECORD

Total Return

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Global Equity Income Share Portfolio is to provide an attractive and growing level of income return and capital appreciation over the long term, predominantly through investment in a diversified portfolio of equities worldwide.

Portfolio Strategy and Review

The portfolio outperformed its reference benchmark in the six months to the end of November 2020. On a total return basis, the Portfolio’s net asset value rose by 16.1% over the six months, compared to a rise of 12.2% in the MSCI World index (£, total return, net of withholding tax).

Throughout the period we maintained a significant exposure to the technology sector; Taiwan Semiconductor Manufacturing, for example, is a clear technology leader in a highly oligopolistic market, benefitting from diversified sources of revenue growth. It has 15% of its market capitalisation on its balance sheet as net cash and pays a 3% yield, growing at around 8% per annum. We would also include companies such as Microsoft and Samsung Electronics in this category, despite lower dividends. They all share similar attributes of market leadership, strong balance sheets, and a continued runway for earnings and dividend growth. Towards the end of the period, however, we had begun to reduce exposure where we felt valuations were running too hot, such as Microsoft and Mastercard, or where we had become less confident in the management strategy, such as Analog Devices.

We added Coca-Cola to the portfolio during the summer. It has underperformed other consumer staple stocks this year, mainly due to its over exposure to the restaurant and bar market, which was significantly impacted globally by Covid-19 restrictions. It was trading at a low level relative to its sector and the US equity market. New management is reinvigorating the product range and sales strategy. It has a growing, above average, dividend yield.

Another new holding was Progressive, a leading US automotive insurer which we thought was attractively valued. It has an innovative business strategy and brand, with the ability to grow market share and compound returns for many years in what is a highly fragmented market.

Although travel and leisure related names have been costly for us throughout the year, we felt it appropriate to maintain some exposure to good businesses, on discounted valuations, which ought to be able to weather the storm. The good news we saw on vaccines in November meant that companies such as Amadeus, Rolls-Royce, American Express and Coca-Cola, outperformed significantly towards the period end. Banking stocks also performed well as the period came towards a close, due to an improved economic outlook for 2021.

Financials remain the least liked sector in the market (apart from energy) by many investors. Whilst we acknowledge the challenges the sector faces, we continue to believe banks, such as JPMorgan Chase and Standard Chartered, offer massive recovery potential and low valuations by historic standards. Also, we believe insurers such as AIA, Zurich Insurance and Progressive offer some modest growth and significant secure income. Despite the strong recovery in performance witnessed in November we continue to see further upside.

Amongst other portfolio changes, we disposed of our position in Bayer in October after it issued another unexpected warning on profitability, principally due to challenges in their crop business. This was the latest in a series of disappointing updates from the company and caused us to re-evaluate our position as we do not have confidence that it can begin to reach the levels of profitability we envisaged at the time of purchase. We felt it was right to move on and invest in a company where we have higher conviction.

Outlook

Markets feel to be in a very different place in 2021 from that of only a few months ago. Optimism has replaced fear as equity prices have rebounded. Certainly, it is understandable that markets have rallied with the resolution of Brexit, the US election and vaccine approvals, but it does leave us questioning, what next? There has been a good deal of good news, but much of this now feels ‘in the price’, certainly at an aggregate market level. With news of further virus spread, any negative issues surrounding vaccine roll out and return to normal could undermine this bullish sentiment, at least for the first half of 2021.

However, our central case remains that vaccines roll out broadly as planned, and governments and central banks continue to adhere to more growth friendly monetary and fiscal policies. Earnings and dividend growth should recover rapidly, but global equity markets’ returns are likely to lag the growth in corporate earnings.

Stephen Anness

Portfolio Manager

5 February 2021

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

LIST OF INVESTMENTS

AT 30 November 2020

Ordinary shares unless stated otherwise

ADR: American Depositary Receipts – are certificates that represent shares in the relevant stock and are issued by a US bank. They are denominated and pay dividends in US dollars.

R: Red Chip Holdings – holdings in companies incorporated outside the PRC, listed on the Hong Kong Stock Exchange, and controlled by PRC entities by way of direct or indirect shareholding and/or representation on the board.

† MSCI and Standard & Poor’s Global Industry Classification Standard.

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GLOBAL EQUITY INCOME SHARE PORTFOLIO

INCOME STATEMENT­

SUMMARY OF NET ASSETS

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

PERFORMANCE RECORD

Total Return

Source: Refinitiv.

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Balanced Risk Allocation Portfolio is to provide shareholders with an attractive total return in differing economic and inflationary environments, and with low correlation to equity and bond market indices by gaining exposure to three asset classes: debt securities, equities and commodities.

Portfolio Strategy and Review

For the half year to 30 November 2020 the Balanced Risk Allocation Portfolio posted a positive return of 14.1%. Two of the three asset classes in which the portfolio invests generated positive results over the period, with bonds posting negative results.

Strategic exposure to commodities was the top contributor to performance with all four commodity complexes posting gains. Agricultural commodities led results, headed by grains, specifically soymeal and soybeans. Demand for feed increased as meat processing plants reopened and as hog herds in China started to recover from swine flu. Weather in the Midwest also supported higher grain prices as windstorms followed by low rainfall and an extended heatwave in August reduced crop sizes. Industrial metals rose with the increase in Chinese manufacturing and infrastructure spending, while production constraints also impacted copper supply. Energy prices advanced as news on the Covid-19 vaccine sparked hopes for higher demand. Precious metals posted subdued gains after strong performance early in the period, when they had been supported a decline in the US dollar, low real yields and demand for safe-haven exposure. Safe-haven demand decreased as optimism over the Covid-19 vaccine increased.

Strategic exposure to equities also contributed positively to results with all six markets invested in posting positive results. US small caps were the top contributor and outpaced US large caps as optimism around the recovery increased risk appetite. Hong Kong equities also contributed due to increased manufacturing and economic activity in China. Japanese equities rose on the recovery from the Covid-19 bottom as well as the election of Yoshihide Suga to replace Shinzo Abe. European equities rose despite a resurgence of Covid-19 cases. UK equities advanced too, but were subdued compared to other markets as increased Covid-19 cases led officials to reimpose lockdowns and as the UK dealt with renewed Brexit uncertainty.

Strategic exposure to government bonds detracted from results as the safe-haven demand that bonds had enjoyed dissipated with the rise of risk assets. Enthusiasm for bonds was further dampened by the unified call from central banks for higher levels of inflation. Australian bonds led results as the Reserve Bank of Australia expanded its term funding facility to ensure the smooth provision of credit and indicated they would increase bond buying through quantitative easing. Japanese bond performance was flat for the period. North American bond markets produced losses as US equity markets generally fared well, dampening enthusiasm for safe havens. Canadian bonds saw yields rise despite the Bank of Canada communicating that it had recalibrated its quantitative easing program to focus on the longer end of the curve. Returns were relatively muted, with central banks having begun to point out the limits to monetary policy and the need for additional fiscal stimulus to support the recovery from the Covid-19 lows. Average inflation targeting introduced by the US Federal Reserve (Fed) during the period, and anticipation that other central banks are likely to follow the Fed’s lead, could be further impeding a move lower in yields.

Tactical positioning delivered additional gains as overweights to equities, industrial metals and agriculture proved timely.

Outlook

Over the near term, the success in stopping the spread of Covid-19 infections will likely be the primary driver of asset class returns. Now

that several vaccines are available and are being administered, we should see the extent to which they are able to reduce the spread and,

by extension, the need for lockdowns. Given the degree of stimulus present in the system, any sign of effectiveness could extend the

powerful rally across risk assets.

Scott Wolle

Portfolio Manager

5 February 2021

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

MANAGER’S REPORT

TARGET ANNUALISED RISK

The targeted annualised risk (volatility of monthly returns) for the Portfolio as listed below is analysed as follows:

Derivative instruments held in the Balanced Risk Allocation Share Portfolio are shown on the next page. At the period end all derivative instruments held in this Portfolio were exchange traded futures contracts. Holdings in futures contracts that are not exchange traded are permitted as explained in the investment policy which is disclosed in full on page 34 of the Company’s 2020 annual financial report.

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

LIST OF INVESTMENTS

AT 30 NOVEMBER 2020

(1) The hedge fund investments are residual holdings of the previous investment strategy, which are awaiting realisation of underlying investments.

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LIST OF DERIVATIVE INSTRUMENTS

AT 30 NOVEMBER 2020

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BALANCED RISK ALLOCATION SHARE PORTFOLIO

INCOME STATEMENT

SUMMARY OF NET ASSETS

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MANAGED LIQUIDITY SHARE PORTFOLIO

PERFORMANCE RECORD

Total Return

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MANAGED LIQUIDITY SHARE PORTFOLIO

MANAGER’S REPORT

Investment Objective

The investment objective of the Managed Liquidity Share Portfolio is to produce an appropriate level of income return combined with a high degree of security.

Portfolio Strategy and Review

The investment strategy followed for this Portfolio in the six months ended 30 November 2020 was to invest principally in the PIMCO Sterling Short Maturity Source UCITS ETF, which is managed by PIMCO. In addition, since from time to time it is necessary to be able to realise assets quickly to meet short term payment obligations, a small proportion of the Portfolio’s assets was invested in the Sterling Liquidity Portfolio of Invesco Liquidity Funds plc, which is a money market fund managed by Invesco. The underlying investments of the ETF carry greater risks than is typical for a money market fund and accordingly the Portfolio value may rise or fall.

The PIMCO Sterling Short Maturity Source UCITS ETF seeks to provide capital preservation, liquidity and stronger return potential relative to traditional cash investments, in exchange for a modest increase in risk. The fund is actively managed by PIMCO and invests predominantly in sterling denominated short-term investment grade debt (rated at least Baa3 by Moody’s or BBB– by S&P, or equivalently rated by Fitch (or, if unrated, determined by PIMCO to be of comparable quality).

The Sterling Liquidity Portfolio of Invesco Liquidity Funds plc is managed by Invesco in a laddered maturity structure, investing in repurchase agreements, time deposits, commercial paper, certificates of deposit, medium-term notes and floating rate notes rated A-1/P-1 or better.

The Bank of England base rate of interest remained at only 0.1% throughout the period.

Outlook

The Board announced on 30 November 2020 the appointment of Derek Steeden to manage the Company’s Managed Liquidity portfolio. Based in London, Mr Steeden is a Portfolio Manager for the Invesco Investment Solutions team, which provides customised, multi-asset investment strategies for clients. He joined Invesco in 2019, having begun his investment career in 2005. There will be no change to the investment objective and policy of the portfolio.

Following his appointment, Mr Steeden, together with Invesco Investment Solutions, has undertaken a review of the Portfolio’s holdings and identified the benefit of switching holdings in the PIMCO Sterling Short Maturity Source UCITS ETF to the iShares Sterling Ultrashort Bond UCITS ETF. This fund offers diversified exposure to investment grade very short maturity sterling denominated fixed and floating rate bonds, including direct investment in corporate bonds across sectors (industrials, utilities and financial companies) with improved yield, liquidity and charges. The switch was completed on 19 January 2021.

Invesco

5 February 2021

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MANAGED LIQUIDITY SHARE PORTFOLIO

LIST OF INVESTMENTS

AS AT 30 November 2020

MANAGED LIQUIDITY SHARE PORTFOLIO

INCOME STATEMENT

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SUMMARY OF NET ASSETS

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CONDENSED INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 NOVEMBER

The total column of this statement represents the Company’s profit and loss account, prepared in accordance with UK Accounting Standards. The return after taxation for the financial period is the total comprehensive income and therefore no additional statement of other comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the period. Income Statements for the different Share classes are shown on pages 13, 18, 23 and 26 for the UK Equity, Global Equity Income, Balanced Risk Allocation and Managed Liquidity Share Portfolios, respectively.

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CONDENSED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 NOVEMBER

CONDENSED BALANCE SHEET

AS AT 30 NOVEMBER 2020

REGISTERED NUMBER 5916642

CONDENSED BALANCE SHEET

AS AT 31 MAY 2020

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CONDENSED CASH FLOW STATEMENT

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NOTES TO THE CONDENSED FINANCIAL STATEMENTS

1. Accounting Policies

The condensed financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, FRS 104 Interim Financial Reporting and the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in October 2019. The financial statements are issued on a going concern basis.

The accounting policies applied to these condensed financial statements are consistent with those applied in the financial statements for the year ended 31 May 2020.

2. Management Fees and Finance Costs

Investment management fees and finance costs are charged to the applicable Portfolio as follows, in accordance with the Board’s expected split of long-term income and capital returns:

Any entitlement to the investment performance fee which is attributable to the UK Equity and/or the Global Equity Income Portfolio is allocated 100% to capital as it is principally attributable to the capital performance of the investments in those Portfolios.

The Manager is entitled to a basic fee which is calculated and payable quarterly. The fee is based on the net assets of each Portfolio, at the following percentages:

– 0.55% per annum in the case of the UK Equity and Global Equity Income Portfolios;

– 0.75% per annum for the Balanced Risk Allocation Portfolio; and

– 0.12% per annum for the Managed Liquidity Portfolio.

The Manager is also entitled to receive performance fees in respect of the UK Equity and Global Equity Income Portfolios of 12.5% of the increase in net assets per relevant Share in excess of a hurdle of the relevant benchmark plus 1% per annum. The amount of the performance fee that can be paid in any one year has been capped at 0.55% of the net assets of the relevant Portfolio and payment is subject to a high water mark. Any underperformance of the benchmark, or performance above the cap, is carried forward to subsequent periods and any underperformance must be offset by future overperformance before any performance fee can be paid.

Due to underperformance brought forward, no performance fee was earned by the UK Equity Portfolio during the six months (30 November 2019: £nil). The performance fee accrued for past periods is £531,000 and, as it cannot be reduced by future underperformance, remains an obligation of the Company. Similarly, no performance fee was earned for the Global Equity Portfolio during the six months (30 November 2019: £nil).

Underperformance movements in the six months to 30 November 2020 are shown below:

3. Investment Trust Status and Tax

It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an investment trust company. Any company so approved is not liable for taxation on capital gains.

The tax charge represents withholding tax suffered on overseas income for the period.

4. Basic Return per Ordinary Share

Basic revenue, capital and total return per ordinary share is based on each of the returns on ordinary activities after taxation as shown by the income statement for the applicable Share class and on the following number of shares being the weighted average number of shares in issue throughout the period for each applicable Share class:

5. Net Asset Values per Ordinary Share

The net asset values per ordinary share were based on the following Shareholders’ funds and shares (excluding treasury shares) in issue at the period end:

6. Classification Under Fair Value Hierarchy

FRS 102 sets out three fair value levels. These are:

Level 1 The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2 Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

The fair value hierarchy analysis for investments held at fair value at the period end is as follows:

Level 1 This is the majority of the Company’s investments and comprises all quoted investments and Treasury bills.

Level 2 This includes liquidity funds held in the Balanced Risk Allocation and Managed Liquidity Portfolios, and any derivative instruments.

Level 3 This includes the remaining legacy hedge fund investments of the Balanced Risk Allocation Portfolio.

7. Movements in Share Capital and Share Class Conversions

IN THE SIX MONTHS ENDED 30 NOVEMBER 2020

As part of the conversion process, 194,710 deferred shares of 1p each were created. All deferred shares are cancelled before the period end and so no deferred shares are in issue at the start or end of the period.

8. Share Prices

9. Dividends on Ordinary Shares

First interim dividends for UK Equity and Global Equity Income were paid on 17 August 2020. Second interim dividends for UK Equity and Global Equity Income were paid on 16 November 2020:

Dividends paid for the six months to 30 November 2020 totalled £1,737,000 (six months to 30 November 2019: £1,955,000). No dividend was paid in the period to the holders of Managed Liquidity shares (six months to 30 November 2019: £35,000, in respect of the year ended 31 May 2019).

10. The financial information contained in this half-yearly financial report, which has not been reviewed or audited by the independent auditor, does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the half years ended 30 November 2020 and 30 November 2019 has not been audited. The figures and financial information for the year ended 31 May 2020 are extracted and abridged from the latest audited accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and include the Independent Auditor’s Report, which was unqualified and did not include a statement under section 498 of the Companies Act 2006.

By order of the Board

Invesco Asset Management Limited

Company Secretary

5 February 2021

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STATEMENT OF DIRECTORS’ RESPONSIBILITY

in respect of the preparation of the half-yearly financial report ­

The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and UK Accounting Standards.

The Directors confirm that, to the best of their knowledge:

– the condensed set of financial statements contained within the half-yearly financial report has been prepared in accordance with the FRC’s FRS 104 Interim Financial Reporting;

– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure Guidance and Transparency Rules; and

– the interim management report includes a fair review of the information required on related party transactions.

The half-yearly financial report has not been audited or reviewed by the Company’s auditor.

Signed on behalf of the Board of Directors.

Graham Kitchen

Chairman

5 February 2021