Smith & Williamson UK Equity Income Fund. Annual Long Report. for the year ended 31 August 2016

Transcription

1 Smith & Williamson UK Equity Income Fund Annual Long Report

2 Contents Page Report of the Manager 2 Statement of the Manager's responsibilities 4 Report of the Trustee to the unitholders of Smith & Williamson UK Equity Income Fund 5 Independent Auditor's report to the unitholders of Smith & Williamson UK Equity Income Fund 6 Accounting policies of Smith & Williamson UK Equity Income Fund 7 Investment Adviser's report 10 Summary of material portfolio changes 11 Portfolio statement 12 Risk and reward profile 15 Comparative table 16 Ongoing charges figure 18 Financial statements: Statement of total return 19 Statement of change in net assets attributable to unitholders 19 Balance sheet 20 Notes to the financial statements 21 Distribution table 32 Further information 35 Appointments 36 1

3 Smith & Williamson UK Equity Income Fund Report of the Manager Smith & Williamson Fund Administration Limited as the Manager presents herewith the Annual Long Report ( the Report ) for Smith & Williamson UK Equity Income Fund. Smith & Williamson UK Equity Income Fund ( the Trust or the Fund ) is an authorised unit trust scheme further to an authorisation order dated 29 April 1988 and is a UCITS scheme complying with the investment and borrowing powers rules in the Collective Investment Schemes sourcebook ( COLL ), as issued and amended by the Financial Conduct Authority ("FCA"). The Manager is of the opinion that it is appropriate to continue to adopt the going concern basis in the preparation of the accounts as the assets of the Fund consist predominantly of securities which are readily realisable and, accordingly, the Fund has adequate financial resources to continue in operational existence for the foreseeable future. Further, appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, have been used in the preparation of these accounts and applicable accounting standards have been followed. The Trust Deed can be inspected at the offices of the Manager. The base currency of the Company is UK sterling. Copies of the Prospectus and the Key Investor Information Document ("KIID") are available on request free of charge from the Manager. Investment objective and policy The objective of the Fund is to achieve a high and growing income over the longterm primarily through investment in the UK. The Fund may invest in transferable securities, including warrants, in UK and other exchanges as well as collective investment schemes, money market instruments, deposits and cash and near cash. The policy in order to achieve the Fund s objective will be to select companies which offer attractive dividend yields and at the same time may be reasonably expected to increase their dividends. The general nature of the portfolio will be primarily in UK equities. The Fund will use fixed interest securities in both the UK and other world markets when it is not possible to achieve high returns on equities. The Fund will invest in other world markets when the returns look better than those obtainable in the UK. The Fund may also apply for new issues. The investment policy may mean that at times it may be appropriate for the Fund not to be fully invested but to hold cash or near cash. In the light of extreme market conditions, the Investment Adviser may raise or reduce the liquidity of the Fund from normal working levels. The Fund may hedge transactions against price or currency fluctuations by backtoback foreign currency borrowings against sterling or by suitable transactions permitted for hedging. The extent will depend upon the circumstances. The Manager does not envisage that the Fund will enter into hedging transactions to a major extent. Remuneration In accordance with COLL 4.5.7R (7) The Authorised Fund Manager (AFM) is required to make disclosures of remuneration paid to staff and UCITS remuneration code staff by the AFM and a description of how the remuneration has been calculated. COLL 4.5.7A G allows the relevant disclosure not to be included in these accounts as the first full performance period of the AFM is not complete and the required information is therefore not currently available. 2

4 Report of the Manager (continued) Changes affecting the Fund in the year On 1 September 2015 Smith & Williamson UK Equity Income Trust changed its name to Smith & Williamson UK Equity Income Fund. On 3 October 2016 the Fund launched an additional unit class; Y class income. Following their intention to gradually wind down the activity in their registered firm, KPMG Audit Plc resigned as auditor and an alternative entity, KPMG LLP, became the auditor. There is no impact on the terms on which the auditor was retained. KPMG LLP have expressed their willingness to continue in office and the Manager has consented to their reappointment. Further information in relation to the Fund is illustrated on pages 35. In accordance with the requirements of the Collective Investment Schemes sourcebook as issued and amended by the Financial Conduct Authority, we hereby certify the Report on behalf of the Manager, Smith & Williamson Fund Administration Limited. K. Stopps G. Murphy Directors Smith & Williamson Fund Administration Limited 4 November

5 Statement of the Manager's responsibilities The Collective Investment Schemes sourcebook ("COLL") requires the Manager to prepare financial statements for each annual accounting period which give a true and fair view of the financial affairs of the Fund as at the end of the financial period and of its net revenue and the net capital gains on the property of the Fund for the year. In preparing the financial statements, the Manager is required to: select suitable accounting policies and then apply them consistently; comply with the disclosure requirements of the Statement of Recommended Practice: Financial Statements of Authorised Funds issued by the Investment Association ( the IA ) in May 2014; follow generally accepted United Kingdom accounting principles (UK accounting standards and applicable law) including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland; prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Fund will continue in operation; keep proper accounting records which enable it to demonstrate that the financial statements as prepared comply with the above requirements; make judgements and estimates that are reasonable and prudent; and take reasonable steps for the prevention and detection of fraud and other irregularities. The Manager is responsible for the management of the Fund in accordance with the Trust Deed, the Prospectus and COLL. 4

6 Report of the Trustee to the unitholders of Smith & Williamson UK Equity Income Fund Trustee's responsibilities The Trustee must ensure that the Fund is managed in accordance with the Financial Conduct Authority s Collective Investment Schemes sourcebook, the Financial Services and Markets Act 2000, as amended (together "the Regulations"), the Trust Deed and Prospectus (together "the Scheme documents") as detailed below. The Trustee must in the context of its role act honestly, fairly, professionally, independently and in the interests of the Fund and its investors. The Trustee is responsible for the safekeeping of all the custodial assets and maintaining a record of all other assets of the Fund in accordance with the Regulations. The Trustee must ensure that: the Fund's cash flows are properly monitored (this requirement on the Trustee applied from 18 March 2016) and that cash of the Fund is booked into the cash accounts in accordance with the Regulations; the sale, issue, redemption and cancellation of units are carried out in accordance with the Regulations; the value of units of the Fund are calculated in accordance with the Regulations; any consideration relating to transactions in the Fund's assets is remitted to the Fund within the usual time limits; the Fund's income is applied in accordance with the Regulations; and the instructions of the Alternative Investment Fund Manager ("AIFM") are carried out (unless they conflict with the Regulations). The Trustee also has a duty to take reasonable care to ensure that the Fund is managed in accordance with the Regulations and the Scheme documents in relation to the investment and borrowing powers applicable to the Fund. Report of the Trustee to the unitholders of Smith & Williamson UK Equity Income Fund Having carried out such procedures as we considered necessary to discharge our responsibilities as Trustee of the Fund, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the Fund, acting through the AIFM: (i) has carried out the issue, sale, redemption and cancellation, and calculation of the price of the Fund s units and the application of the Fund s income in accordance with the Regulations and the Scheme documents, and (ii) has observed the investment and borrowing powers and restrictions applicable to the Fund. National Westminster Bank Plc Trustee and Depositary Services 4 November

7 Independent Auditor s report to the unitholders of Smith & Williamson UK Equity Income Fund ("the Trust") We have audited the financial statements of the Trust which comprise the Statement of Total Return, the Statement of Changes in Net Assets Attributable to Unitholders, the Balance Sheet, the Related Notes and Distribution Table and the accounting policies set out on pages 7 to 9. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. This report is made solely to the Trust s unitholders, as a body, in accordance with Rule of the Collective Investment Schemes sourcebook ( the COLL Rules ) issued by the Financial Conduct Authority under section 247 of the Financial Services and Markets Act Our audit work has been undertaken so that we might state to the Trust s unitholders those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trust and the Trust s unitholders as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Manager, Smith & Williamson Fund Administration Limited and the Auditor As explained more fully in the Statement of the Manager's responsibilities set out on page 4 the Manager is responsible for the preparation of financial statements which give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council s website at Opinion on financial statements In our opinion the financial statements: give a true and fair view, in accordance with UK Generally Accepted Accounting Practice, of the financial position of the Trust as at 31 August 2016 and of the net revenue and the net capital gains on the property of the Trust for the year then ended; and Opinion on other matters prescribed by the COLL Rules have been properly prepared in accordance with the Trust Deed, the Statement of Recommended Practice relating to Authorised Funds, and the COLL Rules. In our opinion the information given in the Authorised Corporate Director's report is consistent with the financial statements. We have received all the information and explanations which we consider necessary for the purposes of our audit. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where under the COLL Rules we are required to report to you if, in our opinion: proper accounting records for the Trust have not been kept; or the financial statements are not in agreement with the accounting records. Philip Merchant for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants Saltire Court 20 Castle Terrace Edinburgh EH1 2EG 4 November

8 Accounting policies of Smith & Williamson UK Equity Income Fund a Basis of accounting The financial statements have been prepared under the historical cost convention, as modified by the revaluation of investments. They have been prepared in accordance with FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland ("FRS 102"). No recognition or measurement changes have occurred as a result of the adoption of FRS 102. They have been prepared in accordance with the Statement of Recommended Practice for Authorised Funds ("the SORP") issued by The Investment Association in May Previously the financial statements were prepared in accordance with the SORP issued in The changes in the SORP are presentational and have no impact on the current or prior year net asset value. The Fund has elected to early adopt the amendments to FRS 102 in respect of the fair value hierarchy disclosure requirements for financial instruments held at fair value as permitted for authorised funds. As described in the Manager's report, the Manager continues to adopt the going concern basis in the preparation of the accounts. b Valuation of investments The purchase and sale of investments are included up to close of business on 31 August Purchases and sales of investments are recognised when a legally binding and unconditional right to obtain, or an obligation to deliver an asset arises. Investments are stated at their fair value at balance sheet date. In determining fair value, the valuation point is global close of business on 31 August 2016 with reference to quoted bid prices from reliable external sources. Where an observable market price is unreliable or does not exist, investments are valued at the Manager's best estimate of the amount that would be received from an immediate transfer at arm's length. c Foreign exchange The base currency of the Fund is UK sterling which is taken to be the Fund's functional currency. All transactions in foreign currencies are converted into sterling at the rates of exchange ruling at the dates of such transactions. The resulting exchange differences are disclosed in note 2 of the Notes to the financial statements. Any foreign currency assets and liabilities at the end of the accounting period are translated at the exchange rate prevailing at the balance sheet date. d Revenue Revenue is recognised in the Statement of total return on the following basis: Dividends from quoted equity instruments and non equity shares are recognised as revenue, net of attributable tax credits on the date when the securities are quoted exdividend. Overseas dividends are recognised as revenue gross of any withholding tax and the tax consequences are recognised within the tax expense. Dividends from unquoted equity shares are recognised when declared. Special dividends are treated as either revenue or a repayment of capital depending on the facts of each particular case. Interest on bank deposits and short term deposits is recognised on an accruals basis. Ordinary scrip dividends are recognised wholly as revenue on the basis of the market values of the shares on the date that they are quoted exdividend. Where an enhancement is offered the amount by which the market value of the shares on the date they are quoted exdividend exceeds the cash dividend is taken to capital. The ordinary element of scrip dividends is treated as revenue and forms part of the Fund's distributions. 7

9 Accounting policies of Smith & Williamson UK Equity Income Fund (continued) e Expenses All expenses, other than those relating to the purchase and sale of investments are charged to the relevant unit against revenue. The annual management charge is then reallocated to capital net of any tax effect. f Allocation of revenue and expenses to multiple unit classes All revenue and expenses which are directly attributable to a particular unit class are allocated to that class. All revenue and expenses which are attributable to the Fund are allocated to the Fund and are normally allocated across the unit classes pro rata to the net asset value of each class on a daily basis. g Taxation Tax payable on profits is recognised as an expense in the period in which profits arise. The tax effects of tax losses available to carry forward are recognised as an asset when it is probable that future taxable profits will be available, against which these losses can be utilised. UK corporation tax is provided as amounts to be paid/recovered using the tax rates and laws that have been enacted at the balance sheet date. Deferred taxation is provided in full on timing differences that result in an obligation at 31 August 2016 to pay more or less tax, at a future date, at rates expected to apply when they crystallise based on current rates and tax laws. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax assets and liabilities are not discounted. Provision for deferred tax assets are only made to the extent the timing differences are expected to be of future benefit. All foreign dividend revenue is recognised as a gross amount which includes any withholding tax deducted at source. Where foreign tax is withheld in excess of the applicable treaty rate a tax debtor is recognised to the extent that the overpayment is considered recoverable. h Efficient portfolio management Where appropriate, certain permitted instruments such as derivatives or forward currency contracts may be used for efficient portfolio management purposes. Where such instruments are used to protect or enhance revenue, the revenue or expenses derived therefrom are included in the Statement of total return as revenue related items and form part of the distribution. Where such instruments are used to protect or enhance capital, the gains and losses derived therefrom are included in the Statement of total return as capital related items. i Dilution levy The need to charge a dilution levy will depend on the volume of sales or redemptions. The Manager may charge a discretionary dilution levy on the sale and redemption of units if, in its opinion, the existing unitholders (for sales) or remaining unitholders (for redemptions) might otherwise be adversely affected, and if charging a dilution levy is, so far as practicable, fair to all unitholders and potential unitholders. Please refer to the Prospectus for further information. j Distribution policies i Basis of distribution The distribution policy is to distribute all available revenue after deduction of expenses payable from revenue. Distributions attributable to income units are paid to unitholders. Distributions attributable to accumulation units are reinvested in the Fund on behalf of the unitholders. ii Unclaimed distributions Distributions to unitholders outstanding after 6 years are taken to the capital property of the Fund. 8

10 Accounting policies of Smith & Williamson UK Equity Income Fund (continued) j Distribution policies (continued) iii Revenue All revenue is included in the final distribution with reference to policy d. iv Expenses Expenses incurred against the revenue of the Fund are included in the final distribution, subject to any expense which may be transferred to capital for the purpose of calculating the distribution, with reference to policy e. v Equalisation Group 2 units are units purchased on or after the previous XD date and before the current XD date. Equalisation applies only to group 2 units. Equalisation is the average amount of revenue included in the purchase price of group 2 units and is refunded to holders of these units as a return of capital. Being capital it is not liable to income tax in the hands of the unitholders but must be deducted from the cost of units for capital gains tax purposes. Equalisation per unit is disclosed in the Distribution table. 9

11 Investment Adviser's report Investment performance* During the 12 month period to 31 August 2016 the Fund returned +9.8% against the FTSE All Share of +11.7%. Key equity and bond markets were strong with the US dollar price of Brent oil down 6%, gold up 15% and trade weighted sterling down 14% (following the BREXIT vote). UK inflation started to rise towards the end of the period. The US raised rates in December 2015 but monetary conditions were further eased in the UK and Europe. Generally, economic conditions remained stable. Our best performer was SABMiller, which received a bid approach from ABI, an European peer. Relatively defensive overseas earners generally performed well, such as British American Tobacco, Imperial Brands, GlaxoSmithKline, Diageo, and National Grid. On the downside, domestically focused discretionary stocks were weak, such as Stagecoach Group, easyjet, British Land, ITV, Next and Henry Boot. BT Group was weak on concern about the impact of lower bond yields on its pension fund deficit. * based on a cumulative total return including distributions on a mid to mid basis to 12 noon on 31 August Source: Morningstar Direct, 2016 Investment activities We sold Vodafone Group as we became concerned about their level of debt combined with their cash flow demands. Concerned about future expectations and valuations, we sold Greene King, Melrose Industries, TUI, WH Smith and WPP. We believed interest rates would remain lower for longer and sold HSBC Holdings and Prudential as profitability was likely to remain under pressure. Uncertainty about the eventual impact of the BREXIT vote led us to reduce our exposure and we sold Next and British Land. We sold Pearson as a recovered share price no longer adequately reflected future profitability concerns. We introduced retailers Halfords Group and Poundland as a number of profit warnings had brought expectations and valuations to attractive levels. Poundland was bid for towards the end of the period. We also bought HICL Infrastructure as we believed its price did not reflect its stable income, modest asset growth and low market correlation. We bought and sold Indivior during the period as our initial belief that patent court challenges were overly discounted proved correct. Believing the oil price appeared more stable we increased our weightings in BP and Royal Dutch Shell 'B'. Using price weakness, we introduced A.G. Barr, G4S, Johnson Matthey, Phoenix Group Holdings, PZ Cussons, Smith & Nephew and Schroders. We also increased our weighting in BT Group. Investment strategy The aim of the Fund is to achieve a high and growing level of income over the long term primarily through investment in the UK. The strategy is focused on investing in those companies with strong balance sheets, good profitability, strong cash generation and the ability to grow their dividend. With this in mind, the exposure to Mid Caps is likely to remain relatively high as we continue to see plenty of opportunities in this area. Smith & Williamson Investment Management LLP 19 September 2016 FTSE is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. All rights in the FTSE Indices vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept liability for any errors or omissions in the FTSE Indices or underlying data. 10

12 Summary of material portfolio changes Purchases Cost Sales Proceeds British American Tobacco 2,222,468 British American Tobacco 1,757,402 Centrica 1,437,494 Vodafone Group 1,692,235 Next 1,378,882 Indivior 1,544,334 Indivior 1,361,362 WPP 1,442,421 HICL Infrastructure 1,335,763 Ultra Electronics Holdings 1,294,934 BT Group 1,306,665 Greene King 1,245,985 Halfords Group 1,204,632 British Land 1,240,039 Ultra Electronics Holdings 1,113,362 BBA Aviation 1,154,116 Poundland 1,025,622 Compass Group 1,146,509 Restaurant Group 999,990 Next 1,127,022 BP 973,476 TUI 1,065,293 Vodafone Group 955,827 Prudential 1,063,974 Capita 926,277 WH Smith 1,055,461 G4S 926,213 Pearson 1,036,930 Diageo 925,088 HSBC Holdings 1,018,382 Schroders 891,702 Rotork 987,812 PZ Cussons 860,768 Melrose Industries 940,372 Royal Dutch Shell 'B' 856,648 BHP Billiton 877,515 ITV 824,124 SABMiller 802,983 SSE 799,391 Electrocomponents 779,275 The above represents the major purchases and the major sales in the year to reflect a clearer picture of the major investment activities. 11

13 Portfolio statement as at 31 August 2016 Holding Market % of total value net assets Investment Equities 95.11% (99.03%) Equities United Kingdom 95.11% (99.03%) Equities incorporated in the United Kingdom 86.63% (91.88%) Banks 0.00% (2.42%) Basic Resources 0.00% (1.90%) Chemicals 1.52% (3.43%) Johnson Matthey 24, , Construction & Materials 0.00% (1.49%) Financial Services 5.06% (3.33%) Close Brothers Group 58, , Rathbone Brothers 5,000 91, Schroders 32, , Standard Life European Private Equity Trust 370, , ,666, Food & Beverages 5.47% (3.81%) A.G. Barr 150, , Diageo 95,000 2,003, SABMiller 2, , ,874, Health Care 10.51% (7.53%) AstraZeneca 39,000 1,914, Consort Medical 75, , GlaxoSmithKline 124,000 2,032, Smith & Nephew 65, , ,522, Industrial Goods & Services 13.09% (18.38%) Babcock International Group 80, , BAE Systems 265,000 1,424, BBA Aviation 400, , Capita 80, , G4S 400, , Howden Joinery Group 178, , Ultra Electronics Holdings 65,000 1,098, ,887, Insurance 5.24% (8.09%) Chesnara 263, , Jardine Lloyd Thompson Group 110,000 1,080, Novae Group 96, , ,753, Media 1.53% (3.42%) ITV 400, ,

14 Portfolio statement (continued) as at 31 August 2016 Holding Market % of total value net assets Investment Equities incorporated in the United Kingdom (continued) Oil & Gas 7.61% (5.95%) BP 450,000 1,925, Royal Dutch Shell 'B' 107,000 2,077, ,003, Personal & Household Goods 11.85% (8.28%) British American Tobacco 43,000 2,031, Burberry Group 102,000 1,329, Imperial Brands 51,000 2,035, PZ Cussons 250, , ,232, Real Estate 0.00% (2.02%) Retail 3.39% (2.06%) Debenhams 675, , Halfords Group 214, , Marks & Spencer Group 47, , Poundland 205, , ,777, Telecommunications 5.14% (4.40%) BT Group 500,000 1,931, KCOM Group 700, , ,703, Travel & Leisure 5.33% (6.83%) easyjet 66, , Mitchells & Butlers 220, , Restaurant Group 188, , Stagecoach Group 353, , ,795, Utilities 10.89% (8.54%) Centrica 340, , National Grid 145,000 1,516, Pennon Group 120,000 1,052, SSE 80,000 1,202, United Utilities Group 120,000 1,165, ,727, Total equities incorporated in the United Kingdom 45,547,

15 Portfolio statement (continued) as at 31 August 2016 Holding Market % of total value net assets Investment Equities incorporated outwith the United Kingdom 8.48% (7.15%) Financial Services 2.85% (0.00%) HICL Infrastructure 850,000 1,497, Industrial Goods & Services 1.50% (1.64%) Wolseley 18, , Insurance 3.77% (1.58%) Lancashire Holdings 170,000 1,071, Phoenix Group Holdings 105, , ,984, Media 0.00% (1.91%) Telecommunications 0.36% (0.00%) Manx Telecom 95, , Travel & Leisure 0.00% (2.02%) Total equities incorporated outwith the United Kingdom 4,457, Total equities United Kingdom 50,005, Portfolio of investments 50,005, Other net assets 2,574, Total net assets 52,579, The comparative figures in brackets are as at 31 August United Kingdom equities are grouped in accordance with the Industry Classification Benchmark. The Industry Classification Benchmark (ICB) is a joint product of FTSE International Limited and Dow Jones & Company, Inc. and has been licensed for use. "FTSE" is a trade and service mark of London Stock Exchange and the Financial Times Limited. "Dow Jones" and "DJ" are trade and service marks of Dow Jones & Company Inc. FTSE and Dow Jones do not accept any liability to any person for any loss or damage arising out of any error omission in the ICB. 14

16 Risk and reward profile The following risk and reward profile relates to all unit classes in the Fund. The Risk and Reward Indicator table demonstrates where the Fund ranks in terms of its potential risk and reward. The higher the rank the greater the potential reward but the greater the risk of losing money. It is based on past data, may change over time and may not be a reliable indication of the future risk profile of the Fund. The shaded area in the table below shows the Fund's ranking on the Risk and Reward Indicator. Typically lower rewards, lower risk Typically higher rewards, higher risk The Fund is in a higher category because the price of its investments have risen or fallen frequently and more dramatically than some other types of investment. The category shown is not guaranteed to remain unchanged and may shift over time. Even the lowest category does not mean a riskfree investment. The price of the Fund and any income from it can go down as well as up and is not guaranteed. Investors may not get back the amount invested. Past performance is not a guide to the future. The Fund is entitled to use derivative instruments for efficient portfolio management. Derivatives may not achieve their intended purpose. Their prices may move up or down significantly over relatively short periods of time which may result in losses greater than the amount paid. This could adversely impact the in losses greater than the amount paid. This could adversely impact the value of the Fund. The organisation from which the Fund buys a derivative may fail to carry out its obligations, which could also cause losses to the Fund. Where the Fund invests in bonds, there is a risk the bond issuer may fail to meet its repayments. This is usually a greater risk for bonds that produce a higher level of income. Changes in interest rates, inflation and the creditworthiness of the bond issuer may also affect the bond s market value. For further information please refer to the Key Investor Information Document ("KIID"). For full details on risk factors for the Fund, please refer to the Prospectus. There have been no changes to the risk and reward indicator in the year. 15

17 Comparative table The following disclosures give a unitholder an indication of the performance of a unit in the Fund. It also discloses the operating charges and direct transaction costs applied to each unit. Operating charges are those charges incurred in operating the Fund and direct transaction costs are costs incurred when purchasing or selling securities in the portfolio of investments. A class income units were first issued at 100.0p on 7 May B class income units were first issued at 100.0p on 8 June A class income B class income p p p p p p Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges Return after operating charges * Distributions on income units ^ Closing net asset value per unit * after direct transaction costs of: Performance Return after charges 7.28% 4.93% 10.77% 8.20% 5.85% 11.70% Other information Closing net asset value ( ) 452, , ,980 50,788,940 44,308,822 35,787,536 Closing number of units 198, , ,463 40,322,243 36,517,727 29,928,949 Ongoing charges 1.56% 1.57% 1.61% 0.71% 0.72% 0.76% Direct transaction costs 0.45% 0.71% 1.15% 0.45% 0.71% 0.90% Prices Highest offer unit price (p) Lowest bid unit price (p) Investments carry risk. Past performance is not a guide to future performance. Investors may not get back the amount invested. ^ rounded to 2 decimal places 16

18 Comparative table (continued) B class accumulation units were first issued at 100.0p on 11 April B class accumulation ^^ p p Change in net assets per unit Opening net asset value per unit Return before operating charges Operating charges Return after operating charges * Closing net asset value per unit Retained distributions on accumulation units^ * after direct transaction costs of: Performance Return after charges 8.40% 5.85% 3.10% Other information Closing net asset value ( ) 1,338, ,102 32,492 Closing number of units 948, ,635 26,417 Ongoing charges 0.71% 0.72% 0.76% Direct transaction costs 0.45% 0.73% 0.57% Prices Highest offer unit price (p) Lowest bid unit price (p) Investments carry risk. Past performance is not a guide to future performance. Investors may not get back the amount invested. ^ rounded to 2 decimal places ^^ for a period from 11 April 2014 to 31 August

19 Ongoing charges figure The ongoing charges figure provides investors with a clearer picture of the total annual costs in running a collective investment scheme. The ongoing charges figure consists principally of the Manager's periodic charge and the Investment Adviser's fee which are included in the annual management charge, but also includes the costs for other services paid. A class income Annual management charge 1.50% 1.50% Other expenses 0.06% 0.07% Ongoing charges figure 1.56% 1.57% B class income Annual management charge 0.65% 0.65% Other expenses 0.06% 0.07% Ongoing charges figure 0.71% 0.72% B class accumulation Annual management charge 0.65% 0.65% Other expenses 0.06% 0.07% Ongoing charges figure 0.71% 0.72% Please note the ongoing charges figure is indicative of the charges which the unit classes may incur in a year as it is calculated on historical data. 18

20 Financial statements Smith & Williamson UK Equity Income Fund Statement of total return Income: Notes Net capital gains 2 2,259, ,142 Revenue 3 2,125,718 1,837,687 Expenses 4 (338,350) (303,869) Net revenue before taxation 1,787,368 1,533,818 Taxation 5 (3,601) Net revenue after taxation 1,783,767 1,533,818 Total return before distributions 4,042,954 2,339,960 Distributions 6 (2,093,869) (1,815,948) Change in net assets attributable to unitholders from investment activities 1,949, ,012 Statement of change in net assets attributable to unitholders Opening net assets attributable to unitholders 45,895,302 36,526,008 Amounts receivable on issue of units 7,093,784 10,243,574 Amounts payable on cancellation of units (2,411,388) (1,434,335) 4,682,396 8,809,239 Change in net assets attributable to unitholders from investment activities 1,949, ,012 Retained distributions on accumulation units 52,552 36,043 Unclaimed distributions 352 Closing net assets attributable to unitholders 52,579,687 45,895,302 19

21 Balance sheet as at 31 August 2016 Assets: Notes Fixed assets: Investments 50,005,589 45,452,163 Current assets: Debtors 7 1,878, ,727 Cash and bank balances 8 1,717, ,978 Total assets 53,602,309 46,538,868 Liabilities: Creditors: Distribution payable 6 (695,247) (631,141) Other creditors 9 (327,375) (12,425) Total liabilities (1,022,622) (643,566) Net assets attributable to unitholders 52,579,687 45,895,302 20

22 Notes to the financial statements 1. Accounting policies The accounting policies are disclosed on pages 7 to Net capital gains Nonderivative securities realised (losses) / gains (740,392) 2,739,134 Nonderivative securities movement in unrealised gains / (losses) 3,005,184 (1,923,759) Currency gains Transaction charges (5,820) (9,324) Total net capital gains 2,259, ,142 Unrealised gains/losses are disclosed as the movement in unrealised gains/losses on investments between the prior year and the current year. Where realised gains/losses on investments include unrealised gains/losses arising in previous periods, a corresponding loss/gain is included in unrealised losses/gains. 3. Revenue Franked revenue 1,961,675 1,579,404 Unfranked revenue 35,485 8,304 Overseas revenue 120, ,697 Bank and deposit interest 8,227 11,282 Total revenue 2,125,718 1,837, Expenses Payable to the Manager and associates Annual management charge 313, ,148 Registration fees , ,741 Payable to the Trustee Trustee fees 16,346 15,302 Other expenses: Audit fee 6,120 4,680 Safe custody fees 1,168 1,010 FCA fee ,354 5,826 Total expenses 338, ,869 21

23 Notes to the financial statements (continued) 5. Taxation a. Analysis of the tax charge for the year Overseas tax withheld 3,601 Total taxation 3,601 b. Factors affecting the tax charge for the year The tax assessed for the year is lower (2015: lower) than the standard rate of UK corporation tax for an authorised collective investment scheme of 20% (2015: 20%). The differences are explained below: Net revenue before taxation 1,787,368 1,533,818 Corporation 20% 357, ,764 Effects of: Franked revenue (392,335) (315,882) Overseas revenue (24,067) (47,739) Overseas tax withheld 3,601 Excess management expenses 58,928 56,857 Total taxation (note 5a) 3,601 c. Provision for deferred taxation At the year end, a deferred tax asset has not been recognised in respect of timing differences relating to excess management expenses as there is insufficient evidence that the asset will be recovered. The amount of the asset not recognised is : 917,532 (2015: 858,604). 22

24 Notes to the financial statements (continued) 6. Distributions The distributions take account of revenue added on the issue of units and revenue deducted on the cancellation of units, and comprise: Quarter 1 income distribution 476, ,729 Quarter 1 accumulation distribution 11,187 6,483 Interim income distribution 350, ,997 Interim accumulation distribution 9,325 4,870 Quarter 3 income distribution 559, ,865 Quarter 3 accumulation distribution 14,120 11,463 Final income distribution 695, ,141 Final accumulation distribution 17,920 13,227 Equalisation: 2,134,136 1,851,775 Amounts deducted on cancellation of units 11,253 4,908 Amounts added on issue of units (51,520) (40,735) Total net distributions 2,093,869 1,815,948 Reconciliation between net revenue and distributions: Net revenue after taxation per Statement of total return 1,783,767 1,533,818 Undistributed revenue brought forward Expenses paid from capital 313, ,148 Capital tax relief (3,867) Undistributed revenue carried forward (254) (248) Distributions 2,093,869 1,815,948 Details of the distribution per unit are disclosed in the Distribution table. 7. Debtors Amounts receivable on issue of units 1,111, ,942 Sales awaiting settlement 403,665 Accrued revenue 363, ,025 Recoverable overseas withholding tax 2,760 Prepaid FCA fee 38 Total debtors 1,878, , Cash and bank balances Bank balances 200, ,657 Cash on deposit 1,516, ,321 Total cash and bank balances 1,717, ,978 23

25 Notes to the financial statements (continued) 9. Other creditors Amounts payable on cancellation of units 6,052 Purchases awaiting settlement 312,342 Accrued expenses: Payable to the Manager and associates Annual management charge 2,504 Registration fees 5 2,509 Other expenses: Trustee fees 136 Safe custody fees Audit fee 6,120 4,680 FCA fee 57 Transaction charges 2,384 4,622 8,981 9,916 Total accrued expenses 8,981 12,425 Total other creditors 327,375 12, Commitments and contingent liabilities At the balance sheet date there are no commitments or contingent liabilities. 11. Unit classes The Fund currently has 3 unit classes; A class income, B class income and B class accumulation. The following reflects the change in units in issue for each unit class in the year: A class income Opening units in issue 284,942 Total units issued in the year 20,363 Total units cancelled in the year (70,359) Total units converted in the year (36,702) Closing units in issue 198,244 B class income Opening units in issue 36,517,727 Total units issued in the year 5,311,976 Total units cancelled in the year (1,574,352) Total units converted in the year 66,892 Closing units in issue 40,322,243 B class accumulation Opening units in issue 733,635 Total units issued in the year 481,893 Total units cancelled in the year (266,878) Closing units in issue 948,650 24

26 Notes to the financial statements (continued) 11. Unit classes (continued) The annual management charge for each unit class is as follows: A class 1.50% B class 0.65% The annual management charge includes the Manager's periodic charge and the Investment Adviser's fee. Further information in respect of the return per unit is disclosed in the Comparative table. On the winding up of a Fund all the assets of the Fund will be realised and apportioned to the unit classes in relation to the net asset value on the closure date. Unitholders will receive their respective share of the proceeds, net of liabilities and the expenses incurred in the termination in accordance with the FCA regulations. Each unit class has the same rights on winding up. 12. Related party transactions Smith & Williamson Fund Administration Limited, as Manager is a related party due to its ability to act in respect of the operations of the Fund. The Manager acts as principal in respect of all transactions of units in the Fund. The aggregate monies received and paid through the creation and cancellation of units are disclosed in the Statement of change in net assets attributable to unitholders. Amounts payable to the Manager and its associates are disclosed in note 4. The Investment Adviser, Smith & Williamson Investment Management LLP is a related party to the Manager as they are within the same corporate body. A director of the Manager, the Investment Adviser or a body corporate within the same group as the Manager or Investment Adviser may have significant influence over the financial and operating policies of the Fund and as such are deemed to be related parties Smith & Williamson Nominees Limited 41.39% 43.48% A unitholder with a holding in excess of 20% of the value of the Fund may be able to exercise significant influence over the financial and operating policies of the Fund with reference to unitholders' voting rights at general meetings and as such is deemed to be a related party. Parties with an interest in excess of 20% of the Fund are as follows: Smith & Williamson Nominees Limited 41.39% 43.48% Nortust Nominees Limited 33.15% 28.65% 13. Events after the balance sheet date Subsequent to the year end, the net asset value per A class income unit has decreased from 228.0p to 227.2p, the net asset value per B class income unit has decreased from 126.0p to 125.7p and the net asset value per the B class accumulation unit has decreased from 141.1p to 140.8p as at 2 November This movement takes into account routine transactions but also reflects the market movements of recent months. On 3 October 2016 the Fund launched an additional unit class; Y class income. 25

27 Notes to the financial statements (continued) 14. Transaction costs a Direct transaction costs Direct transaction costs include fees and commissions paid to agents, advisers, brokers and dealers; levies by regulatory agencies and security exchanges; and transfer taxes and duties. Commission is a charge which is deducted from the proceeds of the sale of securities and added to the cost of the purchase of securities. This charge is a payment to agents, advisers, brokers and dealers in respect of their services in executing the trades. Tax is payable on the purchase of securities in the United Kingdom. It may be the case that 'other taxes' will be charged on the purchase of securities in countries other than the United Kingdom. The total purchases and sales and the related direct transaction costs incurred in these transactions are as follows: 2016 % of purchases by asset class 2015 Purchases: % of purchases by asset class Equities purchases before transaction costs 39,130,465 54,625,798 Commission 20, % 28, % Taxes 175, % 250, % Financial transaction tax 212 Total direct transaction costs equities 195, % 278, % Equities purchases after direct transaction costs 39,326,462 54,904,718 Total purchases after direct transaction costs 39,326,462 54,904,718 Capital events^ 638,400 ^ The total purchases exclude the capital events as there were no direct transaction costs charged in these transactions % of sales by asset class 2015 Sales: % of sales by asset class Equities sales before transaction costs 37,613,349 45,761,666 Commission (18,854) 0.05% (23,855) 0.05% Taxes (383) (558) Total direct transaction costs equities (19,237) 0.05% (24,413) 0.05% Equities sales after direct transaction costs 37,594,112 45,737,253 Total sales after direct transaction costs 37,594,112 45,737,253 Capital events^ 20, ,400 ^ The total sales exclude the capital events as there were no direct transaction costs charged in these transactions. 26

28 Notes to the financial statements (continued) 14. Transaction costs (continued) a Direct transaction costs (continued) Summary of direct transaction costs The following represents the total of each type of transaction cost, expressed as a percentage of the Fund's average net asset value in the year: 2016 % of average net asset value 2015 % of average net asset value Commission 39, % 52, % Taxes 176, % 250, % Financial transaction tax 212 b Average portfolio dealing spread The average dealing spread is calculated as the difference between the bid and offer value of the portfolio as a percentage of the offer value. The average portfolio dealing spread of the investments at the balance sheet date was 0.13% (2015: 0.13%). 27

29 Notes to the financial statements (continued) 15. Risk management policies a In pursuing the Fund's investment objective, as set out in the Prospectus, the following are accepted by the Manager as being the main risks from the Fund's holding of financial instruments, either directly or indirectly through its underlying holdings. These are presented with the Manager's policy for managing these risks. To ensure these risks are consistently and effectively managed these are continually reviewed by the risk committee, a body appointed by the Manager, which sets the risk appetite and ensures continued compliance with the management of all known risks. Market risk Market risk is the risk that the value of the Fund s financial instruments will fluctuate as a result of changes in market prices and comprise three elements; other price risk, currency risk, and interest rate risk. (i) Other price risk The Fund's exposure to price risk comprises mainly of movements in the value of investment positions in the face of price movements. The main element of the portfolio of investments which is exposed to this risk is equities which are disclosed in the Portfolio statement. This risk is generally regarded as consisting of two elements; stock specific risk and market risk. Through these two factors, the Fund is exposed to price fluctuations, which are monitored by the Manager in pursuance of the investment objective and policy. Adhering to investment guidelines and avoiding excessive exposure to one particular issuer can limit stock specific risk. Subject to compliance with the investment objective of the Fund, spreading exposure in the portfolio of investments both globally and across sectors or geography can mitigate market risk. (ii) Currency risk Currency risk is the risk that the value of investments or future cash flows will fluctuate as a result of exchange rate movements. Investment in overseas securities or holdings of foreign currency cash will provide direct exposure to currency risk as a consequence of the movement in foreign exchange rates against sterling. These fluctuations can also affect the profitability of some UK companies, and thus their market prices, as sterling s relative strength or weakness can affect export prospects, the value of overseas earnings in sterling terms, and the prices of imports sold in the UK. Forward currency contracts may be used to manage the portfolio exposure to currency movements. The foreign currency risk profile of the Fund's financial instruments and cash holdings at the balance sheet date is as follows: Financial instruments and cash holdings Net debtors and creditors Total net foreign currency exposure 2016 US dollar Total foreign currency exposure 1,460 78,801 80,261 1,460 78,801 80,261 28

30 Notes to the financial statements (continued) 15. a Risk management policies (continued) Market risk (continued) (ii) Currency risk (continued) Financial instruments and cash holdings Net debtors and creditors Total net foreign currency exposure 2015 US dollar 61,504 61,504 Total foreign currency exposure 61,504 61,504 (iii) Interest rate risk Interest rate risk is the risk that the value of the Fund's investments will fluctuate as a result of interest rate changes. During the year the Fund's direct exposure to interest rates consisted of cash and bank balances. The amount of revenue receivable from bank balances or payable on bank overdrafts will be affected by fluctuations in interest rates. The Fund would not in normal market conditions hold significant cash balances and would have limited borrowing capabilities as stipulated in the COLL rules. Derivative contracts are not used to hedge against the exposure to interest rate risk. There is no exposure to interest bearing securities at the balance sheet date. b Credit risk This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. This includes counterparty risk and issuer risk. The Trustee has appointed the custodian to provide custody services for the assets of the Fund. There is a counterparty risk that the custodian could cease to be in a position to provide custody services to the Fund. The Fund's investments (excluding cash) are ring fenced hence the risk is considered to be negligible. c The Fund holds cash and cash deposits with financial institutions which potentially exposes the Fund to counterparty risk. The credit rating of the financial institution is taken into account so as to minimise the risk to the Fund of default. Liquidity risk A significant risk is the cancellation of units which investors may wish to sell and that securities may have to be sold in order to fund such cancellations if insufficient cash is held at the bank to meet this obligation. If there were significant requests for the redemption of units at a time when a large proportion of the portfolio of investments were not easily tradable due to market volumes or market conditions, the ability to fund those redemptions would be impaired and it might be necessary to suspend dealings in units in the Fund. Investments in smaller companies at times may prove illiquid, as by their nature they tend to have relatively modest traded share capital. Shifts in investor sentiment, or the announcement of new price sensitive information, can provoke significant movement in share prices, and make dealing in any quantity difficult. The Fund may also invest in securities that are not listed or traded on any stock exchange. In such situations the Fund may not be able to immediately sell such securities. 29